Question

In: Accounting

Classify each of the following transactions as to the type of reorganization (Type A B C...

Classify each of the following transactions as to the type of reorganization (Type A B C D E F) or, if applicable, a taxable transaction.

a.Alpha Corporation owns assets valued at $400,000 and liabilities of $100,000. Beta Corporation transfers $160,000 of its voting stock and $40,000 in cash for 75% of Alpha's assets and all of its liabilities. Alpha distributes its remaining assets and the Beta stock to its shareholders. Alpha then liquidates. Taxable

b. Beta Corporation owns assets valued at $1,500,000 with liabilities of $700,000, and Alpha holds assets valued at $350,000 with liabilities of $150,000. Beta transfers 200,000 shares of stock and $50,000 cash, and it accepts $100,000 of Alpha's liabilities, in exchange for all of the Alpha assets. Alpha distributes the Beta stock to its shareholders for their Alpha stock and then ceases to exist.

c. Alpha Corporation obtained 200,000 shares of Beta Corporation's stock 10 years ago. In the current year, Alpha exchanges 40% of its stock for 500,000 of the remaining 600,000 shares of Beta stock. After the transaction, Alpha owns 700,000 of the 800,000 Beta shares outstanding.

d. Alpha Corporation has two divisions that have been in existence for seven years. The nail division has assets valued at $500,000 and liabilities of $120,000, whereas the hammer division has assets valued at $645,000 and liabilities of $25,000. Alpha would like the two divisions to be separate corporations. It creates Beta Corporation and transfers all of the hammer division assets and liabilities in exchange for 100% of Beta's stock. Alpha then distributes the Beta stock to its shareholders.

e. Alpha Corporation owns assets valued at $750,000 with liabilities of $230,000, and Beta holds assets valued at $1,500,000 with liabilities of $500,000. Beta transfers 33% of its stock for $700,000 of Alpha's assets and $200,000 of its liabilities. Alpha distributes the Beta stock and its remaining assets and liabilities to its shareholders in exchange for their stock in Alpha. Alpha then terminates.

f. Beta Corporation has not been able to pay its creditors in the last year. To avoid foreclosure, Beta transfers its assets valued at $650,000 and liabilities of $700,000 to a new corporation, Alpha, Inc., in accordance with a state court proceeding. The creditors receive shares of Alpha voting stock valued at $300,000 and cancel the outstanding debt. The former Beta shareholders receive the remaining shares in Alpha.

Solutions

Expert Solution

Part A

transaction is not taxable and is classified as Type A reorganization.

As 80% of Alpha’s assets are not acquired using Beta’s stock, it cannot be qualified for Type C reorganization.

Part B

It is a taxable transaction.

As all of Alpha’s liabilities are not transferred to Beta, it cannot be qualified for Type A reorganization.

As 80% of Alpha’s assets are not acquired using Beta’s stock, it cannot be qualified for Type C reorganization.

Part C

transaction is not taxable and is classified as Type B reorganization

The time till Alpha owns at least 80% of the assets after restructuring, it will be qualified for Type B reorganization.

Part D

transaction is not taxable and is classified as Type D reorganization (spin-off reorganization)

Stock in Alpha does not give up the Beta Stock.

Part E

transaction is not taxable and is classified as Type C reorganization

As at least 80% of Alpha’s assets are acquired using Beta’s stock as well as only selected liabilities are acquired, it can be qualified for Type C reorganization. All liabilities must be transferred for qualifying as Type A reorganization.

Part F

transaction is not taxable and is classified as Type G reorganization

To meet liabilities obligation, creditors are given voting stock for at least 40% of liabilities’ fair value


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