To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER CORPORATIONS: REORGANIZATIONS SOLUTIONS TO PROBLEM MATERIALS Question/ Problem Learning Objective LO LO 1, LO LO 10 11 12 13 14 15 16 LO LO 1, 2, LO LO LO LO LO LO LO LO LO 3, 4, LO 3, 4, 17 18 LO LO 19 LO 20 21 22 23 24 25 *26 27 LO LO LO LO LO 5, LO 5, LO LO Topic IRS Letter Ruling Treatment of taxable reorganization gains Types of reorganizations Like-kind exchange versus corporate reorganization Reorganization: tax effects “Type A” reorganization “Type A” and “Type B” reorganizations “Type B” and “Type C” reorganizations “Type A” and “Type C” reorganizations “Type C” reorganizations “Type D” reorganizations “Type E” reorganization “Type F” reorganization “Type G” reorganization Section 382 and judicial doctrines “Type C” continuity of interest and step transaction doctrine Application of § 381 limitation Ownership change for shareholders owning less than 5% Objective of § 382 limitation: future income stream Continuity of business enterprise Judicial doctrines Excess credit § 382 limitation computation Negative E & P carried to successor Net present value of NOL Earnings & profits Classify as to type of reorganization Gain taxable as stock redemption Status: Present Edition Q/P in Prior Edition Modified Modified Modified New New Unchanged New New Modified New Modified New Unchanged Unchanged New Unchanged 11 13 14 16 New Modified 18 Modified 19 Unchanged New New Unchanged New Unchanged New Modified 20 23 25 27 Instructor: For difficulty, timing, and assessment information about each item, see p 7-4 7-1 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-2 2012 Corporations Volume/Solutions Manual Question/ Problem 28 29 30 31 *32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 Learning Objective LO Topic Reorganization gain, loss, and basis determination LO Character of shareholder gain LO 2, Stocks and bonds received in a “Type E” reorganization LO Effect on basis when gain recognized LO Gain recognition and basis computation LO Reorganization gain, loss, and basis determination LO Classify type of reorganization LO 3, Structuring a “Type B” or “Type C” reorganization LO 3, Comparison of “Type A”, “Type C,” and acquisitive “Type D” reorganizations LO 3, “Type B” reorganization LO 3, “Type C” reorganization LO 3, “Type D” reorganization LO “Type D” reorganization LO 2, “Type E” reorganization LO “Type F” reorganization LO “Type G” reorganization LO 3, Sound business purpose and continuity of business LO 2, 3, 4, Continuity of interest and NOL carryover 5, LO Capital loss carryover and “Type B” reorganization LO NOL carryover and § 382 limitation LO 3, NOL carryover change year when no § 382 limitation LO “Type E” reorganization and net present value LO Carryover of NOL: net present value LO Net present value of acquired NOL LO Carryover of capital loss and excess credits LO Business credits and net present value LO Stock valuation and net present value LO 3, 4, 5, Application of Judicial doctrines; NOL and business credit carryovers Status: Present Edition Q/P in Prior Edition Unchanged 28 Unchanged New 29 New Unchanged Unchanged 32 33 New Modified 34 Unchanged 35 Modified Unchanged New Unchanged New Unchanged Unchanged New 36 37 Unchanged 39 41 42 44 New New New New Unchanged Unchanged Unchanged New New Unchanged 49 50 51 48 *The solution to this problem is available on a transparency master Instructor: For difficulty, timing, and assessment information about each item, see p 7-4 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Corporations: Reorganizations Research Problem Topic “Type B” reorganization with bond exchange “Type G” reorganization “Type D” reorganization Treatment of reorganization costs Internet activity Internet activity Internet activity Internet activity 7-3 Status: Present Edition Unchanged Unchanged Unchanged New New New New New Q/P in Prior Edition © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-4 2012 Corporations Volume/Solutions Manual Question/ Problem Est'd completion time Difficulty Assessment Information AICPA* AACSB* Core Comp Core Comp Easy Easy 5 Easy Easy 5 Easy Medium 10 Easy Easy Easy 5 10 FN-Reporting FN-Measurement | FNReporting FN-Reporting FN-Measurement | FNReporting FN-Reporting FN-Measurement | FNReporting FN-Reporting FN-Reporting FN-Reporting 10 11 12 13 14 15 Easy Easy Easy Easy Easy Medium 5 5 10 FN-Reporting FN-Reporting FN-Reporting FN-Reporting FN-Reporting FN-Reporting 16 17 18 19 20 21 22 Hard Easy Easy Easy Medium Medium Easy 10 5 10 10 23 24 Easy Medium 10 FN-Reporting FN-Reporting FN-Reporting FN-Reporting FN-Reporting FN-Reporting FN-Measurement | FNReporting FN-Reporting FN-Reporting 25 26 27 Medium Hard Medium 10 15 10 28 Hard 15 29 Medium 10 30 Easy 10 31 Hard 20 32 Medium 10 FN-Reporting FN-Reporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting Analytic Analytic Analytic Analytic Analytic Analytic | Reflective Thinking Analytic Analytic Analytic | Reflective Thinking Analytic Analytic Analytic Analytic Analytic Analytic | Reflective Thinking Analytic Analytic Analytic Analytic Communication | Analytic Analytic Analytic Analytic Analytic | Reflective Thinking Analytic Analytic Analytic Analytic Analytic Analytic | Reflective Thinking Analytic Analytic *Instructor: See the Introduction to this supplement for a discussion of using AICPA and AACSB core competencies in assessment © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Corporations: Reorganizations Question/ Problem Difficulty Est'd completion time 33 Hard 15 34 35 Hard Medium 15 10 36 Medium 15 37 Medium 10 38 Medium 15 39 Medium 10 40 Medium 15 41 Easy 42 Easy 43 Medium 10 44 Hard 10 45 Hard 10 46 Easy 47 Medium 48 Easy 49 Hard 20 50 Medium 10 51 Medium 10 52 Medium 10 53 Medium 15 54 Hard 10 55 Medium 10 10 7-5 Assessment Information AICPA* AACSB* Core Comp Core Comp FN-Measurement | FNReporting FN-Reporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting Analytic Analytic Analytic | Reflective Thinking Communication | Analytic | Reflective Thinking Analytic | Reflective Thinking Communication | Analytic Analytic | Reflective Thinking Communication | Analytic Analytic Analytic | Reflective Thinking Analytic Analytic | Reflective