Chapter 19 Corporate Formation, Reorganization, and Liquidation

46. [LO 3] {research} On March 1, 2013, Leucadia National Corporation acquired Jefferies Group LLC. in a tax-deferred acquisition. The Form 8-K for Jefferies (ticker JEF, cik 1084580) describes the transaction and was filed with the SEC on November 13, 2012. You can access the Form 8-K at the SEC’s Investor website (http://www.sec.gov/edgar/searchedgar/webusers.htm). Read “Item 1.01, Entry into a Material Definitive Agreement” and determine which form of merger was used to affect the acquisition.

47. [LO 4] Amy and Brian were investigating the acquisition of a tax accounting business, Bottom Line, Inc. (BLI). As part of their discussions with the sole shareholder of the corporation, Ernesto Young, they examined the company’s tax accounting balance sheet. The relevant information is summarized as follows:

FMV Adjusted Basis Appreciation

Cash $ 10,000 $ 10,000

Receivables 15,000 15,000

Building 100,000 50,000 50,000

Land 225,000 75,000 150,000

Total $ 350,000 $ 150,000 $ 200,000

Payables $ 18,000 $ 18,000

Mortgage* 112,000 112,000

Total $ 130,000 $ 130,000

* The mortgage is attached to the building and land.

Ernesto was asking for $400,000 for the company. His tax basis in the BLI stock was $100,000. Included in the sales price was an unrecognized customer list valued at $100,000. The unallocated portion of the purchase price ($80,000) will be recorded as goodwill.

a. What amount of gain or loss does BLI recognize if the transaction is structured as a direct asset sale to Amy and Brian? What amount of corporate-level tax does BLI pay as a result of the transaction, assuming a tax rate of 34 percent?

b. What amount of gain or loss does Ernesto recognize if the transaction is structured as a direct asset sale to Amy and Brian, and BLI distributes the after-tax proceeds (computed in question a) to Ernesto in liquidation of his stock?

c. What are the tax benefits, if any, to Amy and Brian as a result of structuring the acquisition as a direct asset purchase?

48. [LO 4] Using the same facts in problem 47, assume Ernesto agrees to sell his stock in BLI to Amy and Brian for $400,000.

a. What amount of gain or loss does BLI recognize if the transaction is structured as a stock sale to Amy and Brian? What amount of corporate-level tax does BLI pay as a result of the transaction, assuming a tax rate of 34 percent?

b. What amount of gain or loss does Ernesto recognize if the transaction is structured as a stock sale to Amy and Brian?

c. What are the tax benefits, if any, to Amy and Brian as a result of structuring the acquisition as a stock sale?

49. [LO 4] Rather than purchase BLI directly (as in problems 47 and 48), Amy and Brian will have their corporation, Spartan Tax Services (STS), acquire the business from Ernesto in a tax-deferred Type A merger. Amy and Brian would like Ernesto to continue to run BLI, which he agreed to do if he could obtain an equity interest in STS. As part of the agreement, Amy and Brian propose to pay Ernesto $200,000 plus voting stock in STS worth $200,000. Ernesto will become a 10 percent shareholder in STS after the transaction.

a. Will the continuity of ownership interest (COI) requirements for a straight Type A merger be met? Explain.

b. What amount of gain or loss does BLI. recognize if the transaction is structured as a Type A merger? What amount of corporate-level tax does BLI pay as a result of the transaction, assuming a tax rate of 34 percent?

c. What amount of gain or loss does Ernesto recognize if the transaction is structured as a Type A merger?

d. What is Ernesto’s tax basis in the STS stock he receives in the exchange?

e. What are the tax bases of the BLI assets held by STS after the merger?

50. [LO 4] Robert and Sylvia propose to have their corporation, Wolverine Universal (WU), acquire another corporation, EMU, Inc., in a tax-deferred triangular Type A merger using an acquisition subsidiary of WU. The sole shareholder of EMU, Edie Eagle, will receive $250,000 plus $150,000 of WU voting stock in the transaction.

a. Can the transaction be structured as a forward triangular Type A merger? Explain why or why not.

b. Can the transaction be structured as a reverse triangular Type A merger? Explain why or why not.

51. [LO 4] Robert and Sylvia propose to have their corporation, Wolverine Universal (WU), acquire another corporation, EMU, Inc., in a stock-for-stock Type B acquisition. The sole shareholder of EMU, Edie Eagle, will receive $400,000 of WU voting stock in the transaction. Edie’s tax basis in her EMU stock is $100,000.

a. What amount of gain or loss does Edie recognize if the transaction is structured as a stock-for-stock Type B acquisition?

b. What is Edie’s tax basis in the WU stock she receives in the exchange?

c. What is the tax basis of the EMU stock held by WU after the exchange?

