Gravy Corporation and Dirt Corporation enter into merger negotiations.Gravy is very interested in a merger with Dirt because it has a large NOL that Gravy could use to offset its income from manufacturing processed food.Dirt has been sustaining losses in its contaminated dirt removal business.Gravy acquires all of Dirt's assets and liabilities in exchange for 20% of Gravy's stock.Dirt immediately liquidates by transferring Gravy stock to its shareholders in exchange for all of their Dirt stock.How will this transaction be treated for tax purposes?

Question

Quizplus · Accepted Answer

Since this transaction does not have a sound business purpose,it does not qualify as a tax-free reorganization and thus is a taxable transaction.Acquiring a corporation merely for tax avoidance (through the use of its NOL)does not constitute a sound business purpose.

Gravy Corporation and Dirt Corporation Enter into Merger Negotiations