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Solution Manual for South-Western Federal Taxation 2021: Corporations, Partnerships, Estates
Solution Manual for South-Western Federal Taxation

2021: Corporations, Partnerships, Estates and
Trusts, 44th Edition, William A. Raabe, James C.
Young, Annette Nellen, William H. Hoffman, Jr., David
M. Maloney
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CHAPTER 7
CORPORATIONS: REORGANIZATIONS
SOLUTIONS TO PROBLEM MATERIALS
DISCUSSION QUESTIONS
1. (LO 1) A private letter ruling from the IRS is like an insurance policy because if the parties proceed
with the transaction as proposed in the ruling request, a favorable ruling indicates the tax treatment
the IRS sanctions for the restructuring.
2. (LO 2) Using the four-column template in Concept Summary 7.1, the shareholder’s basis in the new
stock is the fair market value of the new stock less the postponed gain or plus the postponed loss. The
postponed gain is equal to the gain that was realized but not recognized. This computation ensures
that the gain not currently recognized will be recognized when the stock is sold at a later date.
3. (LO 3) The “Type A” reorganizations can be classified as either mergers or consolidations. A merger
is the union of two or more corporations, with one of the corporations retaining its corporate existence
and absorbing the others. The other corporations cease to exist by operation of law.
A consolidation occurs when a new corporation is created to take the place of two or more
corporations. To qualify as a “Type A” reorganization, mergers and consolidations must comply with
the requirements of foreign, state, or Federal statutes.
4. (LO 3) In a “Type B” reorganization, the acquiring corporation obtains at least an 80% control of the
target corporation in an exchange involving solely its voting stock for the stock of the target (voting
and nonvoting). Both corporations survive after the restructuring, and a parent-subsidiary relationship
is created.
5. (LO 3) In a “Type A” reorganization, the acquiring corporation must assume all liabilities (including
unknown and contingent liabilities) of the target as a matter of state law. However, in the “Type C”
reorganization, the acquiring corporation assumes only the target liabilities that it chooses. Normally,
the acquiring corporation is not liable for unknown or contingent liabilities of the target.
The liabilities can cause problems for a “Type C” reorganization. If property and voting stock are
transferred by the acquiring corporation to the target, the target liabilities are considered “other
property” and the 80%-of-property-for-voting-stock requirement may be difficult to meet.
6. (LO 3) The chief differences between divisive “Type D” reorganizations include the following.
• Split-up: Two or more new corporations are formed and receive all of the original corporation’s
property. The stock of each new corporation is exchanged for the divided corporation’s stock.
The distributing corporation then is liquidated.
7-1
© 2021 Cengage®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
7-2 2021 Corporations Volume/Solutions Manual
• Spin-off: A new corporation is formed to receive some assets from the distributing corporation in
exchange for the new corporation’s stock. The new corporation’s stock is distributed to the
distributing corporation’s shareholders. None of the distributing corporation’s stock is surrendered.
• Split-off: This is like a spin-off, except that the shareholders surrender distributing corporation
stock in exchange for stock in the new corporation.
7. (LO 4) The sound business purpose doctrine requires that the reorganization have economic
consequences germane to the businesses. The purpose must go beyond tax avoidance because tax
avoidance is not, by itself, considered a business purpose. Regulations indicate that the corporation’s
business purpose should be paramount. When both the corporation and the shareholder have valid
purposes for a reorganization, the corporate purpose must be the reason for the transaction.
The continuity of business enterprise test requires the acquiring corporation to either (1) continue the
target corporation’s historic business (historic business test) or (2) use a significant portion of the
target corporation’s assets in its business (asset use test). Continuing one of the target corporation’s
significant business lines satisfies the historic business test.
The step transaction doctrine prevents taxpayers from engaging in a series of transactions to obtain
tax benefits that would not be allowed if the transaction were accomplished in a single step. When the
steps are so interdependent that the accomplishment of one step would be fruitless without the
completion of the series of steps, the transactions may be collapsed into a single step.
8. (LO 3) A “Type E” reorganization is used when the corporation is recapitalizing—when it has a

