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    Sample - Chapter 7 - Problem 35 (Due 10.18.20)

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    Tenaj Kram
    Aqua Corporation proposes a merger with Icterine Corporation in which it will exchange 40% of its stock and $200,000 for most of Icterine's assets. Aqua aims to acquire Icterine primarily for its unused net operating loss (NOL) carryforward. The transaction must qualify as a tax-free Type A reorganization for the NOL to transfer to Aqua. Key tax issues include whether the continuity of interest and control requirements are met and ensuring dissenting Icterine shareholders do not jeopardize the reorganization's tax-free status.

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    Sample - Chapter 7 - Problem 35 (Due 10.18.20)

    Uploaded by

    Tenaj Kram
    71 views2 pages
    Aqua Corporation proposes a merger with Icterine Corporation in which it will exchange 40% of its stock and $200,000 for most of Icterine's assets. Aqua aims to acquire Icterine primarily for its unused net operating loss (NOL) carryforward. The transaction must qualify as a tax-free Type A reorganization for the NOL to transfer to Aqua. Key tax issues include whether the continuity of interest and control requirements are met and ensuring dissenting Icterine shareholders do not jeopardize the reorganization's tax-free status.

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    Aqua Corporation proposes a merger with Icterine Corporation in which it will exchange 40% of its stock and $200,000 for most of Icterine's assets. Aqua aims to acquire Icterine primarily for its unused net operating loss (NOL) carryforward. The transaction must qualify as a tax-free Type A reorganization for the NOL to transfer to Aqua. Key tax issues include whether the continuity of interest and control requirements are met and ensuring dissenting Icterine shareholders do not jeopardize the reorganization's tax-free status.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    71 views2 pages

    Sample - Chapter 7 - Problem 35 (Due 10.18.20)

    Uploaded by

    Tenaj Kram
    Aqua Corporation proposes a merger with Icterine Corporation in which it will exchange 40% of its stock and $200,000 for most of Icterine's assets. Aqua aims to acquire Icterine primarily for its unused net operating loss (NOL) carryforward. The transaction must qualify as a tax-free Type A reorganization for the NOL to transfer to Aqua. Key tax issues include whether the continuity of interest and control requirements are met and ensuring dissenting Icterine shareholders do not jeopardize the reorganization's tax-free status.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    of 2

    Chapter 7, Problem 35 – LO.3,4 Aqua Corporation is a retail operation specializing in pool equipment and outdoor furniture.

    It is
    very interested in merging with Icterine Corporation, a lamp manufacturer; Aqua is very profitable, and Icterine has a large NOL
    that it has not been able to utilize.

    Aqua proposes to exchange about 40% of its stock and $200,000 for most of Icterine’s assets. The assets not acquired by Aqua
    will be distributed to Icterine’s shareholders. Aqua stock will be distributed to most of Icterine’s shareholders, while dissenting
    Icterine shareholders will receive the cash.

    Aqua is not interested in the lamp business except for the possibility of making pool lights. It therefore will sell off Icterine’s
    assets except those that can be retooled to manufacture pool lights. What are the Federal income tax issues to be considered in
    these transactions?

    NOTES

    See page 7-8

    The “Type A” reorganization allows more flexibility than the other types of reorganizations. Unlike both “Type B” and “Type C”
    reorganizations, the acquiring stock transferred to the target need not be voting stock. The acquiring corporation can transfer
    money or other property to the target corporation without destroying nontaxable treatment for the stock also exchanged,
    provided that the consideration given is at least 40 percent stock. Footnote: Money or other property, however, constitutes
    boot and may cause gain to be recognized by the parties involved in the reorganization.

    There is no requirement that “substantially all” of the target’s assets be transferred to the acquiring corporation as in a “Type C”
    reorganization. The target can sell or dispose of assets not desired by the acquiring corporation without affecting the tax-free
    nature of the restructuring.

    A “Type A” is not without its disadvantages. Each corporation involved in the restructuring must obtain the approval of the
    majority of its shareholders. In almost every state, dissenting shareholders can require that their shares be appraised and
    bought back by the corporation. Meeting the demands of objecting shareholders can become so cumbersome and expensive that
    the parties may be forced to abandon the “Type A” reorganization. Finally, the acquiring corporation must assume all liabilities
    (including unknown and contingent liabilities) of the target as a matter of state law.

    See page 7-18

    As indicated in the discussion for “Type A” reorganizations, the continuity of interest test is met when the target shareholders
    receive acquiring stock that is at least 40 percent of their prior target stock ownership. Not all target shareholders need to
    receive stock in the surviving corporation; the requirement is applied to the aggregate consideration given by the acquiring
    corporation.

    See page 7-20 – 7-21

    Because a reorganization must result in some continuation of the previous corporation’s business activities, existing liabilities are
    rarely liquidated (a “Type G” reorganization is the exception). The acquiring corporation either assumes the target’s liabilities or
    takes the target’s assets subject to their liabilities. These liabilities generally are not considered boot when determining gain
    recognition for the corporations involved in the restructuring.

    When a corporation acquires a target’s property, it also acquires the target’s tax attributes. Section 381 determines which of the
    target’s tax benefits can be carried over to the successor

    A target’s NOL is one of the beneficial tax attributes (and sometimes its most valuable asset) that may be carried over to the
    acquiring corporation. Although the NOL cannot be carried back to a prior acquiring corporation tax year, it can be used
    prospectively. Thus, an NOL is valuable to the acquirer because it can offset future income of the combined successor
    corporation.
    Acquiring Corporation: Aqua Corporation Target Corporation: Icterine Corporation
    *40% of stock *Large NOL that it has not been able to utilize
    *$200K for most of target’s assets
    *Assets not acquired will be distributed to target’s
    shareholders
    *Acquiring corporation’s stock will be distributed to most of
    target’s shareholders, while dissenting target shareholders will
    receive cash
    *Acquiring corporation will sell off unwanted target’s assets

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