CHAPTER 7—CORPORATE REORGANIZATIONS Key
1. It is sufficient to meet just one of the acceptable reorganizational patterns to obtain non-recognition
treatment.
2. The continuity-of-interest doctrine is designed to prevent sales from being treated as nontaxable
reorganizations.
3. To meet the “continuity of business enterprise” requirement, the acquiring corporation must continue the
target corporation’s historic business.
4. The combination of two corporations, pursuant to state law, to form a third corporation, is called a merger.
5. In a “B” reorganization, only voting stock of the acquiring corporation (or its parent) may be used to acquire
the target corporation.
6. A nontaxable triangular “B” reorganization can be achieved provided that solely voting stock of the acquiring
corporation’s parent corporation is used.
7. In a “C” reorganization, the result is a parent-subsidiary group.
8. Following the transfer of assets, the target company must liquidate in order for there to be a valid “C”
reorganization.
9. As part of a “C” reorganization, the target corporation must liquidate by distributing solely the stock and
securities of the acquiring corporation.
10. In a “C” reorganization, the courts have held that as long as the target corporation transfers substantially all
the assets to the acquiring corporation, target is permitted to keep assets that formerly had been essential to the
11. In a “C” reorganization, the assumption of target corporation’s liabilities by the acquiring corporation can be
ignored as long as boot in the form of cash or property does not exceed 20 percent of the fair market value of
the assets transferred.
12. It is possible for a reorganization transaction to meet the definition of both a “C” and the acquisitive “D”
reorganization.
13. A “D” reorganization can be either acquisitive or divisive.
14. Both “E” and “F” reorganizations are examples of reorganizations that involve only one corporation.
15. In order for a reorganization to be given non-recognition treatment, a plan of reorganization must be
adopted by at least one of the corporations involved in the transaction.
16. The shareholders of target and acquiring corporations engaged in nontaxable reorganizations are not parties
to the reorganization themselves, and may be subject to taxation.
17. The basis of the property transferred to the acquiring corporation is equal to the target corporation’s basis
plus any gain recognized by the target on the transfer.
18. Target Corporation generally must recognize gain or loss on receipt of stock, securities, and boot in an
acquisitive reorganization.
19. In a “C” or acquisitive “D” reorganization, the target corporation is required to recognize gain or loss on all
stock, securities, boot, or assets distributed to shareholders.
20. As long as the business of the target corporation is continued, the full amount of target corporation’s NOL
will survive in a reorganization.
21. P Corporation owns 100 percent of R Corporation. P operates a car dealership while R owns a chain of
quick-lube franchises. P established R 10 years ago but now finds it advisable to narrow its business focus. P
distributes all of its shares in R to its shareholders. The distribution is a taxable dividend distribution.
22. A split-off occurs when the parent corporation distributes the stock of a subsidiary to stockholders who do
not surrender any of their stock in the parent for stock in the subsidiary.
23. A split-up occurs when a parent corporation distributes the stock of two or more subsidiary corporations to
its shareholders in exchange for all of their stock in the parent as part of a complete liquidation of the parent.
24. L Corporation transferred $100,000 cash and bonds to a subsidiary in exchange for all of its stock, which it
distributed to its shareholders. The distribution is a nontaxable spin-off.
25. R received $1,000 cash in addition to stock in a transaction that meets the requirements of § 355. If the
transaction is a spin-off, R’s basis for his stock will increase by $1,000.
26. A distributing corporation distributes solely stock or securities of a controlled corporation. Gain or loss is
recognized by the distributing corporation.
27. Which one of the following statements concerning the requirements for a nontaxable reorganization is
false?
28. Which one of the following statements concerning the “continuity of interest” doctrine is true?
29. Which one of the following statements concerning the “continuity of business enterprise” doctrine is true?
30. Control of the target corporation must be obtained in all reorganizations in order to avoid recognizing
income. In reorganizations other than a type “D,” what constitutes “control” following a reorganization?
31. Generally, which one of the following is not a valid “A” reorganization?
32. Which one of the following statements is not a step in an “A” reorganization by statutory merger?
33. Which one of the following statements about “B” reorganizations is true?
34. Which one of the following statements concerning a reverse triangular merger is false?
35. Which one of the following statements about a “B” reorganization is true?
36. Which one of the following statements concerning a creeping “B” reorganization is true?
37. X Corporation, which desires to obtain operations of Z Corporation, reorganizes by issuing voting stock
equal to 35 percent of its total outstanding stock in exchange for all the assets of Z Corporation. Z Corporation
then liquidates, distributing stock of X Corporation to its shareholders in exchange for their stock in Z. This
would be referred to as
38. Which one of the following statements concerning a “C” reorganization is true?
39. Which one of the following situations does not qualify as a “C” reorganization?
40. Which one of the following statements concerning the split-off type of divisive “D” reorganization is true?
41. Which one of the following statements is not a requirement for a divisive “D” reorganization?
42. Which one of the following situations satisfies the requirements for a divisive “D” reorganization pursuant
to Code § 355?
43. Which one of the following exchanges will not qualify as a tax-free reorganization in an “E”
recapitalization?
44. Which one of the following situations could not qualify as an “E” reorganization?
45. S and J, Inc. decided to change its name to SJ Company. What type of reorganization is this?
46. As part of a “C” reorganization, T Corporation transfers assets with a basis of $200,000 and a fair market
value of $500,000. T receives stock of A Corporation worth $400,000 and $100,000 worth of other property
with a basis to A of $75,000. What is the basis of the property transferred to A?
