Deck 7: Corporations: Reorganizations

Question 1

When substantially all 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.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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.

Answer 3

True

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 the liabilities known and contingent) must be assumed by the new corporation.

Question 5

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

Question 6

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

Question 7

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.

Question 8

The gains that shareholders recognize as a part of a corporate reorganization may be treated a dividend to the extent of the corporation's E & P.

Question 9

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

Question 10

If the acquiring corporation purchased 25% of target stock for cash 10 years ago, the acquiring corporation still can meet the "Type C" reorganization requirement that 80% of the target's assets be acquired with stock.

Question 11

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

Question 12

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

Question 13

In a divisive "Type D" reorganization, the distributing corporation obtains control of the new target by exchanging some of its assets for at least 80% of the new target's outstanding stock.

Question 14

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.

Question 15

The "Type B" reorganization requires a continuity of business interest. Therefore, the acquiring corporation must obtain at least 40% of the target corporation's stock through the reorganization.

Question 16

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

Question 17

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

Question 18

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

Question 19

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.

Question 20

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.

Question 21

All the following statements are true about corporate reorganization except:

A) Taxable amounts for shareholders are classified as a dividend or capital gain.
B) Reorganizations receive treatment similar to corporate formations under § 351.
C) The transfers of stock to and from shareholders qualify for like-kind exchange treatment.
D) The value of the stock received by the shareholder less the gain not recognized postponed) will equal the shareholder's basis in the stock received.
E) All of these are true.

Question 22

One advantage of acquiring a corporation with losses is that after a tax-free reorganization, the remaining corporation may combine the negative earnings and profits E & P) of the target corporation with positive E & P of the acquiring corporation.

Question 23

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

Question 24

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

Question 25

Liabilities generally are not considered boot in corporate reorganizations except in a "Type C" when cash or other property is received by the target in the transaction.

Question 26

When a corporation has cancellation-of-debt relief in a "Type G" reorganization, the corporation reduces its benefits in tax items such as earnings and profits.

Question 27

A tax-free corporate reorganization can be utilized to:

A) Transfer assets in a bankruptcy.
B) Resolve management issues by dividing a company into three new companies.
C) Combine four corporations into one.
D) Create a subsidiary.
E) All the above results are possible.

Question 28

When applying the § 382 limitation to deductible losses and credits, the § 382 limit first is applied to capital loss carryovers and then to NOLs.

Question 29

An exchange of common stock for preferred stock or bonds for preferred stock can qualify as a "Type E" reorganization.

Question 30

In a year in which an ownership change occurs for a corporation, the NOL carryforward is limited not only by the § 382 annual limitation but also by the percentage of the year remaining.

Question 31

The continuity of business enterprise doctrine requires that at least 40% of the target's assets are acquired with stock.

Question 32

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 regarding 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.

Question 33

When a "Type F" reorganization includes a change from a taxable corporation to a flow-through entity, the original corporation stock loses its § 1244 status and earnings and profits do not carry over.

Question 34

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

Question 35

Which of the following statements is true?

A) The dollar amounts involved in reorganizations are generally substantial; thus, it is important that the financial and tax treatment of the reorganization be consistent.
B) A letter ruling indicates the income tax treatment the IRS will apply to the proposed corporate restructuring transaction.
C) Careful planning can ensure that all gains recognized by individual shareholders receive beneficial dividend treatment.
D) None is true.

Question 36

When the § 382 limitation is evoked, the acquiring corporation is limited in its use of the tax loss carryover of the loss corporation. The limitation is based on the net present value of the loss corporation using the Federal long-term discount rate.

Question 37

Without evidence to the contrary, the IRS views transactions occurring within one year of a reorganization as part of the restructuring under the step transaction doctrine.

Question 38

Which of the following statements is true concerning all types of tax-free corporate reorganizations?

A) Assets are transferred from one corporation to another.
B) Stock is exchanged with shareholders.
C) Liabilities that are assumed when cash is also used as consideration will be treated as boot.
D) Corporations and shareholders involved in the reorganization will recognize gains but not losses.
E) None is true.