Thinking Analytic | Reflective Thinking Analytic Analytic Analytic Analytic | Reflective Thinking Analytic | Reflective Thinking Analytic Analytic | Reflective Thinking Analytic | Reflective Thinking Analytic | Reflective Thinking Analytic | Reflective Thinking *Instructor: See the Introduction to this supplement for a discussion of using AICPA and AACSB core competencies in assessment © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-6 2012 Corporations Volume/Solutions Manual CHECK FIGURES 26.a 26.b 26.c 26.d 26.e 26.f 27 28 “Type D” spin-off Taxable “Type A.” Taxable Acquisitive “Type D.” “Type B.” $300,000 stock redemption gain Tyron $50,000 gain, $250,000 basis Anna no loss recognized, $220,000 basis Triangle $480,000 basis 29 $84,000 dividend, $16,000 capital gain 30 “Type E,” $20,000 gain to shareholder and to bondholder 31.a Frank: stock basis $200,000, bond basis $20,000, $14,000 dividend, and $6,000 capital gain Kasha: stock basis $800,000, bond basis $80,000, $56,000 dividend, and $24,000 capital gain 31.b Nontaxable to Quail Covey’s basis $1.5 million 32.a Rosa’s basis $50,000; Arvid’s basis $600,000 32.b Rosa no gain; Arvid $80,000 gain; Lodgepole $40,000 gain; Pine no gain 33.a Stock value $270,000 33.b Lea’s $50,000 realized loss not recognized 33.c Lemon’s $10,000 gain recognized; Lime’s basis in Lemon’s assets $900,000 34.a “Type F.” 34.b 34.c 34.d 34.e 34.f 35 36 37 38 39 40 41 42 43 46 47 48 49 50 51 52 53 54 Taxable Taxable “Type D” split-up “Type C.” Taxable Qualifies for “Type B,” not “Type C” with Otter Acquisitive “Type D” best choice Shareholder’s gain $200,000 in separate transaction; current transaction “Type B.” “Type C.” Split-up “Type D.” Divisive “Type D.” “Type E.” “Type F.” “Type G,” NOL benefit $150,000 Golden cannot use RetrieverCo’s capital loss $165,000 NOL used by Collie $80,000 NOL used by Spaniel Net present value of $180,000 bond is higher Net present value of NOL $118,932 Maximum value of Kers $626,812 $60,000 capital loss carryover and $20,400 business credits in current year Net present value of credits $45,553 Maximum shares 33,498; “Type A,” or “Type C” reorganization © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Corporations: Reorganizations 7-7 DISCUSSION QUESTIONS Since the dollar amount involved in a reorganization may be substantial, the tax consequences are important Therefore, corporations contemplating a corporate reorganization should seek an IRS letter ruling determining the income tax effect of the restructuring Assuming the parties proceed with the transaction as proposed in the ruling request, a favorable ruling provides, in effect, an insurance policy as to the tax treatment of the restructuring p 7-2 If a corporate reorganization produces taxable gains, a corporate shareholder would prefer the gains to be treated as a dividend because of the dividends received deduction While dividends and capital gains are taxed at the same rates, individuals prefer capital gains because of the subtraction of stock basis in determining the amount of the gain recognized The gain on a corporate reorganization is treated as a dividend to the extent of the shareholder’s proportionate share of the corporate earnings and profits at the time of the reorganization The stock redemption rules can apply if the reduction in the shareholder’s ownership meets the requirements of § 302(b) A comparison of the acquiring stock received with the number of shares that could have been received if solely stock had been distributed is the basis for determining the application of the substantially disproportionate redemption rules pp 7-2, 7-6, and 7-7 The seven forms of corporate reorganizations that qualify as nontaxable exchanges include the following A A statutory merger or consolidation B The acquisition by a corporation of another using solely stock of each corporation (voting-stock-for-stock exchange) C The acquisition by a corporation of substantially all of the property of another corporation in exchange for voting stock (stock-for-asset exchange) D The transfer of all or part of a corporation’s assets to another corporation when the original corporation’s shareholders are in control of the new corporation immediately after the transfer (divisive exchange, also known as a spin-off, split-off, or split-up) E A recapitalization F A mere change in identity, form, or place of organization G A transfer by a corporation of all or a part of its assets to another corporation in a bankruptcy or receivership proceeding p 7-4 The tax treatment for the parties involved in a tax-deferred reorganization almost exactly parallels the treatment under the like-kind exchange provisions of § 1031 In the simplest form, no gain or loss is recognized If there is boot, gain (but not loss) is recognized to the extent of the lesser of the boot received or realized gain In § 368 transactions, the basis in the asset received is the vehicle for postponement of any gain not recognized in the transaction For the acquiring corporation, the basis in the assets received is a carryover basis plus any gain recognized by the target corporation pp 7-4, 7-5, and 7-8 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-8 2012 Corporations Volume/Solutions Manual 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 The postponed gain is equal to the gain that was realized but not recognized This computation assures that the gain not currently recognized will be recognized when the stock is sold at a later date pp 7-4, 7-5, and Concept Summary 7.1 Some tax issues to consider are listed below This should not be considered an exhaustive list of possible issues • What is Mervin’s basis in his Fern stock? • What will be Mervin’s basis in his Ivy stock? • Will the transaction qualify as a “Type A” reorganization? • • Did Ivy assume all of Fern’s liabilities? • Were the state law requirements met? • Was the restructuring approved by the shareholders? • Is the continuity of interest test met? That is, what did the other Fern shareholders receive? Is the bond considered boot to Mervin? • If yes, does a portion of the transaction qualify for stock redemption treatment? • If yes, what is the amount and character of the gain Mervin recognizes? • Could