major change in the character and amount of outstanding stock, securities, or paid-in capital of the
corporation. A “Type E” transaction can be bonds for stock, stock for stock (common for preferred, or
preferred for common), or bonds for bonds.
A “Type F” reorganization is used when the corporation is merely changing its identity (changing its
name), form (from a C corporation to an S corporation or vice versa), or place of organization
(changing its state of incorporation).
9. (LO 5) The earnings and profits (E & P) of the acquired corporation carry over to the successor
corporation. If the balance is positive, the acquired E & P is added to the successor’s accumulated
E & P balance and deemed as received by the successor corporation as of the change date. However,
the negative E & P of the acquired can only offset E & P accumulated by the successor corporation
after the change date. Consequently, the successor corporation must maintain two separate E & P
accounts after the change date: one account contains the acquirer’s prior positive accumulated E & P
as of the change date, and the other contains the negative balance transferred and E & P accumulated
since the change date. The negative balance in the post-transfer account may not be used to reduce
accumulated E & P in the pre-transfer account.
For a divisive “Type D” reorganization, the E & P of the distributing corporation must be allocated
among the new and originating corporations based on the FMV of each entity.
10. (LO 5, 6) The § 382 limitation helps curtail the tax benefits received by the successor corporation
from a targetʼs NOL carryforwards. The limitation applies when there is a more than 50-percentage-
point ownership change (by value) for the target (loss) common shareholders. In this case, the yearly
NOL amount usable by the successor corporation is restricted.
The objective of the limitation is to restrict NOL use to a hypothetical future income stream based on
what would be received if the stock was sold and the proceeds were invested in long-term tax-exempt
securities. As a result, § 382 does not disallow an NOL. It merely limits the amount that can be used
by the successor corporation on an annual basis.
Corporations: Reorganizations 7-3
11. (LO 5) The E & P of an acquired corporation carries over to a successor corporation. However, when
the target has negative E & P, the negative amount cannot be added to the acquirer’s positive E & P.
The negative E & P of the target may be used only to offset E & P accumulated by the successor after
the change date.
In this example, the company wants to pay a dividend immediately after the merger. Since neither the
negative accumulated E & P of the target nor the post-merger negative E & P can be used to reduce
the positive pre-merger E & P of the acquirer, the first $1,000,000 of distribution paid to shareholders
most likely is a dividend.
COMPUTATIONAL EXERCISES
12. (LO 2)
a. Rebecca’s Gotchas stock is valued at $4,000 ($40 per share × 100 shares). Assuming that this
exchange qualifies for tax-free treatment under § 368, Rebecca’s recognized gain and basis in her
Solis stock are computed as follows using the four-column template of Concept Summary 7.1 and
Microsoft Excel. An Excel formula solution follows.
The exchange of Rebecca’s stock has no tax consequences for Gotchas or Solis. Thus,
Rebecca’s realized gain is $3,000 and her recognized gain is $500.
b. Rebecca’s basis in Solis stock is $1,000.
13. (LO 2)
a. Due to the boot (property) it used in the transfer, Cato recognizes a $255,000 gain ($500,000
− $245,000) on the reorganization.
b. Since Firestar distributes the property to its shareholders, it does not recognize gain.
14. (LO 2)
a. Since this exchange qualifies for tax-free treatment under § 368, the recognized gain for
Townsend is the lesser of boot received (land, $100,000) or realized gain ($220,000). Thus,
Townsend has a $100,000 recognized gain on the reorganization computed as follows using
the four-column template of Concept Summary 7.1 and Microsoft Excel. An Excel formula
solution follows.
Thus, Townsend’s recognized gain equals $100,000.

b. Rogers reports a gain on the land of $75,000 [i.e., the difference between its value ($100,000)
and its basis ($25,000)]. Pruett records a zero gain or loss; it distributed all that it received.
c. Townsend’s basis in the Roger stock is $480,000, and the basis in the land is its value of
$100,000.
15. (LO 2)
a. Assuming that this exchange qualifies for tax-free treatment under § 368, the realized loss for
Hosha on the reorganization is computed as follows using the four-column template of
Concept Summary 7.1 and Microsoft Excel. An Excel formula solution follows.
Thus, Hosha’s realized loss is $2,000, but none of it is recognized.

b. Hosha’s basis in the Petal stock is $20,000.
16. (LO 5) Jessamine’s $12,000,000 NOL carries over to offset some of the $30,000,000 taxable income,
reducing it to $18,000,000. Whitney saves $3,000,000 in state and Federal income taxes by being able
to utilize Jessamine’s NOL carryover ($12,000,000 NOL carryover × 25%). Thus, the $12,000,000
NOL is a valuable asset that is worth $3,000,000 to Whitney.
17. (LO 5) ShoeBiz starts with an E & P balance of $157,500 [$630,000 × ($1,000,000/$4,000,000)], and
Park retains an E & P balance of $472,500 ($630,000 − $157,500).
PROBLEMS
18. (LO 3)
a. “Type A” reorganization. The transaction does not qualify as a “Type C” reorganization
because substantially all of the assets are not acquired with voting stock.
b. This is a taxable transaction. It does not qualify as a “Type A” reorganization because all of
Alpha’s liabilities are not transferred to Beta. It does not qualify as a “Type C” because at
least 80% of Alpha’s assets ($350,000 × 80% = $280,000) are not acquired with Beta stock
($200,000 stock exchanged). The liabilities constitute boot because cash also is used in the
transaction.
c. “Type B” reorganization. As long as Alpha owns at least 80% after the restructuring, it is a
“Type B.”
d. “Type D” spin-off reorganization. Stock in Alpha is not relinquished to receive Beta stock.
e. “Type C” reorganization because Beta acquires substantially all of Alpha’s assets and only
those liabilities it chooses. It cannot qualify as a “Type A” because all of Alpha’s liabilities
were not acquired.
f. The transaction qualifies as a “Type G” reorganization. The creditors received voting stock
representing at least 40% of the total fair value of the liabilities.
19. (LO 2) Cornell reports a $5,000 recognized gain to the extent that the bond he received ($55,000) has
a greater face value than the bond he relinquished ($50,000). His basis in the 7-year Glaucous bond is
$27,300, as computed using the four-column template of Concept Summary 7.1 and Microsoft Excel.
20. (LO 2) The transaction meets the § 368 requirements for a “Type C” reorganization. Citron
recognizes $70,000 gain on the land distributed to Electra ($150,000 FMV – $80,000 basis). Ecru
recognizes no gain or loss because it transfers solely voting stock for Citron’s assets. Ecru’s basis in
the assets received from Citron is $670,000 ($600,000 carryover basis + $70,000 gain). Gain or loss
and the basis determination for Electra can be determined using the four-column formula presented in
Concept Summary 7.1 and Microsoft Excel. An Excel formula solution follows.
Electraʼs realized gain is the difference between the fair market values of the two assets received in
the transaction (the FMV of the Ecru stock of $800,000 and the land distributed to Electra of
$150,000), less Electraʼs basis in her Citron stock given up of $970,000.
Note that Electra does not recognize a loss even though she received boot. Losses cannot be
recognized unless only boot is received (i.e., no stock is received).
21. (LO 2, 3) This restructuring qualifies as a “Type E” reorganization and has no immediate income tax
consequence to Spinone. To the extent that James received common or preferred stock for his prior
common stock, he does not recognize gain. However, he recognizes gain because of the boot
($30,000 cash) he received, as demonstrated below. His basis in the common stock of $29,412 and
$20,588 in the preferred stock are computed using the four-column formula presented in Concept
Summary 7.1 and Microsoft Excel. An illustrative Excel formula solution follows.
The bondholder, Karen, has a gain equal to the $10,000 difference in face values of the bonds
($160,000 – $150,000). The fact that the bonds pay at different interest rates is not relevant to the
taxation of the exchange.
22. (LO 2)
a. The merger of Quail and Covey Corporations results in Kasha receiving $90,000 in bonds
($100,000 × 90%) and $1,530,000 in Covey stock ($1,700,000 × 90%) for her Quail stock.
She reports a recognized gain of $90,000 due to the bond and a basis in her Covey stock of
$900,000. These amounts are computed below using the four-column formula presented in
Concept Summary 7.1 and Microsoft Excel. The transaction cannot qualify under § 302(b).
Frank receives the remaining $170,000 in Covey stock and $10,000 in bonds. Frank
recognizes gain to the extent of the bond received, or $10,000. His basis in the Covey stock is
$100,000. These amounts are computed below using the four-column formula presented in
Concept Summary 7.1 and Microsoft Excel.
The character of Kasha’s and Frank’s gain is part dividend (to the extent of the $70,000
earnings and profits) and part capital gain.
Kasha: $70,000 × 90% = $63,000 dividend and $27,000 capital gain ($90,000 – $63,000).
Frank: $70,000 × 10% = $7,000 dividend and $3,000 capital gain ($10,000 – $7,000).
b. Since Quail distributes the Covey stock and bonds it receives in exchange for its assets, Quail
recognizes no gain on the reorganization. Covey’s basis in the Quail assets is a carryover
basis of $1,200,000.
23. (LO 2)
a. The consolidation of Alpha and Beta Corporations results in Jed receiving $36,000 in cash
and $90,000 in AlphaBeta stock for his Alpha stock. All of his $26,000 realized gain is
recognized gain because the cash he receives is greater than his realized gain. Jed’s basis in
his AlphaBeta stock is $90,000 because no gain is postponed. These amounts are computed
below using the four-column formula presented in Concept Summary 7.1 and Microsoft Excel.
Zia’s $22,000 realized loss is not recognized. Since the loss is postponed, Zia’s basis in her
AlphaBeta stock is $337,000. These amounts are computed below using the four-column
formula presented in Concept Summary 7.1 and Microsoft Excel.
b. Alpha recognizes a $28,000 gain on the assets distributed to Zia ($63,000 – $35,000). Beta
and the consolidated AlphaBeta recognize no gain or loss on the reorganization.
c. AlphaBeta Stock
Alpha Corporation AlphaBeta Corporation
Alpha Stock Alpha Assets
AlphaBeta Stock AlphaBeta Stock