Question 39

The acquiring corporation in a "Type G" reorganization reduces the tax attributes carried over from the bankrupt corporation by the percentage in change in ownership.

Question 40

The continuity of interest doctrine requires that all target shareholders receive some acquiring stock.

Question 41

Which of the following statements regarding "Type B" reorganizations is true?

A) Since a parent-subsidiary relationship is created, the tax attribute carryover limitations are problematic.
B) The acquisition of liabilities can cause problems when the liabilities of the target are greater than 20% of the total consideration and the acquiring owned target stock prior to the "Type B" reorganization.
C) The acquisition of common and preferred target stock by the acquiring entity can be directly from the shareholders or from the target corporation.
D) The acquiring corporation must distribute the target stock it obtains to its shareholders. The acquiring shareholders do not always have to turn in acquiring stock in exchange for the target stock.
E) All of these statements are true.

Question 42

Bobcat Corporation redeems all of Zed's 4,000 shares and distributes to him 2,000 shares of Van Corporation stock plus $50,000 cash. Zed's basis in his 20% interest in Bobcat is $100,000 and the stock's value is $250,000. At the time Bobcat is acquired by Van, the accumulated earnings and profits of Bobcat are $200,000 and of Van are $75,000. How does Zed treat this transaction for tax purposes?

A) Zed recognizes no gain in this reorganization.
B) Zed reports a $50,000 recognized dividend.
C) Zed reports a $50,000 recognized capital gain.
D) Zed reports a $40,000 recognized dividend and a $10,000 capital gain.

Question 43

Racket Corporation and Laocoon Corporation create Raccoon Corporation. Racket transfers $600,000 in assets for all of Raccoon's common stock. Racket distributes its remaining assets $300,000) and the Raccoon common stock to its shareholder, Mia, for all her stock in Racket basis $950,000) and then liquidates. Laocoon receives all the Raccoon preferred stock for its $400,000 of assets. Laocoon distributes its remaining assets $300,000) and the Raccoon preferred stock to its shareholder, Carlos, for all his stock in Laocoon basis $200,000) and then liquidates. How will this transaction be treated for tax purposes?

A) This qualifies as a "Type A" reorganization. Mia recognizes no gain or loss, but Carlos recognizes $300,000 gain.
B) This qualifies as a "Type C" reorganization. Mia and Carlos recognize $300,000 gain, to the extent of the boot.
C) This qualifies as a "Type D" reorganization. Neither Mia nor Carlos recognizes a gain or loss.
D) This is a taxable transaction. Mia recognizes $50,000 loss and Carlos recognizes $500,000 gain.

Question 44

Acquiring Corporation transfers $1 million of its voting common stock and $100,000 cash to Target Corporation in exchange for 90% of Target's 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 their Target shares. Target then liquidates. This restructuring qualifies as a:

A) "Type A" reorganization.
B) "Type B" reorganization.
C) "Type C" reorganization.
D) "Type D" reorganization.
E) Taxable exchange.

Question 45

Humming Inc. is interested in acquiring BirdCo, a supplier of materials for Humming's products, and feels that it could improve the management of BirdCo. Current management has been lax in monitoring product quality, which could lead to recalls or lawsuits. Management of BirdCo is not supportive of a merger because they could lose their positions, whereas most of the shareholders support the acquisition as a method of obtaining new management. There is a very small minority of shareholders who do not want to be shareholders of Humming. BirdCo has assets of $5 million with a basis of $6 million. Its liabilities are $2 million. Which of the following would be the best solution for Humming in its acquisition of BirdCo?

A) "Type A" reorganization.
B) "Type B" reorganization.
C) "Type C" reorganization.
D) Humming buys BirdCo's assets for cash and BirdCo distributes the cash to its shareholders and liquidates.
E) Humming buys BirdCo's stock for cash directly from the shareholders.

Question 46

Manx Corporation transfers 40% of its stock and $50,000 in cash to Somali Corporation for $500,000 of assets and all $200,000 of its liabilities. Somali exchanges the Manx stock, cash, and its remaining $100,000 of assets with its shareholders for all their Somali stock. After the exchange, Somali liquidates. The exchange qualifies as what type of transaction?

