Exam 7: Corporations: Reorganizations

Present Value Tables needed for this question.Sauce Corporation is very interested in acquiring a controlling interest Pear Corporation,to obtain operating efficiencies.Sauce currently owns 30% of Pear,which it bought six years ago for $600,000.Sauce is a fruit processor with assets valued at $3 million and liabilities of $1 million.Pear supplies Sauce with fruit from its orchards that are valued at $4 million with $3 million in mortgages.Pear also has $60,000 in unused general business credits.Sauce has negotiated a restructuring with most of Pear's shareholders.It will exchange 1 share of its stock for 2 shares of Pear.Pear's founder,who own 10% of the outstanding common stock,is not willing to relinquish her stock and thus,Sauce cannot own 100% of Pear.

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

In an acquisitive "Type D" reorganization,substantially all of the target corporation's assets must be transferred to the acquiring corporation for stock amounting to at least 80% of the total acquiring stock.

Present Value Tables needed for this question.Tony is the sole shareholder of Create Corporation.Tony is a chemical engineer and has been working hard to create a unique product but has been unsuccessful.Thus,Create has accumulated an NOL of $240,000.This year she finally finds the right combination for a new cleaning product.Predicting that Create will be very profitable next year,Create borrows $250,000 to pay Tony the salary she rightly deserves.Next year,Create does become profitable,earning $100,000 before application of carryovers.Mega Corporation,a huge ($50 million value,35% tax bracket)competitor,offers to purchase the patent from Tony for $750,000.Knowing that the Create's NOL should be useful to Mega,Tony suggests a restructuring where she receives $500,000 in Mega stock,Mega assumes all of Create's liabilities ($250,000),plus $75,000 cash for the NOL.Mega counter offers with cash for the NOL (to be determined),and $750,000 of stock.It will not assume any liabilities.How much would be the maximum cash offered by Mega for the NOL,assuming that Mega uses an 11% discount factor and the Federal long-term tax-exempt rate is 4%? If Tony accepts Mega's offer,what type of reorganization,if any,is this restructuring?

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

Explain whether shareholders are exempted from gain/loss recognition in nontaxable corporate reorganization or the gain/loss recognition is merely postponed.If postponed,what is the vehicle for ensuring the postponed gain/loss will be recognized in the future?

Present Value Tables needed for this question.Hair Corporation would like to acquire Scalp Corporation on August 31 because Scalp has an $8,000 capital loss carryover and $32,200 of general business credits that Hair could readily use.At this time,Scalp has assets valued at $1 million (basis of $1.1 million).While Hair is not interested in having Scalp's shareholders become its shareholders,it is interested in expanding into Scalp's business line.Hair thinks it could turn Scalp around with up-to-date equipment.Thus,Hair would like to sell Scalp's assets immediately,recognize the loss to offset its expected gains,and then use the proceeds to purchase new equipment.Hair is a very profitable corporation and is also expecting to have at least $50,000 of capital gains and $3 million in other income for the current year.Hair is proposing paying cash for all of Scalp's assets and liabilities.The Federal long-term tax-exempt rate is currently 3%,and Hair's discount factor for making investment decisions is 15%.

The continuity of interest requires that all target shareholders receive some acquiring stock.

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

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.

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

The application of the § 382 limitation to credits requires determining the income tax reduction benefit when applying the § 382 limitation to deductions.

Discuss the influence of step transaction,sound business purpose,continuity of business enterprise,and continuity of interest doctrines on tax-free corporate reorganizations.

Compare the consideration that can be used in "Type A," "Type B," and "Type C" reorganizations.

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

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

The Long Corporation has $500,000 of assets with a basis of $350,000 and liabilities of $125,000.ShortCo acquires Long's assets and $100,000 of liabilities by exchanging $400,000 of its voting stock.Long distributes the ShortCo stock and remaining liabilities to its shareholder in exchange for her Long stock with a basis of $275,000 and then it liquidates.Which,if any,of the following statements is correct?

To qualify as a tax-free reorganization,a corporate restructuring must meet not only the specific requirements of § 368 but also four general requirements.These four requirements are: ____________________,____________________,____________________,and _________________________.In addition,the ____________________ doctrine should not apply to the reorganization. or

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

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