Test Bank for Corporate Partnership Estate and Gift Taxation 2013 7th Edition by Pratt

Test Bank for Corporate Partnership Estate and Gift

Taxation 2013 7th Edition by Pratt

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7

Corporate Reorganizations

Solutions to Tax Research Problems

TAX RESEARCH PROBLEMS

7-53 Stable Corporation will have a difficult, but not impossible, time arguing that the
transaction is a reorganization.

Section 368(a)(1)(B) states that "the acquisition by one corporation, in

exchange solely for all or a part of its voting stock ... [for] stock of another
corporation if ... acquiring corporation has control of such other corporation" is a
reorganization. The effect of cash on the exchange has been considered in several
important cases. The most recent case was the ITT-Hartford merger which
involved cash purchases in 1969 with the acquisition of control solely for stock in
1970.

Initially, the Tax Court and District Court ruled that the ITT-Hartford
transaction was a valid reorganization because control was acquired solely for
stock. (This is the same as the Stable-Glamour transaction.) However, on appeal
both the 1st and 3rd Circuit Courts of Appeals reversed this decision. (See
Chapman 45 AFTR 2d 80-1290 and Heverly 45 AFTR 2d 80-1122.) The Courts
reasoning was based on the legislative history of the Section and the fact that the
word "solely" provides no leeway.

At the appellate level, taxpayers devised a second argument. They contended

that the 1969 purchases were unrelated to the 1970 reorganization and therefore,
the reorganization transaction was solely for voting stock. Although not
specifically cited, this argument is based on the example in Reg. § 1.368-2(c). In
this example A purchased 30 percent of W in 1939. In 1954, A acquired 60
percent of W solely for voting stock. The regulation concludes that the 1954
transaction is a non-taxable reorganization. The underlying argument is that the
1939 purchase was unrelated to the 1954 reorganization. The Court of Appeals
recognized that if the 1969 purchase was separate from the 1970 transaction, then
the 1970 exchange was a valid reorganization. The case was remanded to the
lower court for determination of this factual question.

Based on the above, Glamour will have to prove that the cash purchases were
not part of the reorganization. The fact that the reorganization plan was developed
after the IRS audit, whereas the cash purchases were before the audit, should help
Glamour. Because the question is one of fact, the final decision is uncertain.

7-54 Assuming that Jim's basis in T Corporations stock is $360,000 or less, Jim's
realized gain will exceed $40,000, and therefore the entire $40,000 cash will be
taxable. Since Jim is surrendering his T stock in the transaction, the character of
 the gain will be governed by § 356(a)(2), which provides that the gain will be
capital except if the distribution is the equivalent of a dividend.

In Rev. Rul. 74-516, 1974-2 CB 121, the IRS addresses the correct approach
to § 356(a)(2) in split-offs and split-ups. It concludes that boot should be treated
as distributed by the distributing corporation in redemption of its own stock
before the tax-free distribution under § 355. The character of the gain is
determined by applying the rules of § 302 to the ownership of the distributing
corporation before and after this hypothetical distribution.

In Clark 89-1 USTC ¶9230, 63 AFTR2d, 89-860, 109 S. Ct. 1455, the
Supreme Court decided that in an acquisitive reorganization the boot should be
considered a distribution in redemption after the tax-free reorganization. The case
did not address § 355 transactions. Therefore, it is uncertain whether Rev. Rul.
74-516 is still a valid precedent. However, in PLR 9043007, July 31, 1990, the
Service concluded that Rev. Rul. 74-516 was still applicable to § 355 even after
the Clark decision. After the hypothetical redemption of Rev. Rul. 74-516, Jim
owns 43.75 percent (140,000/320,000) of T Corporation. Since this is not less
than 80 percent of his former ownership, Jim does not qualify under § 302(b)(2).
Therefore, to receive capital gain, Jim would have to argue that this is a
meaningful reduction in interest under § 302(b)(1) based on Davis, 70-1 USTC
¶9289, 25 AFTR2d, 70-287, 397 U.S. 301. It is likely that he will be successful.

Corporate Reorganizations

Test Bank

True or False

________ 1. It is sufficient to meet just one of the acceptable reorganizational

patterns to obtain non-recognition treatment.

________ 2. The continuity-of-interest doctrine is designed to prevent sales from

being treated as nontaxable reorganizations.

________ 3. To meet the "continuity of business enterprise" requirement, the

acquiring corporation must continue the target corporation's historic
business.

________ 4. The combination of two corporations, pursuant to state law, to form a

third corporation, is called a merger.

________ 5. In a "B" reorganization, only voting stock of the acquiring corporation

(or its parent) may be used to acquire the target corporation.

________ 6. A nontaxable triangular "B" reorganization can be achieved provided

 that solely voting stock of the acquiring corporation's parent corporation
is used.

________ 7. In a "C" reorganization, the result is a parent-subsidiary group.

________ 8. Following the transfer of assets, the target company must liquidate in
order for there to be a valid "C" reorganization.

________ 9. As part of a "C" reorganization, the target corporation must liquidate by

distributing solely the stock and securities of the acquiring corporation.

________ 10. In a "C" reorganization, the courts have held that as long as the target
corporation transfers substantially all the assets to the acquiring
corporation, target is permitted to keep assets that formerly had been
essential to the active conduct of its trade or business.

________ 11. In a "C" reorganization, the assumption of target corporation's liabilities

by the acquiring corporation can be ignored as long as boot in the form
of cash or property does not exceed 20 percent of the fair market value
of the assets transferred.

________ 12. It is possible for a reorganization transaction to meet the definition of

both a "C" and the acquisitive "D" reorganization.

________ 13. A "D" reorganization can be either acquisitive or divisive.

________ 14. Both "E" and "F" reorganizations are examples of reorganizations that
involve only one corporation.

________ 15. In order for a reorganization to be given non-recognition treatment, a

plan of reorganization must be adopted by at least one of the
corporations involved in the transaction.

________ 16. The shareholders of target and acquiring corporations engaged in

nontaxable reorganizations are not parties to the reorganization
themselves, and may be subject to taxation.

________ 17. The basis of the property transferred to the acquiring corporation is equal
to the target corporation's basis plus any gain recognized by the target on
the transfer.

________ 18. Target Corporation generally must recognize gain or loss on receipt of
stock, securities, and boot in an acquisitive reorganization.

________ 19. In a "C" or acquisitive "D" reorganization, the target corporation is

required to recognize gain or loss on all stock, securities, boot, or assets
distributed to shareholders.
________ 20. As long as the business of the target corporation is continued, the full
amount of target corporation's NOL will survive in a reorganization.

________ 21. P Corporation owns 100 percent of R Corporation. P operates a car

dealership while R owns a chain of quick-lube franchises. P established
R 10 years ago but now finds it advisable to narrow its business focus. P
distributes all of its shares in R to its shareholders. The distribution is a
taxable dividend distribution.

________ 22. A split-off occurs when the parent corporation distributes the stock of a
subsidiary to stockholders who do not surrender any of their stock in the
parent for stock in the subsidiary.

________ 23. A split-up occurs when a parent corporation distributes the stock of two
or more subsidiary corporations to its shareholders in exchange for all of
their stock in the parent as part of a complete liquidation of the parent.

________ 24. L Corporation transferred $100,000 cash and bonds to a subsidiary in

exchange for all of its stock, which it distributed to its shareholders. The
distribution is a nontaxable spin-off.

________ 25. R received $1,000 cash in addition to stock in a transaction that meets
the requirements of § 355. If the transaction is a spin-off, R's basis for
his stock will increase by $1,000.

________ 26. A distributing corporation distributes solely stock or securities of a

controlled corporation. Gain or loss is recognized by the distributing
corporation.

Multiple Choice

________ 27. Which one of the following statements concerning the requirements for a
nontaxable reorganization is false?

a. The reorganization must meet regulations concerning either

"continuity of interest" or "continuity of business enterprise."

b. The reorganization must conform to one of several qualifying

patterns.

c. The transaction must have a business purpose.

d. There must be a plan of reorganization that is adopted by each

corporation involved in the transaction.

________ 28. Which one of the following statements concerning the "continuity of
interest" doctrine is true?
 a. The target corporation's shareholders can only receive stock.

b. According to the Code, at least 50 percent of the consideration

received by the target corporation's shareholders as a group must be
stock of the acquiring corporation.

c. The target corporation's shareholders can dispose of the acquiring

corporation's stock immediately after the transaction, provided it was
not a prearranged disposition.

d. All of the above statements are false.

________ 29 Which one of the following statements concerning the "continuity of

business enterprise" doctrine is true?

a. The acquiring corporation must continue all of the acquired

corporation's lines of business to qualify as continuing the business.

b. The acquiring corporation may not sell any of the target corporation's
assets to qualify as using target's assets in a business.

c. As long as the acquiring corporation uses a significant portion of

target's assets in a business, it is immaterial that they are used in a
different manner than target used them.

d. All of the above statements are false.

________ 30. Control of the target corporation must be obtained in all reorganizations
in order to avoid recognizing income. In reorganizations other than a
type "D," what constitutes "control" following a reorganization?

a. Owning 80 percent or more of voting stock and 80 percent or more

of nonvoting stock

b. Owning 50 percent of all assets

c. Owning 80 percent of total stock

d. All of the above answers are false.

________ 31. Generally, which one of the following is not a valid "A" reorganization?

a. The combination of X and Y to form Z

b. The merger of S, a subsidiary of P, with K, using solely voting stock

of S and P

c. The merger of L into N, followed immediately by a transfer of L's

assets to new corporation S, a subsidiary of N
 d. The merger of S, a subsidiary of P, into T, using P stock to acquire
control of T, resulting in T becoming a subsidiary of P

________ 32. Which one of the following statements is not a step in an "A"
reorganization by statutory merger?

a. Target corporation transfers its assets and liabilities to acquiring

corporation in exchange for part of acquiring corporation's stock.

b. Target exchanges acquiring stock received for part of shareholders'

target stock.

c. Target corporation shareholders become shareholders in acquiring

corporation.

d. Target dissolves.

________ 33. Which one of the following statements about "B" reorganizations is
true?

a. Solely voting stock must be used.

b. The result is always a parent-subsidiary group.

c. Stock of a corporation controlling the acquirer may be used in the

transaction.

d. All of the above statements are true.

________ 34. Which one of the following statements concerning a reverse triangular
merger is false?

a. Subsidiary corporation is merged into target corporation.

b. Voting stock of parent corporation is given to shareholders of target

corporation in return for all of target's assets.

c. Parent corporation must obtain at least 80 percent of voting and at

least 80 percent of nonvoting stock of the target corporation.

d. All of the above statements are true.

________ 35. Which one of the following statements about a "B" reorganization is
true?

a. The transferee must acquire control in the reorganization.

b. If the transferee purchases stock of the target corporation, it will

never qualify for a "B" reorganization.
 c. A "B" reorganization results in only one surviving corporation.

d. All of the above statements are false.

________ 36. Which one of the following statements concerning a creeping "B"
reorganization is true?

a. An overall plan is required.

b. The period of time for acquisition to be carried out is limited to five

years.

c. The acquisition may be made for cash as well as voting stock.

d. Any prior cash purchase will invalidate the reorganization.

________ 37. X Corporation, which desires to obtain operations of Z Corporation,

reorganizes by issuing voting stock equal to 35 percent of its total
outstanding stock in exchange for all the assets of Z Corporation. Z
Corporation then liquidates, distributing stock of X Corporation to its
shareholders in exchange for their stock in Z. This would be referred to
as

a. An "A" reorganization

b. A divisive "D" reorganization

c. A "C" reorganization

d. A "B" reorganization

________ 38. Which one of the following statements concerning a "C" reorganization
is true?

a. Target's shareholders normally must approve the sale of assets and

liquidation.

b. Acquiring corporation shareholders need not formally approve the

acquisition.

c. "C" reorganization is sometimes called the "practical merger."

d. All of the above statements are true.