A) "Type A" reorganization.
B) "Type B" reorganization.
C) "Type C" reorganization.
D) "Type D" reorganization.
E) A taxable exchange.

Question 47

All the following should apply to a tax favored corporate restructuring except:

A) The reorganization is planned to be accomplished over five months.
B) Transactions to remove any barriers occur within three months of the restructuring.
C) The purpose of the restructuring is to ensure a supply of raw materials.
D) The acquired equipment and machinery of the target will be utilized to manufacture the products of the acquiring corporation.
E) All of these statements are true.

Question 48

Saucer Corporation has a value of $800,000, basis in its assets of $670,000, and liabilities of $200,000. Cup Corporation acquires 90% of Saucer's assets by exchanging $550,000 of its voting stock, $20,000 cash, and assuming $150,000 of Saucer's liabilities. The remaining 10% of Saucer's assets not acquired is $80,000 cash. Saucer distributes the Cup stock, $100,000 in cash and associated $50,000 in liabilities to its shareholder, Sam, in exchange for his Saucer stock basis $560,000). Saucer then liquidates. How will this transaction be treated for tax purposes?

A) As a "Type A" reorganization. Sam recognizes $50,000 gain and Saucer recognizes $20,000 gain.
B) As a "Type A" reorganization. Sam recognizes $100,000 gain and Saucer recognizes $120,000 gain.
C) As a "Type C" reorganization. Sam recognizes $50,000 gain and Saucer recognizes $20,000 gain.
D) As a "Type C" reorganization. Sam recognizes $40,000 gain and Saucer recognizes no gain.
E) As a taxable transaction.

Question 49

Spoonbill Corporation has assets with a FMV of $800,000 and adjusted basis of $600,000. It has been manufacturing engineering equipment and laboratory tools for the last eight years. Spoonbill forms a new corporation, Roseate Corporation, by acquiring all of its stock in exchange for the laboratory tool division of Spoonbill. Each of the Spoonbill shareholders receives 1 share of Roseate stock for each 50 shares they own in Spoonbill. How will this transaction be treated for Federal income tax purposes?

A) As a split-off "Type D" reorganization.
B) As a spin-off "Type D" reorganization.
C) As a spit-up "Type D" reorganization.
D) This transaction is treated as a stock dividend.

Question 50

Which of the following conclusions regarding bonds in tax-favored corporate reorganizations is faulty?

A) Bonds exchanged must have the same face value to ensure that the holder will receive equal value when the bonds are repaid.
B) The interest rates on the bonds should be the same percentage because if the bond holder receives a security with a higher interest rate, the bondholder is receiving an asset with a greater value.
C) Debt instruments with lives longer than 10 years are treated as securities because they have more risk associated with the likelihood that they will be repaid; this is similar to the risk with owning stock long-term.
D) Bonds exchanged for stock do not receive tax-favored treatment because this exchange is essentially the purchase of stock by changing a debt holder into a shareholder.

Question 51

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 the shareholder's Long stock with a basis of $275,000 and then it liquidates. Which, if any, of the following statements is correct?

A) This restructuring qualifies as a "Type A" reorganization with no recognized gains or losses.
B) This restructuring qualifies as a "Type C" reorganization with no recognized gains or losses.
C) This qualifies as either a "Type A" or "Type C" and the shareholder has a $25,000 recognized gain.
D) The restructuring is taxable because liabilities cannot be distributed to shareholders in a tax-free reorganization.
E) None of these statements is correct.

Question 52

Against the will of Rally Corporation's management, Buoy Corporation offers Rally's shareholders 2 shares of Buoy common stock for each share of Rally common and 50 shares of Buoy common for each share of Rally preferred. The results of a hostile takeover yield Buoy 85% of Rally common stock and 100% of the preferred. The only stock it did not obtain was that owned by management. This transaction qualifies as an):

A) "Type A" consolidation.
B) "Type B" reorganization.
C) "Type C" reorganization.
D) "Type D" split-up reorganization.
E) Taxable event.

