Question 1

Individual shareholders would prefer to have a gain on a corporate reorganization treated as a capital gain rather than as a dividend, because they can reduce the amount taxable by their basis in the stock involved.

Accepted Answer

Capital gains are typically taxed at a lower rate than dividends and allow shareholders to reduce the taxable amount by their basis in the stock, potentially resulting in a lower tax liability.

Question 2

The Federal income tax treatment of a corporate restructuring is an extension of allowing entities to form without taxation.

Accepted Answer

The Federal income tax treatment of corporate restructuring often allows for tax-neutral transactions under specific conditions, reflecting the principle of not imposing tax on the formation or reorganization of business entities, provided certain criteria are met to ensure the continuity of business and ownership.

Question 3

Since debt holders do not own stock, they do not fall under the corporate reorganization rules.

Accepted Answer

Debt holders can be affected by corporate reorganization rules since these rules can dictate the terms of debt restructuring, priority of claims, and potential conversion of debt into equity, impacting their rights and recoveries.

Question 4

A shareholder bought 10,000 shares of Coral Corporation for $50,000 several years ago. When the stock is valued at $90,000, Coral redeems the shares in exchange for 5,000 shares of Blush Corporation stock and a $10,000 Blush bond. This transaction meets the requirements of § 368. Which of the following statements is false regarding this transaction?
A) The shareholder has a realized gain of $40,000.
B) The shareholder has a postponed gain of $30,000.
C) The shareholder has a basis in the Blush stock of $60,000.
D) The shareholder has a recognized gain of $10,000.

Accepted Answer

The shareholder's basis in the Blush stock is the original basis of the Coral stock ($50,000) minus the recognized gain ($10,000), resulting in a basis of $40,000, not $60,000.

Question 5

The amount of gain recognized by a shareholder in a corporate reorganization is based on the shareholder's proportionate share of E & P.

Accepted Answer

The amount of gain recognized by a shareholder in a corporate reorganization is based on the difference between the fair market value of the property received and the shareholder's adjusted basis in the stock exchanged. Earnings and Profits (E & P) affect dividend distributions, not the recognition of gain in reorganizations.

Question 6

For a corporate restructuring to qualify as a tax-free reorganization, the step transaction doctrine must apply.

Accepted Answer

The step transaction doctrine is a legal principle used to analyze a series of formally separate steps in a transaction to determine whether they should be treated as a single integrated event for tax purposes. A corporate restructuring can qualify as a tax-free reorganization without the application of the step transaction doctrine; it must meet specific requirements outlined in the Internal Revenue Code, such as continuity of interest, business purpose, and continuity of business enterprise, among others. The step transaction doctrine is not a requirement for a reorganization to be tax-free but rather a tool that might be used to analyze the transaction.

Question 7

The gains that shareholders recognize as a part of a corporate reorganization may be treated a dividend to the extent of the corporation's E & P.

Accepted Answer

In a corporate reorganization, the gains recognized by shareholders can indeed be treated as a dividend to the extent of the corporation's Earnings and Profits (E & P), reflecting the distribution of accumulated earnings.

Question 8

A tax-free corporate reorganization can be utilized to:
A) Transfer assets in a bankruptcy.
B) Resolve management issues by dividing a company into three new companies.
C) Combine four corporations into one.
D) Create a subsidiary.
E) All the above results are possible.

Accepted Answer

Tax-free corporate reorganizations can be utilized for various purposes, including transferring assets in a bankruptcy, resolving management issues by dividing a company into new entities, combining multiple corporations into one, and creating subsidiaries. These actions can be structured to meet the specific requirements of the Internal Revenue Code to ensure the reorganization is conducted on a tax-free basis.

Question 9

The tax treatment of reorganizations almost parallels the Federal income tax treatment for like-kind exchanges.

Accepted Answer

Both reorganizations and like-kind exchanges under U.S. Federal income tax law are designed to be non-recognition events, meaning that the tax on the gain is deferred if the transactions meet certain criteria, making their tax treatment similar.

Question 10

For corporate restructurings, meeting the § 368 reorganization "Type" requirements is all that needs to be considered when planning the structure of the transaction.

