CHAPTER 1?UNDERSTANDING AND WORKING WITH THE FEDERAL TAX

679. CHAPTER
7—CORPORATIONS: REORGANIZATIONS Question MA #1-10
Match the following items with the
statements below. Terms may be used more than once.Carries over to new corporations
in a split-up reorganization.A 50 percentage-point change in ownership that
occurs because of tax-free reorganization.Tax avoidance is not enough;
transaction must have a corporate economic consequence.Requires the computation
of a deduction equivalent when determining its limitation.Rate used to
determine the § 382 limitation.When the transactions are so interdependent that
the accomplishment of one would be fruitless without the completion of the
series.Shareholders recognize gain to the extent the restructuring qualifies as
a redemption.Any asset other than stock or securities received by the target
shareholders.Requires at least a 40% carryover ownership by target
shareholders.Can be treated as boot if cash as well as voting stock is the consideration
used by the acquiring corporation in a “Type C” reorganization.Earnings and
profits Equity structure shift Sound business purpose Business credits Federal
long-term tax-exempt rate Step transaction Capital gain Boot Continuity of
interest Liability assumption Continuity of business enterprise Dividend
Discount rate Ordinary gain Owner shift Ownership change Section 382 limitation

1. Carries over to new corporations
in a split-up reorganization.
2. A 50 percentage-point change
in ownership that occurs because of tax-free reorganization.
3. Tax avoidance is not
enough; transaction must have a corporate economic consequence.
4. Requires the computation of
a deduction equivalent when determining its limitation.
5. Rate used to determine the
§ 382 limitation.
6. When the transactions are
so interdependent that the accomplishment of one would be fruitless without the
completion of the series.
7. Shareholders recognize gain
to the extent the restructuring qualifies as a redemption.
8. Any asset other than stock
or securities received by the target shareholders.
9. Requires at least a 40%
carryover ownership by target shareholders.
10. Can be treated as boot if
cash as well as voting stock is the consideration used by the acquiring
corporation in a “Type C” reorganization.

a. Earnings and profits
b. Equity structure shift
c. Sound business purpose
d. Business credits
e. Federal long-term
tax-exempt rate
f. Step transaction
g. Capital gain
h. Boot
i. Continuity of interest
j. Liability assumption
k. Continuity of business
enterprise
l. Dividend
m. Discount rate
n. Ordinary gain
o. Owner shift
p. Ownership change
q. Section 382 limitation

680. CHAPTER
7—CORPORATIONS: REORGANIZATIONS Question MA #11-20
What type of reorganization is affected
in each of the following independent transactions?Red and Blue Corporations
are merged under state law into a new corporation, White Corporation. The White
voting common (70% of value) and nonvoting preferred stocks (30% of value) are
distributed to the Red and Blue shareholders in exchange for all of their
voting common and nonvoting preferred stock. Red and Blue then liquidate.In
exchange for all of Yellow Corporation’s voting common and nonvoting preferred
stock, Green Corporation transfers 40% of its voting common and nonvoting
preferred stock to Yellow. The Green stock is distributed to the Yellow
shareholders and then Yellow liquidates. Yellow becomes a subsidiary of
Green.Apple Corporation transfers voting stock to Banana Corporation in
exchange for substantially all of its assets (value $600,000), $15,000 cash,
and assumes $100,000 of Banana’s liabilities. Banana distributes the Apple
stock and cash to its shareholders in exchange for their Banana stock. Banana
then liquidates.Purple Corporation wants to combine with Pink Corporation.
Purple transfers substantially all of its assets to Pink for 82% of Pink’s
voting shares. Purple distributes the Pink stock and its remaining assets to its
shareholders in exchange for their Purple stock. Purple then liquidates.
Purple’s shareholders are in control of Pink Corporation.Black Corporation has
been engaged in manufacturing toys for 8 years and tools for 3 years. Black
creates Brown Corporation and transfers the toy division to it in exchange for
all of Brown’s common voting stock. Black then distributes the Brown stock to
its shareholders.Bark and Wood Corporations are created by Tree Corporation.
Tree transfers its calculator business to Bark in exchange for all of Bark’s
stock. Tree distributes the Bark stock to its shareholders in exchange for 60%
of their Tree stock. Next, Tree transfers its slide ruler division to Wood for
all of its stock. Tree distributes the Wood stock to its shareholders in
exchange for their remaining Tree stock. Tree then liquidates. Tree had
operated both lines of business for 35 years.Flower Corporation has been in
existence for 20 years and has always been owned by Iris and Lilly. They each
also own $50,000 of Flower’s bonds. All of Lilly’s bonds are called in and
exchanged for $50,000 of preferred stock. Iris does not participation in the
transaction.Feather currently has four divisions that have been in existence
for 15 years. Feather creates three new corporations and transfers one division
to each newly formed corporations in exchange for all of the stock of these new
corporations. Feather retains one division. Feather then distributes the stock
in the three new corporations to its shareholders in exchange for 75% of their
stock in Feather.Snow Corporation desires to change to an S Corporation. On
March 1 of the current year, it files all necessary forms with the IRS. The
change becomes retroactive to January 1 of the current year.Loser Corporation
is considering filing bankruptcy under Chapter 11. Loser transfers all of its
assets to NewStart Corporation in exchange for NewStart’s stock and $400,000 in
cash. Loser uses the cash to pay off most of its liabilities and then
distributes the balance to NewStart shareholders and any remaining debtors.
After the transaction, Loser liquidates.“A” reorganization, consolidation
Taxable transaction “C” reorganization Acquisitive “D” reorganization Taxable
transaction “D” reorganization, split-up “E” reorganization “D” reorganization,
split-off “F” reorganization Taxable transaction “A” reorganization, merger “B”
reorganization “D” reorganization, spin-off “G” reorganization