________ 39. Which one of the following situations does not qualify as a "C"
reorganization?

a. R Corporation acquires assets of M Corporation for voting stock of R

Corporation. Following the reorganization, R Corporation transfers
 the assets received from M Corporation to a newly formed subsidiary
in a § 351 transaction.

b. Q Corporation transfers assets with a fair market value of $200,000

to W Corporation for voting stock of W Corporation. W assumes
$40,000 of Q Corporation's liabilities.

c. Same as b, but W also transfers $2,000 cash boot to Q Corporation.

d. All of the above are valid "C" reorganizations.

________ 40. Which one of the following statements concerning the split-off type of
divisive "D" reorganization is true?

a. Shareholders do not surrender ownership in the original corporation

for the subsidiary's stock, retaining the same interest in the original
corporation.

b. Two corporations are held by the original shareholders but in

different proportions than they held in the original corporation.

c. Two new corporations are created.

d. All of the above statements are false.

________ 41. Which one of the following statements is not a requirement for a divisive
"D" reorganization?

a. Pro rata distribution of stock.

b. Active business requirement for both the original and controlled

corporation.

c. The distribution cannot be a device to distribute earnings.

d. All of the above statements are required.

________ 42. Which one of the following situations satisfies the requirements for a
divisive "D" reorganization pursuant to Code § 355?

a. ABC Corporation transfers excess accumulated cash to S, a newly

created subsidiary, and distributes S stock to its shareholders.
Shareholders liquidate S and report capital gains for liquidation.

b. Y Corporation transfers land to new corporation Z. Some of the land

will be held for future appreciation, and the remainder will be leased
back to Y.

c. X Corporation transfers an active business to Z Corporation in

 exchange for all of Z's stock. Z stock is then distributed to individual
J in exchange for all her X stock. X remains engaged in the active
conduct of other businesses it did not transfer to Z.

d. All of the above

________ 43. Which one of the following exchanges will not qualify as a tax-free
reorganization in an "E" recapitalization?

a. Stock for stock

b. Bonds for stock

c. Stock for bonds

d. Bonds for bonds

________ 44. Which one of the following situations could not qualify as an "E"
reorganization?

a. Exchange of a shareholder's common stock for nonvoting,

nonparticipating preferred stock in the same corporation.

b. Exchange of all of W corporation's stock for stock of Q, a wholly

owned subsidiary of W.

c. XYZ agrees to exchange one share of participating cumulative

preferred stock for each share of common stock currently
outstanding.

d. All of the above

________ 45. S and J, Inc. decided to change its name to SJ Company. What type of
reorganization is this?

a. Just changing a corporate name is not a reorganization.

b. "G" reorganization

c. "F" reorganization

d. "D" reorganization

________ 46. As part of a "C" reorganization, T Corporation transfers assets with a

basis of $200,000 and a fair market value of $500,000. T receives stock
of A Corporation worth $400,000 and $100,000 worth of other property
with a basis to A of $75,000. What is the basis of the property
transferred to A?
 a. $400,000

b. $75,000

c. $200,000

d. $100,000

________ 47. In a statutory merger, P Corporation transfers assets worth $250,000

(basis $200,000) in exchange for M Corporation's stock worth $250,000.
What is M Corporation's basis in the assets?

a. $250,000

b. $200,000

c. $50,000

d. None of the above

________ 48. In a valid "C" reorganization, Target transfers assets with a basis of $1
million and a fair market value of $1.5 million and receives stock with a
fair market value of $1.3 million and $200,000 boot. Target has no
remaining assets. Target liquidates by transferring the stock and boot to
its shareholders. The amount of gain Target must recognize is

a. $0

b. $200,000

c. $500,000

d. None of the above

________ 49. As part of a "C" reorganization, T Corporation transfers assets with a

basis of $300,000 and a fair market value of $500,000. T receives stock
of A Corporation worth $400,000 and $100,000 worth of other property
with a basis to A of $75,000. What is the basis of the other property
received by T Corporation as part of the consideration from A
Corporation?

a. $75,000

b. $100,000

c. $300,000

d. $200,000
________ 50. In a "C" reorganization, Target Corporation transferred all of its assets
except land to Acquiring Corporation. The land was worth $600,000
(basis $520,000). The transferred assets were worth $20 million and had
a basis of $16 million in the hands of Target. In exchange, Target
received stock of Acquiring worth $19.4 million, cash of $200,000, and
an office building worth $400,000 (basis to Acquiring was $260,000).
Target liquidates, subject to the rules of § 361. How much gain must
Target recognize?

a. None

b. $80,000 on land

c. $140,000 on office building

d. $600,000 on the assets received

e. $600,000 on the assets received and $80,000 on the land distributed

________ 51. X, as part of a reorganization, exchanges a security with a principal

amount of $2,000 and a fair market value of $2,100, for a security with a
principal amount of $2,500 and a fair market value of $2,800. The
amount of boot X received is

a. $0

b. $100

c. $500

d. $560

e. $700

________ 52. As part of a plan of reorganization, S received the following assets in

exchange for a share of stock with a $75 basis:

One share of stock worth $50

Cash $20

What is S's recognized gain or loss on this exchange?

a. $25 loss

b. $20 gain

c. $5 loss
 d. No gain or loss is recognized.

________ 53. Which of the following statements is true?

a. In an "A" reorganization, the surviving corporation can use all of the

acquired corporation's NOL without limitation.

b. In a "C" reorganization, the target corporation's E&P disappears.

c. In a "B" reorganization, the acquiring corporation inherits the target

corporation's tax attributes.

d. All of the above statements are false.

________ 54. In which types of reorganization do tax attributes not transfer to the
acquiring corporation?

a. "A" and "C" reorganizations

b. "B" and divisive "D" reorganizations

c. Acquisitive "D," "F," and "G" reorganizations

d. None of the above

________ 55. Which one of the following statements regarding E&P carryover is
false?

a. E&P of target corporation only is considered.

b. The loss corporation's deficit in E&P may be used to offset the E&P
of the profitable corporation.

c. A deficit in E&P can be used to offset E&P arising from the separate
corporations in the tax year prior to the transfer.

d. All are false.

________ 56. R Corporation is merged into B Corporation in an "A" reorganization on

June 30, 2012. R has a $250,000 NOL carryover. B has taxable income
(before the NOL deduction) of $800,000 for the year ending December
31, 2012. How much of R's NOL can B deduct on the 2012 tax return?
(Assume §382 does not apply.)

a. $0

b. $250,000

c. $50,000
 d. $125,000

________ 57. Which one of the following statements regarding computation of the
limitation of NOL carryover described in § 382, relating to the
acquisition of "loss corporations," is true?

a. The value of the loss corporation is considered to be the amount paid

by the purchaser.

b. It is assumed that the equity of the loss corporation immediately

before change in ownership is invested in tax-exempt securities that
pay interest at a rate prescribed by statute.

c. The amount of NOL carryover that can be used is a product of the

FMV of the corporation's stock before the change and the "long-term
tax-exempt rate."

d. All are true.

________ 58. Under Code § 382, if either an owner shift or equity structure shift has
occurred, the test for an "ownership change" must be made. Which is
true of an owner shift?

a. An owner shift occurs only when a 5 percent shareholder

(determined before or after the change) buys or sells stock.

b. For purposes of the owner shift, the effect of a stock redemption on

the stock ownership percentage is ignored.

c. Owner shift can occur if a purchaser not owning 5 percent acquires

sufficient stock to meet the 5 percent threshold.

d. All of the above are true.

________ 59. Code § 382 limits the deductibility of NOLs acquired from loss
corporations, if there has been a substantial change in ownership—a so-
called "ownership change." In which one of the following situations has
ownership change occurred?

a. R owns 1,000 shares of Q Corporation. Q Corporation has 1,000

shares outstanding. R sells 400 shares to S Corporation.

b. Same as above, except Q Corporation issues 200 shares each to T

and U later that same year.

c. M owns 10 percent of Loss Corporation. She purchased additional

stock, increasing her ownership to 15 percent.
 d. Loss Corporation, publicly held, has been actively traded such that
there has been a complete change in ownership. At no time did one
shareholder own more than 5 percent of stock.

________ 60. Code § 384 limits the ability of a loss corporation to use its loss by
purchasing an acquired corporation's assets that have a built-in gain.
Which one of the following statements is not a condition of § 384
regarding built-in gains?

a. Either Target or Acquiring must have a net unrealized built-in gain.

b. Acquiring corporation must not have an NOL carryforward.

c. There must be a stock acquisition or asset acquisition.

d. All of the above are conditions of § 384.

________ 61. In the "C" reorganization, substantially all of the assets of the target
corporation must be obtained by the acquiring corporation. Which one of
the following statements indicates the IRS position concerning the
substantially all the assets requirement in a "C" reorganization?

a. The phrase "substantially all the assets" is defined in Code § 368.

b. "Substantially all the assets" means at least 95 percent of the assets.

c. "Substantially all the assets" refers to at least 70 percent of the gross

assets and at least 90 percent of the net assets.

d. "Substantially all the assets" refers to more than 75 percent of the net
or gross assets.

e. Both a. and c. are true.

________ 62. All of the stock of P Corporation is owned by two individuals, J and K. P
owns all of the stock of Q that it acquired by purchase 10 years ago. P
manufactures disk drives while Q manufactures floppy disks. Both
corporations have substantial E&P. J and K are deadlocked on the
direction of their businesses. As a result, they have agreed to go their
separate ways with J taking over the business of Q. The most logical way
to accomplish their objective is a

a. Spin-off

b. Split-off

c. Split-up

d. Partial liquidation
 e. Redemption

________ 63. Network Corporation is a publicly traded corporation with its stock
widely held. It owns all of the stock of Cable Corporation. Both
corporations have substantial E&P. A recent government ruling required
Network to divest itself of Cable. As a result, Network distributed all of
the stock of Cable to its shareholders. One Network shareholder, T,
received 50 shares of Cable worth $2,000. These shares had a basis to
Network of $500. T must recognize

a. A dividend of $2,000

b. A capital gain of $2,000

c. No gain or loss

d. A dividend of $500

e. A capital gain of $500

________ 64. Mr. A and Ms. B own all of the stock of Salt which in turn owns all of
the stock of Pepper. Salt acquired Pepper 15 years ago. Both
corporations conduct active businesses and have substantial E&P.
During the year, Salt distributed the stock of Pepper to A and B. Both A
and B each received 100 shares of Pepper stock worth $50,000. In
addition, they both received a Pepper bond with a face value of $10,000
and worth $9,000. Due to the distribution, A and B will each report
(assuming the transaction meets the conditions of § 355)

a. No gain or loss

b. $60,000 dividend

c. $59,000 dividend

d. $10,000 dividend

e. $9,000 dividend

________ 65. Which of the following resembles a dividend?

a. Spin-off

b. Split-off

c. Split-up

d. None of the above

________ 66. Which of the following resembles a redemption?

a. Spin-off

b. Split-off

c. Split-up

d. None of the above

________ 67. In her landmark case, Evelyn Gregory found that

a. Meeting the literal requirements of the law is not necessarily

sufficient to achieve your objective.

b. The General Utilities doctrine was a blessing for taxpayers.

c. Avoiding dividend equivalency requires a meaningful reduction in

the shareholder's interest.

