Question 1

Rocky is a party to a tax-free asset-for-stock reorganization. As part of the transaction, Rocky exchanges 100% of the Hope Corporation stock with a $40,000 basis and a $50,000 FMV for Moth Corporation stock worth $40,000 and $10,000 cash. Hope Corporation is subsequently liquidated as part of the reorganization, with Moth receiving the Hope assets and liabilities. Rocky is

Accepted Answer

In a tax-free reorganization involving an exchange of stock for stock plus "boot" (cash in this case), the recipient must recognize gain to the extent of the lesser of the realized gain or the boot received. The character of the gain (capital gain or dividend) depends on the specifics of the transaction, including the corporation's earnings and profits (E&P) and the shareholder's interest in the corporation post-transaction.

Question 2

Buddy owns 100 of the outstanding shares of Binder Corporation stock. Buddy's basis in his Binder Corporation stock is $100,000. Binder Corporation is merged with Clipper Corporation in a tax-free reorganization. Buddy receives 50 shares of Clipper stock worth $150,000 and $150,000 cash. The remaining 100 shares of Binder stock were owned by Bruce who received the same consideration for his Binder stock. Binder and Clipper have E&P balances of $250,000 and $500,000, respectively. Buddy and Bruce each own 25% of Clipper Corporation's 200 shares of stock after the reorganization. Which of the following is correct?

Accepted Answer

In a tax-free reorganization, the basis in the new stock received is the same as the basis in the old stock. Therefore, Buddy's basis in his 50 shares of Clipper stock is $50,000 ($100,000 / 2 for the split). The $150,000 cash received is not taxable. Buddy did not receive any dividend income in the reorganization. When Buddy eventually sells his 50 shares of Clipper stock, he will recognize a capital gain equal to the difference between his basis in the stock ($50,000) and the amount realized ($150,000), or $100,000.

Question 3

Identify which of the following statements is true.

Accepted Answer

In a tax-free reorganization, the acquiring corporation's holding period for the acquired properties indeed includes the period of time the target corporation held the properties. This allows the acquiring corporation to benefit from a longer holding period for purposes of determining long-term capital gains.

Question 4

Identify which of the following statements is true.

Accepted Answer

When the acquiring corporation makes the Sec. 338 election, the target corporation is treated in many respects as a new corporation. This election results in a deemed liquidation of the target corporation, with the target corporation treated as if it had sold all of its assets to a new corporation that then assumed the liabilities of the target corporation. The new corporation is deemed to have acquired the target corporation's assets at fair market value. As a result, depreciation, amortization, and other tax attributes of the target corporation are either lost or adjusted to reflect the new fair market value of the assets. Furthermore, the new corporation generally adopts the same tax year as the target corporation.

Question 5

When gain is realized by a target corporation from disposing of its assets in a tax-free reorganization, the gain is

Accepted Answer

When a target corporation realizes gain from disposing of its assets in a tax-free reorganization, the gain is recognized if boot (cash or other property in addition to stock of the acquiring corporation) is received and retained by the target corporation. If the boot is immediately distributed to its shareholders, the gain is still not recognized due to the continuity of interest requirement. However, if the boot is retained by the target corporation, then the gain is recognized to the extent of the boot received.

Question 6

Identify which of the following statements is false.

Accepted Answer

The answer of Identify which of the following statements is...

Question 7

Identify which of the following statements is true.

Accepted Answer

The answer of Identify which of the following statements is...

Question 8

Which of the following definitions of Sec. 338 property classes is not correct?

Accepted Answer

Class III typically includes assets that are depreciable tangible personal property, not intangible assets like covenants not to compete. These would fall under a different classification.

Question 9

Identify which of the following statements is true.

Accepted Answer

The residual method, as specified under IRC Section 338, is used to allocate the total basis of the target corporation's assets to the individual assets following a Sec. 338 election. This method prioritizes the allocation to certain assets based on their class, ensuring that the purchase price (adjusted for liabilities assumed) is properly distributed among the target's assets.

