Exam 7: Corporations: Reorganizations

All of the following statements are true about corporate reorganization except:

In a "Type B" reorganization, the acquiring corporation obtains control by exchanging common and preferred stock in the same percentages as the target's outstanding common and preferred stock.

Xian Corporation and Win Corporation would like to combine into one entity. Xian exchanges 40% of its common and preferred stock plus $200,000 cash for 60% of Win's assets and liabilities. Win distributes the Xian stock, cash, unwanted assets, and liabilities to its shareholders in exchange for their outstanding stock. Win then liquidates.

If the acquiring corporation purchased 25% of target stock for cash ten years ago, the acquiring corporation cannot meet the "Type C" reorganization requirement that 80% of the target's assets be acquired with stock requirement.

Noncorporate shareholders may elect out of § 368 and recognize losses when property subject to a liability is distributed to them in a corporate reorganization.

Once a gain is recognized in a corporate reorganization, its character must be determined. What are the different tax character possibilities that a corporate reorganization gain may trigger?

Miro Corporation exchanged 10% of its stock with Lobo shareholders for all of the Lobo stock outstanding. At the time of the acquisition by Miro, the fair market value of Lobo was $1.5 million, and the Federal long-term tax-exempt rate was 5%. In the current year, Miro has $600,000 of taxable income. Lobo has excess credits from prior years amounting to $40,000. What is Miro's Federal income tax for the year, if it is in the 34% tax bracket?

In corporate reorganizations, an acquiring corporation using property other than stock as consideration may recognize gains but not losses on the transaction.

A "Type A" reorganization that is the union of two or more corporations with one retaining its existence is called a ____________________. A ____________________ is when a new corporation is created to take the place of two or more corporations.

The continuity of business enterprise requires that at least 60% of the target's assets are acquired with stock.

Siamese Corporation purchased 25% of Persian Corporation 8 years ago for $250,000. Siamese now wants to acquire the remaining 75% of the Persian stock. Siamese acquires 70% of Persian's stock (worth $900,000) by exchanging its common voting stock with the shareholders of Persian. Since 5% of the Persian shareholders are not interested in being common shareholders of Siamese, they retain their shares. This transaction qualifies as what type of reorganization?

For a corporate restructuring to qualify as a tax-free reorganization, the transaction must have a sound business purpose.

Present Value Tables needed for this question. Avocado Corporation wants to acquire Tomato Corporation because their businesses are complementary and Tomato has unused business credits of $63,000. Avocado is a manufacturer with a basis in its assets of $2.4 million (value of $3.1 million) and liabilities of $600,000. It is in the 35% tax bracket and uses a 10% discount factor when making investments. However, the Federal long-term tax-exempt rate is only 5%. Tomato is a distributor of a variety of products including those of Avocado's. Its basis in its assets is $2 million (value of $1.5 million) and has liabilities of $400,000. Avocado is willing to acquire only $1 million of Tomato's assets and all its liabilities for stock and $100,000 cash. Tomato will distribute its remaining assets, cash, and Avocado stock to its shareholders in exchange for their stock and then liquidate. Given these facts, what type of reorganization would you suggest for Avocado and Tomato? What is the maximum amount Avocado should be willing to pay for the business credits? Use a "Type A" merger. Value of business credits = $45,728.

The § 382 limitation on the use of capital loss carryovers is triggered when there is a change in ownership of more than 50 percentage points for shareholders owning at least 5% of the stock.

Qadira exchanges 40% of her common stock for 80% of newly issued preferred stock in the Pinto Corporation. There was no Pinto preferred stock previously outstanding, and Qadira received only stock. The other 20% of the preferred stock was received by another shareholder, solely in exchange for 10% of his common stock in Pinto. How is this transaction treated for tax purposes?

In a ____________________ reorganization the creditors rather than the shareholders are considered when testing the continuity of ____________________ doctrine.

The yearly § 382 limitation is computed by multiplying the ____________________ of the loss corporation's stock on the ____________________ date by the ____________________. For the ____________________, the § 382 limitation must be multiplied by the fraction equal to the number of days remaining in the year divided by days in the year.

The two "Type A" reorganizations are mergers and acquisitions.

Gera owns 25,000 shares of Flow Corporation's common stock, for which she paid $250,000. The other 5,000 shares belong to Gera's brother, Earl, which he purchased for $50,000. Wanting to expand a few years ago, Flow sold $200,000 in bonds to Earl. The expansion has paid off and Flow now can afford to redeem 50% of Earl's bonds.

Debt security holders recognize gain when the interest rate on the securities received is greater than the interest rate on the bonds given up.