Exam 7: Corporations: Reorganizations

On March 1, Cream Corporation transfers all of its assets to Coffee Corporation in exchange for 10% of its common voting stock. At the time of the reorganization, Cream has assets valued at $4 million (basis of $3 million) and its earnings and profits account shows a deficit of $650,000. Coffee's earnings and profits as of March 1 were $420,000. Due to the reorganization, Coffee has an NOL for the current year of $150,000. Coffee still declares its usual dividends of $100,000, paid on April 30, August 31, and December 31 ($300,000 of total dividends). a. How are the Coffee shareholders taxed on the distribution? b. What portion of the current-year NOL may be carried back to prior Coffee and/or Cream tax years?

Which of the following statements is correct with regards to liabilities in corporate reorganizations?

WhydahCo is owned by Gilda and her four nieces and nephews. Gilda owns all the WhydahCo voting stock and its $50,000 bond. She wants to relinquish control of the entity; accordingly, WhydahCo redeems all of Gilda's voting common stock and issues her its preferred stock. She also exchanges her bond for preferred stock. The nonvoting preferred shares owned by the nieces and nephew are exchanged for voting common stock. Which of the following statements is correct?

Pallid Swift, Inc., is an S corporation located in Colorado. In the past year, PallidSwift has become profitable; but due to its rapid growth, Pallid Swift has no excess cash for distributions. Therefore, Pallid Swift decides that it should become a C corporation.

Liabilities generally are not considered boot in corporate reorganizations except in a "Type C" when cash or other property is also used in the transaction.

In a "Type A" merger, the acquiring corporation may select which liabilities of the target it assumes, but in a "Type A" consolidation, all of the liabilities (known and contingent) must be assumed by the new corporation.

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 long­term tax­exempt 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?

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?

The Federal income tax treatment of a corporate restructuring is an extension of allowing entities to form without taxation.

Spoonbill Corporation has assets with a FMV of $800,000 and adjusted basis of $600,000. It has been manufacturing engineering equipment and laboratory tools for the last 8 years. Spoonbill forms a new corporation, Roseate Corporation, by acquiring all of its stock in exchange for the laboratory tool division of Spoonbill. Each of the Spoonbill shareholders receives 1 share of Roseate stock for each 50 shares they own in Spoonbill. How will this transaction be treated for Federal income tax purposes?

In a reorganization, shareholders may exchange preferred stock for common or common for preferred stock.

One advantage of acquiring a corporation with losses is that after a tax-free reorganization, the remaining corporation may combine the negative earnings and profits (E & P) of the target corporation with positive E & P of the acquiring corporation.

In which type of corporate reorganization do shareholders receive stock in at least two other corporations, in exchange for all of the stock in the original corporation?

Match the following items with the statements below. Terms may be used more than once. a. Boot b. Business credits c. Capital gain d. Continuity of business enterprise e. Continuity of interest f. Dividend g. Discount rate h. Earnings and profits i. Equity structure shift j. Federal long-term tax-exempt rate k. Liability assumption l. Ordinary gain m. Owner shift n. Ownership change o. Section 382 limitation p. Sound business purpose q. Step transaction -Requires the computation of a deduction equivalent when determining its limitation.

A tax avoidance motive is essential in establishing a sound business purpose.

Acquiring Corporation transfers $1 million of its voting common stock and $100,000 cash to Target Corporation in exchange for 90% of the Target assets. The assets retained by Target are used to settle its liabilities. Target then distributes the Acquiring stock and cash received to its shareholders in exchange for all of their Target shares. Target then liquidates. This restructuring qualifies as a:

Saucer Corporation has a value of $800,000, basis in its assets of $670,000, and liabilities of $200,000. Cup Corporation acquires 90% of Saucer's assets by exchanging $550,000 of its voting stock, $20,000 cash, and assuming $150,000 of Saucer's liabilities. The remaining 10% of Saucer's assets not acquired is $80,000 cash. Saucer distributes the Cup stock, $100,000 in cash and associated $50,000 in liabilities to its shareholder, Sam, in exchange for his Saucer stock (basis $560,000). Saucer then liquidates. How will this transaction be treated for tax purposes?

Besides the statutory requirements for tax-free treatment for corporate reorganizations, there are several judicial requirements. Which of the following is not a judicial requirement for corporate reorganizations?

Angus Corporation purchased 15% of Hereford Corporation 4 years ago for $150,000. Angus acquires 75% more of Herford's stock directly from the Hereford shareholders in an exchange for 25% of the Angus common stock currently outstanding. There is still 10% of the Hereford stock held by its original shareholders as they are not interested in being common shareholders of Angus. This transaction qualifies as what type of reorganization?

Match the following items with the statements below. Terms may be used more than once. a. Boot b. Business credits c. Capital gain d. Continuity of business enterprise e. Continuity of interest f. Dividend g. Discount rate h. Earnings and profits i. Equity structure shift j. Federal long-term tax-exempt rate k. Liability assumption l. Ordinary gain m. Owner shift n. Ownership change o. Section 382 limitation p. Sound business purpose q. Step transaction -Requires at least a 40% carryover ownership by target shareholders.