Reference no: EM132349848
PROBLEMS
Assumptions: T is a closely held corporation with 100 shares of voting common stock outstanding, which are owned 50 shares by A (adjusted basis $200), 30 shares by B (adjusted basis $400), and 20 shares by C (adjusted basis $150). T owns the following assets:
|
Basis |
Value |
| Nonoperating assets |
$200 |
$300 |
| Operating assets |
$700 |
$900 |
| Totals |
$900 |
$1,200 |
T owes outstanding liabilities of $200 (in the form of a 20-year bond held by L at an adjusted basis of $200), and T has E&P of $400. Assume each T share is worth $10. P is a publicly held corporation whose stock is listed on the New York Stock Exchange. Unless otherwise indicated, (1) each transaction has a proper business purpose; (2) there is continuity of T's "business enterprise" in P, (3) the transaction is pursuant to a "plan of reorganization," and (4) FMV of debt is also its face amount and adjusted issue price. In each problem below, L consented to and did receive a bond of P that is identical in terms to the bond of T that L exchanged therefore.
What are the tax consequences to T, P, A, B, C, and L from the following transactions?
(1) T merges into P under state law. T's shareholders receive pro rata $1,000 FMV of P's nonvoting, nonparticipating, nonconvertible 8 percent cumulative ("pure" or "straight") preferred stock.
Alternative 1: T's debt to L is either $1,000 or $1,300 (and the consideration given by P is appropriately adjusted).
Alternative 2: T and/or P are foreign corporations and the merger occurs under the laws of England.
(2) same as (1) above, but instead of preferred stock T's shareholders receive pro rata $200 FMV of P's two-year notes, $400 FMV of P's 20 year registered bonds, and $400 FMV of P's voting Common stock.
Alternative: Before the merger, P's voting common stock is 100 Percent owned by E, A's father; after the merger, E owns 70 percent of P' s voting common stock.
*(3) T merges into P solely in exchange for P voting stock (and the debt assumption). B, however, dissents under state law procedure for objecting shareholders. B's T stock is purchased by T under an agreement whereby B agrees to take the $300 nonoperating assets, and whereby the stock given by p is reduced to $700. [State the results generally, but do the numbers for B only.]
*(4) Same as (3) above, A also dissents and likewise is bought out for $500 worth of the operating assets. P gives T only $200 in value of P stock. Will P be concerned about this result (aside from the loss of Ts assets)? What would you advise P to do to protect itself?
*(5) Tmerges into P solely in exchange for P voting stock. Within six months of the merger, A, B, and C sell all of their P stock in a disposition they had planned at the time of the merger. What if, at the time of the merger, A, B, and C planned to keep the P stock.
*(6) S, a subsidiary of P, merges into T, exchanging solely cash for T's outstanding stock. New T stock is issued to P for its S stock.
*Note: Need only 3, 4, 5, 6.