d. Reducing the size of your business by fire is a genuine corporate

contraction.

e. None of the above

________ 68. S and P each owns 50 shares of the outstanding stock of G Corporation
which specializes in framing pictures. G owns all 100 shares of the
outstanding stock of W Corporation. S and P caused G to form W many
years ago to manufacture frames. This year S and P have decided to
divide the corporate assets and part ways. To this end, G distributed all
of the stock in W Corporation to S for all of her stock in G. This type of
corporate division is referred to as

a. A liquidation

b. A spin-off

c. A split-off

d. None of the above

________ 69. Under Code § 355, nonrecognition of gain or loss is granted only to
distributions of stock or securities of a "controlled" corporation. Control
is present where

a. The distributing parent corporation owns at least 80 percent of the

voting power of all classes of the subsidiary's stock entitled to vote,
and at least 50 percent of the total number of shares of all other
classes of stock.
 b. The distributing parent corporation owns at least 51 percent of the
voting power of all classes of the subsidiary's stock entitled to vote,
and at least 51 percent of the total number of shares of all other
classes of stock.

c. The distributing parent corporation owns at least 80 percent of the

voting power of all classes of the subsidiary's stock entitled to vote,
and at least 80 percent of the total number of shares of all other
classes of stock.

d. None of the above is true.

________ 70. Brothers A and B each owns 50 percent of the stock of P. P Corporation
manufactures coats, and its wholly owned subsidiary, Q, manufactures
ties. Q was acquired 20 years ago. During the current year, A and B
squabbled over company policy and B decided he wanted to go his
separate way. Accordingly, P distributed the stock of Q to B in exchange
for all of B's stock in P, for which he had a basis of $15,000. The Q
stock was worth $100,000. B will report

a. Dividend income of $ 100,000

b. Dividend income of $85,000

c. Capital gain of $85,000

d. No gain or loss

e. None of the above

________ 71. Under § 355 concerning distributions of stock and securities of a

controlled corporation, the active business requirement states that

a. The activities in which the corporations engage must make a profit.

b. Each business must have been conducted throughout the five-year

period ending on the date of the distribution.

c. None of the businesses may have been acquired in a taxable

transaction in the three-year period ending on the date of the
distribution.

d. All of the above are true.

Corporate Reorganizations

Solutions to Test Bank

True or False

1. False. In addition to meeting one of the patterns, there must be a plan of

reorganization, the Regulation's tests of "continuity of interest" and "continuity of
business enterprises" must be met, and the judicially imposed test for "business
purpose" must be met. (See pp. 7-3 through 7-5.)

2. True. As stated in Cortland Specialty Co., a continuity of interest is required to

prevent sales from qualifying as reorganizations. (See pp. 7-3 and 7-4.)

3. False. To meet this requirement, the acquiring corporation must either continue
the target corporation's historic business or use a significant portion of the target
corporation's assets in a business. (See pp. 7-4 and 7-5.)

4. False. A merger is the absorption of one corporation by another. A combination

of two corporations to form a third is called a consolidation. (See p. 7-7.)

5. True. Section 368(a)(1)(B) specifically limits the acquirer to issuing voting stock.
(See p. 7-15.)

6. True. Section 368(a)(1)(B) specifically says voting stock of a corporation that

controls the acquiring corporation may be used in a nontaxable "B"
reorganization. In order to have a triangular reorganization, only the voting stock
of the parent may be used. A mixture of parent and acquiring corporation stock is
not permitted in the acquisition of the target. (See p. 7-15.)

7. False. In a "C" reorganization, the acquiring corporation receives assets, not stock
of the target. After the transfer, the target corporation must liquidate. Therefore,
the result cannot be a parent-subsidiary group. (See pp. 7-17 and 7-18.)

8. True. The 1984 Tax Act added the requirement that the target corporation be
liquidated in a "C" reorganization unless the IRS waives the requirement. [See p.
7-17 and § 368(a)(2)(G).]

9. False. Target must also distribute any remaining assets it possesses. (See p. 7-17.)

10. False. The type of assets retained by the target is just as important as the amount
of assets. The courts generally require that those assets critical to the continuation
of the target's business must be transferred. Failure to do so may cause the
transaction to fall outside the scope of a "C" reorganization. (See p. 7-19.)

11. False. Normally, target corporation's liabilities are ignored in a "C"

reorganization. However, if the acquiring corporation transfers boot in the form of
cash or property to the target, the assumption of liabilities is treated as a transfer
of additional boot. The amount of combined boot is limited to 20 percent of the
total consideration. (See p. 7-19.)

12. True. It is possible for a single transaction to meet the definition of a "C"
 reorganization and an acquisitive "D." In these cases § 368(a)(2)(A) states that it
will be treated as a "D" reorganization. (See p. 7-22.)

13. True. A transaction may be an acquisitive "D" reorganization if it meets the

requirements of §§ 368(a)(1)(D) and 354, or a divisive "D" if it meets §§
368(a)(1)(D) and 355. (See pp. 7-20 through 7-22.)

14. True. The "E" reorganization is a recapitalization that can only involve one
corporation and the "F" reorganization is a mere change in identity that will only
involve one corporation. (See pp. 7-28 and 7-30.)

15. False. Each corporation involved must adopt the plan of reorganization. This
requirement appears in §361. (See p. 7-31.)

16. True. Tax treatment of shareholders is determined by property exchanged,

according to § 354(a). (See pp. 7-36 through 7-39.)

17. True. The property transferred plus gain recognized on the transfer becomes the
basis of the property to the transferee corporation. (See pp. 7-33 and 7-34.)

18. False. No gain or loss is recognized by the target corporation on its receipt of
stock, securities, and boot from the acquiring corporation in an acquisitive
reorganization if the boot is distributed. The transfer of liabilities in excess of
basis does not produce gain except in the case of a "D" reorganization. (See pp. 7-
34 and 7-35.)