Question 53

Grebe Corporation is a car dealership that has been in existence for 10 years. It has also been in the car leasing business for 6 years. Both businesses produce substantial amounts of cash, and Grebe has been investing this cash in mutual funds for the past 10 years. Grebe is interested in separating its businesses. It will create a) new corporations) to receive assets in exchange for stock. Which of the following is correct regarding this transaction?

A) Grebe must distribute at least 80% of the new corporations) stock to its shareholders in exchange for a proportionate amount of Grebe's stock. If the shareholders do not exchange stock, the transaction receives dividend treatment.
B) Grebe may create up to three new corporations because it has three lines of business. If three new corporations are created, Grebe ceases to exist because it will have no assets.
C) The new corporations created will carry over no tax attributes or earnings and profits from Grebe.
D) Using a split-off "Type D" reorganization, Grebe can transfer the car leasing business to the new corporation and exchange the new corporation stock for some of the Grebe stock held by its shareholders.
E) All of these statements are correct.

Question 54

Ula purchased stock in Purple, Inc., six 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 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 her Purple stock. Purple then liquidates. How is this transaction treated for tax purposes?

A) Ula recognizes a $15,000 gain on the exchange.
B) Ula recognizes a $25,000 gain on the exchange.
C) Ula recognizes a $25,000 gain and Purple recognizes a $25,000 gain on the exchange.
D) Purple recognizes a $50,000 gain on the exchange.

Question 55

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 his Ocelot stock basis
$100,000). Ocelot then liquidates. How is this transaction treated for tax purposes?

A) Since this qualifies as a "Type A" reorganization, Van recognizes no gain.
B) Since this qualifies as a "Type C" reorganization, Van recognizes a $200,000 gain.
C) Since this qualifies as a "Type A" reorganization, Van recognizes a $150,000 gain.
D) Since this does not qualify as a reorganization, Van recognizes a $150,000 gain.

Question 56

Xian Corporation and Win Corporation would like to combine into one entity. Win redeems 90% of its common stock and all of its nonvoting preferred stock in exchange for 40% of Xian's common and 20% of its nonvoting preferred stock. Win then distributes the Xian stock to its shareholders. Win then becomes a subsidiary of Xian.

A) This is a taxable transaction.
B) This restructuring qualifies as a divisive "Type D" reorganization.
C) This restructuring qualifies as a "Type B" reorganization.
D) This restructuring qualifies as a "Type E" reorganization.
E) This restructuring qualifies as a "Type C" reorganization.

Question 57

Angus Corporation purchased 15% of Hereford Corporation four years ago for $150,000. Angus acquires 75% more of Herford's stock directly from Hereford shareholders in an exchange for 25% of Angus common stock currently outstanding. There is still 10% of the Hereford stock held by its original shareholders because they are not interested in being common shareholders of Angus. This transaction qualifies as what type of reorganization?

A) "Type A" reorganization.
B) "Type B" reorganization.
C) "Type C" reorganization.
D) "Type D" reorganization.
E) A taxable exchange.

Question 58

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?

A) Wanda recognizes a $100,000 gain. Her Jupiter stock basis is $900,000.
B) Wanda recognizes a loss of $100,000. Her Jupiter stock basis is $800,000.
C) Wanda recognizes a $100,000 gain. Her Jupiter stock basis is $700,000.
D) Wanda realizes a $200,000 loss of which $100,000 is recognized. Her Jupiter stock basis is $1 million.
E) None of these.

Question 59

Which of the following statements is true regarding "Type A" reorganizations?

A) At least 80% of the acquiring corporation's consideration must be voting stock, but the other 20% can be cash or preferred stock.
B) The target shareholders must receive a proprietary interest in the acquiring corporation. This means that target shareholders must receive at least 40% of all the acquiring corporation's stock.
C) Substantially all the target's assets must be transferred to the acquiring corporation. This means at least 90% of the net asset value.
D) Assumption of all liabilities for a "Type A" reorganization includes unknown and contingent liabilities.
E) None of these is true.