the reorganization meet the requirements of a “Type C” reorganization? • Was the Ivy stock used in the restructuring common and/or preferred? • Is either Fern or Ivy required to recognize gain on the transaction? pp 7-4 to 7-10 and Chapter Unlike a “Type B” reorganization, the acquiring corporation in a “Type A” need not use solely voting stock Acquiring can transfer money, other property, and other classes of stock without destroying the tax-free treatment In a “Type B” reorganization, Acquiring may use only voting stock as the consideration This requirement is strictly construed pp 7-9 and 7-13 In a “Type B” reorganization, the target corporation becomes a subsidiary of the acquiring corporation In a “Type C” reorganization, the target’s assets are transferred to the acquiring corporation and the target must liquidate after the restructuring Thus, Target is consumed by Acquiring pp 7-10, 7-12 to 7-14, and Figures 7.2 and 7.3 In the “Type A” reorganization, the acquiring corporation must assume all liabilities (including unknown and contingent liabilities) of the target corporation as a matter of state law However, in the ‘‘Type C,’’ 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 Thus, the ‘‘Type C’’ can be preferable to the ‘‘Type A’’ reorganization pp 7-10, 7-14, and 7-15 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Corporations: Reorganizations 7-9 10 The substantially all of the assets test in a “Type C” reorganization does not have a statutory definition To receive a favorable IRS ruling, the target must transfer to the acquiring corporation at least 90% of its net assets value and 70% of its gross asset value p 7-16 11 The “Type D” reorganizations include the following • Acquisitive: Substantially all of the acquiring corporation’s assets are transferred to the target corporation in exchange for target stock Acquiring corporation must be in control of target after the transaction and acquiring corporation must liquidate • 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: Like a spin-off, except that the shareholders surrender distributing corporation stock in exchange for stock in the new corporation • Split-up: Two or more new corporations are formed and receive all of the distributing corporation’s property The stock of each new corporation is exchanged for the distributing corporation’s stock The distributing corporation is then liquidated pp 7-16 to 7-21 12 A “Type E” reorganization permits an exchange of stock for stock, bonds for stock and bonds for bonds Stock for bonds is not tax-free p 7-19 13 A “Type F” reorganization is merely changing the corporation’s identity (name), form (going from an S to a C corporation or vice versa), or place of organization p 7-22 and Examples 27 and 28 14 The continuity of interest test is more lenient for “Type G” reorganizations When a corporation is insolvent, the creditors become the real owners of the corporate assets Thus, rather than the shareholders, the creditors should hold the continuing interest in the property of the insolvent corporation The former shareholders need not receive any stock in the acquiring corporation for the restructuring to qualify as the “Type G” reorganization pp 7-22 and 7-23 15 The list of concerns regarding the proposed merger of Air and Water should include the following • Does Air have a valid business purpose for the proposed merger? • Will the continuity of interest requirement be met for Water shareholders? • Can the continuity of business test be met if Air discontinues the manufacture of scuba diving equipment? Could the continuity of business requirement be met using the asset use test? That is, are the same assets used in the production of scuba diving equipment and air tanks for the military? • Can Air meet the state and Federal corporate law requirements for the merger? • Could the IRS apply § 269 to disallow the benefits from any of the carryovers? © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-10 2012 Corporations Volume/Solutions Manual • To what extent is Air limited by § 382 in its utilization of Water’s capital loss carryovers? Can Air sell its investments to generate enough gains to deduct the capital losses before they expire? • Under what type of reorganization would the proposed merger be able to qualify? pp 7-25 to 7-35 and Concept Summary 7.4 16 It is not likely that the IRS would apply the step transaction doctrine to the proposed transactions of Square and Circle corporations In the planned divisive “Type D” split-off reorganization, those shareholders not interested in becoming owners of Square will receive shares in a new corporation that receives Circle’s assets not wanted by Square Therefore, not all of Circle’s original owners will become shareholders of Square However, the continuity of interest requirement is determined at the time of the “Type C” reorganization and transactions before and after the reorganization are not considered As for acquiring substantially all of Circle’s assets (a requirement for the “Type C” reorganization), the prior split-off is not considered as an integral step in the reorganization The IRS has indicated that it will not apply the step transaction doctrine to reorganizations even when they are part of a coordinated plan pp 7-13 to 7-16, 7-25, 7-26, and 7-36 to 7-38 17 The “Type A,” “Type C” acquisitive, “Type D,” and “Type G” reorganizations fall under the carryover rules of § 381 p 7-28 18 The testing period for § 382 is generally the three years prior to the carryover year Shareholders owning less than a 5% interest during the testing period are aggregated and treated as one shareholder for determining an owner shift Thus, transfers between shareholders who own less than 5% not influence the percentage-point ownership change computation p 7-30 19 The objective of the § 382 limitation is to restrict carryforward usage to the hypothetical future income stream from the loss corporation This future income stream is defined as the yield that would be received if the stock were sold, and the proceeds were invested in longterm tax-exempt securities pp 7-30 and 7-31 20 Hoffman, Raabe, Smith, and Maloney, CPAs 5191 Natorp Boulevard Mason, OH 45040 October 28, 2011 Ms Emily