Accepted Answer

Meeting the § 368 reorganization "Type" requirements is a critical aspect of planning a corporate restructuring, but it is not the only consideration. Tax implications, regulatory compliance, business objectives, and other legal requirements also play significant roles in structuring the transaction.

Question 11

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 will recognize gains but not losses.
E) None is true.

Accepted Answer

In tax-free corporate reorganizations, the goal is to allow restructuring without immediate tax consequences, so gains or losses are generally not recognized by corporations or shareholders.

Question 12

Target shareholders recognize gain or loss when they receive assets (boot) as well as stock in the acquiring corporation in a transaction meeting the § 368 requirements.

Accepted Answer

In a transaction that meets the § 368 requirements (a type of reorganization under the Internal Revenue Code), target shareholders generally do not recognize gain or loss when they receive a combination of stock in the acquiring corporation and other property or cash (often referred to as "boot") unless the boot received is sufficient to trigger gain recognition. The primary focus is on the continuity of interest and the nature of the transaction rather than the receipt of boot per se.

Question 13

All 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 these are true.

Accepted Answer

C) The transfers of stock to and from shareholders do not qualify for like-kind exchange treatment under Section 1031, as like-kind exchanges are specific to real property as of the Tax Cuts and Jobs Act of 2017. Corporate reorganizations have their own set of rules under the Internal Revenue Code, distinct from like-kind exchanges.

Question 14

Obtaining a favorable letter ruling from the IRS can ensure the desired tax treatment for parties contemplating a corporate reorganization.

Accepted Answer

A favorable letter ruling from the IRS provides assurance that the IRS will not challenge the tax treatment of a proposed transaction, including corporate reorganizations, based on the facts and circumstances presented in the ruling request.

Question 15

Which of the following statements is true?
A) The dollar amounts involved in reorganizations are generally substantial; thus, it is important that the financial and tax treatment of the reorganization be consistent.
B) A letter ruling indicates the income tax treatment the IRS will apply to the proposed corporate restructuring transaction.
C) Careful planning can ensure that all gains recognized by individual shareholders receive beneficial dividend treatment.
D) None is true.

Accepted Answer

The answer of Which of the following statements is true?
A)...

Question 16

Compare the sale of a corporation's assets with a sale of its stock from the perspective of the seller.

Accepted Answer

The answer of Compare the sale of a corporation's assets...

Question 17

The basis for the acquiring corporation in the target's assets is increased by any gain recognized by the target.

Accepted Answer

In a taxable acquisition, the acquiring corporation's basis in the target's assets is increased by the amount of gain recognized by the target, reflecting the fair market value of the assets.

Question 18

On March 15, 2018, Blue Corporation purchased 10% of the Gold Corporation stock outstanding. Blue Corporation purchased an additional 40% of the stock in Gold on October 24, 2018, and an additional 25% on April 4, 2019. On July 25, 2019, Blue Corporation purchased the remaining 25% of Gold Corporation stock outstanding.
a. For purposes of the § 338 election, on what date does a qualified stock purchase occur?
b. What is the due date for making the § 338 election?

Accepted Answer

The answer of On March 15, 2018, Blue Corporation purchased...

Question 19

Bobcat Corporation redeems all of Zed's 4,000 shares and distributes to him 2,000 shares of Van Corporation stock plus $50,000 cash. Zed'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 of Van are $75,000. How does Zed treat this transaction for tax purposes?
A) Zed recognizes no gain in this reorganization.
B) Zed reports a $50,000 recognized dividend.
C) Zed reports a $50,000 recognized capital gain.
D) Zed reports a $40,000 recognized dividend and a $10,000 capital gain.

Accepted Answer

The answer of Bobcat Corporation redeems all of Zed's 4,000...

Question 20

In corporate reorganizations, if an acquiring corporation is using property other than stock as consideration, it may recognize gains but not losses on the transaction.

Accepted Answer

In corporate reorganizations, when an acquiring corporation uses property other than its own stock as consideration, it may indeed recognize gains if the fair market value of the property exceeds its adjusted basis. However, losses are generally not recognized in these transactions due to the nonrecognition rules designed to prevent tax avoidance through the selective recognition of losses.

Quiz 20: Corporations: Distributions in Complete Liquidation and an Overview of Reorganizations