19. False. Under Code § 361, the target corporation does not recognize any gain or
loss on the distribution of the acquiring corporation's stock or securities. As a
practical matter, the target recognizes gain only on appreciated property that was
not transferred to the acquiring corporation, since the basis of any property
received from the acquiring corporation is its fair market value. (See pp. 7-34 and
7-35.)

20. True. Under the 1986 Tax Reform Act, the full amount of the NOL will survive.
If there is a 50 percentage point change in ownership, the amount of the NOL that
can be used each year will be limited. (See pp. 7-42 and 7-43.)

21. False. Although the spin-off is virtually indistinguishable from a dividend

distribution, it is a tax-free distribution if the requirements of § 355 are satisfied.
Such conditions include: (1) 80 percent control of the subsidiary immediately
before the distribution; (2) a distribution of at least 80 percent of the stock of the
subsidiary; (3) both the retained and distributed corporations must be involved in
an active trade or business which have been carried on for the five-year period
ending on the date of the distribution; and (4) neither business could have been
acquired in a taxable transaction during the five-year period ending on the date of
distribution. Because these conditions are met, the distribution is tax-free to the
recipient shareholders. (See and pp. 7-22 through 7-25.)
22. False. This defines the spin-off method of dividing the corporation. (See pp. 7-22
through 7-24.)

23. True. The subsidiaries continue to survive as separate corporations and the parent
no longer exists. (See Example 30, p. 7-25.)

24. False. The transaction will not qualify as a nontaxable spin-off because the active
business requirement is not met. (See pp. 7-26 through 7-28.)

25. False. His basis is increased by the gain recognized of $1,000 but reduced by the
boot received of $1,000. Thus, the basis is unchanged. (See pp. 7-36 and 7-38.)

26. False. The gain or loss is not recognized because the distribution consisted of only
the stock or securities of the controlled corporation. Gain may be recognized if the
control of either the distributing or controlled corporation is attributable to a
purchase within the previous five years. (See p. 7-34.)

Multiple Choice

27. a. Both "continuity of interest" and "continuity of business enterprise" tests

contained in the Regulations must be met. (See pp. 7-3 through 7-5.)

28. c. Boot is acceptable in a reorganization. The exact amount is not specified. The 50
percent limit is for ruling purposes only. Shareholders can sell the stock provided
it was not prearranged. (See pp. 7-3 and 7-4.)

29. c. The doctrine only requires the continuance of target's most significant line of
business or use of a significant portion, not all of the assets, in a business. (See
pp. 7-4 and 7-5.)

30. a. Owning 80 percent of the total voting power and at least 80 percent of all other
classes of stock constitutes control, according to § 368. To meet this definition,
the IRS requires shareholders to own at least 80 percent of the total number of
shares of each class of nonvoting stock. Choice c. is incorrect because it is
possible to own 80 percent of total stock without owning 80 percent of each of the
voting and nonvoting groups. For example, let us look at the situation where a
target corporation has 100 shares of stock outstanding—50 voting and 50
nonvoting shares. After the reorganization, the acquiring corporation owns all 50
voting shares, but only 30 nonvoting shares. Note that the acquiring corporation
owns only 60 percent of the nonvoting shares (30 shares of the 50 shares
outstanding). (See p. 7-5.)

31. b. In an "A" reorganization, the stock of S or P can be used but not both. Statement
a. is a consolidation. Statement c. is a valid drop-down and d. is a valid reverse
merger. (See pp. 7-6 through 7-12.)

32. b. All of the target stock is surrendered by target's former shareholders in a type "A"
reorganization by merger. (See Exhibit 7-2 and pp. 7-6 through 7-10.)
33. d. All the statements are true. Statement c. is true because stock of a controlling
corporation may be used as long as it is not used in addition to stock of the
acquiring corporation. (See pp. 7-15 through 7-17.)

34. b. In a reverse triangular merger, the target corporation becomes a controlled

subsidiary, and target's identity is maintained. The target corporation must end up
with "substantially all" the property it owned before the merger and "substantially
all" the property of the merged subsidiary. (See pp. 7-14 and 7-15.)

35. d. The transferee can purchase target stock provided it is a separate transaction. In
fact, transferee already has control provided it is in control immediately after the
purchase. (See pp. 7-15 through 7-17.)

36. a. The acquisition must be part of a series of acquisitions that are part of an overall
plan to acquire the requisite control. The time period must be relatively short, for
example, 12 months. Acquisition must be made solely for voting stock. Prior cash
purchases do not invalidate the reorganization, provided they are separate
transactions. (See p. 7-17.)

37. c. The target's former shareholders become voting shareholders in the acquiring
corporation. In a "C" reorganization, the assets of the target are acquired and the
target must dissolve. (See Example 18, p. 7-18.)

38. d. All are true. The "C" reorganization permits a business combination when
mergers are not practical or allowed under state law. (See pp. 7-17 through 7-20.)

39. c. Choice a. qualifies as a "C" reorganization. A subsequent transfer of assets to a

corporation controlled by the acquiring corporation does not affect the "C"
reorganization, as § 368(a)(2)(C) allows the acquiring corporation to restructure
the target's operations. Choice b. also qualifies as a "C" reorganization because
liabilities are disregarded as long as no other boot is transferred. Choice c. does
not qualify as a "C" reorganization since boot exceeds 20 percent of the FMV of
the assets transferred [$42,000 > (20% × $200,000)]. (See pp. 7-17 through 7-20.)

40. b. Choice a. is a spin-off. Choice c. describes a split-up. Choice b. is the end result
of a split-off, which is used when shareholders prefer different investments in the
future operations of the corporation. (See pp. 7-23 and 7-24.)

41. a. A distribution is required but it does not have to be pro rata. (See p. 7-25.)

42. c. Choice a. does not qualify, since no business was conducted after the transfer.
The leasing of assets described in choice b. would probably not be considered an
active trade or business. Situation c. fulfills the requirements of Code § 355. (See
pp. 7-26 through 7-28.)

