Question 1

To qualify as a "Type A" reorganization, mergers must comply with the requirements of pertinent foreign, state, and Federal statutes.

Accepted Answer

To qualify as a "Type A" reorganization, mergers must comply with the requirements of pertinent foreign, state, and Federal statutes.

Question 2

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.

Accepted Answer

A "Type B" reorganization requires the acquiring corporation to use solely voting stock to acquire control of the target corporation, but there is no specific percentage like 40% mandated by law.

Question 3

If the acquiring corporation purchased 25% of target stock for cash ten years ago, the acquiring corporation can still meet the "Type C" reorganization requirement that 80% of the target's assets be acquired with stock.

Accepted Answer

The "Type C" reorganization requirement is that 80% of the target's assets be acquired with stock. In this case, the acquiring corporation purchased 25% of target stock for cash ten years ago. This means that the acquiring corporation already owns 25% of the target's assets. Therefore, the acquiring corporation can still meet the "Type C" reorganization requirement by acquiring the remaining 75% of the target's assets with stock.

Question 4

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.

Accepted Answer

In a Type A consolidation, the new corporation assumes all of the assets and liabilities of the merging entities, including known and contingent liabilities.

Question 5

The Federal income tax treatment of a corporate restructuring is an extension of allowing entities to form without taxation.

Accepted Answer

The Federal income tax treatment of a corporate restructuring follows the principle of allowing entities to form without taxation, as it aims to incentivize corporate reorganization and restructuring for the purpose of increasing efficiency and productivity, without imposing unnecessary tax burdens on businesses.

Question 6

Originally, the Supreme Court decided that corporate reorganizations were substantially continuations of the prior entities and thus should not be subject to taxation.

Accepted Answer

The answer of Originally, the Supreme Court decided that corporate...

Question 7

For a corporate restructuring to qualify as a tax-free reorganization, the step transaction doctrine must apply.

Accepted Answer

The step transaction doctrine is a legal principle used to analyze a series of formally separate steps in a transaction to determine whether they should be treated as a single integrated event for tax purposes. A corporate restructuring can qualify as a tax-free reorganization without the application of the step transaction doctrine; it must meet specific requirements outlined in the Internal Revenue Code, such as continuity of interest, business purpose, and continuity of business enterprise, among others. The step transaction doctrine is not a requirement for a reorganization to be tax-free but rather a tool that might be used to analyze the transaction.

Question 8

While a "Type B" reorganization requires that voting stock be used by the acquiring corporation, in a "Type A," the acquiring corporation can use common or preferred stock and still have the restructuring meet the qualifications of § 368.

Accepted Answer

In a Type A reorganization, the acquiring corporation can use either common or preferred stock and still qualify under § 368.

Question 9

The tax treatment of reorganizations almost parallels the Federal income tax treatment for like-kind exchanges.

Accepted Answer

Reorganizations and like-kind exchanges both involve the exchange of assets or securities, and the tax code provides certain rules and exceptions for both types of transactions that can allow for a deferral of tax liability. Therefore, the tax treatment of reorganizations is similar to that of like-kind exchanges.

Question 10

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.

Accepted Answer

As per the tax laws, the acquiring corporation is allowed to recognize gains but not losses when using property other than stock as consideration in corporate reorganizations. This is known as the "boot" received by the selling shareholders, and it usually results in the recognition of a taxable gain to the selling shareholders.

Question 11

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.

Accepted Answer

This is because capital gains are taxed at a lower rate than dividends, and shareholders can also use their basis to reduce the amount of taxable gain.

Question 12

For corporate restructurings, meeting the § 368 reorganization "Type" requirements is all that needs to be considered when planning the structure of the transaction.

Accepted Answer

While meeting the § 368 reorganization Type requirements is an important consideration for corporate restructurings, there are many other factors that need to be taken into account when planning the structure of the transaction, such as tax implications, legal requirements, and business goals.

Question 13

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

Accepted Answer

Obtaining a positive letter ruling from the IRS can provide assurance to parties involved in a corporate reorganization that their desired tax treatment will be recognized and accepted by the IRS.

Question 14

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.

Accepted Answer

According to the IRS, gains realized by shareholders during a corporate reorganization may be treated as a dividend to the extent of the corporation's earnings and profits (E&P). This is because such gains may be seen as a distribution of the corporation's accumulated profits. However, any gains in excess of the E&P are generally treated as a capital gain.

Question 15

When substantially all of 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.

Accepted Answer

According to the Internal Revenue Code (IRC) section 368(a)(1)(C), a Type C reorganization occurs when substantially all of the assets of the target corporation are received in exchange for voting stock and selected liabilities. Therefore, the statement is true.

Question 16

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.

Accepted Answer

In a transaction that meets the § 368 requirements (a type of reorganization under the Internal Revenue Code), target shareholders generally do not recognize gain or loss when they receive a combination of stock in the acquiring corporation and other property or cash (often referred to as "boot") unless the boot received is sufficient to trigger gain recognition. The primary focus is on the continuity of interest and the nature of the transaction rather than the receipt of boot per se.

Question 17

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

Accepted Answer

The answer of Since debt security holders do not own...

Question 18

In a "Type B" reorganization, the acquiring corporation obtains control by exchanging common and preferred stock in the same percentages as the target's outstanding common and preferred stock.

Accepted Answer

In a "Type B" reorganization, the acquiring corporation obtains control by exchanging its voting stock for the stock of the target corporation, but there is no requirement for the exchange to be in the same percentages as the target's outstanding common and preferred stock.

Question 19

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

Accepted Answer

This is known as the "inside basis" and it reflects the fair market value of the assets acquired by the acquiring corporation, including any recognized gains from the target's assets.

Question 20

The amount of gain recognized by a shareholder in a corporate reorganization is based on the shareholder's proportionate share of E & P.

Accepted Answer

The amount of gain recognized by a shareholder in a corporate reorganization is based on the difference between the fair market value of the property received and the shareholder's adjusted basis in the stock exchanged. Earnings and Profits (E & P) affect dividend distributions, not the recognition of gain in reorganizations.

Quiz 7: Corporations Reorganizations

To qualify as a "Type A" reorganization, mergers must comply with the requirements of pertinent foreign, state, and Federal statutes.

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.

If the acquiring corporation purchased 25% of target stock for cash ten years ago, the acquiring corporation can still meet the "Type C" reorganization requirement that 80% of the target's assets be acquired with stock.

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.

The Federal income tax treatment of a corporate restructuring is an extension of allowing entities to form without taxation.

Originally, the Supreme Court decided that corporate reorganizations were substantially continuations of the prior entities and thus should not be subject to taxation.

For a corporate restructuring to qualify as a tax-free reorganization, the step transaction doctrine must apply.

While a "Type B" reorganization requires that voting stock be used by the acquiring corporation, in a "Type A," the acquiring corporation can use common or preferred stock and still have the restructuring meet the qualifications of § 368.

The tax treatment of reorganizations almost parallels the Federal income tax treatment for like-kind exchanges.

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.

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.

For corporate restructurings, meeting the § 368 reorganization "Type" requirements is all that needs to be considered when planning the structure of the transaction.

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

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.

When substantially all of 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.

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.

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

In a "Type B" reorganization, the acquiring corporation obtains control by exchanging common and preferred stock in the same percentages as the target's outstanding common and preferred stock.

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

The amount of gain recognized by a shareholder in a corporate reorganization is based on the shareholder's proportionate share of E & P.