Arson, President 510 S Market Street Alton, MO 65606 Dear Emily: This letter is in response to your question regarding the application of the continuity of business enterprise doctrine to the pending reorganization of Emar Corporation with Mega Tires, Inc The continuity of business enterprise is to ensure that tax-free reorganization treatment is limited to the situation where Emar’s business continues This continuity can be met by either continuing the production of shoes or using a significant portion of Emar’s assets in the reorganized entity © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Corporations: Reorganizations 7-11 Based on the facts you have provided, it does not appear that Mega Tires is planning to continue Emar’s business as measured by either test You should suggest that Mega Tire not demolish Emar’s plant but rather incorporate this building into the new tire retail outlet Since the plant and land constitute 90 percent of Emar’s asset value, using the plant and land in the tire outlet would meet the requirement of using a significant portion Emar’s assets by the reorganized entity If you should desire further tax advice on this issue, please contact our firm at your earliest convenience Sincerely, Tiberius Tsu, CPA pp 7-26 and 7-27 21 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 However, the courts have considered both corporate and shareholder purposes in this regard, because it is sometimes impossible to distinguish between them The continuity of business enterprise test requires the acquiring corporation to either (1) continue the target corporation’s historic business (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 business test The step transaction doctrine prevents taxpayers from engaging in a series of transactions for the purpose of obtaining tax benefits that would not be allowed if the transaction was 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 pp 7-25 to 7-27 22 The § 382 limitation for business credits requires calculations beyond what is necessary for NOLs, because the § 382 limitation is defined for deductions To convert the § 382 limitation for business credits, the following steps are necessary Calculate regular tax liability after allowable losses Compute regular tax liability as if the full § 382 limitation is deductible Subtract the tax liability in step from the tax liability in step The remainder is the § 382 limitation applicable to excess credits pp 7-34 and 7-35 23 The negative earnings and profits (E & P) balance that is carried over in a reorganization is deemed as received by the successor corporation as of the change date The negative E & P carried over 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 prior 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 p 7-34 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-12 2012 Corporations Volume/Solutions Manual 24 In valuing Flower Corporation, Garden Corporation should consider the time value of money While the capital loss carryforward is a valuable “asset” of Flower, it may not all be used in the first year of the acquisition Based on the Federal long-term tax-exempt rate times the value of Flower’s assets, Garden can determine the amount of capital loss carryforward available for use each year and use this to figure the number of years needed to fully use it The yearly amount available, number of years to use the capital loss carryforward, along with Garden’s discount rate for investments are factors used in determining the present value of the capital loss carryforward The net present value of the capital loss carryover indicates the maximum amount Garden should pay for the capital loss tax benefit p 7-32 25 When the target corporation has a deficit in its earnings and profits (E & P) account, the acquiring corporation will have two E & P accounts The target’s deficit may be used only to offset E & P accumulated by the acquiring corporation after the change date Consequently, the acquiring corporation must maintain two separate E & P accounts after the change date: one account contains the acquiring corporation’s prior accumulated E & P as of the change date, and the other contains the deficit transferred and E & P accumulated since the change date The deficit in the post-transfer account may not be used to reduce accumulated E & P in the pre-transfer account p 7-34 PROBLEMS 26 27 a “Type D” spin-off reorganization Stock in Chow is not relinquished to receive Spitz stock pp 7-17 to 7-21 b Taxable transaction Does not qualify as a “Type G” reorganization The creditors did not receive voting stock representing at least 50% of the total fair value of the liabilities pp 7-22 and 7-23 c “Type A” reorganization Does not qualify as a “Type C” reorganization because substantially all of the assets are not acquired with voting stock pp 7-9, 7-10, and 7-13 to 7-15 d An acquisitive “Type D” reorganization because Griffon (acquiring) has transferred substantially all of its assets to Akita pp 7-16 and 7-17 e An acquisitive “Type D” reorganization because Anatol (acquiring) transfers all of its assets to York It obtains a controlling interest (at least 50% control) in York pp 7-16 and 7-17 f “Type B” reorganization As long as Canaan owns at least 80% after the restructuring, it is a "Type B." pp 7-10 to 7-13 Cole realizes a gain on the transaction of $800,000 ($900,000 stock + $300,000 land – $400,000 basis) Gain is recognized by Cole to the extent of the boot received ($300,000 land) which is less than the realized gain of $800,000 This transaction qualifies as a stock redemption under § 302(b)(2) since Cole’s ownership interest changes by more than 20% due to the receipt of land Great’s total stock value is $12 million ($900,000/7.5%) If Cole had received solely stock worth $1.2 million ($900,000 + $300,000), his interest in Great would have been 10% ($1.2 million/$12 million) A decline from 10% to 7.5% is more than a 20% reduction (2.5%/10% = 25%) Therefore, Cole’s $300,000 recognized gain is long-term capital gain pp 7-6, 7-7, and Example © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Corporations: Reorganizations 28 7-13 The reorganization meets the § 368 requirements for the “Type A” consolidation, and