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Exam 7: Corporations: Reorganizations

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Question 21

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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?

A) Since this qualifies as a "Type A" reorganization, Van recognizes no gain.
B) Since this qualifies as a "Type C" reorganization, Van recognizes a $200,000 gain.
C) Since this qualifies as a "Type A" reorganization, Van recognizes a $150,000 gain.
D) Since this does not qualify as a reorganization, Van recognizes a $150,000 gain.

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

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Question 22

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Asity Corporation is interested in acquiring the majority of Pitta Corporation's assets. Pitta's assets are currently valued at $950,000, and its liabilities are $250,000. However, there is one operating division of Pitta in which Asity is not interested. Since Pitta desires to be taken over by Asity, Pitta first sells the unwanted division for its net fair market value of $250,000 ($350,000 FMV assets - $100,000 liabilities) . Pitta then transfers its remaining assets and liabilities to Asity for $450,000 in common voting stock. Which of the following statements is correct with regards to the proposed restructuring?

A) Continuity of interest does not exist for the Pitta shareholders.
B) The continuity of business enterprise test is failed.
C) There is no sound business purpose for this restructuring.
D) The step transaction can be applied to this transaction.
E) All of the above statements are true.

F) A) and C)
G) C) and D)

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Question 23

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A shareholder bought 10,000 shares of Coral Corporation for $50,000 several years ago. When the stock is valued at $90,000, Coral redeems the shares in exchange for 5,000 shares of Blush Corporation stock and a $10,000 Blush bond. This transaction meets the requirements of § 368. Which of the following statements is false with regard to this transaction?

Cotinga Corporation is acquiring Petrel Corporation through a "Type C" reorganization by exchanging 20% of its voting stock and $50,000 for all of Petrel's assets (value of $800,000 and basis of $600,000) and liabilities ($100,000). Jerrika owns 48% of Petrel (basis $270,000), and Allen owns the remaining 52% (basis $380,000). They exchange their stock in Petrel for their proportionate shares of the Cotinga stock and cash. What is the value of the Cotinga stock received by Jerrika and Allen? What are the amounts of gains/losses each recognizes due to the reorganization? What is Jerrika's and Allen's basis in the Cotinga stock?

Against the will of Rally Corporation's management, Buoy Corporation offers Rally's shareholders 2 shares of Buoy common stock for each share of Rally common and 50 shares of Buoy common for each share of Rally preferred. The results of a hostile takeover yield Buoy 85% of Rally common stock and 100% of the preferred. The only stock it did not obtain was that owned by management. This transaction qualifies as a(n) :

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

Dahlia owns $100,000 in Crimson Topaz preferred stock. The annual dividend rate on the preferred is 4%. She exchanges this preferred stock for $60,000 in Crimson Topaz bonds paying 4% annual interest and $40,000 in common stock. How is this transaction treated for tax purposes?

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.

Weaver Corporation has net assets valued at $800,000 and an NOL of $250,000. On September 30 of the current year, Weaver is acquired by Loom Corporation, a calendar year taxpayer, in a restructuring qualifying as a tax-free reorganization. Weaver shareholders receive 30% of Loom's shares in exchange for all of their Weaver stock. Assuming that the Federal long-term tax-exempt rate is 8%, what is the maximum amount of Weaver's NOL available to Loom in the current year?

Spoonbill Corporation has assets with a FMV of $800,000 and adjusted basis of $600,000. It has been manufacturing engineering equipment and laboratory tools for the last 8 years. Spoonbill forms a new corporation, Roseate Corporation, by acquiring all of its stock in exchange for the laboratory tool division of Spoonbill. Each of the Spoonbill shareholders receives 1 share of Roseate stock for each 50 shares they own in Spoonbill. How will this transaction be treated for Federal income tax purposes?

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.

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

When a "Type F" reorganization includes a change from a taxable corporation to a flow-through entity, the original corporation stock loses its § 1244 status and earnings and profits do not carry over.

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?

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?

The basis for the acquiring corporation in the target's assets is increased by any gain recognized by the target.

Xian Corporation and Win Corporation would like to combine into one entity. Win redeems 90% of its common stock and all of its nonvoting preferred stock, in exchange for 40% of Xian's common and 20% of its nonvoting preferred stock. Win then distributes the Xian stock to its shareholders. Win then becomes a subsidiary of Xian.

Acquiring Corporation transfers $1 million of its voting common stock and $100,000 cash to Target Corporation in exchange for 90% of the Target assets. The assets retained by Target are used to settle its liabilities. Target then distributes the Acquiring stock and cash received to its shareholders in exchange for all of their Target shares. Target then liquidates. This restructuring qualifies as a:

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

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