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Exam 7: Corporations Reorganizations

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Question 31

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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?

A) The shareholder has a realized gain of $40,000.
B) The shareholder has a postponed gain of $30,000.
C) The shareholder has a basis in the Blush stock of $60,000.
D) The shareholder has a recognized gain of $10,000.
E) All of the above statements are true.

F) A) and B)
G) A) and C)

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Question 32

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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.

A) True
B) False

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Question 33

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Ula purchased stock in Purple, Inc., 6 years ago for $150,000. Purple has assets with a value of $225,000 ($175,000 basis) and liabilities of $60,000. Purple transfers $200,000 of assets and all of its liabilities to White Corporation in exchange for White common stock. Purple distributes the White stock and its $25,000 remaining asset (cash) to Ula in exchange for all of her Purple stock. Purple then liquidates. How is this transaction treated for tax purposes?

In a "Type A" merger, the acquiring corporation may select which liabilities of the target it assumes, but in a "Type A" consolidation, all of the liabilities (known and contingent) must be assumed by the new corporation.

Mars Corporation merges into Jupiter Corporation by exchanging all of its assets for 300,000 shares of Jupiter stock valued at $2 per share and $100,000 cash. Wanda, the sole shareholder of Mars, surrenders her Mars stock (basis $900,000) and receives all of the Jupiter stock transferred to Mars plus the $100,000. How does Wanda treat this transaction on her tax return?

For a capital restructuring to qualify as a "Type E," there must be at least a 50% change in the common stock ownership.

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?

Changing from an S corporation to a C corporation is a ____________________ reorganization.

Target shareholders recognize gain or loss when they receive assets (boot) as well as stock in the acquiring corporation in a transaction meeting the § 368 requirements.

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 tax avoidance motive is essential in establishing a sound business purpose for a reorganization.

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

Match the following items with the statements below. Terms may be used more than once. -Apple Corporation transfers voting stock to Orange Corporation in exchange for substantially all of its assets and its liabilities associated with the plant and equipment. Its general liabilities are not acquired by Apple. Orange distributes the Apple stock to its shareholders in exchange for their Orange stock. Orange then liquidates.

Match the following items with the statements below. Terms may be used more than once. -Green Corporation transfers 20% of its voting stock to Brown Corporation's shareholders in exchange for 60% of Brown's common stock and 90% of its preferred stock. Green acquired 30% of Brown's common stock three years ago in a taxable transaction. Brown becomes a subsidiary of Green.

The application of the § 382 limitation to credits requires determining the income tax reduction benefit when applying the § 382 limitation to deductions.

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

Match the following items with the statements below. Terms may be used more than once. -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 and only liabilities associated with real estate to Plum for 45% of Plum's shares. Pear distributes the Plum stock to its shareholders in exchange for their Pear stock. Pear then liquidates.

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.

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?

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: