Question 1

In which type of reorganization could bonds and other liabilities be exchanged for stock and not be treated as boot?

Accepted Answer

The answer of In which type of reorganization could bonds...

Question 2

Sweet Corporation is in the candy business and sells most of its products in Europe. Lucky Corporation manufactures horse shoes for domestic consumption. Lucky would like to acquire Sweet Corporation because Sweet has large built-in losses in its business assets and foreign tax credit carryovers. To benefit from the built-in ordinary losses, Lucky will sell most of Sweet's business assets upon completion of the reorganization. Those assets with built-in gains will be distributed proportionately before the reorganization to Sweet's shareholders in exchange for 60% of their stock. All of the Sweet shareholders will receive Lucky stock for their remaining shares in Sweet. Which of the following statements is false?

Accepted Answer

The answer of Sweet Corporation is in the candy business...

Question 3

Heart Corporation has net assets valued at $1 million and an NOL of $250,000. On December 31 of last year, Heart is acquired by Brain Corporation, a calendar year taxpayer, in a restructuring qualifying as a tax-free reorganization. Heart shareholders receive 45% of Brain's shares in exchange for all of the Heart stock. Assuming that the Federal long-term tax-exempt rate is 5% and Brain's discount factor is 10%, what is the maximum amount that Brain can use of Heart's NOL this year?

Accepted Answer

The maximum amount that Brain can use of Heart's NOL is limited by the Section 382 limitation, which is based on the value of Heart at the time of the ownership change. In this case, the value of Heart is $1 million, and the long-term tax-exempt rate is 5%, so the Section 382 limitation is calculated as follows:

$1 million x 5% = $50,000

Brain's discount factor is 10%, which is higher than the long-term tax-exempt rate, so the amount of Heart's NOL that can be used is limited to 45% of the Section 382 limitation:

$50,000 x 45% = $22,500

However, since Heart has an NOL of $250,000, Brain can use the entire NOL in the current year, subject to any other limitations that may apply. Therefore, the maximum amount that Brain can use of Heart's NOL this year is $250,000. However, this amount may be limited in future tax years based on the Section 382 limitation.

Question 4

Loser Corporation has outstanding bonds of $800,000 and assets valued at $600,000. It also has a $200,000 NOL and capital loss carryovers of $160,000. Loser is solely owed by Dai Won. Loser is restructured and the successor company is LouderCo. Which of the following statements is false?

Accepted Answer

For a Type G reorganization, control of the successor company does not have to be transferred to the former shareholders of the target company. Instead, the control may be transferred to the creditors of the target company, as long as certain conditions are met. Therefore, Dai Won does not have to receive a controlling interest in LouderCo for this transaction to qualify as a tax-free reorganization.

Question 5

Qadira exchanges 40% of her common stock for 80% of newly issued preferred stock in the Pinto Corporation. There was no Pinto preferred stock previously outstanding, and Qadira received only stock. The other 20% of the preferred stock was received by another shareholder, solely in exchange for 10% of his common stock in Pinto. How is this transaction treated for tax purposes?

Accepted Answer

This transaction qualifies as a "Type B" reorganization because one corporation (Qadira) acquires control of another corporation (Pinto) solely for voting stock.

Question 6

Miro Corporation exchanged 10% of its stock with Lobo shareholders for all of the Lobo stock outstanding. At the time of the acquisition by Miro, the fair market value of Lobo was $1.5 million, and the Federal long-term tax-exempt rate was 5%. In the current year, Miro has $600,000 of taxable income. Lobo has excess credits from prior years amounting to $40,000. What is Miro's Federal income tax for the year, if it is in the 34% tax bracket?

Accepted Answer

The answer of Miro Corporation exchanged 10% of its stock...

Question 7

Contra Corporation is owned 50% by Terry and 50% by Sammy. Due to news articles damaging Contra's reputation, Terry and Sammy decide to liquidate Contra, which has been in existence for 4 years. They create Alpha and Beta Corporations to receive all of the manufacturing assets of Contra's two picture frame plants. Alpha receives the urban plant manufacturing assets and Beta receives the country manufacturing plant. Terry receives 60% Alpha stock and 40% of the Beta stock and Sammy receives 40% Alpha stock and 60% of the Beta stock. Terry and Sammy turn in their Contra stock and Contra then liquidates. Assuming all other requirements are met, how will this transaction be treated for tax purposes?

Accepted Answer

The answer of Contra Corporation is owned 50% by Terry...

Question 8

Burmese Corporation is interested in acquiring Javanese Corporation by transferring 30% of its stock for all of Javanese's assets valued at $500,000 (basis of $150,000) and its $200,000 of liabilities. Javanese has created $50,000 in general business research credits which it cannot use. Javanese concentrates on pharmaceutical research whereas Burmese manufactures sun glasses. Burmese uses a discount factor of 8% and the Federal applicable rate is 4%. Javanese will terminate after the restructuring. How will this transaction be treated for tax purposes?

