Exam 2 Review ch 7, 8

Question 0

2 steps of type c reorganization

Answer 0

1 A voting stock exchanged (possibly other cornsideration)
Exchanged for substantially all T’s assets

2 T liquidates, voting stock distributed to shareholders for
T stock and securities

Question 1

Why would an acquiring corporation want an acquisition to be tax free if it gets only substituted basis rather than step up basis for acquired assets?
2

Answer 1

1 target corp has tax attributes that provide economic benefit
To acquirer

2 acquirer may not have sufficient cash so it issues stock

Question 2

Post reorganization structure of Type C reorganization

Answer 2

A’s and former T’s shareholders own A corp, which owns

Substantially all of T’s assets and liabilities

Question 3

3 advantages of Type C reorganization

Answer 3

1 acquiring corp does not have to comply with merger laws
Of state and federal government (like in type A)
2 A corp. only assumes T’s assets and liabilities in acquisition
Agreement, unknown contingent liabilities not assumed (as in
Merger)
3 shareholder’s of A corp. need not approve transaction,
Reducing transaction cost

Question 4

5 disadvantages of Type C reorganization

Answer 4

1 A corp must use voting stock as consideration
2 tighter boot restrictions under type C
3 T liabilities assumed by A corp. may be substantial
4 substantially all test
5 dissenting target corp. shareholders

Question 5

Substantially all test

Answer 5

T corp. may want to sell, dispose or retain assets A corp. doesn’t
Want.

Can’t take actions shortly before asset for stock acquisition (type C)
Because may cause transaction to fail substantially all test

Question 6

What kind of reorganization is a Type B reorganization?

Answer 6

Stock for stock reorganization

Question 7

Single step in Type B reorganization

Answer 7

A corp exchanges voting stock for T stock from T corp

Giving A corp controlling interest in T corp

Question 8

What is the post reorganization structure of a Type B reorganization?

Answer 8

A and former. T shareholders own A corp which controls the
T corp subsidiary

Minority T corp shareholders own 20% or less of T corp
Stock

Question 9

5 advantages of Type B Reorganization 5

Answer 9

1 acquisition of. T stock accomplished in single transaction w/out
A’s shareholder approval or T’s management approval
2 target corp remains in existence, so its assets, liabilities and
Tax attributes don’t need to be transferred to A corp
3 corporate name, goodwill, licenses and rights of T corp
Preserved after acquisition
4 A corp doesn’t directly assume T corp’s liabilities
5 A and T corps can report post acquisition results on
consolidated basis

Question 10

Disadvantages of Type B reorganization 5

Answer 10

1 A corp can only use voting stock as consideration
2 issuing additional stock dilutes voting power and control of
A corp shareholders
3 A corp must obtain 80% of T corp, when effective control
Can be less
4 may give rise to dissenting minority shareholders of T
Subsidiary stock
5 no step up basis for T corp stock or assets

Question 11

What are the advantages of a taxable acquisition compared to a nontaxable reorganization? 4

Answer 11

1 step up basis
2 don’t need to give away voting stock
3 can recognize losses
4 acquire what you want

Question 12

Disadvantages of taxable acquisition compared to nontaxable acquisition? 2

Answer 12

1 taxes paid

2 depreciation recaptured in transaction

Question 13

Advantage of nontaxable reorganization compared to taxable acquisition?

Answer 13

Usually an advantage when tax attributes carry over to acquirer

Question 14

Disadvantage of nontaxable reorganization compared to taxable acquisition?

Answer 14

Can dilute shares

Question 15

A sole shareholder in a restaurant corporation, sells the business to a bartender in a taxable acquisition and liquidates the corporation: what are the tax consequences for the restaurant corporation? 3 things

Answer 15

1 Recognizes an ordinary gain/loss on sale of assets to acquirer

2 During liquidation, any property retained by restaurant corp is
Distributed to its sole shareholder

3 tax attributes remain with restaurant

Question 16

A sole shareholder in a restaurant corporation, sells the business to a bartender in a taxable acquisition and liquidates the corporation: what are the tax consequences for the restaurant’s sole shareholder?

Answer 16

When shareholder receives liquidating distribution he recognizes
a capital gain or loss depending on his respective stock basis

Question 17

A sole shareholder in a restaurant corporation, sells the business to a bartender in a taxable acquisition and liquidates the corporation: what are the tax consequences for the purchaser?

Answer 17

1 purchaser’s bases in acquired assets equals their acquisition
Cost
2 purchaser can eventually claim depreciation deductions based
On acquisition cost of Depreciable property

Question 18

2 steps to type A reorganization (merger)

Answer 18

1 A corp exchanges stock (possibly other consideration) for
T’s assets and liabilities

2 T liquidates by giving stock of acquirer to shareholders in
Exchange for their T stock

Question 19

Post reorganization structure of Type A merger

Answer 19

A’s and T’s former shareholders own A corp, which owns T’s

Assets and liabilities

Question 20

2 steps of type A Reorganization: Consolidation

Answer 20

1 A corp distributes A stock to 2 different T corps for their
Assets and liabilities

2 both T corps liquidate: exchanging acquiring stock to
shareholders for their T stock

Question 21

2 advantages of Type A reorganization

Answer 21

1 more flexible on consideration used in merger (can use up to
60% cash other property and debt instead of stock, don’t need
Voting stock)