Question 10

A stock acquisition that is not treated as a purchase for purposes of meeting the Sec. 338 rules is

Accepted Answer

All of the options listed (A, B, C) describe situations where the stock acquisition is not treated as a purchase for the purposes of meeting the Section 338 rules. Section 338 allows a purchasing corporation to treat the stock purchase of another company as an asset acquisition under certain conditions, but these conditions exclude stock acquisitions where the basis is determined by reference to the previous owner's basis, stock acquired from a decedent, and stock acquired in a tax-free reorganization.

Question 11

Bob exchanges 4000 shares of Beetle Corporation stock that he had purchased for $800,000 for 6000 shares of Butterfly Corporation common stock with a fair market value of $1,000,000. What is Bob's recognized gain on the exchange and his basis in the Butterfly stock?

Accepted Answer

To calculate Bob's recognized gain on the exchange, we need to compare the fair market value of the Butterfly stock he received ($1,000,000) to the adjusted basis of the Beetle stock he gave up.

Bob's adjusted basis in the Beetle stock is the amount he paid for it ($800,000) plus any transaction costs, such as brokerage fees.

We don't have any information about transaction costs, so we'll assume they're negligible. That means Bob's adjusted basis in the Beetle stock is $800,000.

Since the fair market value of the Butterfly stock he received ($1,000,000) is greater than the adjusted basis of the Beetle stock he gave up ($800,000), Bob has a recognized gain on the exchange of $1,000,000 - $800,000 = $200,000.

Bob's basis in the Butterfly stock he received is equal to the adjusted basis of the Beetle stock he gave up ($800,000) plus the recognized gain on the exchange ($200,000). That means his basis in the Butterfly stock is $1,000,000.

Therefore, the correct answer is B) 11eac5ad_18c9_be18_888f_2b388f514116_TB2921_00.

Question 12

Acme Corporation acquires Fisher Corporation's assets in a Type A reorganization for $800,000 of Acme's nonvoting preferred stock and $200,000 (face amount and FMV) of securities. The assets have an adjusted basis of $600,000 and an FMV of $1,500,000. In addition, Acme Corporation assumes $500,000 of Fisher's liabilities. At the time of the transfer, Acme's E&P is $400,000. Fisher distributes the stock and securities to its sole shareholder Barbara for all of her Fisher stock. After the reorganization, Barbara owns 25% of Acme's stock. Barbara has an adjusted basis of $400,000 in her Fisher stock. Barbara's basis for her Acme securities is

Accepted Answer

Barbara's basis in the Acme securities is $200,000, which is the face amount and FMV of the securities she received. In a Type A reorganization, the basis of the property received (in this case, the securities) is generally the same as the basis of the property exchanged (her Fisher stock), adjusted for any money received or liabilities assumed. However, since the securities are specified with a face amount and FMV of $200,000, and this is part of the consideration received, it directly establishes the basis for those securities.

Question 13

Identify which of the following statements is true.

Accepted Answer

Depreciation recapture rules do not override the nonrecognition of gain or loss rules in certain transactions, such as like-kind exchanges under IRC Section 1031, where the primary purpose is to defer the recognition of gain or loss.

Question 14

Jersey Corporation purchased 50% of Target Corporation's single class of stock on June 1 of this year. They purchased an additional 40% on November 20 of this year. The Sec. 338 election must be made on or before

Accepted Answer

The Sec. 338 election allows a purchasing corporation to treat a qualified stock purchase as an asset acquisition for tax purposes. The election must be made by the 15th day of the 9th month following the month in which the acquisition occurred. Since the additional purchase that resulted in an 80% ownership occurred on November 20, the deadline for making the Sec. 338 election would be August 15 of the following year.

Question 15

Acme Corporation acquires Fisher Corporation's assets in a Type A reorganization for $800,000 of Acme's nonvoting preferred stock and $200,000 (face amount and FMV) of securities. The assets have an adjusted basis of $600,000 and an FMV of $1,500,000. In addition, Acme Corporation assumes $500,000 of Fisher's liabilities. At the time of the transfer, Acme's E&P is $400,000. Fisher distributes the stock and securities to its sole shareholder Barbara for all of her Fisher stock. After the reorganization, Barbara owns 25% of Acme's stock. Barbara has an adjusted basis of $400,000 in her Fisher stock. Barbara must recognize a gain of

Accepted Answer

In a Type A reorganization, no gain or loss is recognized by either the acquiring corporation or the target corporation. Additionally, the shareholders of the target corporation do not recognize any gain or loss on the exchange of their stock for the acquiring corporation's stock. Therefore, Barbara does not recognize any gain or loss on the exchange of her Fisher stock for the Acme preferred stock and securities.

