Chapter 7: Corporate Reorganizations Research Problem 1 Essays

Under liquidation, the term sheet stipulates that the Series E investors is entitled to claim its initial investment of $10.75 million plus any accrued but unpaid dividend. Any proceeds after this claim will then be distributed to all common and Series E Preferred shareholders on an as-converted pro-rata basis. This double dipping means that RSC will not only recover its initial investment of $5 millions, but also enjoys the convertible benefits.

When the debt instrument and the option to acquire common stock are inseparable, as in the case of convertible bonds, the entire proceeds of the bond issue are allocated to the debt and the related premium or discount accounts.

offered the option to reinvest $20 to receive additional new Ford common shares. In this

Parent Corporation owns 85% of the common stock and 100% of the preferred stock of Subsidiary Corporation. The common stock and preferred stock have adjusted bases of $500,000 and $200,000, respectively, to Parent. Subsidiary adopts a plan of liquidation on July 3 of the current year, when its assets have a $1 million FMV. Liabilities on that date amount to $850,000. On November 9, Subsidiary pays off its creditors and distributes $150,000 to Parent with respect to its preferred stock. No cash remain to be aid to Parent with respect to the remaining $50,000 of its liquidation preference for the preferred stock, or with respect to any common stock. In each of Subsidiary’s tax years, less than %10 of its gross

Gregory argued that under section 112 of the Revenue Act of 1928 26 USCA 2112, the transfer of shares was a reorganization and since the transfer was a reorganization, she claimed that her gain should not be recognized because the shares were distributed in pursuance of a plan reorganization. Per section 112, reorganizations are not taxed.

During the transaction, if the transferor receives boot, section 351(b) requires them to recognize the gain (capital, long-term, or short-term) equal to the lessor of the gain that would be recognized under section 1001 if the transferor were treated as selling property transferred and the fair market value of the boot received. Under section 351(b)(2), no such loss of any realized loss to be recognized (4)(8).

c. A parent transfers its controlling interest in several partially owned subsidiaries to a new wholly owned subsidiary. That also is a change in legal organization but not in the reporting entity.

Section 368(a)(1) of the tax code provides several options for corporate reorganizations. Section 368(a)(1)(d), also known as a “divisive D reorganization”, is the best choice for this particular situation. In a divisive “D” reorganization, the controlling corporation (in this case, BackBone) will distribute assets (the Willow office) to a newly formed subsidiary corporation, in exchange for the stock of the new subsidiary corporation, in a transaction that qualifies under section 355 (Sec. 368(a)(1)(d)). After the transaction is complete, the Willow office will be its own corporation which is wholly (or at least mostly) owned by BackBone. BackBone will also still own and control the Troy, Union and Vista offices after the reorganization.

Off course, if we think about only these numbers it seemed that TKC is receiving more than it pays but this not exactly true since TKC paid for the bonds more than it is going to get after the 38 years (premium bond = coupon>YTM plus TKC’ initial investment of $21 million.

In a Type D reorganization, the acquired business is subdivided into smaller components which are then either spun off, split off or split up. When the acquired business is spun off, the entity is divided into two separate entities, which are then given to the existing shareholders in the form of stock. If the acquired business is split off, the acquired business is split into different entities, with some shareholders only retaining their shares in the original entity, while the other shareholders turn in their shares in exchange for shares in the new entity. When the acquired business is split up, the corporation would create several new entities, transfers its assets and liabilities to them, and liquidates itself. Shareholders within the acquired business are now transferred to your corporation (Kibilko,

Under certain circumstances, ASC 830 obligates that equity must be switched to net income. According to ASC 830-40-1, the circumstances that require this reclassification are “upon sale or upon complete or substantially complete liquidation of an investment in a foreign entity.” Therefore, when dissolving any foreign operation, it is essential to determine if that foreign entity makes up its own foreign entity or is a part of a different overall foreign entity.

It demonstrated that deductions for capital expenditures are possible. In Chief Industries, Inc., TC Memo 2004-45, the tax court held that the settlement payment and the redemption payment should be considered as separate. In 1993, the tax payer, a corporation, and its board of directors voted a new CEO to replace the principle founder. The taxpayer and the founder reached an employment agreement that the founder could continue the title “chairman of the board of directors” without any managerial authority. Then, a litigation of controlling the taxpayer occurred between the board and the founder. To avoid unnecesary risks, time and expenses, the board pursed settlement negotiations. In 1996, the taxpayer, the new chairman and CEO agreed to purchase all of the founder’s stocks in the taxpayer for $37,223,114. Additionally, the taxpayer transferred a $3,082,710 settlement payment to the founder to relinquish his rights under the employment agreement. IRS argued, the settlement payments were used for purchasing stocks, which belong to capital assets. Furthermore, the settlement payments increased company’s value, because the payments were to prevent the founder re-controlling the taxpayer. According to Reg. 1.263(a)-1(b), expenditures that substantially increase values should not be deductible. However, the taxpayer argued that the payments were “to defend against attacks on business practices and partially in

Acquisition: In a simple acquisition, the acquiring firm will hold the majority of stake in the acquired company that does not change their name or any legal structure.

An acquisition happens when a purchasing organization acquires over half possession in an objective organization. As a component of the trade, the procuring organization frequently buys the objective organization's stock and different resources, which permits the getting organization to settle on choices in regards to the recently gained resources without the endorsement of the objective organization's investors. Acquisitions can be paid for in real money, in the obtaining organization's stock or a combination of both.

In a type C reorganization, the acquiring corporation can be selective while choosing the liabilities it assumes. A tax responsibility may arise if consideration other than stock is used in the possession of the resources. Type D reorganization enables the selling corporation to be exempted from paying tax immediately because assets transfer is followed by absolute liquidation of the acquired corporation. I would recommend type D as the most beneficial to the client because the shareholders quits operations once the corporation is bought by the acquiring company Furthermore, transfer of titles contracts and leases may not be necessary.