Question 1

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.

Question 2

In corporate reorganizations, if an acquiring corporation using property other than stock as consideration, it may recognize gains but not losses on the transaction.

Accepted Answer

This statement is true. If an acquiring corporation uses property other than stock as consideration in a corporate reorganization, it may recognize gains but not losses on the transaction. This is because of the tax rules that allow corporations to defer recognition of gain or loss in certain types of reorganizations, such as those involving a change in ownership or control of the company. However, there are certain limitations and requirements that must be met in order for the corporation to qualify for this tax treatment.

Question 3

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 4

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 5

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

Under the Internal Revenue Code, certain gains recognized by shareholders in a corporate reorganization may be treated as a dividend to the extent of the corporation's E & P (earnings and profits) from prior years. This is known as the E & P limitation. Shareholders recognize a dividend to the extent that the amount of gain exceeds the corporation's E & P.

Question 6

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 important in corporate restructurings, other factors such as tax implications, legal considerations, and business goals also need to be taken into account when planning the structure of the transaction.

Question 7

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 reduce the amount taxable by their basis in the stock involved.

Question 8

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 9

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

Accepted Answer

Corporate restructuring is generally allowed to occur without triggering immediate tax consequences under certain circumstances, such as when it is done for legitimate business purposes and there is no transfer of value to shareholders. This is intended to promote flexibility and efficiency in the corporate world while maintaining the integrity of the tax system.

Question 10

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 meet certain statutory requirements, including those at the state, federal, and foreign levels.

Question 11

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

This statement is true. In a Type C reorganization, the acquiring corporation exchanges voting stock and selected liabilities for substantially all of the assets of the target corporation.

Question 12

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

The answer of The "Type B" reorganization requires a continuity...

Question 13

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 14

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

Accepted Answer

This is true. A Type A reorganization does not require the use of voting stock by the acquiring corporation, as long as the restructuring satisfies the requirements of § 368 of the Internal Revenue Code.

Question 15

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.

Accepted Answer

The answer of The determination of whether a shareholder's gain...

Question 16

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 17

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 combining corporations, including known and contingent liabilities.

Question 18

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

Accepted Answer

Both reorganizations and like-kind exchanges are given tax deferral treatment under the Federal income tax code. This means that the gain or loss on the transaction is not recognized immediately, but rather is deferred until a later date. Therefore, the tax treatment of reorganizations is similar to that of like-kind exchanges.

Question 19

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

Accepted Answer

This is true. A positive letter ruling from the IRS provides assurance to parties that their proposed corporate reorganization will receive the desired tax treatment.

Question 20

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

Accepted Answer

When a corporation acquires the assets of another corporation, the basis for the acquiring corporation in the target's assets is increased by any gain recognized by the target. This is known as a "step-up" in basis. It allows the acquiring corporation to depreciate or amortize the assets at a higher level, resulting in greater tax deductions.

Quiz 7: Corporations: Reorganizations