therefore it receives nontaxable exchange treatment Neither Tri nor Angle Corporation recognizes gain or loss because each distributes all of the Triangle stock and cash received in the transaction to their shareholders Gain, loss, and basis determination for Tyron and Anna can be determined using the fourcolumn formula presented in Concept Summary 7.1 Realized Gain/Loss Recognized Gain/Loss Postponed Gain/Loss Basis in Assets/Stock Tyron $400,000 −250,000 $150,000 $50,000 cash received $150,000 − 50,000 $100,000 $350,000 − 100,000 $250,000 Anna $200,000 −250,000 ($ 50,000) ($50,000) $170,000 + 50,000 $220,000 $ –0– Tyron recognizes a $50,000 gain due to the cash he received He has a carryover basis of $250,000 in his Triangle stock Anna may not recognize the loss on her stock Her basis in the Triangle stock is $220,000 ($250,000 basis – $30,000 cash received) (or computed as shown above) Since Tri and Angle recognized no gain or loss on the consolidation, Triangle has a carryover basis in the assets it receives This basis is equal to Tri’s basis of $280,000 plus Angle’s basis of $200,000, or $480,000 Triangle assumes liabilities from Tri ($250,000) and Angle ($50,000) for a total of $300,000 p 7-5, Example 8, and Concept Summary 7.1 29 Using the four-column formula presented in Concept Summary 7.1, Rama’s recognized gain is $100,000 Realized Gains $390,000* –225,000 $165,000 Recognized Gains Postponed Gain $100,000 cash received $65,000 Basis in Stock $290,000 – 65,000 $225,000 *60% [$950,000 (fair market value) – $300,000 (liabilities)] The $100,000 gain will be treated as a dividend to the extent of Rama’s proportionate share of E & P Thus, $84,000 is treated as a dividend ($140,000 × 60%) and the remaining $16,000 is capital gain pp 7-6, 7-7, Example 4, and Concept Summary 7.1 30 This restructuring qualifies as a “Type E” reorganization It is not immediately taxable to the shareholder to the extent that he received common or preferred stock for his prior stock To the extent of the lesser of the realized gain or $20,000 cash received, the shareholder has a taxable gain The bondholder has a gain equal to the $20,000 difference in face values of the bonds ($170,000 – $150,000) The fact that the bonds pay at different interest rates is not relevant to the taxation of the exchange pp 7-19 to 7-22 31 a The merger of Quail and Covey Corporations results in Frank receiving $20,000 in bonds ($100,000 × 20%) and $380,000 in Covey stock ($1.9 million × 20%) for his © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-14 2012 Corporations Volume/Solutions Manual Quail stock He has a realized gain of $200,000 ($400,000 – $200,000) and a recognized gain of $20,000 due to the bond Kasha receives the remaining $1,520,000 in Covey stock and $80,000 in bonds Since her basis in the Quail stock was $800,000, Kasha has an $800,000 realized gain ($1,600,000 – $800,000) and recognizes gain to the extent of the bond received, or $80,000 The character of Frank’s and Kasha’s gain is part dividend (to the extent of the $70,000 earnings and profits) and part capital gain Frank: $70,000 × 20% = $14,000 dividend and $6,000 capital gain ($20,000 – $14,000) Kasha: $70,000 × 80% = $56,000 dividend and $24,000 capital gain ($80,000 – $56,000) Frank’s basis in his Covey stock is $200,000 and Kasha’s basis in her Covey stock is $800,000 The basis of the bond for Frank is $20,000 and for Kasha is $80,000 b Since Quail distributes the Covey stock and bond it received in exchange for its assets, Quail recognizes no gain on the reorganization Covey’s basis in the Quail assets is a carryover basis of $1.5 million pp 7-3 to 7-9 32 Realized Gain Recognized Gain Postponed Basis in Stock Rosa $300,000 – 50,000 $250,000 $ –0– $250,000 $300,000 –250,000 $ 50,000 Arvid $700,000 –620,000 $ 80,000 $80,000 $ 80,000 – 80,000 $ –0– $600,000 –0– $600,000 a Rosa has a substituted basis from her stock in Pine to her stock in Lodgepole Arvid’s basis in the Lodgepole stock is its FMV, because all the realized gain is recognized (no gain is postponed) As shown above, Rosa’s basis in her Lodgepole stock is $50,000 and Arvid’s basis is $600,000 b As shown above, Rosa has no recognized gain on the exchange of her stock Arvid recognizes gain of $80,000, the lesser of the $80,000 realized gain or the value of the boot received ($100,000 in assets) Lodgepole recognizes a $40,000 gain on the assets transferred to Pine and distributed to Arvid ($100,000 – $60,000 basis) Pine recognizes no gain or loss on the reorganization pp 7-5, 7-6, Concept Summary 7.1, and Example 33 a The value of stock transferred from Lime to Lemon is $270,000, computed as follows ($900,000 value – $600,000 liabilities) × 90% = $270,000 stock b Lea receives stock and assets valued at $300,000 for her Lemon stock, computed as follows © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Corporations: Reorganizations 7-15 Lime stock $270,000 + assets $30,000 ($90,000 value – $60,000 liability) = $300,000 Realized Gain $300,000 –350,000 ($ 50,000) Recognized Gain/Loss $–0– Postponed Gain/Loss ($50,000) Basis in Stock $270,000 +50,000 $320,000 Lea has a realized loss of $50,000 that she cannot recognize Her basis in the Lime stock is $320,000 c Lemon has a realized loss of $90,000 (computed below) from the merger that cannot be recognized It has a $10,000 recognized gain on the distribution to Lea $900,000 value – $90,000 distribution of Lea = $810,000 value of assets transferred to Lime $980,000 basis − $80,000 distributed to Lea = $900,000 basis of assets transferred to Lime $810,000 − $900,000 = ($90,000) Distribution to Lea: $90,000 value – $80,000 basis = $10,000 gain Lime’s basis in Lemon’s assets is $900,000, a carryover basis from Lemon pp 7-4 to 7-9, Concept Summaries 7.1, 7.2, and Example 34 35 a This is a “Type F” reorganization p 7-22 b This is a taxable transaction It does not qualify as a “Type A” or a “Type C” because Tzu retains the investments and does not liquidate pp 7-9, 7-10, and 7-13 to 7-15 c This is a taxable transaction It does not qualify as a “Type B” because solely voting stock was not exchanged by Mastiff pp 7-10, 7-12, and 7-13 d This is a “Type D” split-up reorganization Rottweiler divides into two corporations