47. In a statutory merger, P Corporation transfers assets worth $250,000 (basis $200,000) in exchange for M
Corporation’s stock worth $250,000. What is M Corporation’s basis in the assets?
48. In a valid “C” reorganization, Target transfers assets with a basis of $1 million and a fair market value
of$1.5 million and receives stock with a fair market value of $1.3 million and $200,000 boot. Target has no
remaining assets. Target liquidates by transferring the stock and boot to its shareholders. The amount of gain
Target must recognize is
49. As part of a “C” reorganization, T Corporation transfers assets with a basis of $300,000 and a fair market
value of $500,000. T receives stock of A Corporation worth $400,000 and $100,000 worth of other property
with a basis to A of $75,000. What is the basis of the other property received by T Corporation as part of the
consideration from A Corporation?
50. In a “C” reorganization, Target Corporation transferred all of its assets except land to Acquiring
Corporation. The land was worth $600,000 (basis $520,000). The transferred assets were worth $20 million and
had a basis of $16 million in the hands of Target. In exchange, Target received stock of Acquiring worth$19.4
million, cash of $200,000, and an office building worth $400,000 (basis to Acquiring was $260,000).Target
liquidates, subject to the rules of § 361. How much gain must Target recognize?
51. X, as part of a reorganization, exchanges a security with a principal amount of $2,000 and a fair market
value of $2,100, for a security with a principal amount of $2,500 and a fair market value of $2,800. The amount
of boot X received is
52. As part of a plan of reorganization, S received the following assets in exchange for a share of stock with a
$75 basis:
One share of stock worth
$50
Cash
$20
What is S’s recognized gain or loss on this exchange?
53. Which of the following statements is true?
In an “A” reorganization, the surviving corporation can use all of the acquired corporation’s NOL without
limitation.
54. In which types of reorganization do tax attributes not transfer to the acquiring corporation?
55. Which one of the following statements regarding E&P carryover is false!
56. R Corporation is merged into B Corporation in an “A” reorganization on June 30, 2012. R has a
$250,000NOL carryover. B has taxable income (before the NOL deduction) of $800,000 for the year ending
December31, 2012. How much of R’s NOL can B deduct on the 2012 tax return? (Assume § 382 does not
apply.)
57. Which one of the following statements regarding computation of the limitation of NOL carryover described
in § 382, relating to the acquisition of “loss corporations,” is true!
58. Under Code § 382, if either an owner shift or equity structure shift has occurred, the test for an “ownership
change” must be made. Which is true of an owner shift!
59. Code § 382 limits the deductibility of NOLs acquired from loss corporations, if there has been a substantial
change in ownership—a so-called “ownership change.” In which one of the following situations has ownership
change occurred?
60. Code § 384 limits the ability of a loss corporation to use its loss by purchasing an acquired corporation’s
assets that have a built-in gain. Which one of the following statements is not a condition of § 384 regarding
built-in gains?
61. In the “C” reorganization, substantially all of the assets of the target corporation must be obtained by the
acquiring corporation. Which one of the following statements indicates the IRS position concerning the
substantially all the assets requirement in a “C” reorganization?
62. All of the stock of P Corporation is owned by two individuals, J and K. P owns all of the stock of Q that it
acquired by purchase 10 years ago. P manufactures disk drives while Q manufactures floppy disks. Both
corporations have substantial E&P. J and K are deadlocked on the direction of their businesses. As a result, they
have agreed to go their separate ways with J taking over the business of Q. The most logical way to accomplish
their objective is a
63. Network Corporation is a publicly traded corporation with its stock widely held. It owns all of the stock of
Cable Corporation. Both corporations have substantial E&P. A recent government ruling required Network to
divest itself of Cable. As a result, Network distributed all of the stock of Cable to its shareholders. One Network
shareholder, T, received 50 shares of Cable worth $2,000. These shares had a basis to Network of$500. T must
recognize
64. Mr. A and Ms. B own all of the stock of Salt which in turn owns all of the stock of Pepper. Salt acquired
Pepper 15 years ago. Both corporations conduct active businesses and have substantial E&P. During the year,
Salt distributed the stock of Pepper to A and B. Both A and B each received 100 shares of Pepper stock worth
$50,000. In addition, they both received a Pepper bond with a face value of $10,000 and worth $9,000.Due to
the distribution, A and B will each report (assuming the transaction meets the conditions of § 355)
65. Which of the following resembles a dividend?
66. Which of the following resembles a redemption?
67. In her landmark case, Evelyn Gregory found that
68. S and P each owns 50 shares of the outstanding stock of G Corporation which specializes in framing
pictures. G owns all 100 shares of the outstanding stock of W Corporation. S and P caused G to form W many
years ago to manufacture frames. This year S and P have decided to divide the corporate assets and part ways.
To this end, G distributed all of the stock in W Corporation to S for all of her stock in G. This type of corporate
division is referred to as
69. Under Code § 355, non recognition of gain or loss is granted only to distributions of stock or securities of a
“controlled” corporation. Control is present where
70. Brothers A and B each owns 50 percent of the stock of P. P Corporation manufactures coats, and its wholly
owned subsidiary, Q, manufactures ties. Q was acquired 20 years ago. During the current year, A and B
squabbled over company policy and B decided he wanted to go his separate way. Accordingly, P distributed the
stock of Q to B in exchange for all of B’s stock in P, for which he had a basis of $15,000. The Q stock was
worth $100,000. B will report
71. Under § 355 concerning distributions of stock and securities of a controlled corporation, the active business
requirement states that