+ Cash Beta Assets AlphaBeta Stock
+ Land
Jed Zia Beta Corporation
24. (LO 2, 3)
a. Yes. This transaction meets the qualifications of a “Type C” reorganization. Solely voting
stock of Acquiring is used in the reorganization; thus, the liabilities are not considered boot.
At least 90% of the net fair market value of the Target assets and 70% of the gross value are
transferred to Acquiring. In a “Type C,” the acquiring can choose which liabilities to assume.
Target ceases to exist after the distribution to Wei.
b. The value of stock transferred from Acquiring to Target is $2,300,000, computed as follows:
$3,700,000 – $1,400,000 liabilities = $2,300,000 stock.
c. Wei receives $2,300,000 in stock and a building valued at $300,000 with a $100,000
mortgage for her Target stock. Thus, Wei receives $2,500,000 for her Target stock
($2,300,000 + $300,000 – $100,000). Since her basis is $2,100,000, Wei recognizes gain to
the extent of the boot received, which is $200,000 ($300,000 building – $100,000 mortgage).
See part d. for computation of gain using the four-column approach.
Target has a $75,000 ($300,000 – $225,000) recognized gain on the reorganization due to the
building distributed to Wei. Acquiring has no gain or loss on the reorganization.
d. Wei’s basis in the building is $300,000 and has a $100,000 liability she acquired. Her basis in
the stock is computed as follows using the four-column template of Concept Summary 7.1
and Microsoft Excel. An Excel formula solution follows.
25. (LO 3)
a. This is a “Type D” split-up reorganization. AlphaPsi divides into two corporations, then
ceases to exist.
b. This is a “Type A” reorganization because all of the liabilities are assumed.
c. This is a “Type F” reorganization.
d. This is a taxable transaction. It does not qualify as a “Type B” because solely voting stock
was not exchanged by Alpha.
e. This is a taxable transaction. It does not qualify as a “Type A” or a “Type C” because Alpha
retains the investments and does not liquidate.
f. This is a “Type C” reorganization. It does not qualify as a “Type A” because none of the
liabilities were assumed by Nu.
26. (LO 3, 6)
a. The fact that Red already owns 55% of Brown will not adversely affect its ability to meet the
“Type B” control requirement (80% stock) or the “Type C” 80% of the assets acquired with
voting stock.
Using a “Type B” reorganization, Red can exchange $3,500,000 in its voting stock with Blue
for its 35% interest in Brown [35% × ($12,000,000 − $2,000,000 liabilities)]. After the
exchange, Red will own 90% of Brown. Yellow Corporation does not have to relinquish its
$1,000,000 of Brown stock. As it desires, Yellow does not have to become a shareholder of
Red. If Yellow desires to receive cash or other property for its stock, Red cannot qualify for
tax-free treatment under a “Type B” or “Type C” reorganization. A “Type B” requires that the
sole consideration given by Red be voting stock. For a “Type C,” at least 80% of the fair
market value of Brown’s assets must be obtained with voting stock. When cash is used, the
liabilities also are considered other property. The $1,000,000 cash for Yellow stock plus the
$2,000,000 liabilities is greater than 20% of Brown’s value ($12,000,000 × 20% =

