93) Why would an acquiring corporation want an acquisition to be tax-free if it gets only a substituted basis rather than a step-up basis for the acquired assets? 94) Briefly describe A, B, C, D, and G reorganization types. 99) The Supreme Court has held that literal compliance with the statutory requirements for a reorganization transaction is not enough for a transaction to receive tax-free treatment. The courts have placed four primary restrictions on reorganization transactions. What are they? 100) Discuss the advantages and disadvantages of a tax-free reorganization as compared with a taxable transaction. 101) John Van Kirk owns all the stock of Monmouth Restaurant Corporation in Pittsburgh. John would like to sell his business and retire to sunny Florida now that he has turned 65. Pam, a long-time bartender at Monmouth Restaurant, offers to purchase all the business’s noncash assets in exchange for a 25% down payment, with the remaining 75% being paid in five equal annual installments. Interest will be charged at a 10% rate on the unpaid installments. John plans to liquidate the corporation that has operated the restaurant and have Monmouth Restaurant distribute the installment notes and any remaining assets. What tax issues should Monmouth Restaurant, John, and Pam consider with respect to the purchase transaction? 102) WorldCom is a telecommunications company that provides national and international service to local and long-distance customers. On September 14, 1998, WorldCom acquired MCI Communications Corporation (MCI) pursuant to a merger agreement. The acquisition can be divided into three stages: 1. WorldCom created an acquisitions subsidiary (TC Investments Corporation) by transferring WorldCom stock and cash to TC Investments Corporation in exchange for newly issued TC Investments Corporation stock. TC Investments Corporation then used the WorldCom stock and cash to acquire MCI as described in the next two steps. 2. TC Investments Corporation used cash to purchase all the outstanding MCI Class A common stock from British Telecommunications (BT) for $51 per share. BT had acquired the MCI Class A common stock two years earlier in a failed merger attempt involving BT and MCI. In addition, TC Investments Corporation used WorldCom stock to acquire all outstanding shares of regular MCI common stock from other MCI shareholders. In this exchange, MCI shareholders received 1.2439 shares of WorldCom stock for each share of regular MCI common stock surrendered. TC Investments Corporation paid cash in lieu of issuing fractional WorldCom shares to MCI shareholders who were entitled to such fractional shares. More than 50% of the consideration used to acquire MCI was comprised of the WorldCom stock. 3. After the stock acquisition, MCI transferred its assets to TC Investments Corporation in a liquidation transaction, after which TC Investments Corporation held MCI assets instead of MCI stock. TC Investments Corporation, then changed its name to MCI Communications Corporation, and WorldCom changed its name to MCI WorldCom. After these three steps, MCI Communications Corporation, which held the acquired MCI assets ended up as a subsidiary of MCI WorldCom. Total assets of MCI WorldCom after the merger were $86 billion, including the stock of its subsidiary, MCI Communications Corporation. On December 31, 1997, prior to the acquisition, MCI had $576 million of U.S. NOL carryovers and $179 million of minimum tax credit carryovers. MCI WorldCom incurred expenses of $127 million in connection with the acquisition. MCI WorldCom recorded the transaction as a purchase for financial accounting purposes with the excess of cost over FMV being recorded as a combination of goodwill, in-process R & D costs, and other intangible assets. In addition, MCI WorldCom incurred $21 million in employee severance pay outlays. MCI stock options were converted into MCI WorldCom stock options.What type of reorganization did WorldCom and MCI engage in? What tax issues should the parties to the reorganization (MCI, BT, TC Investments Corporation, WorldCom, and the MCI and WorldCom shareholders) consider when evaluating the acquisition? 103) In Fall 1999, Ford Motor Company’s board of directors announced the $25.8 billion spin-off of its 80.7% interest in the Associated First Capital Corporation finance unit to the Ford shareholders. Ford said that it would distribute about $22.7 billion in Associates shares to its holders of Ford common and Class B stock, and $3.1 billion in cash to shareholders who hold Ford stock in U.S. employee savings accounts. According to market observes who track Ford operations, the spin-off is one of several moves Ford has taken to increase shareholder value by selling off nonautomotive assets, moves that included the initial public offering in April 1999 of Hertz Corporation. Ford said that it will take a one-time, noncash, nontaxable gain of about $16.5 billion in the first quarter as a result of the spin-off. What tax issues should the parties to the divisive transaction consider? 104) Johnson Co. transferred part of its assets to Alive Corporation in exchange for all of Alive’s stock. The Alive stock received for the assets was distributed to the Johnson shareholders. What tax issues should the parties to the divisive reorganization consider?
93) Why would an acquiring corporation
want an acquisition to be tax-free if it gets only a substituted basis rather
than a step-up basis for the acquired assets?
