Exam 7: Corporations: Reorganizations

Ula purchased stock in Purple, Inc., 6 years ago for $150,000. Purple has assets with a value of $225,000 ($175,000 basis) and liabilities of $60,000. Purple transfers $200,000 of assets and all of its liabilities to White Corporation in exchange for White common stock. Purple distributes the White stock and its $25,000 remaining asset (cash) to Ula in exchange for all of her Purple stock. Purple then liquidates. How is this transaction treated for tax purposes?

The continuity of business enterprise requires that at least 40% of the target's assets are acquired with stock.

What type of reorganization is affected in each of the following independent transactions? a. "A" reorganization, merger b. "A" reorganization, consolidation c. "B" reorganization d. "C" reorganization e. Acquisitive "D" reorganization f. "D" reorganization, spin­off g. "D" reorganization, split­off h. "D" reorganization, split­up i. "E" reorganization j. "F" reorganization k. "G" reorganization l. Taxable transaction -Jones Corporation is insolvent and under state law protection from its creditors. Its assets are transferred to Smith Corporation in exchange for all of its stock. The stock is distributed to the creditors of Jones, and the shareholders only receive stock valued at 10% of their stock.

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.

Ocelot Corporation is merging into Tiger Corporation under state law requirements. Ocelot transfers assets worth $300,000 to Tiger. Ocelot receives 30,000 shares of Tiger stock and $200,000 cash. Ocelot transfers the Tiger stock, $200,000 cash, and all of its liabilities ($50,000) to its shareholder, Van, in exchange for all of his Ocelot stock (basis $100,000). Ocelot then liquidates. How is this transaction treated for tax purposes?

Gato Corporation exchanged 25% of its stock with Lobo for all of its assets. The Gato stock was distributed to the Lobo shareholders in exchange for all of their stock. Lobo then liquidated. At the time of the acquisition by Gato, the value of Lobo was $3 million, and the Federal long-term tax-exempt rate was 4%. In the current year, Gato has $500,000 of taxable income. Lobo has excess credits from prior years amounting to $150,000. What amount of Lobo's credits may Gato use in computing its Federal income tax for the year, if Gato is in the 34% tax bracket?

Briefly describe the Federal judicial doctrines that may apply to tax-free corporate reorganizations.

Dipper Corporation is acquiring Bulbul Corporation by exchanging 220,000 shares of Dipper stock and $80,000 cash for all of Bulbul's assets (valued at $500,000), liabilities ($200,000), and accumulated earnings and profits ($120,000). Betty purchased 40% of Bulbul five years ago for $60,000, and Keith purchased the remaining 60% for $90,000. What is the amount and character of the gain or loss that Betty and Keith recognize (if any), assuming that the exchange qualifies as a § 368 reorganization? What is the basis in their new Dipper stock?

To qualify as a "Type A" reorganization, mergers must comply with the requirements of pertinent foreign, state, and Federal statutes.

Tin Corporation was created 10 years ago. It currently is valued at $1.5 million as follows: Tacks division ($420,000), Safety Pins division ($580,000), Paper Clips division ($450,000) and investment assets ($50,000). Tin currently has three shareholders: Antonio, who was the initial shareholder and now owns 40% of the stock (basis in stock $350,000), and Beth and Chang, who each purchased 30% of Tin two years ago for $435,000. Tin is having management problems because the shareholders cannot agree on the future of the company. They have determined that it would be best to divide up the company and go their separate ways. Each shareholder feels that the others do not deserve to continue using the Tin Corporation name. a. a. Determine what would be the best method to divide the corporation among the shareholders with the least amount of taxes. b. Draw a diagram of the solution you suggested in part c. Any investments that should be received by the new entities will be distributed to the shareholders in exchange for their Tin stock. Beth is the only shareholder who has indicated that she prefers to receive some investments. Determine the gain or loss each entity and shareholder will have upon the division.

Last year, Loss Corporation transferred all of its assets (value of $8.2 million; basis of $2.7 million) and liabilities ($3.7 million) to Gain Corporation in exchange for 40% of Gain's voting stock. Loss then liquidated. At the time of the reorganization, Loss had NOLs and excess credits that may be carried forward. For the current year, Gain has taxable income of $770,000 before considering the $150,000 NOL and $30,000 in excess credits carried to this year. If the Federal long-term tax-exempt rate was 4% at the time of the reorganization, what is the amount of NOL and credit carryovers Gain Corporation may utilize in the current year? How much credit carries over to next year?

Mars Corporation merges into Jupiter Corporation by exchanging all of its assets for 300,000 shares of Jupiter stock valued at $2 per share and $100,000 cash. Wanda, the sole shareholder of Mars, surrenders her Mars stock (basis $900,000) and receives all of the Jupiter stock transferred to Mars plus the $100,000. How does Wanda treat this transaction on her tax return?

What type of reorganization is affected in each of the following independent transactions? a. "A" reorganization, merger b. "A" reorganization, consolidation c. "B" reorganization d. "C" reorganization e. Acquisitive "D" reorganization f. "D" reorganization, spin­off g. "D" reorganization, split­off h. "D" reorganization, split­up i. "E" reorganization j. "F" reorganization k. "G" reorganization l. Taxable transaction -Snow Corporation, located in Washington State, establishes Rain Corporation, located in Arizona. Snow then transfers all of its assets to Rain in exchange for all of Snow's stock. After distributing the Rain stock to its shareholders, Snow liquidates.

In a reorganization, the original corporation must receive at least 80% percent of new corporations' stock. The assets transferred to the new corporations must have been owned and conducted as a trade or business for at least ____________________ years.

Provide the formula for the § 382 limitation and demonstrate how the formula is altered for the change year. What is the purpose of the § 382 limitation?

The tax treatment of reorganizations almost parallels the Federal income tax treatment for like-kind exchanges.

Which of the following statements is false?

Since debt security holders do not own stock, they do not fall under the corporate reorganization rules.

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 -Tax avoidance is not enough; transaction must have a corporate economic consequence.

Korat Corporation and Snow Corporation enter into an acquisitive "Type D" reorganization. Xin currently holds a 20-year, $10,000 Snow bond paying 4% interest. There are 8 years until the bond matures. In exchange for his Snow bond, Xin receives an 8 year $16,000 Korat bond paying 2.5% interest. Xin thinks this is fair because he will still receive $400 of interest each year and both bonds mature on the same date. How does Xin treat this transaction on his tax return?