$2,400,000). Thus, only a “Type B” reorganization with Yellow retaining its Brown stock will
provide tax-deferred treatment.
b. Diagram of a “Type B” reorganization.
Stock Transaction
Brown
Red Stock
Red Brown Stock Blue Yellow
55% 35% 10%
After Stock Transaction
Brown
Red Yellow
90% 10%
27. (LO 3, 6) Raabe, Young, Nellen, Hoffman, & Maloney, CPAs

5191 Natorp Boulevard
Mason, OH 45040
January 21, 2021
Ms. Lee Xanders, President
Drab Corporation
Route 1, Box 2440
Mason, OH 45040
Dear Ms. Xanders:
This letter is in response to your request for guidance regarding the merger of Drab and Olive using a
tax-free corporate reorganization transaction. The types of reorganizations considered for this
restructuring are the “Type A” consolidation or the “Type C” merger.
With a “Type A” consolidation, Drab and Olive create a new corporation to receive all of the assets of
each corporation. Since it will be new, the corporation takes a new name, such as Olive Drab. The
new name is beneficial because it indicates that the two companies combined and helps maintain their
customer bases through name recognition. In exchange for all of Drab’s and Olive’s assets and
liabilities, each receives Olive Drab stock. Drab shareholders receive $200,000 ($600,000 FMV −
$400,000 liabilities) of Olive Drab stock in exchange for their Drab stock, and Olive shareholders
receive $800,000 ($900,000 FMV − $100,000 liabilities) in Olive Drab stock in exchange for their
Olive stock. After the exchange of stock, Drab and Olive would liquidate and cease to exist. The
Olive Drab basis in the assets is $980,000 with liabilities of $500,000.
A “Type C” reorganization would work for the merging of Drab and Olive taxwise, but it would not be as
beneficial for retaining the Drab name recognition. This is because Olive, being the larger acquiring
corporation, would remain in existence, and Drab would cease to exist. Because only the Olive name
would continue, the Drab customers may not have an allegiance to the successor corporation.
In summary, a “Type A” or a “Type C” reorganization would work for merging Drab and Olive from
a tax perspective. However, to retain name recognition, the “Type A” consolidation would be the best
choice. Should you have any further questions regarding these types of reorganizations, please contact
us at your earliest convenience.
Sincerely,
Xiang Morris, CPA
28. (LO 3, 6)
a. Transaction
Small, Inc. Small Common Big Corporation

Stock
Big Other Common

Big Stock
Corporation Shareholders
25% 75%
Small Preferred Stock

Preferred Stock
Shareholders
After the Transaction
Big + Former Common & Preferred

Big Corporation
Small Stock Shareholders
Minority Shareholders
Small, Inc. 5%
b. Big’s acquisition of Allie’s stock is a taxable transaction. While Big used stock to acquire
Allie’s stock, Big used preferred, not common, and did not acquire at least 80% of the
stock. It is a subjective decision as to whether this transaction occurs too close in proximity
to the “Type B” reorganization. Thus, the IRS may consider this stock acquisition as a
separate transaction. In this case, the prior acquisition of stock will not destroy the “Type
B” acquisition of the remaining stock. The “Type B” requirement of voting stock for stock
is met as well as the acquisition of at least 80% of all classes of stock. Only 5% remains
held by minority shareholders. Even though two years separate the transactions, the IRS
may view the acquisition of Allie’s stock as part of an integrated plan and disallow the
“Type B” restructuring treatment, because part of the stock was acquired with Big’s
preferred stock.
29. (LO 3, 6) Raabe, Young, Nellen, Hoffman, & Maloney, CPAs