94) Briefly describe A, B, C, D, and G
reorganization types.
99) The Supreme Court has held that
literal compliance with the statutory requirements for a reorganization
transaction is not enough for a transaction to receive tax-free treatment. The
courts have placed four primary restrictions on reorganization transactions.
What are they?
100) Discuss the advantages and
disadvantages of a tax-free reorganization as compared with a taxable
transaction.
101) John Van Kirk owns all the stock of
Monmouth Restaurant Corporation in Pittsburgh. John would like to sell his
business and retire to sunny Florida now that he has turned 65. Pam, a
long-time bartender at Monmouth Restaurant, offers to purchase all the
business’s noncash assets in exchange for a 25% down payment, with the
remaining 75% being paid in five equal annual installments. Interest will be
charged at a 10% rate on the unpaid installments. John plans to liquidate the
corporation that has operated the restaurant and have Monmouth Restaurant
distribute the installment notes and any remaining assets. What tax issues
should Monmouth Restaurant, John, and Pam consider with respect to the purchase
transaction?
102) WorldCom is a telecommunications
company that provides national and international service to local and
long-distance customers. On September 14, 1998, WorldCom acquired MCI
Communications Corporation (MCI) pursuant to a merger agreement. The
acquisition can be divided into three stages:
1. WorldCom created an acquisitions subsidiary
(TC Investments Corporation) by transferring WorldCom stock and cash to TC
Investments Corporation in exchange for newly issued TC Investments Corporation
stock. TC Investments Corporation then used the WorldCom stock and cash to
acquire MCI as described in the next two steps.
2. TC Investments Corporation used cash to
purchase all the outstanding MCI Class A common stock from British
Telecommunications (BT) for $51 per share. BT had acquired the MCI Class A
common stock two years earlier in a failed merger attempt involving BT and MCI.
In addition, TC Investments Corporation used WorldCom stock to acquire all
outstanding shares of regular MCI common stock from other MCI shareholders. In
this exchange, MCI shareholders received 1.2439 shares of WorldCom stock for
each share of regular MCI common stock surrendered. TC Investments Corporation
paid cash in lieu of issuing fractional WorldCom shares to MCI shareholders who
were entitled to such fractional shares. More than 50% of the consideration
used to acquire MCI was comprised of the WorldCom stock.
3. After the stock acquisition, MCI transferred
its assets to TC Investments Corporation in a liquidation transaction, after
which TC Investments Corporation held MCI assets instead of MCI stock. TC
Investments Corporation, then changed its name to MCI Communications
Corporation, and WorldCom changed its name to MCI WorldCom.
After these three steps, MCI
Communications Corporation, which held the acquired MCI
assets ended up as a subsidiary of MCI
WorldCom. Total assets of MCI WorldCom after the merger were $86 billion,
including the stock of its subsidiary, MCI Communications Corporation.
On December 31, 1997, prior to the
acquisition, MCI had $576 million of U.S. NOL carryovers and $179 million of
minimum tax credit carryovers. MCI WorldCom incurred expenses of $127 million
in connection with the acquisition. MCI WorldCom recorded the transaction as a
purchase for financial accounting purposes with the excess of cost over FMV
being recorded as a combination of goodwill, in-process R & D costs, and
other intangible assets. In addition, MCI WorldCom incurred $21 million in
employee severance pay outlays. MCI stock options were converted into MCI WorldCom
stock options.What type of reorganization did WorldCom and MCI engage in? What
tax issues should the parties to the reorganization (MCI, BT, TC Investments
Corporation, WorldCom, and the MCI and WorldCom shareholders) consider when
evaluating the acquisition?
103) In Fall 1999, Ford Motor Company’s
board of directors announced the $25.8 billion spin-off of its 80.7% interest
in the Associated First Capital
shareholders. Ford said that it would distribute about $22.7 billion in
Associates shares to its holders of Ford common and Class B stock, and $3.1
billion in cash to shareholders who hold Ford stock in U.S. employee savings
accounts. According to market observes who track Ford operations, the spin-off
is one of several moves Ford has taken to increase shareholder value by selling
off nonautomotive assets, moves that included the initial public offering in
April 1999 of Hertz Corporation. Ford said that it will take a one-time,
noncash, nontaxable gain of about $16.5 billion in the first quarter as a
result of the spin-off. What tax issues should the parties to the divisive
transaction consider?
104) Johnson Co. transferred part of its
assets to Alive Corporation in exchange for all of Alive’s stock. The Alive
stock received for the assets was distributed to the Johnson shareholders. What
tax issues should the parties to the divisive reorganization consider?
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