Question 60

Why is the shareholder's basis in the new stock received in a corporate reorganization the value of the stock received less the postponed gain?

A) This ensures that the basis is the value of the stock given up in the reorganization.
B) The realized gain is the amount that would be recognized if the stock was sold outright. This gain may not be recognized, however, unless there is boot.
C) The basis is the vehicle to ensure that the gain postponed will be recognized in the future when the stock is sold.
D) A carryover basis or a substituted basis will not include the postponed gain that is necessary in a tax-deferred transaction such as a reorganization.
E) All the above statements are true.

Question 61

WhydahCo is owned by Gilda and her four nieces and nephews. Gilda owns all the WhydahCo voting stock and its $50,000 bond. She wants to relinquish control of the entity; accordingly, WhydahCo redeems all of Gilda's voting common stock and issues its preferred stock to her. She also exchanges her bond for preferred. The nonvoting preferred shares owned by the nieces and nephew are exchanged for voting common stock. Which of the following statements is correct?

A) The exchange of a bond for preferred stock is taxable.
B) The exchange of common for preferred is not taxable but the exchange of preferred stock for common stock is taxable.
C) All of these transactions are taxable.
D) The transaction is not currently taxable; this is a "Type E" reorganization.
E) None of these statements is correct.

Question 62

Fuchsia Corporation would like to merge with Mauve Corporation. Which of the following will cause the transaction to be taxable?

A) The shareholders holding 100% of Mauve receive only 30% of Fuchsia stock. This violates the continuity of interest because the Mauve shareholders' interest decreased by more than 50 percentage points.
B) Mauve spins off assets not desired by Fuchsia before the transaction. This violates the continuity of business asset use test.
C) The reason that Fuchsia desires to merge with Mauve is that Mauve has unused general business credits that Fuchsia can utilize immediately. This violates the sound business purpose doctrine.
D) Mauve sells assets not desired by Fuchsia before the transaction. This violates the step transaction doctrine.

Question 63

Asity Corporation is interested in acquiring the majority of Pitta Corporation's assets. Pitta's assets are currently valued at $950,000, and its liabilities are $250,000. However, Asity is not interested in one operating division of Pitta. Since Pitta desires to be taken over by Asity, Pitta first sells the unwanted division for its net fair market value of $250,000 $350,000 FMV assets - $100,000 liabilities). Pitta then transfers its remaining assets and liabilities to Asity for $450,000 in common voting stock. Which of the following statements is correct with regard to the proposed restructuring?

A) Continuity of interest does not exist for the Pitta shareholders.
B) It fails the continuity of business enterprise test failed.
C) There is no sound business purpose for this restructuring.
D) The step transaction can be applied to this transaction.
E) All of these are true.

Question 64

Gato Corporation exchanged 25% of its stock with Lobo for all of its assets. The Gato stock was distributed to the Lobo shareholders in exchange for all of their stock. Lobo then liquidated. At the time of the acquisition by Gato, the value of Lobo was $3 million, and the Federal long-term tax-exempt rate was 4%. In the current year, Gato has $500,000 of taxable income. Lobo has excess credits from prior years amounting to $150,000. What amount of Lobo's credits may Gato use in computing its Federal income tax for the year if Gato is in the 21% tax bracket?

A) $150,000
B) $105,000
C) $79,800
D) $40,800
E) None of these

Question 65

Target sells assets not desired by Acquirer before entering into a reorganization transaction with Acquirer. In which reorganization will the step transaction doctrine not apply to the sale by Target?

A) "Type A" reorganization.
B) "Type B" reorganization.
C) "Type C" reorganization.
D) Only "Type A" and "Type C".

Question 66

Pallid Swift, Inc. is an S corporation located in Colorado. In the past year, PallidSwift has become profitable; but due to its rapid growth, it has no excess cash for distributions. Therefore, Pallid Swift decides that it should become a C corporation.

