CHAPTER 7—CORPORATIONS
599. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #1
The Federal income tax treatment of a corporate restructuring is an extension of allowing entities to form without taxation.
a. True
b. False
600. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #2
To ensure the desired tax treatment, parties contemplating a corporate reorganization should apply for a Regulation from the Treasury.
a. True
b. False
601. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #3
For corporate reorganizations, the tax laws should be considered while planning the structure of the reorganization.
a. True
b. False
602. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #4
Corporate shareholders would prefer to have a gain on a reorganization treated as a dividend rather than as a capital gain, because of the dividends received deduction.
a. True
b. False
603. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #5
For a corporate restructuring to qualify as a tax-free reorganization, the transaction must have a sound business purpose.
a. True
b. False
604. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #6
Corporate reorganizations can meet the requirements to qualify as like-kind exchanges if there is no boot involved.
a. True
b. False
605. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #7
In 1916, the Supreme Court decided that corporate reorganizations were substantially continuations of the prior entities and thus should not be subject to taxation.
a. True
b. False
606. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #8
In corporate reorganizations, an acquiring corporation using property other than stock as consideration may recognize gains but not losses on the transaction.
a. True
b. False
607. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #9
The gain recognized by a shareholder in a corporate reorganization is the difference between the realized gain and the boot received.
a. True
b. False
608. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #10
The gains shareholders recognize as a part of a corporate reorganization may be treated a dividend to the extent of the corporation’s earnings and profits.
a. True
b. False
609. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #11
Noncorporate shareholders may elect out of § 368 and recognize losses when property subject to a liability is distributed to them in a corporate reorganization.
a. True
b. False
610. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #12
If the target corporation in a reorganization has a deficit in earnings and profits, any gains recognized by the shareholders are treated as stock redemptions and not as dividends.
a. True
b. False
611. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #13
Debt security holders recognize gain when the interest rate on the securities received is greater than the interest rate on the bonds given up.
a. True
b. False
612. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #14
The treatment of corporate reorganizations is similar to like-kind exchanges.
a. True
b. False
613. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #15
In the “Type A” merger, the acquiring corporation must assume all of the liabilities (known and contingent) of the target, but in the “Type A” consolidation only those liabilities selected by the new corporation need be transferred.
a. True
b. False
614. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #16
The “Type A” corporate reorganization can run afoul of the continuity of interest doctrine more easily than a “Type C,” because with a “Type A” the Code does not require that the target shareholders receive common stock of the acquiring corporation in exchange for their ownership of the target.
a. True
b. False
615. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #17
The two “Type A” reorganizations are mergers and acquisitions.
a. True
b. False
616. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #18
In a “Type B” reorganization, the acquiring corporation obtains control by exchanging common and preferred stock in the same percentages as the target’s outstanding common and preferred stock.
a. True
b. False
617. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #19
The “Type B” reorganization requires a continuity of business interest. Therefore, the acquiring corporation must obtain at least 40% of target corporation’s stock through the reorganization.
a. True
b. False
618. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #20
When substantially all of the assets of the target corporation are received in exchange for voting stock and selected liabilities, the restructuring can qualify as a “Type C” reorganization.
a. True
b. False
619. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #21
If the acquiring corporation purchased 25% of target stock for cash ten years ago, the acquiring corporation cannot meet the “Type C” reorganization requirement that 80% of the target’s assets be acquired with stock requirement.
a. True
b. False
620. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #22
In an acquisitive “Type D” reorganization, substantially all of the acquiring corporation’s assets must be transferred to the target corporation for stock amounting to at least 50 percent of the total acquiring stock.
a. True
b. False
621. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #23
In a divisive “Type D” reorganization, the distributing corporation obtains control of the new target by exchanging some of its assets for at least 80% of the new target’s outstanding stock.
a. True
b. False
622. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #24
The distinguishing characteristic of a “Type D” reorganization is the acquiring corporation is the one transferring assets to the target corporation in exchange for a controlling interest in the target.
a. True
b. False
623. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #25
For a capital restructuring to qualify as a “Type E,” there must be at least a 50% change in the common stock ownership.
a. True
b. False
624. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #26
An exchange of common stock for preferred stock or bonds for preferred stock can qualify as a “Type E” reorganization.
a. True
b. False
625. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #27
The “Type F” corporate reorganization includes changes in name, location, and changing from a taxable entity to any flow-through entity.
a. True
b. False
626. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #28
For the “Type G” reorganization, the continuity of interest test is more stringent than for other reorganizations, because the corporation is insolvent and the owners need to be protected.
a. True
b. False
627. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #29
When a corporation has cancellation-of-debt relief in a “Type G” reorganization, the corporation reduces its benefits in tax attributes such as NOLs and business credits.
a. True
b. False
628. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #30
A tax avoidance motive is essential in establishing a sound business purpose.