1. Red and Blue Corporations are
merged under state law into a new corporation, White Corporation. The White
voting common (70% of value) and nonvoting preferred stocks (30% of value) are
distributed to the Red and Blue shareholders in exchange for all of their
voting common and nonvoting preferred stock. Red and Blue then liquidate.
2. In exchange for all of
Yellow Corporation’s voting common and nonvoting preferred stock, Green
Corporation transfers 40% of its voting common and nonvoting preferred stock to
Yellow. The Green stock is distributed to the Yellow shareholders and then
Yellow liquidates. Yellow becomes a subsidiary of Green.
3. Apple Corporation transfers
voting stock to Banana Corporation in exchange for substantially all of its
assets (value $600,000), $15,000 cash, and assumes $100,000 of Banana’s
liabilities. Banana distributes the Apple stock and cash to its shareholders in
exchange for their Banana stock. Banana then liquidates.
4. Purple Corporation wants to
combine with Pink Corporation. Purple transfers substantially all of its assets
to Pink for 82% of Pink’s voting shares. Purple distributes the Pink stock and
its remaining assets to its shareholders in exchange for their Purple stock.
Purple then liquidates. Purple’s shareholders are in control of Pink
Corporation.
5. Black Corporation has been
engaged in manufacturing toys for 8 years and tools for 3 years. Black creates
Brown Corporation and transfers the toy division to it in exchange for all of
Brown’s common voting stock. Black then distributes the Brown stock to its
shareholders.
6. Bark and Wood Corporations
are created by Tree Corporation. Tree transfers its calculator business to Bark
in exchange for all of Bark’s stock. Tree distributes the Bark stock to its
shareholders in exchange for 60% of their Tree stock. Next, Tree transfers its
slide ruler division to Wood for all of its stock. Tree distributes the Wood
stock to its shareholders in exchange for their remaining Tree stock. Tree then
liquidates. Tree had operated both lines of business for 35 years.
7. Flower Corporation has been
in existence for 20 years and has always been owned by Iris and Lilly. They
each also own $50,000 of Flower’s bonds. All of Lilly’s bonds are called in and
exchanged for $50,000 of preferred stock. Iris does not participation in the
transaction.
8. Feather currently has four
divisions that have been in existence for 15 years. Feather creates three new
corporations and transfers one division to each newly formed corporations in
exchange for all of the stock of these new corporations. Feather retains one
division. Feather then distributes the stock in the three new corporations to
its shareholders in exchange for 75% of their stock in Feather.
9. Snow Corporation desires to
change to an S Corporation. On March 1 of the current year, it files all
necessary forms with the IRS. The change becomes retroactive to January 1 of
the current year.
10. Loser Corporation is
considering filing bankruptcy under Chapter 11. Loser transfers all of its
assets to NewStart Corporation in exchange for NewStart’s stock and $400,000 in
cash. Loser uses the cash to pay off most of its liabilities and then
distributes the balance to NewStart shareholders and any remaining debtors.
After the transaction, Loser liquidates.

a. “A” reorganization, consolidation
b. Taxable transaction
c. “C” reorganization
d. Acquisitive “D”
reorganization
e. Taxable transaction
f. “D” reorganization,
split-up
g. “E” reorganization
h. “D” reorganization,
split-off
i. “F” reorganization
j. Taxable transaction
k. “A” reorganization, merger
l. “B” reorganization
m. “D” reorganization,
spin-off
n. “G” reorganization

681. CHAPTER
7—CORPORATIONS: REORGANIZATIONS Question CO #1
One of the tenets of the U.S. tax policy is to ____________________ business
development. As an extension of this concept, corporate restructurings are
given ____________________ treatment.

682. CHAPTER
7—CORPORATIONS: REORGANIZATIONS Question CO #2
To qualify as a tax-free reorganization, a corporate restructuring must meet
not only the specific requirements of § 368 but also four general requirements.
These four requirements are: ____________________, ____________________,
____________________, and _________________________. In addition, the
____________________ doctrine should not apply to the reorganization.

683. CHAPTER
7—CORPORATIONS: REORGANIZATIONS Question CO #3
The tax treatment of the parties involved in a tax-free reorganization almost
exactly parallels the treatment under the ____________________ provisions. When
boot is received, ____________________ may be recognized but ____________________
is not recognized.

684. CHAPTER
7—CORPORATIONS: REORGANIZATIONS Question CO #4
If stockholders of the corporations involved in a tax-free reorganization
receive ____________________ in addition to stock, they may recognize gain. The
character of the gain is either ____________________ or ____________________.

685. CHAPTER
7—CORPORATIONS: REORGANIZATIONS Question CO #5
A “Type A” reorganization that is the union of two or more corporations with
one retaining its existence is called a ____________________. A
____________________ is when a new corporation is created to take the place of
two or more corporations.

686. CHAPTER
7—CORPORATIONS: REORGANIZATIONS Question CO #6
Since the ____________________ reorganization precludes the use of boot, gain
is not recognized in this type of reorganization. In this reorganization, a
____________________ relationship between the acquiring and target corporations
is created.

687. CHAPTER
7—CORPORATIONS: REORGANIZATIONS Question CO #7
The “Type C” reorganization requires that at least ____________________ percent
of the value of the target’s assets be acquired with ____________________
stock.

688. CHAPTER 7—CORPORATIONS:
REORGANIZATIONS Question CO #8
The acquisitive “Type D” reorganization differs from other restructurings in
that the entity that transfers its assets is the ____________________
corporation rather than the ____________________ corporation.