Exam 7: Corporate Acquisitions and Reorganizations

The Supreme Court has held that literal compliance with the statutory requirements for a reorganization transaction is not enough for a transaction to receive tax-free treatment.The courts have placed four primary restrictions on reorganization transactions.What are they?

The acquiring corporation does not obtain the target corporation's tax attributes in

A Type C reorganization is a change in identity,legal form,or state of incorporation in which the shareholders retain the same equity interest.

The acquiring corporation does not recognize gain or loss in a reorganization where it receives boot.

Acme Corporation acquires Fisher Corporation's assets in a Type A reorganization for $800,000 of Acme's nonvoting preferred stock and $200,000 (face amount and FMV)of securities.The assets have an adjusted basis of $600,000 and an FMV of $1,500,000.In addition,Acme Corporation assumes $500,000 of Fisher's liabilities.At the time of the transfer,Acme's E&P is $400,000.Fisher distributes the stock and securities to its sole shareholder Barbara for all of her Fisher stock.After the reorganization,Barbara owns 25% of Acme's stock.Barbara has an adjusted basis of $400,000 in her Fisher stock.Barbara must recognize a gain of

Marty is a party to a tax-free reorganization.He has a basis of $22,000 in his Van Corporation stock that has an FMV of $35,000.Marty exchanges the Van stock for Young Corporation stock worth $29,000 and Young securities with a face amount of $7,000 and an FMV of $6,000.What is Marty's basis in the Young securities?

After the stock acquisition,MCI transferred its assets to TC Investments Corporation in a liquidation transaction,after which TC Investments Corporation held MCI assets instead of MCI stock.TC Investments Corporation then changed its name to MCI Communications Corporation,and WorldCom changed its name to MCI WorldCom. After these three steps,MCI Communications Corporation,which held the acquired MCI assets,ended up as a subsidiary of MCI WorldCom.Total assets of MCI WorldCom after the merger were $86 billion,including the stock of its subsidiary,MCI Communications Corporation. On December 31,1997,prior to the acquisition,MCI had $576 million of U.S.NOL carryovers and $179 million of minimum tax credit carryovers.MCI WorldCom incurred expenses of $127 million in connection with the acquisition.MCI WorldCom recorded the transaction as a purchase for financial accounting purposes with the excess of cost over FMV being recorded as a combination of goodwill,in-process R&D costs,and other intangible assets.In addition,MCI WorldCom incurred $21 million in employee severance pay outlays.MCI stock options were converted into MCI WorldCom stock options.What type of reorganization did WorldCom and MCI engage in? What tax issues should the parties to the reorganization (MCI,BT,TC Investments Corporation,WorldCom,and the MCI and WorldCom shareholders)consider when evaluating the acquisition?

A stock acquisition that is not treated as a purchase for purposes of meeting the Sec.338 rules is

Parent Corporation purchases all of Target Corporation's stock for $200,000 and makes a deemed liquidation election.Target Corporation has Class I assets with an adjusted basis of $55,000 and an FMV of $55,000; Class II assets with an adjusted basis of $40,000 and an FMV of $60,000; and Class V assets with an adjusted basis of $70,000 and an FMV of $100,000.The Class V assets are subject to a $20,000 liability.Assume a 34% corporate tax rate. Assuming that the adjusted grossed-up basis is $237,000 ($200,000 + $20,000 + $17,000 federal income taxes),what is the allocation of adjusted grossed-up basis to Class VI assets?

Carol owns Target Corporation stock having an adjusted basis of $41,000.As part of a Type C tax-free reorganization involving Revbo and Target Corporations,Carol exchanges her Target stock for $42,000 of Revbo stock and Revbo securities having a face amount and FMV of $8,000.What is Carol's basis in the Revbo stock?

Which of the following definitions of Sec.338 property classes is not correct?

Midnight Corporation transferred part of its assets to Noon Corporation in exchange for all of Noon's stock.Midnight distributed all of Noon's stock pro rate to Midnight's shareholders.What is this type of reorganization?

Identify which of the following statements is false.

In a nontaxable reorganization,shareholders of the target corporation recognize gain or loss.

Identify which of the following statements is true.

Pacific Corporation acquires 80% of the stock of Jackson Corporation for $3,000,000 in the current year.Jackson's assets have a basis of $2,000,000 and its liabilities are $800,000.The assets are worth $3,500,000.What gain is recognized by Jackson Corporation on the deemed sale of its assets if a Sec.338 election is made?

Acquiring Corporation acquires all of the assets of Target Corporation in exchange for $3,000,000 of Acquiring common stock and the assumption of $2,000,000 of Target's liabilities.The assets had a $2,300,000 adjusted basis to Target.Target's sole shareholder,Paula,had a $1,000,000 adjusted basis for her stock.Target Corporation had $600,000 of E&P on the acquisition date.Paula receives all of the Acquiring common stock in the liquidation of Target.What are the tax consequences of the acquisition to: Acquiring,Target,and Paula?

The Sec.338 deemed sale rules require that 70% of the target corporation's stock be owned.

What are the advantages and disadvantages of a Type B reorganization?

The assets of Bold Corporation have a $1,000,000 basis and a $3,000,000 FMV.Its liabilities are $500,000.Tidel Corporation acquires 80% of the Bold Corporation stock for $2,000,000.What gain is recognized by Bold Corporation if a timely Sec.338 election is made by Tidel Corporation? What is the total basis of the assets to Bold Corporation following the deemed sale? Assume a 34% corporate tax rate.