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

Quizplus · Accepted Answer

The step transaction doctrine can be applied to this transaction, as it views the prearranged sale of the division and the subsequent acquisition as integrated steps of a single transaction, especially if the sale is part of a plan to make the company more attractive for acquisition.

Asity Corporation Is Interested in Acquiring the Majority of Pitta