5191 Natorp Boulevard
Mason, OH 45040
November 19, 2020
Ms. Lily White, MuCo CEO

3443 E. Riverbank Road
Walla Walla, WA 99362
Dear Ms. White:
This letter is in response to your question as to how to arrange the acquisition of MuCo by Eta
Corporation and have it qualify for tax-favored treatment. We believe that the transaction as it is
currently structured will not qualify as a “Type C” reorganization. Our conclusions are based on the
following facts. MuCo has gross assets valued at $1,500,000 ($1,300,000 toy division + $200,000
publication division) and a net value of $850,000 ($800,000 toys + $50,000 publication).The MuCo
liabilities amount to $650,000 ($500,000 toys + $150,000 publications), and MuCo is requesting the
receipt of $50,000 cash.
For a “Type C” reorganization, at least 80% of the gross fair market value of MuCo’s assets
($1,500,000) must be obtained by Eta with voting stock. Assumption of liabilities is considered other
property if any cash is received by MuCo. Since MuCo is receiving $50,000 in cash, the $650,000 of
liabilities plus the cash cause only $800,000 of the assets to be acquired by Eta with its voting stock.
Thus, the percentage acquired with voting stock is about 53%, which does not meet the 80%
requirement.
If MuCo were to retain the publications division and then sell it to receive the $50,000, the transaction
would qualify as a “Type C” reorganization. A “Type C” requires that “substantially all” of the assets
of MuCo be transferred to Eta. While there is no definition of “substantially all” in the Code, the
IRS requires at least 90% of the asset’s net value and 70% of the gross value to be transferred.
The suggested transaction will meet these guidelines because the toy division has a net value of
$800,000 ($1,300,000 fair market value – $500,000 liabilities), which is more than 90% of the
$850,000 total net value ($800,000/$850,000 = 94%). Further, the $1,300,000 gross value of these
assets is greater than 70% of the $1,500,000 total gross value ($1,300,000/$1,500,000 = 87%).
Therefore, if Eta exchanges its voting stock for the toy division, MuCo sells the publications division,
MuCo distributes the cash and Eta stock to Lily, and then MuCo liquidates, the transactions will
qualify as a “Type C” reorganization.
If I can be of further service regarding this transaction, please contact me.
Sincerely,
Shiv Ghose, CPA
Note: Distributing the publications division to Lily along with the Eta stock and then having Lily sell
the publications division is a supportable alternative solution to this problem.
30. (LO 3, 6)
a. The spin-off reorganization proposed by Puce will not meet the requirements of a divisive
“Type D” reorganization. The assets retained by Puce, the investments, are not an active trade
or business. The new corporations created as well as the original corporation must operate an
active trade or business that has been in existence for at least five years.
b. The division of Puce can be structured as a spin-off “Type D” reorganization. One new
corporation (called New) should be created to receive either the manufacturing assets plus
some investments or the wholesale assets with some investments. Whichever assets are not
transferred to New will remain in Puce. In exchange for the assets transferred, Puce will
receive all the shares in New and will distribute these shares to its shareholders. After the
transaction is complete, Puce’s shareholders own Puce and New.
The reorganization could also be designed as a split-off if Puce’s shareholders exchange some
of their Puce stock for the shares they receive in New. A split-up is not appropriate because
there is no reason for Puce to cease to exist.
c. Diagram of the spin-off “Type D” reorganization.
Transaction
Wholesale assets
Puce
Investments, Wholesale, Some investments New Corporation
Manufacturing
New Stock (100%)

New Stock
Puce Shareholders
After the Transaction

Puce New Corporation
Manufacturing + Investments Wholesale + Investments
Puce Shareholders New (Puce) Shareholders
31. (LO 3)
a. TriStateCo can create two new corporations with one incorporated in Washington (WA Corp)
and the other in Oregon (OR Corp). TriStateCo transfers the landfills located in Washington
to the new WA Corp in exchange for all of its stock. This stock is distributed to the
shareholders of TriStateCo. The same transfers are performed for the OR Corp. TriStateCo
now holds only the landfills located in Idaho. With a “Type F” reorganization, TriStateCo
changes its name to ID Corp. The original shareholders of TriStateCo own all of the stock of
ID Corp, WA Corp, and OR Corp.
b. A diagram of the proposed transaction is as follows.
WA Assets
WA Stock WA Corp
TriStateCo
OR Assets
OR Stock OR Corp
OR WA
Stock Stock
Original
Shareholders
TriStateCo changes its name through a “Type F” reorganization to ID Corp.
After the restructuring, the corporations are organized as follows.
ID Corp WA Corp OR Corp
Original Original Original

Shareholders Shareholders Shareholders
32. (LO 2, 3) Rho can use a “Type E” reorganization to accomplish its restructuring. An exchange of 3%
bonds for 5% bonds is not taxable as long as the face value of the bonds does not change. The fact
that the interest to be received will increase does not create income until the higher interest is paid.
The common stock is currently valued at $60 per share ($900,000/15,000 shares outstanding). If the
exchange of common stock for preferred stock occurs before the acquisition by SheenCo, Tyee and
Danette will receive 12,000 shares of preferred stock valued at $120,000 ($100 per share) in exchange
for 2,000 shares of common stock ($120,000/$60 per share).
The purchase of common stock by SheenCo is not a taxable event. SheenCo will purchase 5,000
shares of common stock for $300,000 (5,000 × $60) to have a 25% interest in Rho ($900,000 +
$300,000 = $1,200,000 × 25% = $300,000).
33. (LO 3) Changing the structure of Beach from a C corporation to an S corporation qualifies as a “Type
F” reorganization, as does changing the name from Beach to Protected Bay. The “Type F”
reorganization is not a taxable transaction, and Beach’s tax attributes would carry over to Protected
Bay. If a restructuring could qualify as a “Type A” or “Type C” as well as a “Type F” reorganization,
according to the IRS, the “Type F” treatment prevails.
34. (LO 3) MEMORANDUM