then ceases to exist pp 7-17 to 7-21 e This is a “Type C” reorganization It does not qualify as a “Type A” because none of the liabilities were assumed by Low-Chen pp 7-9, 7-10, and 7-13 to 7-15 f This is a taxable transaction It does not qualify as a “Type A” because all of the liabilities are not assumed It does not qualify as a “Type C” because the cash causes the liabilities to be counted as boot The boot then is $410,000 [$5,000 cash + (90% × $450,000)] Consequently, only 59% of Spaniel’s assets were acquired with stock ($590,000/$1,000,000) 7-9, 7-10, and 7-13 to 7-15 The fact that ShibCo already owns 33% of Apso, Inc will not adversely affect its ability to meet the requirement of acquiring at least of the 80% stock (“Type B”) or 80% of the assets (“Type C”) Using a “Type B” reorganization, ShibCo can exchange $5.7 million in its voting stock with April for her 57% interest in Apso [57% × ($12 million – $2 million liabilities)] After the exchange, ShibCo will own 90% of Apso © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-16 2012 Corporations Volume/Solutions Manual Otter Corporation does not have to relinquish its $1 million of shares in Apso since it does not want to become a shareholder of ShibCo If Otter desires to receive cash or other property for its stock, ShibCo cannot quality for tax-free treatment under a “Type B” or “Type C” reorganization A “Type B” requires that the sole consideration given by ShibCo be voting stock For a “Type C”, at least 80% of the fair market value of the Apso’s assets must be obtained with voting stock When cash is used, the liabilities will also be considered other property The $1 million cash for Otter stock plus the $2 million liabilities is greater than 20% of Apso’s value ($12 million × 20% = $2.4 million) Thus, only a “Type B” reorganization with Otter retaining its Apso stock will provide taxdeferred treatment pp 7-10 and 7-12 to 7-15 36 Hoffman, Raabe, Smith, and Maloney, CPAs 5191 Natorp Boulevard Mason, OH 45040 January 21, 2011 Ms Xanna Jackson, President Birdie Corporation 460 Lakeview Drive Lake Oswego, OR 97034 Dear Ms Jackson: This letter is in response to your request for guidance regarding the merger of Birdie Corporation with Bogie Corporation through a tax-free corporate reorganization transaction The types of reorganizations considered for this restructuring are the “Type A” consolidation, the “Type C” merger, and the acquisitive “Type D.” Should you like to consider any other types of reorganizations, we would be happy to explain those options as well With a “Type A” consolidation, Birdie and Bogie would create a new corporation to receive all of the assets of each corporation Since it will be a new corporation, it takes a new name, such as Par Corporation A new name would be beneficial as Bogie has a tarnished name and reputation In exchange for all of Birdie’s and Bogie’s assets and liabilities, they would receive all of Par’s stock This new stock would be given to the shareholders of Birdie and Bogie in exchange for all of their stock in the old corporations After the exchange of stock, Birdie and Bogie corporations would liquidate and cease to exist The “Type C” reorganization would not be beneficial as Bogie, the larger corporation, would be the acquiring corporation and remain in existence after the merger Since Bogie has a tarnished name, the merged company would be saddled with Bogie’s unfavorable reputation An acquisitive “Type D” reorganization may be the best choice if the patent that Birdie developed for the new putter is not transferrable It will also be beneficial if Birdie has established loyal customers; the resulting merged company would retain the Birdie name and recognition This transaction entails Bogie transferring all of its assets and liabilities to Birdie in exchange for a controlling interest in Birdie’s stock This stock is transferred to Bogie’s shareholders in exchange for all of their stock Bogie then liquidates and ceases to exist Birdie would be the surviving corporation holding the assets of both Bogie and Birdie Should you have any further questions regarding these types of reorganizations, please contact us at your earliest convenience © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Corporations: Reorganizations 7-17 Sincerely, Jack Morris, CPA pp 7-9 to 7-11 and 7-13 to 7-19 37 PeekCo’s acquisition of the original shareholder’s stock is a taxable transaction The original shareholder recognizes $200,000 gain ($250,000 value – $50,000 basis) Since this transaction does not occur in close proximity to the “Type B” reorganization, the IRS may consider this stock acquisition as a separate transaction Thus, the acquisition of the stock for cash 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 the stock Even though three years separate the transactions, the IRS may view the acquisition of the original shareholder’s stock as part of an integrated plan and disallow the “Type B” restructuring treatment, because part of the stock was acquired with cash pp 7-10, 7-12, and 7-13 38 Hoffman, Raabe, Smith, and Maloney, CPAs 5191 Natorp Boulevard Mason, OH 45040 November 18, 2011 Ms Lisa Spring, WireCo CEO 3443 E Riverbank Road Walla Walla, WA 99362 Dear Ms Spring: This letter is in response to your question as to how to arrange the acquisition of WireCo by Frame Corporation and have it qualify for tax-favored treatment We believe that it is possible for the transaction to qualify as a “Type C” reorganization even with Frame not acquiring all of the assets of WireCo Our conclusions are based on the following facts WireCo has a net value of $700,000 ($1 million assets – $300,000 liabilities) Frame is willing to acquire the plant and equipment with a net value of $650,000 ($850,000 value – $200,000 liabilities) The net value of the headquarters is $50,000 ($150,000 value – $100,000 mortgage) A “Type C” reorganization requires that “substantially all” of the assets of WireCo be transferred to Frame in exchange for stock and other property While there is no definition of “substantially all” in the Internal Revenue Code, the IRS requires at least 90% of the asset’s net value or 70% of the gross value to be transferred The suggested transaction