Question

Target has assets with a fair market value of $4,000,000, a basis of $1,000,000, and liabilities of $800,000. It transfers assets worth $3,800,000 to Acquiring in exchange for voting stock worth $3,000,000 and the assumption of all $800,000 of its liabilities by Acquiring. Target retains a building worth $200,000, basis of $80,000. After the exchange with Acquiring, Target distributes the voting stock in Acquiring and the building to Oprah, Target’s sole shareholder, in exchange for Oprah’s shares in Target. Oprah has a basis of $740,000 in her stock in Target.

Required:

(1)   Does the reorganization described above qualify as a Type A reorganization?
In your answer, discuss the requirements for a Type A reorganization and show supporting computations.
  
(2)   Does the reorganization described above qualify as a Type C reorganization?
In your answer, discuss the requirements for a Type C reorganization and show supporting computations.

(3)   Without prejudice to your answers above, assume that this transaction qualifies as a Type C reorganization. What gain, if any, is recognized by:
a.   Acquiring?
b.   Target?
c.   Oprah?
Show supporting computations for your answers to Part (3) as appropriate.

(4)   What will Oprah’s basis be in her Acquiring stock? Show supporting computations.

Answer 1

Required 1

Type A reorganization- In this type of reorganization, two or more corporations combine, with one of the corporation retaining its existence and absorbing the other. Shareholder of the corporation acquired are given shares of the acquiring corporation.

As in the given case, the Acquiring corporation did not give its share to the shareholders of the Target corporation directly and instead gave its shares to the Target organization as a compensation for the assets acquired. Even though eventually these shares were transferred to the shareholder of Target Corporation, still this reorganization can not be classified as type A reorganization.

Required 2

Type C reorganization - In this type of reorganization, the Acquiring Corporation uses the voting stock to acquire substantially all of the target's net assets.

Since in the given case, Acquiring Corporation acquired all except building of the Target Corporation using its voting stock, this reorganization can be classified as Type C reorganization.

Required 3.

In a tax free reorganization, all assets and liabilities are transferred at their tax basis and no gain / loss is recognized. Also, the basis of the new stock received by shareholders is equal to the tax basis of the old stock and no gain or loss is recognized in the exchange.

However, if a shareholder receives boot ( cash , other securities, other property) in a reorganization, gain is recognized (but not loss).

Realized gain is recognized up to the amount of boot received .

Shareholder's basis for stock / securities received = Carryover basis + gain recognized - boot received.

In the given question,

a. For Acquiring Corporation

Acquiring Corporation has not realize any gain / loss and hence no gain / loss shall be recognized.

b. For Target Corporation

Target corporation would not recognize gain / loss for the asset transferred to Acquiring corporation as it is a tax free reorganization. However for building not transferred and distributed to its shareholder, Target will have to recognize a gain.

Gain = FMV of Building - Adjusted basis = $200,000 - $80,000 = $120,000

c. For Oprah

Gain realized = FMV of the shares received from Acquiring Corporation + FMV of the building received - Adjusted Basis of Oprah's share in Target = ($3,800,000 - $800,000) + $200,000 - $740,000 = $2,460,000.

Boot received = $200,000

Gain to be recognized = realized gain to the extent of boot received = $200,000

Required 4

Oprah Basis in her Acquiring share = Carryover basis + gain recognized - boot received

= $740,000 + $200,000 - $200,000

= $740,000

Feel free to ask for any clarification, if required. Kindly provide feedback by thumbs up. It would be highly appreciated. Thank You.