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Exam 7: Corporations: Reorganizations

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Question 51

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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?

A) All of this transaction is taxable.
B) The transaction is not currently taxable as it qualifies as a "Type E" reorganization.
C) Only the exchange of the preferred stock for the common stock is taxable, because of the reduction in preferential treatment upon liquidation.
D) Only the exchange of the preferred stock for the bond is taxable.
E) None of the above.

F) A) and B)
G) All of the above

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Question 52

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

A) True
B) False

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Question 53

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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.

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 long­term tax­exempt rate is 8%, what is the maximum amount of Weaver's NOL available to Loom in the current year?

All of the following statements are true about corporate reorganization except:

The acquiring corporation in a "Type G" reorganization reduces the tax attributes carried over from the bankrupt corporation by the percentage in change in ownership.

The acquiring corporation in a "Type G" reorganization must reduce the tax attributes carried over to it to the extent of the ____________________ relief.

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 -Pear Corporation wishes to merge with Plum Corporation. Plum has more name recognition with consumers so Pear would like Plum to be the surviving corporation. Pear transfers all of its assets to Plum for 75% of Plum's shares. Pear distributes the Plum stock to its shareholders in exchange for their Pear stock. Pear then liquidates.

In a divisive "Type D" reorganization, the distributing corporation obtains control of the new target by exchanging some of its assets for at least 80% of the new target's outstanding stock.

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.

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 of her stock in Racket (basis $950,000) and then liquidates. Laocoon receives all of the 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 of his stock in Laocoon (basis $200,000) and then liquidates. How will this transaction be treated for tax purposes?

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 -Carries over to new corporations in a split-up reorganization.

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

Crested Serpent Eagle (CSE) Corporation is owned by Lin Yuan and Yu Chi. It has been in the manufacturing and lumber businesses for 20 years. For liability protection, the manufacturing assets of CSE are transferred to Serpent Corporation for all of its stock. This stock is distributed to Lin Yuan in exchange for her CSE stock. The lumber assets are transferred to Eagle Corporation for all of its stock. Yu Chi receives the Eagle stock in exchange for his CSE shares. CSE then terminates.

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?

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

Individual shareholders would prefer to have a gain on a corporate reorganization treated as a capital gain rather than as a dividend, because they can reduce the amount taxable by their basis in the stock involved.

Acquiring Corporation transfers $500,000 stock and land with a value of $400,000 (basis of $250,000) to Target for most of its assets. The assets not acquired in the "Type A" reorganization are distributed to Target's shareholder, Tia. They are valued at $100,000 (basis of $120,000). Acquiring stock and the land also are distributed to Tia in exchange for her stock in Target. Tia's basis in her stock is $650,000. What is the gain or loss recognized by Acquiring, Target, and Tia on this restructuring? What is Tia's basis in the Acquiring stock?

Which of the following statements regarding the applicability of the judicial doctrines to a "Type G" reorganization is correct?

Liabilities are problematic only in the reorganization when the corporation transfers other property (boot) as well as stock to the target.