Exam 7: Corporations: Reorganizations

In 1916, the Supreme Court decided that corporate reorganizations were substantially continuations of the prior entities and thus should not be subject to taxation.

Bobcat Corporation redeems all of Zeb's 4,000 shares and distributes to him 2,000 shares of Van Corporation stock plus $50,000 cash. Zeb's basis in his 20% interest in Bobcat is $100,000 and the stock's value is $250,000. At the time Bobcat is acquired by Van, the accumulated earnings and profits of Bobcat are $200,000 and Van's are $75,000. How does Zeb treat this transaction for tax purposes?

Iron Corporation was created 10 years ago. It has two divisions: tacks, which produces 55% of the sales, and paper clips, producing the remaining sales. Iron currently has two shareholders: Juanita, who acquired 60% of the stock three years ago for $625,000, and Kyle, who purchased his 40% six years ago for $220,000.

The gain recognized by a shareholder in a corporate reorganization is the difference between the realized gain and the boot received.

Contra Corporation is owned 50% by Terry and 50% by Sammy. Due to news articles damaging Contra's reputation, Terry and Sammy decide to liquidate Contra, which has been in existence for 4 years. They create Alpha and Beta Corporations to receive all of the manufacturing assets of Contra's two picture frame plants. Alpha receives the urban plant manufacturing assets and Beta receives the country manufacturing plant. Terry receives 60% Alpha stock and 40% of the Beta stock and Sammy receives 40% Alpha stock and 60% of the Beta stock. Terry and Sammy turn in their Contra stock and Contra then liquidates. Assuming all other requirements are met, how will this transaction be treated for tax purposes?

If the target corporation in a reorganization has a deficit in earnings and profits, any gains recognized by the shareholders are treated as stock redemptions and not as dividends.

Liabilities are problematic only in the ____________________ reorganization when the ____________________ corporation transfers other property as well as stock to the target.

Present Value Tables needed for this question. Sugar Corporation would like to acquire Salt Corporation on January 1 of the current year in a tax-free reorganization. Salt is particularly appealing to Sugar because Salt has a $250,000 capital loss that can carry over for five years. Sugar expects large capital gains for the next several years in addition to its expected $2.5 million net income. At the time of the restructuring, Salt has assets valued at $2 million (basis of $1.4 million). Sugar is proposing exchanging 45% of its stock for all of Salt's assets. The Federal long-term tax-exempt rate is 2% and Sugar's discount rate for investment decisions both currently 7%. What is the maximum present value of the capital loss to Sugar?

A ____________________ reorganization is a recapitalization of a single corporation.

The sound business purpose doctrine and § 269 have the same purpose of disallowing restructurings that are primarily for tax avoidance motives.

Cocoa Corporation is acquiring Milk Corporation in a "Type A" reorganization by exchanging 40% of its voting stock and $50,000 for all of Milk's assets (value of $850,000 and basis of $600,000) and liabilities ($200,000). The shareholders of Milk are Elsie (650 shares) and Ferdinand (350 shares). They bought their stock for $500 per share. What is the value of the stock that Elsie and Ferdinand received from Cocoa? What is the amount of gains or losses they will recognize due to the reorganization and what is their basis in the Cocoa stock? Elsie $390,000 Cocoa stock; Ferdinand $210,000 Cocoa stock. Elsie has $32,500 recognized gain, Ferdinand has $17,500 recognized gain. Elsie's basis in her Milk stock is $325,000 (650 ´ $500) and the value of her Milk stock is $422,500 [($850,000 - $200,000) ´ 65%]. She receives $32,500 in cash ($50,000 ´ 65%) and $390,000 in Cocoa stock [($850,000 - $200,000 - $50,000) ´ 65%]. Ferdinand's basis in his Milk stock is $175,000 (350 ´ $500) and the value of his Milk stock is $227,500 [($850,000 - $200,000) ´ 35%]. He receives $17,500 in cash ($50,000 ´ 35%) and $210,000 in Cocoa stock [($850,000 - $200,000 - $50,000) ´ 35%].

Vintage Corporation has four shareholders: Robin, Quinton, Paula, and Orvil. Paula and Orvil started the business 10 years ago, and Robin and Quinton bought their stock 6 years ago. Vintage's historical business is buying and selling antiques. When Robin and Quinton joined Vintage, it added a new business, trading in collectibles. Lately, there has been a disagreement about the future of Vintage. Orvil and Quinton are not interested in collectibles, but Robin and Paula enjoy this part of the business. To resolve this issue, Paula suggests that two new corporations be created, Antique and Collectible. Antique would receive all of the assets of the antique part of the business, and Collectible would receive all of the assets of the collecting part of Vintage. All of the stock of these two corporations would be received by Vintage and distributed to the appropriate shareholders. Vintage would then terminate.

A present value analysis is beneficial when valuing tax attributes limited by the § 382 limitation.

North Corporation acquires 90% of South's assets (basis of $700,000) by exchanging $600,000 of its voting stock and assuming $300,000 of South's liabilities. South distributes North stock, its remaining $100,000 in assets, and associated $40,000 in liabilities to its shareholder in exchange for his South stock (basis of $500,000). South then liquidates. How will this transaction be treated for tax purposes?

When a corporation has cancellation-of-debt relief in a "Type G" reorganization, the corporation reduces its benefits in tax attributes such as NOLs and business credits.

Burmese Corporation is interested in acquiring Javanese Corporation by transferring 30% of its stock for all of Javanese's assets valued at $500,000 (basis of $150,000) and its $200,000 of liabilities. Javanese has created $50,000 in general business research credits which it cannot use. Javanese concentrates on pharmaceutical research whereas Burmese manufactures sun glasses. Burmese uses a discount factor of 8% and the Federal applicable rate is 4%. Javanese will terminate after the restructuring. How will this transaction be treated for tax purposes?

Corporate shareholders would prefer to have a gain on a reorganization treated as a dividend rather than as a capital gain, because of the dividends received deduction.

When substantially all of the assets of the target corporation are received in exchange for voting stock and selected liabilities, the restructuring can qualify as a "Type C" reorganization.

Corporate reorganizations can meet the requirements to qualify as like-kind exchanges if there is no boot involved.

The ____________________ doctrine ensures that the acquiring corporation cannot immediately sell the target corporation assets it receives in the reorganization. The ____________________ doctrine also prevents transactions that appear to be sales. However, these are sales by the target shareholders to the acquiring corporation.