will meet these guidelines because the plant and equipment’s $650,000 net value is more than 90% of the $700,000 total net value ($650,000/$700,000 = 93%) Further, the $850,000 gross value of these assets is greater than 70% of the $1 million total gross value Therefore, if Frame will exchange its voting stock for the plant and equipment, the headquarters is distributed to the shareholders, and WireCo then liquidates, the transactions will qualify as a “Type C’ reorganization If I can be of further service regarding this transaction, please don’t hesitate to contact me Sincerely, Glenn Allen, CPA pp 7-13 to 7-16 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-18 39 2012 Corporations Volume/Solutions Manual The division of Shelty could be structured as a split-up “Type D” reorganization It cannot be a spin-off or a split-off because Shelty must cease to exist to meet the desires of the owners Shelty would create three new corporations and transfer each of the divisions (dog food, retail, and healthy treats) to one of the new corporations in exchange for all of its stock Jane, Claire, and Brian would exchange their Shelty stock for the stock of one of the newly created corporations With no assets left, Shelty would liquidate and cease to exist pp 7-17 to 7-19, Example 23, and Figure 7.6 40 Hoffman, Raabe, Smith, and Maloney, CPAs 5191 Natorp Boulevard Mason, OH 45040 February 17, 2011 President Robin Fernandez Stapelia Corporation 2500 Cactus Road Dodge City, Kansas 67801 Dear Robin: This is a letter in response to your question regarding the division of Stapelia Corporation into three separate corporations Tax-favored treatment is available for this restructuring under the corporate reorganization rules This means that any gain recognized for tax purposes is deferred to later years A divisive “Type D” reorganization would allow Stapelia to create two new corporations in the states other than Kansas in which the landfills are located In exchange for the landfills, each new corporation would transfer all of its stock to Stapelia At this point Stapelia has a choice of how to distribute this stock to its shareholders It can exchange the shares in the new corporations for a portion of the Stapelia stock (called a split-off) or merely distribute the new stock and not require any Stapelia stock to be returned (called a spin-off) The important factor is that the stock of the new corporations ends up in the hands of the Stapelia shareholders If I can be of further service regarding this transaction, please don’t hesitate to contact me Sincerely, Claire Cote, CPA pp 7-17 to 7-19 and Figure 7.5 41 Komondor can use a “Type E” reorganization to accomplish its restructuring An exchange of bonds for 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 If the exchange of common stock for preferred stock occurs before the acquisition by SheenCo, Tyee will receive 250 shares of preferred stock in exchange for 1,000 shares of common The purchase of common stock by SheenCo is not a taxable event pp 7-5, 7-18, and 7-19 42 The transfer of Titan Arum to Rose qualifies as a “Type F” reorganization This is merely a change of name and location If this 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 p 7-22 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Corporations: Reorganizations 7-19 43 Neither TinCo or ZinCo recognize gain from the “Type G” reorganization TinCo has a cancellation of debt (COD) of $450,000 ($1 million debt – $550,000 asset value), which must first offset tax benefits transferred to ZinCo and lastly reduces the basis of depreciable assets However, ZinCo may elect to offset the depreciable assets first Accordingly, the basis in the depreciable assets is reduced to zero, and the remaining COD of $50,000 ($450,000 – $400,000 asset basis) reduces the NOL tax benefit to $150,000 ($200,000 – $50,000) pp 7-22, 7-23, and Example 29 44 Some of the tax issues to consider are listed below This is not an exhaustive list of possible issues • Was there a sound business reason for acquiring the assets of the wine store? • Was the wine store a corporation or a sole proprietorship? • Would the acquisition of the wine store qualify as a “Type A” or “Type C” reorganization? • After the reorganization, would the continuity of business enterprise test be met? • Will the dropping of the wine business into a separate corporation qualify as a “Type D” split-off? • Does the creation of the separate corporation for the wine business have a sound business purpose for Norwich or was it strictly a shareholder purpose to get rid of Joe? pp 7-10, 7-13 to 7-15, 7-17, 7-18, 7-25, and 7-26 45 Some tax issues to consider are listed below This should not be considered an exhaustive list of possible issues • Does Fierce have a sound business purpose for this merger? • Will the built-in capital losses be available for use by Fierce? • Could the IRS disallow the carryovers by applying Đ 269? If the capital losses are available, will they be restricted by the § 382 limitation? • Does Fierce meet the continuity of business enterprise requirement for tax-free reorganization treatment? • Will the dissenting shareholders prevent Float from obtaining a majority approval for the merger? • Fierce should evaluate the existence of Float having unknown contingent liabilities After the merger, these liabilities would be the responsibility of Aqua • Is the continuity of ownership interest requirement for Float shareholders met? • What is the amount and character of the gain that must be recognized by the shareholders receiving cash? • Will this qualify as a “Type A” reorganization? pp 7-5, 7-9, 7-10, 7-25 to 7-30, 7-36, 7-38, and Figure 7.7 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-20 2012 Corporations Volume/Solutions Manual 46 The ability to utilize attributes from an acquired corporation requires that the acquired 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 p 7-27 47 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 The amount available is determined as follows: 500,000 × 33% = 165,000 Student answers may vary from $163,934 to $165,000 depending how 120/365 (120/366) was rounded to a percentage Next year, Collie can take the remaining NOL because there