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Exam 7: Corporations: Reorganizations

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Question 61

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In each of the following reorganizations, there is an exchange of stock for assets or stock for stock. Indicate for each reorganization the type of stock used for the exchanges and the minimum percentage of stock that may be used for the restructurings to meet the § 368 requirements. Types: A; B; C; divisive D.

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The stock requirements for § 368 reorgan...

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Question 62

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Racket Corporation and Laocoon Corporation create Raccoon Corporation. Racket transfers $600,000 in assets for all of Raccoon's common stock. Racket distributes its remaining assets $300,000) and the Raccoon common stock to its shareholder, Mia, for all her stock in Racket basis $950,000) and then liquidates. Laocoon receives all the Raccoon preferred stock for its $400,000 of assets. Laocoon distributes its remaining assets $300,000) and the Raccoon preferred stock to its shareholder, Carlos, for all his stock in Laocoon basis $200,000) and then liquidates. How will this transaction be treated for tax purposes?

A) This qualifies as a "Type A" reorganization. Mia recognizes no gain or loss, but Carlos recognizes $300,000 gain.
B) This qualifies as a "Type C" reorganization. Mia and Carlos recognize $300,000 gain, to the extent of the boot.
C) This qualifies as a "Type D" reorganization. Neither Mia nor Carlos recognizes a gain or loss.
D) This is a taxable transaction. Mia recognizes $50,000 loss and Carlos recognizes $500,000 gain.

E) C) and D)
F) None of the above

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Question 63

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When substantially all 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.

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

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 its preferred stock to her. She also exchanges her bond for preferred. The nonvoting preferred shares owned by the nieces and nephew are exchanged for voting common stock. Which of the following statements is correct?

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 long-term tax-exempt rate is 3% and Brain's discount factor is 7%, what is the maximum amount that Brain can use of Heart's NOL this year?

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

Humming Inc. is interested in acquiring BirdCo, a supplier of materials for Humming's products, and feels that it could improve the management of BirdCo. Current management has been lax in monitoring product quality, which could lead to recalls or lawsuits. Management of BirdCo is not supportive of a merger because they could lose their positions, whereas most of the shareholders support the acquisition as a method of obtaining new management. There is a very small minority of shareholders who do not want to be shareholders of Humming. BirdCo has assets of $5 million with a basis of $6 million. Its liabilities are $2 million. Which of the following would be the best solution for Humming in its acquisition of BirdCo?

Match the following items with the statements that follow. Terms may be used more than once. -Requires the computation of a deduction equivalent when determining its limitation.

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 $23,000 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 does want to expand 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%, Hair's discount factor for making investment decisions is 10%, and its combined state and Federal tax rate is 25%. a. Discuss the proposed restructuring and the steps that should be taken to maximize Hair's and Scalp's benefits from the reorganization. b. What is the amount of Scalp's carryover loss that Hair may take in the current year assuming that it meets all other tax law requirements? c. As of January 1 next year, what is the present value of carryovers remaining after the current year's utilization?

Match the following items with the statements that follow. Terms may be used more than once. -Requires at least a 40% carryover ownership by target shareholders.

Match the following items with the statements that follow. Terms may be used more than once. -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.

is other property received along with stock in a restructuring falling under § 368. If the shareholders receive the other property, it can be taxed as and/or ____________________.

In a reorganization, each corporation must obtain the approval of the majority of its shareholders. The acquiring corporation must assume at least percent of the target's liabilities.

Which of the following statements is true concerning all types of tax-free corporate reorganizations?

For a "Type C" reorganization, substantially all of the assets means that at least percent of the net asset value and percent of the gross asset value.

Discuss the treatment of accumulated earnings and profits E & P) in a corporate reorganization when both corporations have positive E & P and when the target corporation has a negative E & P.

In a year in which an ownership change 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.

In corporate reorganizations, if an acquiring corporation is using property other than stock as consideration, it may recognize gains but not losses on the transaction.

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, each of whom 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. 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.