Question

1. WhydahCo is owned by Gilda and her four nieces and nephews. Gilda owns all the WhydahCo voting stock and its $50,000 bond. She wants to relinquish control of the entity; accordingly, WhydahCo redeems all of Gilda's voting common stock and issues its preferred stock to her. She also exchanges her bond for preferred. The nonvoting preferred shares owned by the nieces and nephew are exchanged for voting common stock. Which of the following statements is correct?

a.The transaction is not currently taxable; this is a "Type E" reorganization. b.The exchange of a bond for preferred stock is taxable. c.All of these transactions are taxable. d.The exchange of common for preferred is not taxable but the exchange of preferred stock for common stock is taxable. e.None of these statements are correct.

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

True

False

3. Without evidence to the contrary, the IRS views transactions occurring within one year of a reorganization as part of the restructuring under the step transaction doctrine.

True

False

4. Besides the statutory requirements for tax-free treatment for corporate reorganizations, there are several judicial requirements. Which of the following is not a judicial requirement for corporate reorganizations?

a.The ownership change doctrine should be met.

b.There must be a sound business purpose for the restructuring.

c.The continuity of business enterprise test must be met.

d.The step transaction doctrine should not apply.

e.All of these items are judicial requirements for reorganizations.

Answer 1

Answers:- 1. Option (a) The transaction is not currently taxable; this is a "Type E" reorganization is the correct statement. Because a "Type E" reorganization grants an interchange of stock for stock and bonds for stock to be free of tax.

2. Option (a) True. The basis for acquiring corporation in the target's assets is increased by any gain recognized by the target.

3. Option (a) True. Without evidence to the contrary, the IRS views transactions occurring within one year of a reorganization as part of the restructuring under the step transaction doctrine.

4. Option (a) The ownership change doctrine should be met is not a judicial requirement for corporate reorganizations, because the doctrine of durability of interest is absent from the list.