Exam 7: Corporations: Reorganizations

Manx Corporation transfers 40% of its stock and $50,000 in cash to Somali Corporation for $500,000 of assets and all $200,000 of its liabilities.Somali exchanges the Manx stock,cash,and its remaining $100,000 of assets with its shareholders for all of their stock in Somali.After the exchange,Somali liquidates.The exchange qualifies as what type of transaction?

Which of the following statements regarding "Type B" reorganizations is true?

The treatment of corporate reorganizations is similar to like-kind exchanges.

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?

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?

Yoko purchased 10% of Toyger Corporation's stock six years ago for $70,000.In a transaction qualifying as a "Type C" reorganization,Yoko received $50,000 cash and 8% of Angora Corporation's stock (valued at $100,000)in exchange for her Toyger stock.Prior to the reorganization,Toyger had $200,000 accumulated earnings and profits and Angora had $300,000.How does Yoko treat the exchange for tax purposes?

Pipe Corporation is very interested in acquiring all of Ore Corporation.It currently owns 30%,which it purchased 6 years ago for $250,000.Pipe is a manufacturer of plumbing pipes with assets valued at $3 million and liabilities of $1 million.Ore supplies Pipe with copper from its mines that are valued at $4 million with $3 million in mortgages.Pipe negotiates the restructuring with Ore's management.Pipe is concerned about potential environmental issues from the strip mining used by Ore and feels it needs liability protection.

Obtaining a positive letter ruling from the IRS can ensure the desired tax treatment for parties contemplating a corporate reorganization.

The ____________________ doctrine treats several transactions as if they were one transaction when they are all integrated.The ____________________ doctrine ensures that the restructuring has a purpose beyond tax avoidance or evasion.

Ocelot Corporation is merging into Tiger Corporation under state law requirements.Ocelot transfers $300,000 of assets to Tiger in exchange for 30,000 shares and $200,000 in 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 will this transaction be treated for tax purposes?

Which of the following statements is true regarding a "Type A" reorganization?

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.

An exchange of common stock for preferred stock or bonds for preferred stock can qualify as a "Type E" reorganization.

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?

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?

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?

In a "Type B" reorganization,the acquiring corporation obtains control by exchanging common and preferred stock in the same percentages as the target's outstanding common and preferred stock.

The gains shareholders recognize as a part of a corporate reorganization may be treated a dividend to the extent of the corporation's E & P.

Discuss the role of letter rulings in corporate reorganizations.

There are several different types of corporate reorganizations allowed by the Internal Revenue Code.Provide a brief description of each type.