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Exam 7: Corporations: Reorganizations

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Question 61

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Federal bankruptcy legislation created the reorganization. To qualify for this type of reorganization, the corporation must be before the reorganization.

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Question 62

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Bobcat Corporation redeems all of Zed's 4,000 shares and distributes to him 2,000 shares of Van Corporation stock plus $50,000 cash. Zed'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 of Van are $75,000. How does Zed treat this transaction for tax purposes?

A) No gain is recognized by Zed in this reorganization.
B) Zed reports a $50,000 recognized dividend.
C) Zed reports a $50,000 recognized capital gain.
D) Zed reports a $40,000 recognized dividend and a $10,000 capital gain.
E) Not enough information is available to determine proper treatment.

F) D) and E)
G) A) and E)

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Question 63

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

Discuss the role of letter rulings in corporate reorganizations.

Without evidence to the contrary, the IRS views transactions occurring within one year of a reorganization as part of the restructuring.

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 -Black Corporation has been engaged in manufacturing toys and investing in high technology corporate stock for eight years. Black creates Blue and White Corporations. It transfers the toy division to Blue and the investments to White, in exchange for all of each corporation's common voting stock. The stock of Blue and White is distributed to Black shareholders in return for all of their Black stock. Black then liquidates.

When a corporation has cancellation­of­debt relief in a "Type G" reorganization, the corporation reduces its benefits in tax items such as earnings and profits.

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

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?

Since the "Type B" reorganization precludes the use of , gain or loss is not recognized. In this type of reorganization, a relationship between the acquiring and target corporations is created.

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?

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 -Can be treated as boot if cash as well as voting stock is the consideration used by the acquiring corporation in a "Type C" reorganization.

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?

Grebe Corporation is a car dealership that has been in existence for 10 years. It has also been in the car leasing business for 6 years. Both businesses produce substantial amounts of cash, and Grebe has been investing this cash in mutual funds for the past 10 years. Grebe is interested in separating its businesses. It will create (a) new corporation(s) to receive assets in exchange for stock. Which of the following is correct regarding this transaction?

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 -Any asset other than stock or securities received by the target shareholders.

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

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

The term "reorganization" refers to any restructuring that will be tax­free under Code section _________________________.

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?

The determination of whether a shareholder's gain qualifies for stock redemption treatment in a corporate reorganization is based on the reduction in the percentage of the stock held in the target corporation when compared to the percentage held in the acquiring corporation.