A) This transaction qualifies as a "Type F" reorganization.
B) This transaction qualifies as a "Type E" reorganization.
C) This transaction qualifies as a "Type D" shift reorganization.
D) This change is a taxable event.

Question 67

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 3%, what is the maximum amount of Weaver's NOL available to Loom in the current year?

A) $250,000
B) $62,500
C) $24,000
D) $7,500
E) None of these

Question 68

In which type of corporate reorganization do shareholders receive stock in at least two other corporations in exchange for all the stock in the original corporation?

A) "Type A" consolidation reorganization.
B) "Type B" reorganization.
C) "Type D" spin-off reorganization.
D) "Type D" split-off reorganization.
E) Some other type of reorganization.

Question 69

Which of the following statements is false?

A) A "Type B" reorganization is most likely to run afoul of the continuity of interest doctrine because the target remains a separate corporation.
B) Liabilities are problematic for "Type A" and "Type C" reorganizations.
C) The step transaction doctrine can be problematic in "Type B" and "Type C" reorganizations.
D) "Type E" and "Type F" are not likely to be subject to the § 382 limitation.

Question 70

Crested Serpent Eagle CSE) Corporation is owned by Lin Yuan and Yu Chi. It has been in the manufacturing and lumber businesses for 20 years. For liability protection, the manufacturing assets of CSE are transferred to Serpent Corporation for all its stock. This stock is distributed to Lin Yuan in exchange for her CSE stock. The lumber assets are transferred to Eagle Corporation for all of its stock. Yu Chi receives the Eagle stock in exchange for his CSE shares. CSE then terminates.

A) The transaction qualifies as a spin-off "Type D" reorganization.
B) The transaction qualifies as a split-off "Type D" reorganization.
C) The transaction qualifies as a split-up "Type D" reorganization.
D) The transaction is taxable.

Question 71

Besides the statutory requirements for tax-free treatment for corporate reorganizations, there are several judicial requirements. Which of the following is not a judicial requirement for corporate reorganizations?

A) The ownership change doctrine should be met.
B) The continuity of business enterprise test must be met.
C) There must be a sound business purpose for the restructuring.
D) The step transaction doctrine should not apply.
E) All of these items are judicial requirements for reorganizations.

Question 72

Dahlia owns $100,000 in Crimson Topaz preferred stock. The annual dividend rate on the preferred is 4%. She exchanges this preferred stock for $60,000 in Crimson Topaz bonds paying 4% annual interest and $40,000 in common stock. How is this transaction treated for tax purposes?

A) All of this transaction is taxable.
B) The transaction is not currently taxable because it qualifies as a "Type E" reorganization.
C) Only the exchange of the preferred stock for the common stock is taxable, because of the reduction in preferential treatment upon liquidation.
D) Only the exchange of the preferred stock for the bond is taxable.

Question 73

Monal Corporation merged with Bobwhite Corporation two years ago. At the time of the merger, Monal held an earnings and profits E & P) deficit of $250,000, and Bobwhite had a positive E & P of $200,000. Last year's current E & P was $ 100,000 for the successor company. Despite having only $10,000 E & P for the current year, Monal makes a distribution to its shareholders of $270,000. How is the distribution taxed to the shareholders?

A) $270,000 is taxable.
B) $210,000 is taxable.
C) $110,000 is taxable.
D) $60,000 is taxable.
E) None of these amounts is correct.

Question 74

Cuckoo Corporation has just lost a $500,000 product liability suit. Before the lawsuit, its assets were valued at $600,000 basis of $400,000), and it had general liabilities of $300,000 and $100,000 of bonds outstanding. It also has a $50,000 capital loss carryover, $10,000 general business credits, and $150,000 NOL. Cuckoo is solely owed by Emmy Lou. A state restructuring creates Turaco as the successor company to Cuckoo. Which of the following statements is false?

A) This transaction qualifies as a "Type G" reorganization.
B) Emmy Lou may not receive any stock in Turaco in the restructuring.
C) When Turaco reduces Cuckoo's tax attributes for the cancellation of debt income relief, it first reduces the capital loss, then the NOL, then the business credit, and last the basis in the assets.
D) The bondholders of Cuckoo become shareholders of Turaco.
E) All of these statements are true.