Date: April 23, 2021
To: Hunter Green
From: Amit Bhat
RE: Restructuring Rufous Corporation
Given the financial position of Rufous Corporation, it is likely that Rufous could file for bankruptcy.
Under the bankruptcy laws, Rufous could qualify for a “Type G” reorganization. In this kind of
reorganization, the assets of Rufous are transferred by Federal or state court proceedings to an
acquiring corporation. The creditors of Rufous receive voting stock in exchange for their claims upon
Rufous. At least 80% of the fair market value of the debt must be replaced with voting stock.
Because a “Type G” reorganization requires filing for bankruptcy, I suggest that you contact your
attorney as soon as possible if this is the route you select for Rufous.
35. (LO 3, 4) Some of the tax issues to consider are listed below. This is not an exhaustive list of possible
issues.
• Does Aqua have a sound business reason for the proposed merger?
• If NOL carryovers are available, are they restricted by the § 382 limitation?
• After the reorganization, would the continuity of business enterprise test be met?
• Are the dissenting shareholders a large enough group to prevent approval of the merger?
• Should Aqua evaluate Icterine for contingent liabilities?
• Will the continuity of ownership interest requirement be met for Icterine shareholders?
36. (LO 2, 4) Some tax issues to consider are listed below. This is not an exhaustive list of possible
issues.
• The proposed merger does not appear to meet the continuity of interest requirements for tax-free
reorganizations because only 30% of Verdigris shareholders would receive stock in Midori.
• The step transaction doctrine may apply because Verdigris is disposing of part of its assets before
the merger occurs. If a “Type C” reorganization was used, Midori may not be acquiring the
requisite 90% of net assets and 70% of gross assets.
• Using $500,000 of cash may cause large capital gains for the shareholders and cause the merger
not to meet the reorganization requirements.
37. (LO 3, 5) The ability to utilize attributes from a target corporation requires that the target merge with
the acquiring corporation and then liquidate. In a “Type B” reorganization, RetrieverCo would
continue to exist and would utilize the capital loss carryforwards itself. Golden Corporation cannot
use RetrieverCo’s capital loss unless a consolidated return is filed.
38. (LO 5) The amount of Border NOL that Collie can utilize in the current year is limited to the amount
of the year remaining, or 33% (120/365 or 120/366). The § 382 limit does not apply because there
was less than a 50-percentage-point change in ownership for Border. Its shareholders went from
100% ownership to 70% ownership; thus, there is only a 30-percentage-point change. The amount of
NOL available in the current year is $165,000 ($500,000 × 33%).
[Note: Student answers may vary from $163,934 to $165,000, depending on how 120/365 (120/366)
was rounded to a percentage.]
Next year Collie can take the remaining NOL because there is no § 382 limitation.
Instructor Note: The solutions to the remaining questions involve present value computations. Using
different present value tables or calculators with present value capabilities will cause the student
responses to vary slightly from the solutions shown here. Therefore, the solutions should be viewed
as approximations of what the student responses should be.
39. (LO 3, 5) The Spaniel stock owned by the former Springer shareholders is worth $2,000,000. The
present value of receiving $3,000,000 in five years using a 5% discount rate is $2,350,500
[$3,000,000 × 0.7835 (5 years at 5%)]. Thus, having their stock purchased in five years for
$3,000,000 would be beneficial for the former Springer shareholders.
40. (LO 3, 5) This exchange qualifies as a “Type E” reorganization. Mila recognizes no gain or loss
because the face value of the bonds given up is equal to the face value of the bonds received. The
difference in the interest paid on the bonds will be taxable as the interest is received.
Using a 3% discount factor, the values of the two bonds are as follows.
Net
Option Amount Tax Rate Net of Tax PV Factor Present Value
10-Year
Face Value $100,000 = $100,000 × 0.7441 = $ 74,410
Interest 5,000 25% = 3,750 × 8.5302 = 31,988
$106,398
15-Year
Face Value $100,000 = $100,000 × 0.6419 = $ 64,190
Interest 4,500 25% = 3,375 × 11.9379 = 40,290
$104,480
Based on the above analysis, the exchange of Mila’s 5%, 10-year bond for a 4.5%, 15-year bond is
not a good deal for Mila. The present value of what she is giving up is $1,918 higher than what she is
receiving ($106,398 – $104,480).
41. (LO 5) The maximum amount of Cyan NOL available in the current year is $9,674 (see below), and
the net present value of the remaining Cyan NOL to be used by Sinopia is $34,583. Since the § 382
limitation applies to this transaction (Cyan shareholders have a 70-percentage-point change in
ownership), the Microsoft Excel computation of the value of the NOL is below. An Excel formula
solution follows.
42. (LO 5) The maximum amount Zeta should value Tau’s NOL is $282,938.
The Microsoft Excel computation for valuing the NOL is below. An Excel formula solution follows.
43. (LO 5)
a. The § 382 limitation applies because BetaCo shareholders have an ownership change because
they go from owning 100% of Beta to 33% of Alpha [$5,000,000/($10,000,000 +
$5,000,000)]. Thus, the usage of the carryovers is limited in the current year and is computed
as follows.
• Net value of BetaCo’s assets: $5,000,000.
• § 382 limitation: $5,000,000 × 4% = $200,000.
• Capital loss carryover allowable: $150,000 to the extent of capital gains for the year.
• Alpha may use $150,000 of the capital loss carryover. Alpha will have a $70,000 capital
loss ($220,000 – $150,000) carryover to next year.
b. The present value of the capital loss carryforward is computed as follows.
• $70,000 × 25% = $17,500 × 0.7938 (present value for 3 years at 8%) = $13,892.
44. (LO 3, 5) Since the Puli shareholders experienced more than a 50-percentage-point change in their
ownership, the § 382 limits apply. The net present value (NPV) of the Puli NOL to VizslaCo is
$25,163 computed below using Microsoft Excel. An Excel formula solution follows.
45. (LO 3, 5) The contemplated reorganization could be either a “Type A” or a “Type C” depending on
whether state merger laws were met.
The NPV of the RentCo stock is a combination of the NPV of its future after-tax cash flows and the
NPV of the after-tax cash obtained from the sale of the land.
RentCo’s net yearly cash flow is the after-tax proceeds received on the $50,000 of yearly rental
income. At a combined 25% state and Federal income tax rate, RentCo’s yearly after-tax cash flow is
$37,500 [$50,000 × (1 – 25%)].
If RentCo expects to receive this after-tax cash flow for the next 20 years, the NPV of its stock should
reflect this anticipated income. Using 8.5136 as the PVA factor for n=20 and i = 10%, multiplying
$37,500 × 8.5136 provides $319,260 as the present value of this 20-year after-tax annuity.
RentCo shows a net after-tax cash flow from the sale of the land. RentCo’s realized and recognized
gain on the sale of the land is $250,000 ($400,000 sales price – $150,000 basis). At a 25% combined
tax rate, the tax due will be 62,500 ($250,000 × 25%). The after-tax cash flow from the sale of the
land is the sales price less the tax paid on the gain, which is $337,500 ($400,000 – $62,500). Using
n=20 and i = 10, the present value factor of this lump sum is 0.1486. The NPV of the after-tax
proceeds from the sale of the land is $50,153.
The NPV of RentCo’s stock should be the NPV of its future rental earnings plus the NPV of the
proceeds it will receive when it sells the land, which is $369,413 ($319,260 + $50,153). At a
valuation of $10, RentCo shareholders would expect Shepherd to offer 36,941 shares of Shepherd
stock ($369,413/$10 per share) for 100% of the stock of RentCo.
46. (LO 3)
a. The reorganization that could be used to divide Xava Corporation between Xio and Xandra
would be either a split-off or a split-up. A split-off would be appropriate if Xio wanted to
continue the business under the Xava name. If Xandra preferred that Xava cease to exist, a
split-up would be more appropriate.
b. Xandra made the better choice because the present value of her after-tax cash flow is higher,
as the Microsoft Excel computations below indicate.
47. (LO 3, 6) Brad could split off the shoe store to a new business, Shoe Co., and Brad would receive
60% of Shoe Co. stock in exchange for 60 shares in BR Corporation. Andrew would receive 40% of
Shoe Co. stock for his 40 shares of BR Corporation.
After the transaction, BR has 100 shares outstanding. Brad owns 60% of BR (60 shares) and Ashleigh
owns 40% of BR (40 shares). Brad still controls both corporations and can eventually give the shares
to his children when the time is right.
RESEARCH PROBLEMS
1. This case is similar to the facts and circumstances of PLR 201412002 (03/21/2014), in which a
taxpayer requested guidance as to the deductibility of expenses paid to settle a lawsuit from current
and former shareholders. The case utilizes the law and analysis cited in the PLR in its interpretation
of the solution.
Section 162(a) provides a deduction for all ordinary and necessary business expenses paid or incurred
during the taxable year in which the taxpayer carries on a trade or business [see also Comm. v.
Lincoln Savings and Loan 403 U.S. 345 (1971)]. Howard 22 B.T.A. 375 (1931) and Federation Bank
and Trust 27 T.C. 960 (1957) provide that litigation settlements are deductible if the litigation is
directly related to the taxpayer’s business.
Alternatively, litigation arising from capital transactions is generally capitalizable under § 263(a).
The issue here is whether the settlement is a result of the taxpayer’s ordinary and necessary business
activities or, alternatively, whether such payments are properly capitalized. The “origin of claim
doctrine” is used to determine whether costs such as these are deductible in the year they are incurred
or are treated as acquisition costs and capitalized. Under this test, the payment is deductible by
reference to the event that caused such payment, rather than the consequence or result of such
payment [Gilmore 372 U.S. 39, 47 (1963) and McKeague (12 Cl. Ct. 671 (60 AFTR2d 87–5267)
(1987)].
The settlement here is an ordinary and necessary business expense under § 162; it was paid as a result
of plaintiff’s claims of alleged misrepresentations and omissions that caused a decline in value of
post-merger investments. The settlement neither facilitated the transaction nor was part of the price
paid for Leigh Co. The plaintiffs did not contest the merger itself or the price paid for Leigh Co.
As a result, the origin of the claim has its roots in the conduct of the Ash Co. board in its ordinary and
necessary business activities and is deductible.
2. The facts of the Hawk and Dove merger are similar to the facts of Rev.Rul. 2008–25, 2008–21 IRB
986. The restructuring will not qualify as any type of reorganization under § 368 because the
liquidation of Dove was part of the plan of the restructuring. If Dove had not been liquidated, the
transaction would have qualified as a “Type A” merger by reason of § 368(a)(2)(E), which allows a
subsidiary, like Sterling, to use its parent’s stock in the merger and to distribute the Dove stock to
Hawk. Due to the application of the step transaction doctrine, the transaction does not qualify as a
“Type A” because, after the transaction, Dove (acquirer) does not hold substantially all of the assets
of Sterling (target).
Dove has been liquidated and thus holds no assets. As a result, the transaction is treated as a qualified
stock purchase by Hawk of Dove’s stock, followed by a liquidation of Dove.
Paloma is subject to tax on the difference between the value of the Hawk stock she received and her basis
in the Dove stock.
3. A Type D reorganization can be used to split up Redden Co. into two separate corporations: Mining
Co. and Land Co. Redden Co. can transfer the land with the gold discovery to Mining Co. in
exchange for all of Mining Co.’s stock. Redden Co. then can transfer all its other land properties to
Land Co. in exchange for all of its stock.
Redden Co. can transfer Mining Co. stock to the two cousins in exchange for their Redden stock and
transfer Land Co. stock to the third non-mining cousin in exchange for her Redden Co. stock. Redden
Co. will then dissolve. Each cousin will own $5,000,000 in stock. Mining Co. can then elect S
corporation status.
The shareholders receive no boot. As a result, they recognize no gain [§ 355(a)(1)] and allocate their
basis in Redden Co. stock to the stock they receive in either Mining Co. or Land Co. [§ 358(a)].
Section 361(a) allows Redden Co. to avoid gain or loss recognition on the transfer of assets to Mining
Co. and Land Co., and § 361(c) allows Redden Co. to avoid gain recognition on the distribution of
Mining Co. and Land Co. stock to the three cousins.
Research Problems 4 and 5
These research problems require that students utilize online resources to research and answer the questions.
As a result, solutions may vary among students and courses. You should determine the skill and experience
levels of the students before assigning these problems, coaching where necessary. Encourage students to use
reliable websites and blogs of the IRS and other government agencies, media outlets, businesses, tax
professionals, academics, think tanks, and political outlets to research their answers.
CHECK FIGURES
12.a. Realized gain $3,000. 25.a. “Type D” split-up.