52. [LO 5] Shauna and Danielle decided to liquidate their jointly owned corporation, Woodward Fashions, Inc. (WFI). After liquidating its remaining inventory and paying off its remaining liabilities, WFI had the following tax accounting balance sheet.

FMV Adjusted Basis Appreciation

Cash $ 200,000 $ 200,000

Building 50,000 10,000 40,000

Land 150,000 90,000 60,000

Total $ 400,000 $ 300,000 $ 100,000

Under the terms of the agreement, Shauna will receive the $200,000 cash in exchange for her 50 percent interest in WFI. Shauna’s tax basis in her WFI stock is $50,000. Danielle will receive the building and land in exchange for her 50 percent interest in WFI. Danielle’s tax basis in her WFI stock is $100,000. Assume for purposes of this problem that the cash available to distribute to the shareholders has been reduced by any tax paid by the corporation on gain recognized as a result of the liquidation.

a. What amount of gain or loss does WFI recognize in the complete liquidation?

b. What amount of gain or loss does Shauna recognize in the complete liquidation?

c. What amount of gain or loss does Danielle recognize in the complete liquidation?

d. What is Danielle’s tax basis in the building and land after the complete liquidation?

53. [LO 5] Tiffany and Carlos decided to liquidate their jointly owned corporation, Royal Oak Furniture (ROF). After liquidating its remaining inventory and paying off its remaining liabilities, ROF had the following tax accounting balance sheet.

FMV Adjusted Basis Appreciation (Depreciation)

Cash $ 200,000 $ 200,000

Building 50,000 10,000 40,000

Land 150,000 200,000 (50,000)

Total $ 400,000 $ 410,000 $ (10,000)

Under the terms of the agreement, Tiffany will receive the $200,000 cash in exchange for her 50 percent interest in ROF. Tiffany’s tax basis in her ROF stock is $50,000. Carlos will receive the building and land in exchange for his 50 percent interest in ROF. His tax basis in the ROF stock is $100,000. Assume for purposes of this problem that the cash available to distribute to the shareholders has been reduced by any tax paid by the corporation on gain recognized as a result of the liquidation.

a. What amount of gain or loss does ROF recognize in the complete liquidation?

b. What amount of gain or loss does Tiffany recognize in the complete liquidation?

c. What amount of gain or loss does Carlos recognize in the complete liquidation?

d. What is Carlos’s tax basis of the building and land after the complete liquidation?

Assume Tiffany owns 40 percent of the ROF stock and Carlos owns 60 percent. Tiffany will receive $160,000 in the liquidation and Carlos will receive the land and building plus $40,000.

e. What amount of gain or loss does ROF recognize in the complete liquidation?

f. What amount of gain or loss does Tiffany recognize in the complete liquidation?

g. What amount of gain or loss does Carlos recognize in the complete liquidation?

h. What is Carlos’s tax basis in the building and land after the complete liquidation?

54. [LO 5] Jefferson Millinery, Inc. (JMI) decided to liquidate its wholly-owned subsidiary, 8 Miles High, Inc. (8MH). 8MH had the following tax accounting balance sheet.

FMV Adjusted Basis Appreciation

Cash $ 200,000 $ 200,000

Building 50,000 10,000 40,000

Land 150,000 90,000 60,000

Total $ 400,000 $ 300,000 $ 100,000

a. What amount of gain or loss does 8MH recognize in the complete liquidation?

b. What amount of gain or loss does JMI recognize in the complete liquidation?

c. What is JMI’s tax basis in the building and land after the complete liquidation?

55. [LO 5] Jefferson Millinery, Inc. (JMI) decided to liquidate its wholly-owned subsidiary, 8 Miles High, Inc. (8MH). 8MH had the following tax accounting balance sheet.

FMV Adjusted Basis Appreciation

Cash $ 200,000 $ 200,000

Building 50,000 10,000 40,000

Land 150,000 200,000 (50,000)

Total $ 400,000 $ 410,000 $ (10,000)

a. What amount of gain or loss does 8MH recognize in the complete liquidation?

b. What amount of gain or loss does JMI recognize in the complete liquidation?

c. What is JMI’s tax basis in the building and land after the complete liquidation?