43. c. The exchange of stock for bonds is not tax-free because the bonds are considered
to be boot. (See pp. 7-28 and 7-30.)
44. b. Both choices a. and c. are a stock for stock exchange. Choice b. does not qualify,
because the stock exchanged is not from the same corporation. (See pp. 7-28 and
7-30.)

45. c. The change in this situation is a mere change in identity, which requires a change
in the charter. Therefore, it is an "F " reorganization. (See p. 7-30.)

46. c. $200,000. Since the target corporation does not recognize gain on the transfer of
assets, the basis of the assets to the acquiring corporation carries over from the
target unchanged. (See and pp. 7-33 and 7-34.)

47. b. M's basis for assets transferred from P in a type "A" reorganization is the same as
P's basis. (See Example 47 and pp. 7-33 and 7-34.)

48. a. Target recognizes neither gain nor loss, provided it distributes the boot to its
shareholders. (See p. 7-33.)

49. b. $100,000. The basis of boot received by T is its fair market value. A
Corporation was required to treat $25,000 ($100,000 fair market value - $75,000
basis) as taxable gain. (See pp. 7-33 and 7-34.)

50. b. An $80,000 gain must be recognized by Target on land not transferred. The basis
for Target of the office building and cash received from Acquiring Corporation is
fair market value, $400,000 and $200,000 respectively. Remember that Acquiring
was forced to recognize the built-in gain on the office building. (See pp. 7-35 and
7-36.)

51. d. The boot is calculated as follows:

(See Example 55 and pp. 7-36 and 7-37.)

52. d. $0. S has a realized loss on the exchange. The receipt of boot will not cause the
loss to be recognized. [See p. 7-37 and § 356(c).]

53. d. NOL carryovers are limited in reorganizations. In "C" reorganizations, part of the
E&P carries over. Tax attributes are not attributed to the acquirer in a "B"
reorganization because the original corporation survives. (See pp. 7-39 through 7-
41.)

54. b. In "B" reorganizations, tax attributes do not carry over, since only the
corporation's ownership changes. In divisive "D" reorganizations, the transferor
stays in existence and continues an active business and maintains its carryovers,
while the controlled corporation is considered a new entity. (See p. 7-40.)
55. d. E&P of the target is combined with that of the acquiring corporation. The loss
corporation's deficit cannot be used to offset any E&P of the profitable
corporation existing at the date of transfer. A deficit can be used only to offset the
E&P arising, from the combined corporation's operations after transfer. (See pp.
7-41 and 7-42.)

56. b. $250,000. The NOL used in the carryover year is limited to the amount of the
acquiring corporation's income earned after the reorganization. Because this
exceeds the NOL, the full amount can be used. (See pp. 7-42 and 7-43.)

57. d. Under this approach, the new owners of the corporation obtain the same result as
they would if they had invested the amount paid for the loss corporation in tax-
exempt securities instead of buying the loss corporation. (See pp. 7-43 and 7-44.)

58. c. An owner shift is defined as any change in the stock ownership of the corporation
that affects the percentage of stock in the corporation owned by any person who is
a 5 percent shareholder before or after the change. Stock redemption or issuance
of stock can change a 5 percent shareholder's ownership interest or cause a
shareholder to become a 5 percent shareholder. Test for "ownership change" must
be made whenever a 5 percent shareholder buys or sells stock because an owner
shift has occurred. (See pp. 7-44 through 7-46.)

59. b. Choice a describes an owner shift involving two 5 percent shareholders, but the
increase was only 40 percentage points (0% to 40% for S), not the required 50
percentage points. In b, T and U become 5 percent shareholders. Their 14.29
percentage point increase for both T and U (200 shares ? 1,400 shares) added to
S's 28.57 percent increase adds up to more than a 50 percent increase. R's
ownership decrease is ignored. In c, M's ownership has increased by 50 percent,
but the increase itself is only 5 percentage points. In d, no ownership change
occurs, because under the aggregation rule, 100 percent of the stock should be
owned at all times by a single hypothetical shareholder, whose interest has not
changed during the testing period. (See pp. 7-44 through 7-46.)

60. b. The existence of an NOL in either target or acquirer is one of two conditions that
must exist before § 384 will apply. (See p. 7-47.)

61. c. For advance ruling purposes in a "C" reorganization, the IRS requires that an
acquiring corporation obtain at least 70 percent of the gross assets and 90 percent
of the net assets. This interpretation by the IRS is found in Rev. Proc. 77-37. Note
that the phrase "substantially all the assets" is not defined in the Code. (Seep. 7-
19).

62. b. In a split-off, the distributing corporation distributes the stock of a subsidiary to

the distributing corporation's shareholders in exchange for a portion of its own
stock. Assuming the transaction meets all of the requirements of § 355, the
distribution is nontaxable. In this case, J could surrender his stock in P for all of
the stock of Q in a nontaxable fashion. (See pp. 7-23 and 7-24.)
63. c. Under § 355, a corporation may distribute stock and securities to its shareholders
tax-free if certain requirements are satisfied. Such conditions include: (1) 80
percent control of the subsidiary immediately before the distribution; (2) a
distribution of at least 80 percent of the stock of the subsidiary; (3) both the
retained and distributed corporations must be involved in an active trade or
business which has been carried on for the five-year period ending on the date of
the distribution; and (4) neither business could have been acquired in a taxable
transaction during the five-year period ending on the date of distribution. Because
these conditions are met, the distribution is tax-free to the recipient shareholders.
(See p. 7-36.)

