Corporate Reorganizations

Question 1

What are 2 cases of reorganization?

Answer 1

1. Two corporations (acquiring and target) merge or consolidate.
2. One corporation spins off part of its operation into a separate corporation.

Question 2

What are Reorganization A and C?

Answer 2

Stocks for assets.

Acquiring company provides stocks in exchange of assets of the target company.

Question 3

What is Reorganization B?

Answer 3

Stocks for stocks.

Acquiring company provides stocks in exchange of stocks of the target company.

Question 4

What is Reorganization D?

Answer 4

Divisive. 1 corporation splits into 2.

Question 5

A Reorganization: Known as? Why?

Answer 5

A statutory merger since the requirements of state law must be met.

Question 6

A Reorganization: what happens to the target corporation?

Answer 6

Must dissolve.

Question 7

A Reorganization: which stock can be used: voting or non-voting sock?

Answer 7

Both can be used.

Question 8

A Reorganization: requirement re: consideration given to Target by Acquiring?

Answer 8

At least 50% of the consideration must be stock.

Question 9

B Reorganization: requirement re: ownership?

Answer 9

Acquiring must own at least 80% of Target after the transaction.

Question 10

B Reorganization: which stock can be used: voting or non-voting sock?

Answer 10

Only voting stock can be used.

Question 11

B Reorganization: is there any boot allowed?

Answer 11

No.

Question 12

C Reorganization: Difference from A?

Answer 12

Does not have to be a statutory merger (Target does not have to go away).

Question 13

C Reorganization: which stock can be used: voting or non-voting sock?

Answer 13

Only voting stock.

Question 14

C Reorganization: Is boot allowed?

Answer 14

Yes, but can’t exceed 20% of the consideration.

Question 15

C Reorganization: re: acquiring assets?

Answer 15

Acquiring must acquire substantially all of Target’s assets (90% of the asset value and 70% of gross asset value).

Question 16

When shareholders receive only stock in exchange for property of the acquiring organization under tax free reorganization, do they recognize gain or loss?

Answer 16

No gain or loss is recognized to the shareholders.

Question 17

If shareholders receive other property in addition to stock, how is it classified? Treatment of gain?

Answer 17

Boot.
Gain is recognized equal to the lower of:
Boot received or Realized gain.

Question 18

Do corporations recognize gain or loss?

Answer 18

Generally no.

If Acquiring transferes appreciated property to Target, gain (but not loss) will be recognized.

Question 19

When Target transfers appreciated property to its SHAREHOLDERS, what is the treatment for gain or loss?

Answer 19

Only gain will be recognized.

Question 20

What would be the shareholder’s basis in the stock received?

Answer 20

Basis in stock surrendered (Target’s) + gain recognized - Boot received.

Question 21

What would be the basis for the acquiring corporation in the transferor’s asset?

Answer 21

Transferor’s basis in asset + Gain recognized by Transferor.

Question 22

Question:
Under a recapitalization of a Corp, a shareholder exchanged 1,000 shares of stock (cost: $95,000) for 1,000 share of new stock (worth: $108,000) and bonds (principal amount: $10,000, FMV: $10,500).
What is the amount of shareholder’s recognized gain?
What would be the basis to the shareholder in the stock received?

Answer 22

*Amount realized:
Stock: 108,000 + Bonds(boot): 10,500 = $118,500 - Adjusted basis (95,000) = 23,500.
*Lower of: boot received (10,500) or realized gain (23,500).
*Therefore, shareholder recognize gain of $10,500.

Surrendered basis (95,000) + gain recognized (10,500) - boot received (10,500) = 95,000.

Question 23

When reorganization occurs, what happens to tax attributes?

Answer 23

Usually carryover to Acquiring.

Question 24

Tax attributes carryover: what are examples?

Answer 24

Adjusted basis of assets.
Earnings and profits
Carryovers (NOL, capital loss, excess charitable contributions.
Accounting methods (i.e. depreciation methods).
Tax credits carryovers.

Question 25

Tax attributes carryover: limitations?

Answer 25

Limitations maybe placed on the use of Target’s NOLS and negative earnings and profits by Acquiring.

Question 26

Tax attributes carryover: the same rules apply with what?

Answer 26

The tax-free liquidation of a subsidiary.

Question 27

What is type F reorganization?

Answer 27

A mere change in identity, form, or place of organization.

Question 28

What are securities in corporations not parties to a reorganization considered?

Answer 28

Always boot.

Question 29

Does the term “a party to the reorganization” includes a corporation resulting from the reorganization (i.e., the consolidated company)?

Answer 29

Yes.

Question 30

What is Type E reorganization?

Answer 30

Preferred stock for bond.

Question 31

When there is a merger, can acquiring use target’s NOL to offset their income?

Answer 31

Yes.

Question 32

When the acquiring uses target’s NOL, what are 2 limitations?

Answer 32

1. Limited to the acquiring income x the length of merger (if acquired on June 30, income x 184/365).
2. If acquired more than 50%, limited to (exemption rate x target’s FMV before acquisition) x 184/365.