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Question # 00006659 Subject Linguistics Topic General Linguistics Tutorials: 1
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701. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question PR #1
Cocoa Corporation is acquiring Milk Corporation in a “Type A” reorganization by exchanging 40% of its voting stock and $50,000 for all of Milk’s assets (value of $850,000 and basis of $600,000) and liabilities ($200,000). The shareholders of Milk are Elsie (650 shares) and Ferdinand (350 shares). They bought their stock for $500 per share. What is the value of the stock that Elsie and Ferdinand received from Cocoa? What is the amount of gains or losses they will recognize due to the reorganization and what is their basis in the Cocoa stock?

702. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question PR #2
Lyon has 100,000 shares outstanding that are worth $10 per share. It uses 32% of its stock plus $80,000 to acquire Zebra Corporation in a “Type A” reorganization. Zebra’s assets are valued at $400,000 and its accumulated earnings and profits are $25,000 at the time of the reorganization. The Lyon shares and cash are distributed to the Zebra shareholders as follows. Jake (owning 62.5% of Zebra) receives 18,000 shares (value $180,000) and $70,000. Kara (owning 37.5% of Zebra) receives 14,000 shares (value $140,000) and $10,000. Jake and Kara each recognize gains to the extent of the cash they received. What is the character of Jake’s and Kara’s gains?

703. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question PR #3
Present Value Tables needed for this question.Avocado Corporation wants to acquire Tomato Corporation because their businesses are complementary and Tomato has unused business credits of $63,000. Avocado is a manufacturer with a basis in its assets of $2.4 million (value of $3.1 million) and liabilities of $600,000. It is in the 35% tax bracket and uses a 10% discount factor when making investments. However, the Federal long-term tax-exempt rate is only 5%. Tomato is a distributor of a variety of products including those of Avocado’s. Its basis in its assets is $2 million (value of $1.5 million) and has liabilities of $400,000. Avocado is willing to acquire only $1 million of Tomato’s assets and all its liabilities for stock and $100,000 cash. Tomato will distribute its remaining assets, cash, and Avocado stock to its shareholders in exchange for their stock and then liquidate. Given these facts, what type of reorganization would you suggest for Avocado and Tomato? What is the maximum amount Avocado should be willing to pay for the business credits?

704. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question PR #4
Pipe Corporation is very interested in acquiring all of Ore Corporation. It currently owns 30%, which it purchased 6 years ago for $250,000. Pipe is a manufacturer of plumbing pipes with assets valued at $3 million and liabilities of $1 million. Ore supplies Pipe with copper from its mines that are valued at $4 million with $3 million in mortgages. Pipe has negotiated a restructuring with Ore’s management. Pipe is concerned about potential environmental issues from the strip mining used by Ore and feels it needs liability protection. Given these facts, what type of reorganization would you suggest for Pipe and Ore?

705. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question PR #5
Present Value Tables needed for this question.Tony is the sole shareholder of Create Corporation. Tony is a chemical engineer and has been working hard to create a unique product but has been unsuccessful. Thus, Create has accumulated an NOL of $240,000. This year she finally finds the right combination for a new cleaning product. Predicting that Create will be very profitable next year, Create borrows $250,000 to pay Tony the salary she rightly deserves. Next year, Create does become profitable, earning $100,000 before application of carryovers. Mega Corporation, a huge ($50 million value, 35% tax bracket) competitor, offers to purchase the patent from Tony for $750,000. Knowing that the Create’s NOL should be useful to Mega, Tony suggests a restructuring where she receives $500,000 in Mega stock, Mega assumes all of Create’s liabilities ($250,000), plus $75,000 cash for the NOL. Mega counter offers with cash for the NOL (to be determined), and $750,000 of stock. It will not assume any liabilities. How much would be the maximum cash offered by Mega for the NOL, assuming that Mega uses an 11% discount factor and the Federal long-term tax-exempt rate is 4%? If Tony accepts Mega’s offer, what type of reorganization, if any, is this restructuring?

706. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question PR #6
Iron Corporation was created 10 years ago. It has two divisions: tacks, which produces 55% of the sales, and paper clips, producing the remaining sales. Iron currently has two shareholders: Juanita, who acquired 60% of the stock three years ago for $625,000, and Kyle, who purchased his 40% six years ago for $220,000.

In the current year, Holdum Corporation (fair market value of $4 million) is interested in the paper clip division of Iron but not the tacks division. It offers $1.8 million for the all of Iron and then plans to close the tacks division after the acquisition. Kyle thinks this is a great idea but Juanita does not want the tacks division to be closed. She still wants to run it.

Juanita would be glad for Holdum to own the paper clip division, but she will not agree to a sale due to the amount of taxable gain that a sale would generate. Iron has operated the paper clip machinery since it began business; thus, these assets are fully depreciated. With the basis in the paper clip raw materials and inventory amounting to only $200,000, a sale of the paper clip division would cause a substantial gain.

Determine an alternative restructuring of this transaction for Iron that will generate low or zero taxes. Compute the realized and recognized gain or loss and the new basis for Iron, Juanita, and Kyle.

707. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question PR #7
Gera owns 25,000 shares of Flow Corporation’s common stock, for which she paid $250,000. The other 5,000 shares belong to Gera’s brother, Earl, which he purchased for $50,000. Wanting to expand a few years ago, Flow sold $200,000 in bonds to Earl. The expansion has paid off and Flow now can afford to redeem 50% of Earl’s bonds.

Rather than have the bond redeemed, Earl would prefer to receive 100 shares of preferred stock for the $100,000 in bonds. At the same time, Gera would like to equalize her ownership with her brother, so she will turn in 10,000 shares of her common stock in exchange for 100 shares of preferred stock and 10,000 shares of her common for a $200,000 bond. Gera and Earl then each will hold 5,000 shares of common stock and 100 shares of preferred.

The total common stock is valued at $600,000 before the preferred is issued. The preferred shares are valued at $1,000 each. State the type of reorganization, if any, for which these transactions qualify. What is the amount of gain or loss that Gera and Earl recognize on these transactions?

708. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question PR #8
NewCo received all of DebtCo’s assets (value $600,000, basis $150,000) through a Federal court proceeding. The creditors of DebtCo received NewCo voting stock in exchange for their debt, representing 100% of the total liabilities ($500,000). Also transferred to NewCo are DebtCo’s tax attributes, including the following carryovers: capital losses $70,000, NOL $300,000, and general business credits $80,000.

State the type of reorganization, if any, for which these transactions qualify. Assuming that the special election regarding asset basis is elected, compute NewCo’s basis in its assets and the amount of tax benefit carryovers NewCo will have available.

.

709. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question PR #9
Present Value Tables needed for this question.Hair Corporation would like to acquire Scalp Corporation on August 31 because Scalp has an $8,000 capital loss carryover and $32,200 of general business credits that Hair could readily use. At this time, Scalp has assets valued at $1 million (basis of $1.1 million). While Hair is not interested in having Scalp’s shareholders become its shareholders, it is interested in expanding into Scalp’s business line. Hair thinks it could turn Scalp around with up-to-date equipment. Thus, Hair would like to sell Scalp’s assets immediately, recognize the loss to offset its expected gains, and then use the proceeds to purchase new equipment. Hair is a very profitable corporation and is also expecting to have at least $50,000 of capital gains and $3 million in other income for the current year. Hair is proposing paying cash for all of Scalp’s assets and liabilities. The Federal long-term tax-exempt rate is currently 3%, and Hair’s discount factor for making investment decisions is 15%.


a.

Discuss the proposed restructuring and what steps should be taken to maximize Hair’s and Scalp’s benefits from the reorganization.

b.

What is the amount of Scalp’s carryover loss that Hair may take in the current year assuming it meets all other tax law requirements?

c.

As of January 1 next year, what is the present value of carryovers remaining after the current year’s utilization?



710. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question PR #10
Present Value Tables needed for this question. Sugar Corporation would like to acquire Salt Corporation on January 1 of the current year in a tax-free reorganization. Salt is particularly appealing to Sugar because Salt has a $250,000 capital loss that can carry over for five years. Sugar expects large capital gains for the next several years in addition to its expected $2.5 million net income. At the time of the restructuring, Salt has assets valued at $2 million (basis of $1.4 million). Sugar is proposing exchanging 45% of its stock for all of Salt’s assets. The Federal long-term tax-exempt rate is 2% and Sugar’s discount rate for investment decisions both currently 7%. What is the maximum present value of the capital loss to Sugar?

711. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question PR #11
Last year, Loss Corporation transferred all of its assets (value of $8.2 million; basis of $2.7 million) and liabilities ($3.7 million) to Gain Corporation in exchange for 40% of Gain’s voting stock. Loss then liquidated. At the time of the reorganization, Loss had NOLs and excess credits that may be carried forward. For the current year, Gain has taxable income of $770,000 before considering the $150,000 NOL and $30,000 in excess credits carried to this year. If the Federal long-term tax-exempt rate was 4% at the time of the reorganization, what is the amount of NOL and credit carryovers Gain Corporation may utilize in the current year? How much credit carries over to next year?

712. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question PR #12
On March 1, Cream Corporation transfers all of its assets to Coffee Corporation in exchange for 10% of its common voting stock. At the time of the reorganization, Cream has assets valued at $4 million (basis of $3 million) and its earnings and profits account shows a deficit of $650,000. Coffee’s earnings and profits as of March 1 were $420,000. Due to the reorganization, Coffee has an NOL for the current year of $150,000. Coffee still declares its usual dividends of $100,000, paid on April 30, August 31, and December 31 ($300,000 of total dividends).


a.

How are the Coffee shareholders taxed on the distribution?

b.

What portion of the current-year NOL may be carried back to prior Coffee and/or Cream tax years?





713. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question PR #13
Present Value Tables needed for this question.Sauce Corporation is very interested in acquiring a controlling interest Pear Corporation, to obtain operating efficiencies. Sauce currently owns 30% of Pear, which it bought six years ago for $600,000. Sauce is a fruit processor with assets valued at $3 million and liabilities of $1 million. Pear supplies Sauce with fruit from its orchards that are valued at $4 million with $3 million in mortgages. Pear also has $60,000 in unused general business credits. Sauce has negotiated a restructuring with most of Pear’s shareholders. It will exchange 1 share of its stock for 2 shares of Pear. Pear’s founder, who own 10% of the outstanding common stock, is not willing to relinquish her stock and thus, Sauce cannot own 100% of Pear.


a.

What type of reorganization is this restructuring?

b.

What is the value of $60,000 business credits to Sauce Corporation assuming that the Federal long-term tax-exempt rate is 3% and Sauce uses a discount rate of 10%?





714. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question ES #1
Discuss the role of letter rulings in corporate reorganizations.

715. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question ES #2
Explain how the tax treatment for parties involved in a tax-free reorganization almost exactly parallels the treatment under the like-kind exchange provisions of § 1031.

the consequences of a like-kind exchange or corporate reorganization.

716. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question ES #3
Once a gain is recognized in a corporate reorganization, its character must be determined. What are the different tax character possibilities that a corporate reorganization gain may trigger?

717. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question ES #4
There are several different types of corporate reorganizations allowed by the Internal Revenue Code. Provide a brief description of each type.

718. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question ES #5
Compare the consideration that can be used in “Type A,” “Type B,” and “Type C” reorganizations.

719. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question ES #6
Compare an acquisitive “Type D” reorganization with the “Type C” reorganization.

720. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question ES #7
Discuss the influence of step transaction, sound business purpose, continuity of business enterprise, and continuity of interest doctrines on tax-free corporate reorganizations.

721. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question ES #8
Discuss the treatment of accumulated earnings and profits (E & P) in a corporate reorganization when both corporations have positive E & P and when the target corporation has a negative E & P.

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