Exam 7: Corporations: Reorganizations

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 -When the transactions are so interdependent that the accomplishment of one would be fruitless without the completion of the series.

Heart Corporation has net assets valued at $1 million and an NOL of $250,000. On December 31 of last year, Heart is acquired by Brain Corporation, a calendar year taxpayer, in a restructuring qualifying as a tax-free reorganization. Heart shareholders receive 45% of Brain's shares in exchange for all of the Heart stock. Assuming that the Federal long­term tax­exempt rate is 5% and Brain's discount factor is 10%, what is the maximum amount that Brain can use of Heart's NOL this year?

For a corporate restructuring to qualify as a tax-free reorganization, the step transaction doctrine must apply.

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 from qualifying as nontaxable reorganizations. However, these are sales by the target shareholders to the acquiring corporation.

The dollar value in most corporate reorganizations is . Thus, the often dictates the form of the restructurings.

Cuckoo Corporation has just lost a $500,000 product liability suit. Before the lawsuit, its assets were valued at $600,000 (basis of $400,000), and it had general liabilities of $300,000 and $100,000 of bonds outstanding. It also has a $50,000 capital loss carryover, $10,000 general business credits, and $150,000 NOL. Cuckoo is solely owed by Emmy Lou. A state restructuring creates Turaco as the successor company to Cuckoo. Which of the following statements is false?

The tax treatment of the parties involved in a tax-free reorganization almost exactly parallels the treatment under the like-kind exchange provisions. When is received, gain may be ____________________ and losses are ____________________.

Which of the following statements is true regarding the tax benefits from a loss corporation's carryovers that can be used by the successor corporation?

Gnat Corporation and Catcher Corporation would like to merge into one company. Gnat has a net value of $700,000 and Catcher's net value is $300,000. They were considering creating a new corporation called GnatCatcher, but Catcher owns valuable patents that cannot be transferred. Therefore, Gnat will transfer all of its assets to Catcher in exchange for 70% of its stock. Gnat will then liquidate by exchanging the Catcher stock with its shareholders for their stock in Gnat. Which, if any, of the following statements is correct?

The year in which the ownership shift occurs for a corporation, the NOL carryforward is limited not only by the § 382 annual limitation, but also by the percentage of the year remaining.

The provides a restriction on the amount of tax attributes that can be carried over from the target to the acquiring corporation after an ownership shift occurs.

For corporate restructurings, meeting the § 368 reorganization "Type" requirements is all that needs to be considered when planning the structure of the transaction.

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. Rather than have the bond redeemed, Earl would prefer to receive 100 shares of preferred stock for the $100,000 in bonds. At the same time, Gera would like to also own preferred stock, so she turns in 5,000 shares of her common stock in exchange for 100 shares of preferred stock and 5,000 shares of her common for a $100,000 bond. Gera and Earl then each will hold 100 shares of preferred and $100,000 in bonds. Gera still owns 15,000 shares of common and Earl owns 5,000 shares of common. The common stock is valued at $20 per share the day before the preferred is issued. The preferred shares are valued at $1,000 each. State the type of reorganization, if any, for which these transactions qualify. What is the amount of gain or loss that Gera and Earl recognize on these transactions?

Compare an acquisitive "Type D" reorganization with the "Type C" reorganization.

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

The distinguishing characteristic of a "Type D" reorganization is the acquiring corporation is the one transferring assets to the target corporation in exchange for a controlling interest in the target.

The "Type B" reorganization requires a continuity of business interest. Therefore, the acquiring corporation must obtain at least 40% of target corporation's stock through the reorganization.

The yearly § 382 limitation is computed by multiplying the of the loss corporation's stock on the change 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.

Winner Corporation, in the 35% tax bracket, acquires the bankrupt Loser Corporation in a "Type G" reorganization. The assets of Loser are valued at $250,000 (basis of $300,000), and its liabilities are $400,000. Loser holds business credits of $35,000, capital losses of $75,000, and an NOL of $175,000 that will be carried over to Winner. Loser uses $100,000 of its liquid assets to pay off its general creditors. Assuming that no special elections are made, compute Winner's basis in Loser's assets and the amount of tax benefit carryovers available to Winner.

Which of the following statements is true?