Question 75

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 3% and Brain's discount factor is 7%, what is the maximum amount that Brain can use of Heart's NOL this year?

A) $12,500
B) $30,000
C) $100,000
D) $250,000

Question 76

Which of the following statements is correct with regard to liabilities in corporate reorganizations?

A) While in a "Type A" merger, all the liabilities of the target must be acquired; in a consolidation, only general liabilities are transferred.
B) In a "Type G" reorganization, the target's liabilities rarely are liquidated.
C) Liabilities are problematic for a "Type C" only when the acquiring corporation transfers other property in addition to common stock.
D) Long-term liabilities bonds) can be exchanged tax-free in a "Type E" reorganization as long as the terms of the bonds are greater than 10 years and the interest rates are identical.

Question 77

Peony owns all of the Garden Corporation common stock with a basis of $400,000 and a value of $900,000. Her grandchildren own nonvoting preferred stock with a basis and value of $540,000 that pays a 6% annual dividend. Peony would like to transfer her ownership of Garden to her grandchildren but retain a guaranteed income from Garden. What would be the most tax effective method of making this transfer?

A) Peony sells her common stock to her grandchildren. They pay for the stock on the installment method over 20 years with a 6% interest on the unpaid balance.
B) Garden redeems all of Peony's common stock and issues her a 20-year bond for $900,000 that pays 6% interest.
C) Garden redeems Peony's common stock and issues her preferred stock with a 6% yearly dividend rate. Garden exchanges the grandchildren's preferred stock for common stock.
D) Peony exchanges 60% of her common stock with her grandchildren for all of their preferred stock. The grandchildren then have control and Peony retains 40% of the common stock.

Question 78

Flower Corporation has two divisions that it has operated for the last 10 years: Gerbera with a value of $806,000 basis $400,000) and Daisy with a value of $744,000 basis 800,000). While Gerbera is profitable, Daisy continues to incur losses and created a $350,000 NOL for Flower two years ago. Flower has decided this year it would like to become two corporations: Gerbera and Daisy. Which of the following is the best method for Flower to become two corporations?

A) Under a § 351 creation of a corporation, Flower transfers all of the Daisy division assets and the NOL to the new corporation Daisy) for all of its stock. Flower retains the stock and Daisy becomes a subsidiary without limitations on its NOL use.
B) Using a split-off, Flower transfers the Gerbera division assets to the new corporation Gerbera) for all of its stock. Flower distributes all of the Gerbera stock to its shareholders in exchange for 52% of their Flower stock. Flower retains the Daisy division and NOL without limitations on its use.
C) Using a spin-off, Flower transfers the Daisy division assets to the new corporation Daisy) for all of its stock. Flower distributes all of the Daisy stock to its shareholders. Flower retains the Gerbera division and NOL without limitations on its use.
D) Using a split-up, Flower transfers the Daisy division assets to the new corporation Daisy) for all of its stock and transfers the Gerbera division assets to the new corporation Gerbera) for all of its stock. Flower distributes all of the Daisy and Gerbera stock to its shareholders in exchange for 100% of their Flower stock, and Flower then terminates. The Daisy division retains the NOL without limitations on its use.

Question 79

Which of the following statements regarding the applicability of the judicial doctrines to a "Type G" reorganization is correct?

A) The continuity of interest doctrine is applied to the creditors rather than the shareholders.
B) The sound business purpose doctrine does not apply because the restructuring is dictated by state proceedings.
C) The continuity of business enterprise doctrine does not apply because the business must change to be profitable.
D) The step transaction doctrine presents a problem, because a "Type G" reorganization may take an extended period of time to complete.
E) All of these.

Question 80

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 that 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?

A) Since Javanese has liabilities in excess of its basis, this excess will be taxable to Javanese.
B) The most of the general business credits that Burmese can use in any year is $4,200.
C) This transaction could qualify as a "Type A" or a "Type C" reorganization.
D) All of these.
E) None of these.