64. e. Under § 355, a corporation may distribute stock and securities to its shareholders
tax-free if certain requirements are satisfied. Such conditions include: (1) 80
percent control of the subsidiary immediately before the distribution; (2) a
distribution of at least 80 percent of the stock of the subsidiary; (3) both the
retained and distributed corporations must be involved in an active trade or
business which has been carried on for the five-year period ending on the date of
the distribution; and (4) neither business could have been acquired in a taxable
transaction during the five-year period ending on the date of distribution. Because
these conditions are met, the distribution is normally tax-free to the recipient
shareholders. However, § 356 provides that to the extent the shareholder receives
securities with a principal amount in excess of the principal amount surrendered,
the value of such excess is treated as boot. In this case, the shareholders received
$10,000 of principal worth $9,000. Therefore, each must recognize a dividend of
$9,000. (See pp. 7-36 and 7-37.)

65. a. In a spin-off the distributing corporation distributes the stock of a subsidiary to the
distributing corporation's shareholders. The shareholders do not surrender any
stock upon receipt of the subsidiary's stock. This is identical to a distribution of
property and would be considered a dividend if it did not meet the requirements of
§ 355. (See pp. 7-22 through 7-25.)

66. b. In a split-off the distributing corporation distributes the stock of a subsidiary to

the distributing corporation's shareholders in exchange for a portion of its own
stock. This is identical to a redemption and would be considered a redemption if it
did not meet the requirements of § 355. (See pp. 7-22 through 7-25.)

67. a. In the landmark decision of Gregory v. Helvering, Evelyn Gregory carried out a
spin-off transaction which satisfied all of the prescribed statutory requirements.
However, because the transaction had no business purpose and appeared to be a
mere ploy to bail E&P out of her corporation, the Supreme Court denied her
favorable treatment. (See p. 7-31.)

68. c. A split-off occurs when the parent corporation distributes the stock of a
subsidiary to some or all of its shareholders in exchange for some or all of their
stock in the parent. (See pp. 7-22 and 7-25.)
69. c. Under Code § 355, "control" is present when the distributing parent corporation
owns at least 80 percent of the voting power of all classes of the subsidiary's stock
entitled to vote and at least 80 percent of the total number of shares of all other
classes of stock. (See p. 7-22.)

70. d. The transaction qualifies as a nontaxable split-off because all of the requirements
of § 355 are satisfied. Specifically, at least 80 percent of the stock of the
subsidiary must be distributed and the subsidiary and the parent are engaged in
active businesses that were not acquired in a taxable transaction in the previous
five years. (See pp. 7-36 through 7-39.)

71. b. The only requirement is that the activities in which the corporations are engaged
constitute a business. The activities themselves need not be profitable. In fact, a
corporation engaged solely in very profitable investment activities would not
qualify. Thus, choice a. is wrong. Choice c. is wrong because it is a five-year and
not a three-year period ending on the date of distribution during which none of the
businesses may have been acquired in a taxable transaction. (See pp. 7-26 and 7-
27.)

Corporate Reorganizations

Comprehensive Problems

1. R Corporation wishes to acquire T Corporation. T operates two separate lines of

businesses. The primary business is manufacturing widgets. R will continue this
business. The second line of business is a series of health clubs. R will
discontinue this line of business. R wishes to keep T's operations in a separate
business. Ten percent of T's shareholders demand cash. The remaining
shareholders insist that the transaction be tax-free.

a. One option being considered is to acquire T in an A reorganization. R

Corporation would use a combination of voting and nonvoting stock as well as
cash. R would sell the health clubs and transfer the manufacturing operations
to a newly formed subsidiary. Is this a valid A reorganization? Why?

b. Can the above transaction be structured as a B reorganization? If yes, explain

why. If not, how would you change the transaction so that it would qualify?

c. Can the above transaction be structured as a C reorganization? If yes, explain

why. If not, how would you change the transaction so that it would qualify?

2. B Corporation is interested in acquiring Z Corporation so that it can use Z's NOL

carryover.

a. Will Z Corporations NOLs carry over in A, B, and C reorganizations?

 b. What limit is there on the use of the NOL in the year of the reorganization?

c. What other limits are there on the use of the NOL?

d. Could Z acquire B and use its loss to offset B's income?

Solutions to Comprehensive Problems

1.

a. This transaction should qualify as an A reorganization. Since only 10 percent

of the shareholders are being paid cash, the continuity of interest test is met.
The use of nonvoting stock is immaterial. The sale of the second line of
business should not cause the transaction to fail the continuity of enterprise
doctrine. The drop down into a new subsidiary is also acceptable. R
Corporation must make sure that the transaction meets the states legal
definition of a merger.

b. The use of either cash or nonvoting stock will disqualify the transaction from
being a B reorganization. The sale of the health clubs should be immaterial.
One possible way to restructure the transaction is for T to sell the health clubs
first. Then, T can redeem the stock of those shareholders who want cash. R
Corporation could then acquire the remaining stock solely for its voting stock
in a B reorganization.

c. The use of nonvoting stock prevents the transaction from meeting the
requirements of a C reorganization. The use of cash alone is acceptable.
However, if the cash plus the liabilities assumed by R Corporation exceed 20
percent of the value of T Corporation, the transaction will also fail the boot
relaxation rule. To restructure this transaction, R Corporation must use its
voting stock instead of nonvoting stock. It must also stay within the 20 percent
boot rule. The sale of the health clubs should be delayed so that R Corporation
can prove it acquired substantially all of Ts assets. The drop down into a new
subsidiary is immaterial.

2.

a. NOLs carry over in A and C reorganizations. They stay with the acquired
corporation in a B reorganization.

b. In the year of reorganization, the NOL is limited to profit earned by B

Corporation following the reorganization.

c. If the reorganization results in a 50 percentage point change in the ownership

of Z and Z discontinues its business within two years, the NOL is disallowed
completely. If the business is continued following the change of ownership,
then B is limited to using an amount not in excess of the fair market value of
Z Corporation at the time of the reorganization multiplied by the long-term
Test Bank for Corporate Partnership Estate and Gift Taxation 2013 7th Edition by Pratt

tax-exempt rate.

d. Z Corporation may not use its NOL to offset any built-in gain of B
Corporation.

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