12.b. Basis $1,000. 25.b. “Type A.”
13.a. $255,000 gain. 25.c. “Type F.”
13.b. $0 gain. 25.d. Taxable.
14.a. $100,000 gain. 25.e. Taxable.
14.b. Rogers $75,000 gain. 25.f. “Type C.”
14.c. Basis in Roger stock $480,000, basis in 26.a. Qualifies for “Type B,” not “Type C.”
land $100,000. 27. Consolidation “Type A” best choice.
29. Not qualify as “Type C”; cash causes
15.a. Realized loss $2,000, recognized $0.
problem.
15.b. Basis $20,000.
30.a. Not qualify as spin-off “Type D”;
16. $3,000,000 saved. investments retained not active trade or
17. SheBiz $157,500; Park $472,500. business.
18.a. “Type A.” 30.b. Spin-off only manufacturing or wholesale
18.b. Taxable. and leave other in Puce.
18.c. “Type B.” 31.a. “Type D” spin-off and “Type F.”
18.d. “Type D” spin-off. 32. “Type E.”
18.e. “Type C.” 33. “Type F.”
18.f. “Type G.” 34. “Type G.”
19. $5,000 recognized gain, $27,300 basis. 37. Golden cannot use RetrieverCo’s capital
20. Citron $70,000 gain; Ecru $670,000 basis; loss.
Electra no loss recognized, $820,000 38. $165,000 NOL used by Collie; next year
basis. remaining NOL used.
21. “Type E”; James $30,000 recognized gain, 39. PV received = $2,350,000.
$29,412 common basis, $20,588 preferred 40. Not good deal; NPV of 10-year bond
basis; Karen $10,000 gain. higher than 15-year bond.
22.a. Frank $100,000 stock basis, $10,000 bond 41. NOL current year $9,674; PV remaining
basis, $7,000 dividend, $3,000 capital NOL $34,583.
gain. Kasha $900,000 stock basis, $90,000 42. Maximum value NOL $282,938.
bond basis, $63,000 dividend, $27,000 43.a. Current year $150,000 capital loss.
capital gain. 43.b. Capital loss carryforward is worth
22.b. Nontaxable to Quail; Covey’s basis $13,892.
$1,200,000. 44. Net present value of NOL $25,163.
23.a. Jed $26,000 recognized gain, $90,000 basis; 45. Maximum shares 36,941; “Type A” or
Zia no loss recognized, $337,000 basis. “Type C” reorganization.
23.b. Alpha $28,000 gain; Beta and AlphaBeta 46.a. “Type D” split-off or split-up.
no gain. 46.b. Xandra better choice; $1,260,000 versus
24.a. Qualifies as “Type C.” Xio $1,106,058.
24.b. Acquiring stock transferred $2,300,000.
24.c. Wei $200,000 gain; Target $75,000 gain.
24.d. Wei building basis $300,000;
stock basis $2,100,000.
SOLUTION TO ETHICS & EQUITY FEATURE
Voicing Ethical Values (p. 7-19). Joe clearly is not acting in the best interest of his employer, the firm
preparing the first consolidated return for BlueGlass. The document found by the staff accountant indicates
that there is a transaction that can cause the restructuring to be a taxable event rather than being a tax-free
“Type C” reorganization. Assuming that the firm preparing the consolidated return also consulted on the
reorganization, Joe having knowledge of this document could cause the firm to be liable for any taxes,
penalties, and interest that result if the restructuring is treated as taxable. This could be very costly for the
firm.
The student is asked to describe how to communicate this information to the partner, knowing that it could get
Joe fired. How the student communicates this issue will be an individual choice. It may be helpful to have
students discuss the issue in small groups and let them “voice” their values by practicing what they would say
to the partner. Later, the groups can report to the class the ways they “voiced their values.”
Solution Manual for South-Western Federal Taxation 2021: Corporations, Partnerships, Estates
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SOLUTIONS TO PROBLEM MATERIALS

