Expert Answer :CHAPTER 1UNDERSTANDING AND WORKING WITH THE FED

Solved by verified expert :701. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question PR #1Cocoa Corporation is acquiring Milk Corporation in a “Type A” reorganization by exchanging 40% of its voting stock and $50,000 for all of Milk’s assets (value of $850,000 and basis of $600,000) and liabilities ($200,000). The shareholders of Milk are Elsie (650 shares) and Ferdinand (350 shares). They bought their stock for $500 per share. What is the value of the stock that Elsie and Ferdinand received from Cocoa? What is the amount of gains or losses they will recognize due to the reorganization and what is their basis in the Cocoa stock?702. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question PR #2Lyon has 100,000 shares outstanding that are worth $10 per share. It uses 32% of its stock plus $80,000 to acquire Zebra Corporation in a “Type A” reorganization. Zebra’s assets are valued at $400,000 and its accumulated earnings and profits are $25,000 at the time of the reorganization. The Lyon shares and cash are distributed to the Zebra shareholders as follows. Jake (owning 62.5% of Zebra) receives 18,000 shares (value $180,000) and $70,000. Kara (owning 37.5% of Zebra) receives 14,000 shares (value $140,000) and $10,000. Jake and Kara each recognize gains to the extent of the cash they received. What is the character of Jake’s and Kara’s gains?703. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question PR #3Present Value Tables needed for this question. Avocado Corporation wants to acquire Tomato Corporation because their businesses are complementary and Tomato has unused business credits of $63,000. Avocado is a manufacturer with a basis in its assets of $2.4 million (value of $3.1 million) and liabilities of $600,000. It is in the 35% tax bracket and uses a 10% discount factor when making investments. However, the Federal long-term tax-exempt rate is only 5%. Tomato is a distributor of a variety of products including those of Avocado’s. Its basis in its assets is $2 million (value of $1.5 million) and has liabilities of $400,000. Avocado is willing to acquire only $1 million of Tomato’s assets and all its liabilities for stock and $100,000 cash. Tomato will distribute its remaining assets, cash, and Avocado stock to its shareholders in exchange for their stock and then liquidate. Given these facts, what type of reorganization would you suggest for Avocado and Tomato? What is the maximum amount Avocado should be willing to pay for the business credits?704. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question PR #4Pipe Corporation is very interested in acquiring all of Ore Corporation. It currently owns 30%, which it purchased 6 years ago for $250,000. Pipe is a manufacturer of plumbing pipes with assets valued at $3 million and liabilities of $1 million. Ore supplies Pipe with copper from its mines that are valued at $4 million with $3 million in mortgages. Pipe has negotiated a restructuring with Ore’s management. Pipe is concerned about potential environmental issues from the strip mining used by Ore and feels it needs liability protection. Given these facts, what type of reorganization would you suggest for Pipe and Ore?705. CHAPTER 7—CORPORATIONS: REORGANIZATIONS Question PR #5Present Value Tables needed for this question. Tony is the sole shareholder of Create Corporation. Tony is a chemical engineer and has been working hard to create a unique product but has been unsuccessful. Thus, Create has accumulated an NOL of $240,000. This year she finally finds the right combination for a new cleaning product. Predicting that Create will be very profitable next year, Create borrows $250,000 to pay Tony the salary she rightly deserves. Next year, Create does become profitable, earning $100,000 before application of carryovers. Mega Corporation, a huge ($50 million value, 35% tax bracket) competitor, offers to purchase the patent from Tony for $750,000. Knowing that the Create’s NOL should be useful to Mega, Tony suggests a restructuring where she receives $500,000 in Mega stock, Mega assumes all of Create’s liabilities ($250,000), plus $75,000 cash for the NOL. Mega counter offers with cash for the NOL (to be determined), and $750,000 of stock. It will not assume any liabilities. How much would be the maximum cash offered by Mega for the NOL, assuming that Mega uses an 11% discount factor and the Federal long-term tax-exempt rate is 4%? If Tony accepts Mega’s offer, what type of reorganization, if any, is this restructuring?