Question

Michael has 100,000 shares outstanding that are worth $10 per share. It uses 32% of its stock, plus $80,000 to acquire Nickel Corporation in a Type A reorganization. Nickel's assets are valued at $400,000, and its accumulated earnings and profits are $25,000 at the time of the reorganization. The Michael Corp. shares and cash are distributed to the Nickel shareholders as follows. Joe (owning 62.5% of Nickel) receives 18,000 shares (value $180,000) and $70,000. Diane (owning 37.5% of Nickel) receives 14,000 shares (value $140,000) and $10,000. Joe and Diane each recognize gains to the extent of the cash they received. What is the character of Joe and Diane's gains?

Answer 1

ANSWER:

On the off chance that Joe had gotten stock just , he could have gotten (180,000+70,000/10) = 25,000 offers >but in genuine he got just 18,000 offers .so he really got under 80% of what he would have (18,000/25,000 = 72%) If Joe had received stock only , he could have received (180,000+70,000/10) = 25,000 shares >but in actual he received only 18,000 shares .so he actually received less than 80% of what he would have (18,000/25,000 = 72%) and he owns less than 50% of Michael/ therfore joe would recieve stock redemption treatment and gain would be treated as capital gain.

If Diane had received only stock her share is (140,000+10,000/10) 15000 shares >so actually she recieved more than 80% (14,000/15,000 = 93%) So no stock redemption for her infact the cash recieved tp tje extent of Dianes proportionate share (37.5%) of the Nicke 's Accumulated earning and profit ($25,000) and remainder will be treated as capital gain , so dividend income $9,315 and $625 capital gain . he possesses under half of Michael/therfore joe would recieve stock reclamation treatment and addition would be treated as capital increase.

On the off chance that Diane had gotten just stock her offer is (140,000+10,000/10) 15000 offers >so really she recieved over 80% (14,000/15,000 = 93%) So no stock recovery for her infact the money recieved tp tje degree of Dianes proportionate offer (37.5%) of the Nicke 's Accumulated procuring and benefit ($25,000) and leftover portion will be treated as capital increase , so profit salary $9,315 and $625 capital addition .