is no § 382 limitation pp 7-28 to 7-33 48 The amount of Springer NOL that Spaniel can utilize in the current year is limited by § 382 The amount available is determined as follows: $2 million × 4% = $80,000 pp 7- 27 to 7-31 49 This exchange qualifies as a “Type E” reorganization Jack will therefore be required in the year of exchange to recognize a $30,000 capital gain due to boot ($180,000 – $150,000) The interest on the $150,000 bond is $9,000 ($150,000 × 6%) and on the $180,000 bond is $7,200 ($180,000 × 4%) Using a 6% discount factor the values of the two bonds are as follows Option Amount Tax Rate Face Value Interest $150,000 9,000 25% Face value Interest Exchange $180,000 7,200 30,000 × 25% 15% Net of Tax PV Factor Net Present Value = = $150,000 × 6,750 × 558 7.360 = = $ 83,700 49,680 $133,380 = = = $180,000 × 558 5,400 × 7.360 4,500 Tax = = = $100,440 39,744 (4,500)* $135,684 *Amount lost to tax due on boot Since the net present value of the $180,000 bond is higher, this exchange is beneficial to Jack p 7-19 50 The maximum value of State Corporation’s NOL to be used by Global Corporation is $118,932 Since the § 382 limitation applies to this transaction (shareholders have an 80 percentage point change in ownership), the computation of the value of the NOL is as follows • Net value of States assets: $800,000 Section 382 limitation: $800,000 ì 5% = $40,000 • Number of years to fully utilize the NOL: $560,000/$40,000 = 14 years • Yearly tax benefit of the NOL: $40,000 × 34% tax rate = $13,600 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Corporations: Reorganizations • 7-21 Present value of annuity: $13,600 × 8.745 (discount factor for 7% for 14 years) = $118,932 pp 7-28 to 7-33 and Example 36 51 The maximum amount of stock that Taipa Corporation should offer for Kers Corporation’s assets should be worth no more than $626,812 This would equate to 6.27% of Taipa’s stock ($626,812/$10 million) Thus, the § 382 limitation applies to the NOL because Kers Corporation shareholders have a greater than 50 percentage point change in their ownership (100% to 6.27%) The computation of the value of Kers is as follows • Net value of Kers assets: $780,000 value – $230,000 liabilities = $550,000 • Section 382 limitation: $550,000 ì 9% = $49,500 Number of years to fully utilize the NOL: $346,500/$49,500 = years • Yearly tax benefit of the NOL: $49,500 × 34% tax rate = $16,830 Present value of annuity: $16,830 ì 4.564 (discount factor for 12% for years) = $76,812 • Value of Kers: $550,000 + $76,812 = $626,812 pp 7-30 and 7-32 52 The § 382 limitation applies because Tulip, Inc shareholders have an equity shift, from owning 100% of Tulip to 25% of Tree Thus, the usage of the carryovers is limited in the current year and is computed as follows • Net value of Tulip’s assets: $2,000,000 • Section 382 limitation: $2,000,000 ì 6% = 120,000 Capital loss carryover allowable: $60,000 to the extent of capital gains for the year • Business credit allowable: • • Calculate tax liability after capital loss: $600,000 – $60,000 = $540,000 × 34% = $183,600 • Regular tax liability if full § 382 limitation available: $600,000 – $120,000 = $480,000 × 34% = $163,200 • Subtract: $183,600 – $163,200 = $20,400 Tree may use $60,000 of the capital loss carryover and $20,400 of the business credits Tree will have a $20,000 capital loss ($80,000 – $60,000) and a $14,600 business credit carryover ($35,000 – $20,400) to next year pp 7-30, 7-32, 7-34, and Examples 41 and 42 53 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 business credits to VizslaCo is $45,553 computed as follows Section 382 limitation: $500,000 × 5% = $25,000 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-22 2012 Corporations Volume/Solutions Manual Converting the § 382 limitation into a credit limitation: $25,000 × 35% = $8,750 Number of years required to use the credit: $61,250 ÷ $8,750 = years NPV: $8,750 × 5.206 factor (7 years @ 8%) = $45,553 pp 7-30 and 7-32 54 The contemplated reorganization could be either a “Type A” or a “Type C” depending on whether state merger laws are met The maximum amount of Shepherd stock that the RentCo shareholders should expect is 33,311 computed as follows Net yearly cash flow: $50,000 × (1 – 34%) = $33,000 NPV of yearly cash flow: $33,000 × 8.514 factor (20 years @ 10%) = $280,962 Net cash flow from sale of land: $400,000 – $150,000 = $250,000 × 15% (capital gains rate) = $37,500; $400,000 – $37,500 = $362,500 NPV of cash flow from sale of land: $350,000 × 149 (20 years @ 10%) = $54,013 NPV of the RentCo stock: $280,962 + $54,013 = $334,975 $334,975 ÷ $10 per share = 33,498 shares of Shepherd stock pp 7-32 and 7-36 55 Issues that should be considered include the following • Why Henri and Simone think Manx cannot expand further in the pet product industry? • Why does LaPerm lack strategic marketing and have ineffective management? • What is the net present value to Manx of the LaPerm’s NOL and business credit carryovers? That is, how much would Manx be willing to pay for these tax attributes? • Does Manx have a sound business purpose for the acquisition of LaPerm? • Would the acquisition meet the continuity of interest doctrine? • Would the acquisition meet the continuity of business requirement? • Is Manx willing to accept all of LaPerm’s liabilities, and does LaPerm have contingent liabilities? • Will Marcel agree to a tax-free reorganization and receive stock in Manx or will Marcel prefer to receive cash? pp 7-25 to 7-33 The answers to the Research Problems are incorporated into the Instructor’s Guide with Lecture Notes to accompany the 2012 Annual Edition of SOUTH-WESTERN FEDERAL TAXATION: CORPORATIONS, PARTNERSHIPS, ESTATES & TRUSTS © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part ... test bank, visit http://downloadslide.blogspot.com 7-12 2012 Corporations Volume/Solutions Manual 24 In valuing Flower Corporation, Garden Corporation should consider the time value of money While... http://downloadslide.blogspot.com 7-20 2012 Corporations Volume/Solutions Manual 46 The ability to utilize attributes from an acquired corporation requires that the acquired merge with the acquiring corporation and... 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