2 substantially all assets need not be acquired

Question 22

4 disadvantages of Type A reorganization

Answer 22

1 must comply with applicable corporate laws
2 dissenting shareholders in both A and T
3 all liabilities including contingent must be assumed
4 T might have nontransferable rights, licenses or privileges
That are lost

Question 23

Type A triangular mergers

Answer 23

Same as type A merger except, subsidiary of parent acquires
target corp assets

Question 24

3 advantages of Type A triangular merger

Answer 24

1 parent can’t be held directly responsible for contingent liabilities
of Target
2 shareholder approval is easy to obtain because parent is
Principal shareholder of subsidiary
3 target shareholders can recognize gain using installment method

Question 25

Type A reverse triangular merger

Answer 25

Similar to triangular merger, except subsidiary merges into T corp

Question 26

3 steps in Triangular Type A merger

Answer 26

1 A corp exchanges A stock with A subsidiary for subsidiary stock
2 A subsidiary exchanges A stock with T corp for T’s assets
And liabilities
3 T corp liquidates and distributes A stock to its shareholders
For their T stock

Question 27

Post reorganization structure of Triangular Type A Reorganization

Answer 27

A’s and T’s former shareholders own A corp. which controls

A subsidiary that owns substantially all of T’s assets and lia.

Question 28

2 steps Acquisitive type D reorganization

Answer 28

1 T corp transfers substantially all of T’s assets to A corp
In exchange for A stock

2 T corp liquidates giving A stock to its shareholders
In exchange for their T stock

Question 29

Post reorganization structure for acquisitive type D reorganization

Answer 29

A’s shareholders own A corp

T’s former shareholders control A corp

Question 30

Which 5 types of reorganizations does the acquiring corp obtain both the target corp’s tax attributes and assets?

Answer 30

1 Type A
2 Type C 
3 Acquisitive Type D
4 Type F
5 Acquisitive Type G

Question 31

What 2 reorganizations do the tax attributes not change hands?

Why?

Answer 31

Type B and Type E

Because assets not transferred from one corp to another

Question 32

Under section 381, what 5 tax attributes are carried over?

Answer 32

1 NOL
2 Capital losses
3 E&P
4 General business credits
5 Inventory methods

Question 33

NOLs from the period following the acquisition date cannot…

Answer 33

Be carried back by acquiring corp to offset target corp profits
Earned in tax years before the acquisition

Question 34

When is the target corporation’s NOL carryover determined?

When can the Target’s NOL be used by the Acquiring corp?

Answer 34

Acquisition date

Can be used after the acquisition date

Question 35

Section 382 and 269 are intended to discourage taxpayers from purchasing…

Answer 35

The assets or stock of corps having loss carryovers

Question 36

When are section 382 NOL restrictions triggered?

Answer 36

When substantial change in stock ownership of loss corporation
Occurs in 3 year test period

Question 37

Old loss corporation

Answer 37

Any target corp entitled to use NOL carryover or has NOL for tax year
Change in ownership occurs

And that undergoes the requisite stock ownership change

Question 38

2 conditions, that must both occur for a substantial ownership change to trigger section 382 NOL restrictions?

Answer 38

1 stock ownership of any persons owning 5% or more of corp’s
Stock has changed or reorganization occurred

2 percentage of stock in new loss corp. owned by one or more
5% shareholders has increased by 50% over lowest percentage
Of stock owned in old loss corp

Question 39

New loss corporation

Answer 39

Any acquiring corporation entitled to use NOL carryover after stock
Ownership change

Question 40

In many acquisitive reorganizations, the sec. 382 stock ownership
Test is applied first with respect to the…

Answer 40

Old loss (target) corp

and
then to the new loss acquiring corp

Question 41

NOL Loss limitation section 382 formula

Answer 41

Sec. 382 loss limitation =

value of old loss corporations stock) X (long term tax exempt fedl rate

Question 42

What is the carry forward for NOL deferred by sec. 382 loss limitation?

Answer 42

20 years, can’t deduct more than the NOL loss limitation over
Those years

Question 43

What disallows the use of NOL carryovers?

Answer 43

New loss corp (acquirer) discontinues business of old loss corp
(Target), within 2 years after acquisition date

Question 44

What does section 383 restrict? How are the restrictions applied?

Answer 44

Use of tax credits and capital loss carryovers when stock
Ownership change occurs

Restrictions are applied the same way as section 382

Question 45

Inter company transaction

Answer 45

Transaction between 2 corporations that are in same

consolidated group immediately after transaction

Question 46

3 concepts of reporting inter company transactions

Answer 46

1 inter company item
2 corresponding item
3 recomputed corresponding item

Question 47

Inter company item

Answer 47

Selling corp’s income, gain, deduction and loss from inter company
Transaction

Question 48

Corresponding item

Answer 48

Buying corps income, gain, deduction and loss from
inter company transaction

Or from property acquired in inter company transaction

Question 49

Recomputed corresponding item

Answer 49

Corresponding item the buyer corp would have if it and selling
Corp were 2 divisions of single corp

And transaction occurred between those divisions

Question 50

Inter company transactions: Separate entity concept

Answer 50

Selling and buying corps involved in inter company transaction
Generally treated as separate entities

in determining amount of income, gain, deduction and loss
That each incurs

Question 51

4 common events that trigger recognition of inter company item

Answer 51

1 buying corp sells to 3rd party property from inter company
Transaction
2 buying corp claims depreciation deductions
3 buying or selling corp leaves consolidated group
4 corps in affiliated group discontinue filing consolidated returns
And file individual returns