However, Barbara's basis in the Acme stock she receives is equal to her basis in the Fisher stock she exchanged. Therefore, her adjusted basis in the Acme stock is $400,000.

Since Acme assumed $500,000 of Fisher's liabilities, Fisher shareholders are treated as having received boot in the amount of $300,000 ($1,500,000 FMV of assets transferred minus $600,000 adjusted basis of assets minus $600,000 consideration received in nonvoting preferred stock). Because the boot does not exceed Fisher's E&P, it is treated as a capital gain to Fisher's shareholders on the deemed sale of the assets. Barbara's share of the gain is 25%, or $75,000.

In addition to the gain on the deemed sale of assets, Barbara also has $200,000 of gain from the exchange of her Fisher stock for Acme stock in excess of its adjusted basis. This is a capital gain.

Therefore, Barbara must recognize a total capital gain of $275,000 ($75,000 + $200,000).

Question 16

Melon Corporation makes its first purchase of 30% of Hill Corporation stock on July 31 of this year. Melon Corporation uses a calendar tax year. To use the Sec. 338 election, Melon Corporation must purchase

Accepted Answer

The answer of Melon Corporation makes its first purchase of...

Question 17

In a Sec. 338 election, the target corporation

Accepted Answer

The answer of In a Sec. 338 election, the target...

Question 18

Broom Corporation transfers assets with an adjusted basis of $300,000 and an FMV of $400,000 to Docker Corporation in exchange for $400,000 of Docker Corporation stock as part of a tax-free reorganization. The Docker stock had been purchased from its shareholders one year earlier for $350,000. How much gain do Broom and Docker Corporations recognize on the asset transfer?

Accepted Answer

The answer of Broom Corporation transfers assets with an adjusted...

Question 19

Paper Corporation adopts a plan of reorganization and exchanges 1,000 shares of its voting stock and $50,000 in cash for Chase Corporation's assets having a $200,000 adjusted basis and a $275,000 FMV. Chase Corporation is subsequently liquidated. What is Paper Corporation's basis in the assets acquired in the exchange?

Accepted Answer

The answer of Paper Corporation adopts a plan of reorganization...

Question 20

American Corporation acquires the noncash assets of Utech Corporation in exchange for $700,000 of its voting stock plus $50,000 of cash. Utech Corporation assets are worth $750,000. Utech Corporation does not distribute the stock and cash but instead holds the stock as an investment. Utech will use the American cash along with the cash it retained to start a new business. The transaction can be classified as a

Accepted Answer

The answer of American Corporation acquires the noncash assets of...

Quiz 7: Corporate Acquisitions and Reorganizations

Identify which of the following statements is true.

Identify which of the following statements is true.

When gain is realized by a target corporation from disposing of its assets in a tax-free reorganization, the gain is

Identify which of the following statements is false.

Identify which of the following statements is true.

Which of the following definitions of Sec. 338 property classes is not correct?

Identify which of the following statements is true.

A stock acquisition that is not treated as a purchase for purposes of meeting the Sec. 338 rules is

Bob exchanges 4000 shares of Beetle Corporation stock that he had purchased for $800,000 for 6000 shares of Butterfly Corporation common stock with a fair market value of $1,000,000. What is Bob's recognized gain on the exchange and his basis in the Butterfly stock?

Identify which of the following statements is true.

Jersey Corporation purchased 50% of Target Corporation's single class of stock on June 1 of this year. They purchased an additional 40% on November 20 of this year. The Sec. 338 election must be made on or before

Melon Corporation makes its first purchase of 30% of Hill Corporation stock on July 31 of this year. Melon Corporation uses a calendar tax year. To use the Sec. 338 election, Melon Corporation must purchase

In a Sec. 338 election, the target corporation