a. True
b. False
629. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #31
The continuity of business enterprise requires that at least 60% of the target’s assets are acquired with stock.
a. True
b. False
630. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #32
The continuity of interest requires that all target shareholders receive some acquiring stock.
a. True
b. False
631. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #33
Without evidence to the contrary, the IRS views transactions occurring within one year of a reorganization as part of the restructuring.
a. True
b. False
632. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #34
A more than 50 percentage point ownership shift will evoke the § 382 limitation.
a. True
b. False
633. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #35
Liabilities generally are not considered boot in corporate reorganizations, except in an acquisitive “Type D” when cash or other property is also used in the transaction.
a. True
b. False
634. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #36
A present value analysis is beneficial when valuing tax attributes limited by the § 382 limitation.
a. True
b. False
635. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #37
One advantage of acquiring a corporation with losses is that after a tax-free reorganization, the remaining corporation may combine the negative earnings and profits (E & P) of the target corporation with positive E & P of the acquiring corporation.
a. True
b. False
636. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #38
The § 382 limitation on the use of capital loss carryovers is triggered when there is a change in ownership of more than 50 percentage points for shareholders owning at least 5% of the stock.
a. True
b. False
637. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #39
The year in which the ownership shift occurs for a corporation, the NOL carryforward is limited not only by the § 382 annual limitation, but also by the percentage of the year remaining.
a. True
b. False
638. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question TF #40
The sound business purpose doctrine and § 269 have the same purpose of disallowing restructurings that are primarily for tax avoidance motives.
a. True
b. False
639. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question MC #1
One of the tenets of U.S. tax policy is to encourage business development. Which of the following Code sections does not support this tenet?
a. Section 351, which allows entities to incorporate tax-free.
b. Section 1031, which allows the exchange of stock of one corporation for stock of another.
c. Section 368, which allows for tax-favorable corporate restructuring through mergers and acquisitions.
d. Section 381, which allows the target corporation’s tax benefits to carryover to the successor corporation.
e. All of the above provisions support the tenet.
640. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question MC #2
All of the following statements are true about corporate reorganization except:
a. Taxable amounts for shareholders are classified as a dividend or capital gain.
b. Reorganizations receive treatment similar to corporate formations under § 351.
c. The transfers of stock to and from shareholders qualify for like-kind exchange treatment.
d. The value of the stock received by the shareholder less the gain not recognized (postponed) will equal the shareholder’s basis in the stock received.
e. All of the above statements are true.
641. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question MC #3
Which of the following statements is true concerning all types of tax-free corporate reorganizations?
a. Assets are transferred from one corporation to another.
b. Stock is exchanged with shareholders.
c. Liabilities that are assumed when cash is also used as consideration will be treated as boot.
d. Corporations and shareholders involved in the reorganization may recognize gains but not losses.
e. None of the above statements is true.
642. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question MC #4
A shareholder bought 2,000 shares of Zee Corporation for $90,000 several years ago. When the stock is valued at $200,000, Zee redeems these shares in exchange for 6,000 shares of Yea Corporation stock. This transaction meets the requirements of § 368. Which of the following statements is true with regard to this transaction?
a. The shareholder has a recognized gain of $110,000.
b. The shareholder has a postponed gain of $110,000.
c. The shareholder has a basis in the Yea stock of $200,000.
d. Gain or loss cannot be determined because the value of the Yea stock is not given.
e. None of the above statements is true.
643. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question MC #5
Bobcat Corporation redeems all of Zeb’s 4,000 shares and distributes to him 2,000 shares of Van Corporation stock plus $50,000 cash. Zeb’s basis in his 20% interest in Bobcat is $100,000 and the stock’s value is $250,000. At the time Bobcat is acquired by Van, the accumulated earnings and profits of Bobcat are $200,000 and Van’s are $75,000. How does Zeb treat this transaction for tax purposes?
a. No gain is recognized by Zeb in this reorganization.
b. Zeb reports a $50,000 recognized dividend.
c. Zeb reports a $50,000 recognized capital gain.
d. Zeb reports a $40,000 recognized dividend and a $10,000 capital gain.
e. Not enough information is available to determine proper treatment.
644. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question MC #6
Yoko purchased 10% of Toyger Corporation’s stock six years ago for $70,000. In a transaction qualifying as a “Type C” reorganization, Yoko received $50,000 cash and 8% of Angora Corporation’s stock (valued at $100,000) in exchange for her Toyger stock. Prior to the reorganization, Toyger had $200,000 accumulated earnings and profits and Angora had $300,000. How does Yoko treat the exchange for tax purposes?
a. As a recognized $50,000 long-term capital gain.
b. As a $50,000 dividend.
c. As a $20,000 dividend and a $30,000 capital gain.
d. As a $30,000 dividend and a $20,000 capital gain.
e. None of the above.
645. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question MC #7
Korat Corporation and Snow Corporation enter into an acquisitive “Type D” reorganization. Xin currently holds a 20-year, $10,000 Snow bond paying 4% interest. There are 8 years until the bond matures. In exchange for his Snow bond, Xin receives an 8 year $16,000 Korat bond paying 2.5% interest. Xin thinks this is fair because he will still receive $400 of interest each year and both bonds mature on the same date. How does Xin treat this transaction on his tax return?
a. Xin recognizes no gain or loss on the exchange of bonds.
b. Xin recognizes $750 gain each year for the next 8 years.
c. Xin recognizes $6,000 capital gain.
d. Xin recognizes $6,000 ordinary gain.
e. None of the above.
646. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question MC #8
Mars Corporation merges into Jupiter Corporation by exchanging all of its assets for 300,000 shares of Jupiter stock valued at $2 per share and $100,000 cash. Wanda, the sole shareholder of Mars, surrenders her Mars stock (basis $900,000) and receives all of the Jupiter stock transferred to Mars plus the $100,000. How does Wanda treat this transaction on her tax return?
a. Wanda recognizes a $100,000 gain. Her Jupiter stock basis is $900,000.
b. Wanda recognizes a loss of $100,000. Her Jupiter stock basis is $800,000.
c. Wanda recognizes a $100,000 gain. Her Jupiter stock basis is $700,000.
d. Wanda realizes a $200,000 loss of which $100,000 is recognized. Her Jupiter stock basis is $1 million.
e. None of the above.
647. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question MC #9
Xian Corporation and Win Corporation would like to combine into one entity. Xian exchanges 40% of its common and preferred stock plus $200,000 cash for 60% of Win’s assets and liabilities. Win distributes the Xian stock, cash, unwanted assets, and liabilities to its shareholders in exchange for their outstanding stock. Win then liquidates.
a. This restructuring will qualify as a “Type A” statutory merger.
b. This restructuring will qualify as a “Type B” reorganization.
c. This restructuring will qualify as a “Type C” reorganization.
d. This restructuring will qualify as an acquisitive “Type D” reorganization.
e. This does not qualify as a reorganization under § 368.
648. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question MC #10
Racket Corporation and Laocoon Corporation create Raccoon Corporation. Racket transfers $600,000 in assets for all of Raccoon’s common stock. Racket distributes its remaining assets ($300,000) and the Raccoon common stock to its shareholder, Mia, for all of her stock in Racket (basis $950,000) and then liquidates. Laocoon receives all of the preferred stock for its $400,000 of assets. Laocoon distributes its remaining assets ($300,000) and the Raccoon preferred stock to its shareholder, Carlos, for all of his stock in Laocoon (basis $200,000) and then liquidates. How will this transaction be treated for tax purposes?
a. This qualifies as a “Type A” reorganization. Mia recognizes no gain or loss, but Carlos recognizes $300,000 gain.
b. This qualifies as a “Type C” reorganization. Mia and Carlos recognize $300,000 gain, to the extent of the boot.
c. This qualifies as a “Type D” reorganization. Neither Mia nor Carlos recognizes a gain or loss.
d. This is a taxable transaction. Mia recognizes $50,000 loss and Carlos recognizes $500,000 gain.
e. None of the above.
649. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question MC #11
Manx Corporation transfers 40% of its stock and $50,000 in cash to Somali Corporation for $500,000 of assets and all $200,000 of its liabilities. Somali exchanges the Manx stock, cash, and its remaining $100,000 of assets with its shareholders for all of their stock in Somali. After the exchange, Somali liquidates. The exchange qualifies as what type of transaction?
a. “Type A” reorganization.
b. “Type B” reorganization.
c. “Type C” reorganization.
d. Acquisitive “Type D” reorganization.
e. A taxable exchange.
650. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question MC #12
Which of the following statements is true regarding a “Type A” reorganization?
a. At least 80% of the acquiring corporation’s consideration must be voting stock but the other 20% can be cash or preferred stock.
b. The target shareholders must receive a proprietary interest in the acquiring corporation. This means that target shareholders must receive at least 40% of acquiring’s stock.
c. Substantially all of the target’s assets must be transferred to the acquiring corporation. This means at least 90% of the net asset value.
d. Assumption of all liabilities for a “Type A” reorganization includes unknown and contingent liabilities.
e. None of the above statements is true.
651. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question MC #13
Ocelot Corporation is merging into Tiger Corporation under state law requirements. Ocelot transfers $300,000 of assets to Tiger in exchange for 30,000 shares and $200,000 in cash. Ocelot transfers the Tiger stock, $200,000 cash, and all of its liabilities ($50,000) to its shareholder, Van, in exchange for all of his Ocelot stock (basis $100,000). Ocelot then liquidates. How will this