Accepted Answer

The answer of Burmese Corporation is interested in acquiring Javanese...

Question 9

Which of the following is not a requirement for receiving tax-free treatment for a corporate reorganization?

Accepted Answer

The answer of Which of the following is not a...

Question 10

Which of the following statements is false regarding the tax benefits from a loss corporation's carryovers that are taken in the current year?

Accepted Answer

All of the statements provided are true regarding the tax benefits from a loss corporation's carryovers taken in the current year.

Question 11

Burl Corporation has assets with a value of $500,000 (basis of $300,000) and liabilities of $350,000. Wood Corporation is considering merging with Burl by exchanging 30% of its voting stock and $50,000 cash for Burl.

Accepted Answer

The answer of Burl Corporation has assets with a value...

Question 12

Vintage Corporation has four shareholders: Robin, Quinton, Paula, and Orvil. Paula and Orvil started the business 10 years ago, and Robin and Quinton bought their stock 6 years ago. Vintage's historical business is buying and selling antiques. When Robin and Quinton joined Vintage, it added a new business, trading in collectibles. Lately, there has been a disagreement about the future of Vintage. Orvil and Quinton are not interested in collectibles, but Robin and Paula enjoy this part of the business. To resolve this issue, Paula suggests that two new corporations be created, Antique and Collectible. Antique would receive all of the assets of the antique part of the business, and Collectible would receive all of the assets of the collecting part of Vintage. All of the stock of these two corporations would be received by Vintage and distributed to the appropriate shareholders. Vintage would then terminate.

Accepted Answer

The answer of Vintage Corporation has four shareholders: Robin, Quinton,...

Question 13

In which type of divisive corporate reorganization do the shareholders receive stock in another corporation without relinquishing any of their stock in the original corporation?

Accepted Answer

The answer of In which type of divisive corporate reorganization...

Question 14

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 long-term tax-exempt rate is 8%, what is the maximum amount of Weaver's NOL available to Loom in the current year?

Accepted Answer

The answer of Weaver Corporation has net assets valued at...

Question 15

ScottishCo is owned by Gordon Bryson and his four nieces and nephews. Gordon owns all the voting stock. He wants to relinquish control; accordingly, ScottishCo redeems all of Gordon's voting common stock and issues him preferred stock and $50,000 in bonds. The nonvoting preferred shares owned by the nieces and nephew are exchanged for voting common stock. Which of the following statements is correct?

Accepted Answer

The exchange of common stock for a bond is taxable because it is considered a sale or exchange of the common stock. The other transactions may qualify as tax-free reorganizations, but without more information on the specifics of the transaction, it is not possible to determine if any of the other choices are correct.

Question 16

Western, Inc. is a corporation located in California. In June of the current year, Western moves to Georgia and changes its name to Southern Corporation. Its sole shareholder, Dharma, exchanges all of her stock in Western and receives all of the stock in Southern.

Accepted Answer

The answer of Western, Inc. is a corporation located in...

Question 17

Dirty Corporation has owned two chemical manufacturing facilities for the last 20 years. One facility is located in Oklahoma while the other is in Oregon. There have been some environmental investigations at the Oregon facility. Therefore, Dirty creates a new corporation, called Clean, and places the assets of the Oregon plant into Clean in exchange for all of Clean's stock. Dirty distributes this stock proportionately to its shareholders in exchange for 40% of their Dirty stock. How will this transaction be treated for tax purposes?

Accepted Answer

The answer of Dirty Corporation has owned two chemical manufacturing...

Question 18

Rabbit Corporation and Fox Corporation would like to merge into one company. Rabbit's only asset is a nontransferable chemical process that has a value of $300,000 and Rabbit has liabilities of $100,000. Fox has the manufacturing plant and experience in the production of Rabbit's chemical process. Its manufacturing plant has a value of $900,000 with a mortgage of $200,000. Which type of reorganization would be the most appropriate for Rabbit and Fox?

Accepted Answer

The answer of Rabbit Corporation and Fox Corporation would like...

Question 19

YesCo acquired NoCo on January 1 of this year for $1 million when the Federal long-term tax-exempt rate was 3%. Two of the tax attributes that YesCo found appealing are NoCo's NOL of $500,000 and its negative E & P of $300,000. Before applying any of NoCo's tax benefits, YesCo has taxable income of $35,000 and E & P of $350,000. YesCo pays a dividend of $100,000 to its shareholders. How much of this dividend is taxable?

Accepted Answer

The answer of YesCo acquired NoCo on January 1 of...

Question 20

Which of the following statements is false?

Accepted Answer

The answer of Which of the following statements is false?
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Quiz 7: Corporations: Reorganizations