Question 1

Noncorporate shareholders would prefer to have a gain on a corporate reorganization treated as a capital gain rather than as a dividend,because of the lower tax rates applied to capital gains.

Accepted Answer

Dividends and capital gains are taxed at the same rates.

Question 2

Target liabilities assumed by the acquiring corporation in a "Type C" reorganization are considered boot when cash or other property is exchanged by the acquiring corporation. This is likely to destroy the tax-free treatment.

Accepted Answer

Target liabilities assumed by the acquiring corporation in a "Type C" reorganization are considered boot when cash or other property is exchanged by the acquiring corporation. Boot received by the target shareholders may cause the transaction to lose its tax-free treatment.

Question 3

The tax treatment of reorganizations almost parallels the treatment given to related party exchanges.

Accepted Answer

The rules for tax-free reorganizations and like-kind exchanges are almost parallel.

Question 4

United States tax policy tries to encourage business development.

Accepted Answer

The United States tax policy includes various provisions that offer tax incentives for businesses to invest in new equipment, research and development, and hiring. These incentives are intended to encourage business development and stimulate economic growth.

Question 5

Currently,spin-offs of unwanted divisions are popular merger and acquisition strategies.

Accepted Answer

This statement is true. Many companies are choosing to spin off divisions that are not performing well or do not align with their overall strategy, as a way to streamline their operations and focus on their core business. This can also make the remaining company more attractive to potential buyers in a merger or acquisition.

Question 6

A corporate reorganization in the form of an exchange of stock does not qualify as a like-kind exchange.

Accepted Answer

While the results are treated similarly to a like-kind exchange,the like-kind exchange provisions do not cover exchanges of stock.

Question 7

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

Accepted Answer

A "Type A" reorganization involves mergers or consolidations that must comply with applicable foreign, state, or federal laws to qualify under the Internal Revenue Code.

Question 8

Determining whether a shareholder's gain on a corporate reorganization can qualify for stock redemption treatment 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.

Accepted Answer

The percentage reduction compares the actual shares received in the acquiring corporation to what would have been received if solely acquiring stock had been received.

Question 9

While a "Type A" reorganization allows the acquiring corporation to transfer cash as well as stock,the continuity of interest doctrine requires that all stock transferred be voting common.

Accepted Answer

The "Type A" reorganization does not require that the stock transferred be voting common.

Question 10

Shareholders recognize gains and losses if they receive assets other than stock (boot).

Accepted Answer

Gains may be recognized but never losses.

Question 11

A consolidation is the union of two corporations whereas,in a merger,a new corporation is formed to receive the assets of two or more corporations.

Accepted Answer

Just the opposite is true.

Question 12

Debt security holders receive similar treatment to shareholders in a corporate reorganization,as long as the face value of the debt relinquished is equal to the debt received.

Accepted Answer

Debt security holders do receive similar treatment to shareholders in a corporate reorganization, but this is subject to the condition that the face value of the debt relinquished is equal to the debt received. If the face value is not equal, the treatment may differ.

Question 13

The "Type B" reorganization requires that the acquiring corporation obtain at least 80% of target corporation's stock through the reorganization.

Accepted Answer

The acquiring corporation must be in control (80% of a target corporation's stock)immediately after the reorganization.However,the 80% of the stock need not be acquired through the reorganization.Prior purchased stock can be considered.

Question 14

In a "Type B" reorganization,voting stock of the acquiring corporation must be the sole consideration exchanged with the target corporation or its shareholders.

Accepted Answer

The voting stock of the acquiring corporation is exchanged for voting and nonvoting stock of the target in a "Type B" reorganization.

Question 15

Originally the courts (in opposition to Congress)determined that businesses should be able to restructure without being subject to taxation.To be consistent with court findings,Congress changed the Code to provide reorganizations with treatment similar to that given under § 351 for starting a corporation.

Accepted Answer

The courts originally considered even minor changes in a corporation's structure as taxable events.However,Congress determined that businesses should be allowed to make capital changes without being taxed.

Question 16

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

Accepted Answer

The step transaction doctrine should not apply.

Question 17

The home mortgage industry has been particularly active in consolidation reorganizations in recent years.

Accepted Answer

The home mortgage industry has been hit with bankruptcy filings in recent years.

Question 18

Shareholders receiving other property as a part of a corporate reorganization may be treated as having their stock redeemed under § 302(b)and be in the adverse position of being treated as having sold a capital asset.

Accepted Answer

If the requirements of § 302(b)are met,the shareholder receives sale or exchange treatment resulting in capital gain.This is not an adverse position.

Question 19

The basis in the acquiring stock received by the target shareholders is the vehicle for ensuring that any postponed gain is recognized when the stock is sold at a later date.

Accepted Answer

The basis in the acquiring stock received by the target shareholders is used to calculate any gain or loss when the stock is later sold. This ensures that any postponed gain is recognized and taxed appropriately.

Question 20

The amount of recognized gain cannot exceed the amount of realized gain.

Accepted Answer

See column 2 of Concept Summary 7-1.

Quiz 7: Corporations: Reorganizations