Question 1

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

Accepted Answer

According to the rules of corporate acquisitions, the acquiring corporation's basis in the target's assets is increased by any gain recognized by the target. This rule is known as the "step-up" in basis and is intended to allow the acquiring corporation to take advantage of the target's higher basis in its assets to reduce future tax liabilities. Therefore, the statement is true.

Question 2

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.

Accepted Answer

According to the tax code, 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 known as the non-recognition provision.

Question 3

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

Accepted Answer

Obtaining a favorable letter ruling from the IRS can provide assurance to parties involved in a corporate reorganization that their desired tax treatment will be recognized by the IRS.

Question 4

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 of the above are possible.

Accepted Answer

A tax free corporate reorganization can be utilized to transfer assets in a bankruptcy (option A), resolve management issues by dividing a company into three new companies (option B), combine four corporations into one (option C), and create a subsidiary (option D). Therefore, all the choices are possible with a tax free corporate reorganization.

Question 5

All of 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 the above statements are true.

Accepted Answer

The transfer of stock to and from shareholders does not qualify for like-kind exchange treatment. This statement is false, making option C incorrect. The other statements are true, so options A, B, D, and E are not the correct answer.

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 an important consideration for corporate restructurings, other factors such as tax consequences, shareholder approvals, and legal compliance may also need to be taken into account when planning the structure of the transaction.

Question 7

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 is 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 of the statements is true.

Accepted Answer

The answer of Which of the following statements is true?
A)...

Question 8

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 generally taxed at lower rates than dividends, and the basis in the stock can reduce the taxable amount of the gain.

Question 9

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

This is based on the tax law provisions under Internal Revenue Code section 356(a)(2). If the shareholder receives gain as a result of a corporate reorganization (such as a merger or acquisition), the gain may be treated as a dividend to the extent of the corporation's earnings and profits (E&P). This means that the gain would be taxable as a dividend to the shareholder. However, if the gain exceeds the corporation's E&P, it may be treated as a capital gain instead.

Question 10

Compare the sale of a corporation's assets with a sale of its stock from the perspective of the seller.

Accepted Answer

The answer of Compare the sale of a corporation's assets...

Question 11

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 of the above statements is true.

Accepted Answer

In tax-free corporate reorganizations, gains or losses are generally not recognized by corporations or shareholders, and liabilities assumed do not automatically result in boot unless cash or other property is involved.

Question 12

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 13

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 14

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 15

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

Accepted Answer

The Federal income tax treatment of a corporate restructuring is based on the principle of allowing entities to form and restructure without immediate taxation. This is known as tax-free reorganization and is a way to incentivize and facilitate corporate transactions while minimizing the tax burden on the parties involved.

Question 16

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 with regard to 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.

Accepted Answer

The shareholder's basis in the Blush stock is not $60,000. The basis is calculated by subtracting the recognized gain ($10,000) from the original basis ($50,000), resulting in a basis of $40,000 for the Blush stock.

Question 17

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

Accepted Answer

Reorganizations and like-kind exchanges have similar tax treatments in terms of deferral of gain or loss recognition. Both involve the exchange of assets, and under certain conditions, the gains or losses may not be recognized for tax purposes until a future date.

Question 18

On March 15, 2017, Blue Corporation purchased 10% of the Gold Corporation stock outstanding. Blue Corporation purchased an additional 40% of the stock in Gold on October 24, 2017, and an additional 25% on April 4, 2018. On July 25, 2018, Blue Corporation purchased the remaining 25% of Gold Corporation stock outstanding.
a. For purposes of the § 338 election, on what date does a qualified stock purchase occur?
b. What is the due date for making the § 338 election?

Accepted Answer

The answer of On March 15, 2017, Blue Corporation purchased...

Question 19

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 20

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) No gain is recognized by Zed 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.
E) Not enough information is available to determine proper treatment.

Accepted Answer

Zed receives $50,000 cash, which is considered "boot" in a reorganization. The boot is treated as a dividend to the extent of Bobcat's accumulated earnings and profits ($200,000), so $40,000 is a dividend. The remaining $10,000 is a capital gain, as it exceeds the basis of the stock exchanged.

Quiz 20: Corporations: Distributions in Complete Liquidation and an Overview of Reorganizations