8. (LO 3) A “Type E” reorganization is used when the corporation is recapitalizing—when it has a

Thus, Townsend’s recognized gain equals $100,000.

Thus, Hosha’s realized loss is $2,000, but none of it is recognized.

AlphaBeta Stock AlphaBeta Stock

Jed Zia Beta Corporation

$2,000,000 liabilities is greater than 20% of Brown’s value ($12,000,000 × 20% =

b. Diagram of a “Type B” reorganization.

After Stock Transaction

27. (LO 3, 6) Raabe, Young, Nellen, Hoffman, & Maloney, CPAs

Xiang Morris, CPA

Small, Inc. Small Common Big Corporation

Big Other Common

Small Preferred Stock

After the Transaction

Big + Former Common & Preferred

29. (LO 3, 6) Raabe, Young, Nellen, Hoffman, & Maloney, CPAs

November 19, 2020

Ms. Lily White, MuCo CEO

Dear Ms. White:

If I can be of further service regarding this transaction, please contact me.

Shiv Ghose, CPA

c. Diagram of the spin-off “Type D” reorganization.

New Stock (100%)

After the Transaction

Puce Shareholders New (Puce) Shareholders

b. A diagram of the proposed transaction is as follows.

TriStateCo changes its name through a “Type F” reorganization to ID Corp.

After the restructuring, the corporations are organized as follows.

ID Corp WA Corp OR Corp

Original Original Original

34. (LO 3) MEMORANDUM

• Net value of BetaCo’s assets: $5,000,000.

• § 382 limitation: $5,000,000 × 4% = $200,000.

b. The present value of the capital loss carryforward is computed as follows.

Research Problems 4 and 5

12.a. Realized gain $3,000. 25.a. “Type D” split-up.

SOLUTION TO ETHICS & EQUITY FEATURE

7-26 2021 Corporations Volume/Solutions Manual

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