Chapter 5

1) AMT- Alternative Minimum Tax

a. Objective - to ensure that corporations with substantial economic income pay a
significant amount of tax despite the use of exclusions, deductions, and credits.
b. AMT rate (20%) is lower than the top regular corporate rate (35%) but tax base
for AMT is larger If the tentative minimum tax does not exceed the
corporation's regular tax, no AMT is owned
c. Small corporations are exempt from AMT
i. Initial year all corporations exempt
ii. 2 nd year exempt if first year gross receipts does not exceed $5 million
iii. 3 rd year exempt if average of year 1 & 2 gross receipts does not exceed
$7.5 million
iv. Subsequent years exempt if all prior 3- year periods average gross
receipts do not exceed $7.5 million Once lost, corp. cannot regain this
exemption
2) AET- Accumulated Earning Tax
a. If a corporation accumulates too much E&P without a valid business reason, it
can be subject to this tax.
b. It generally does not apply to widely held corporations but is frequently a problem
for closely-held or family corporations.
c. Corporations exempt include S corporations, taxexempt corporations and personal
holding companies.
i. So if PHC tax applies, this tax will not apply.
d. Sec. 537 defines reasonable business needs to include reasonably anticipated
needs of the business. Some of these are include:
i. Expansion or replacement of facilities
ii. Acquisition of a business enterprise
iii. Debt Retirement
iv. Loans to suppliers and/or customers if necessary to maintain the business
v. Necessary working capital (Bardahl formula)
vi. Product liability losses
e. Evidence of Tax Avoidance
i. Loan to shareholders
ii. Corporate funds spent for personal benefit of shareholders
iii. Loans to a brother/sister corporation
iv. Investments unrelated to corporations business
v. Protection against unrealistic hazards
3) PHC- Personal Holding Company Tax
a. The Personal Holding Company (PHC) tax prevents high-income taxpayers from
sheltering their investments in personal corporations to avoid paying taxes as
individuals
i. PHC rate is 20%, the same as the highest dividend rate for individual
shareholders

ii. Purpose of the PHC tax is to compel the distribution of income by a

closely-held investment corporation so that the income will be taxed to the
shareholders
b. To be a PHC, two tests must be met:
i. 1. 5 or fewer taxpayers must own more than 50% of the value of the
corporation's stock at any time during the last half of the tax year
ii. 2. 60% or more of the corporation's Adjusted Ordinary Gross Income
(AOGI) is PHC income
1. AOGI is gross income minus gains from capital and Sec. 1231
assets less certain expenses
2. PHC income includes dividends, interest, royalties, income from
estates and trusts, and annuities, certain personal service contracts

Chapter 7
Tax free reorganizations

Seven types of reorganizations are defined in Sections 368(a)(1)(A) through (G)

o Type A - merger or consolidation
The acquiring subsidiary corporation must obtain substantially all of the
target corporation's assets.
o Type B - stock-for-stock
The target corporation exchange their stock for the acquiring corporation's
voting stock, and the target corporation remains in existence as the
acquiring corporation's subsidiary.
o Type C - assets-for-stock
o Type D - assets-for-stock & securities
o Type E change in structure (recapitalization)
o Type F change in identity, legal form, or state of incorporation
o Type G bankruptcy
Tax-free reorganizations must comply with several judicial doctrines
o Continuity of Interest - requires owners of a combining company maintain a
certain equity interest in the combined entity
o Continuity of Business Enterprise - either continue the historical business of the
combining company or use a significant portion of its assets in a new business
o Business Purpose - the reorganization must be done for some benefit accruing to
the corporation (not just to avoid taxes)

41) Identify which of the following statements is true.

A) To qualify as a Type A reorganization, generally at least 50% of the total consideration used
must be acquiring corporation stock.

B) A Type A reorganization has the advantage of avoiding the acquisition of unknown and
contingent liabilities.
C) A merger usually involves the approval of all of the shareholders of both corporations.
D) All of the above are false.
Answer: A
40) American Corporation acquires the noncash assets of Utech Corporation in exchange for
$700,000 of its voting stock plus $50,000 of cash. Utech Corporation assets are worth $750,000.
Utech Corporation does not distribute the stock and cash but instead holds the stock as an
investment. Utech will use the American cash along with the cash it retained to start a new
business. The transaction can be classified as a
A) Type A reorganization.
B) Type B reorganization.
C) Type C reorganization.
D) The transaction does not qualify as a tax-free reorganization.
Answer: D Explanation: D) The transaction does not meet the requirements of a Type B (stockfor-stock) reorganization. The stock and cash must be distributed to qualify as a Type C
reorganization unless an IRS waiver is obtained, and this acquisition most likely does not qualify
for a waiver. A Type A reorganization requires the target Corporation to go out of existence
under most state corporation laws. Page Ref.: C:7-20 Objective: 4
42) Rock Corporation acquires all of the assets of Stone Corporation using only its voting stock.
Stone Corporation distributes the Rock stock to its shareholders pursuant to its liquidation. After
the acquisition, Stone Corporation's shareholders own 20% of the Rock stock (by voting power
and value). The transaction is classified as a
A) Type B reorganization.
B) Type C reorganization.
C) Type D reorganization.
D) The transaction does not qualify as a tax-free reorganization.
Answer: B Explanation: B) The transaction does not meet the stock-for-stock requirements of a
Type B reorganization. Since the control requirement is not met by Stone's shareholders, the
transaction cannot be a Type D reorganization. Page Ref.: C:7-25 Objective: 4
43) Identify which of the following statements is false.
A) In a Type C reorganization, the acquired corporation must distribute stock, securities, and
other property it receives to its shareholders.
B) A Type C reorganization is less flexible than a Type A reorganization because of the solelyfor-voting stock requirement of a Type C.
C) To qualify as a Type C reorganization, the target corporation must be formally dissolved.
D) In a Type C reorganization, shareholders of the acquiring corporation generally do not have to
approve the acquisition.
Answer: C Page Ref.: C:7-26 Objective: 4
44) Identify which of the following statements is true.

A) The acquired corporation in a Type C reorganization may retain its corporation charter.
B) Alpha Corporation acquires 100% of the assets of Beta Corporation in exchange for $75,000
of Alpha stock and $25,000 in cash. Beta is subsequently liquidated. This exchange qualifies as a
Type C reorganization.
C) Alpha Corporation acquires 100% of the assets of Beta Corporation in exchange for $75,000
of Alpha stock and the assumption of $25,000 of Beta liabilities. Beta is subsequently liquidated.
This exchange does not qualify as a Type C reorganization.
D) All of the above are false.
Answer: A Page Ref.: C:7-26 Objective: 4
45) In a Type B reorganization, the
1. stock of the target corporation is acquired solely for the voting stock of either the acquiring
corporation or its parent.
2. acquiring corporation must have control of the target corporation immediately after the
acquisition.
A) Only statement 1 is correct.
B) Only statement 2 is correct.
C) Both statements are correct.
D) Neither statement is correct.
Answer: C
13 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 46) Identify which of
the following statements is true.
A) Both a Type B reorganization or a reverse triangular merger will not allow the target
corporation to remain in existence.
B) Andrews Corporation gives 10% of its stock worth $200,000 and Andrews notes worth
$10,000 in exchange for 80% of Baxter Corporation's stock. The exchange qualifies as a Type B
reorganization.
C) In a Type B reorganization, with minor exceptions only voting stock can be used by the
acquiring corporation to acquire the target corporation's stock.
D) All of the above are false.
Answer: C Page Ref.: C:7-29 and C:7-30 Objective: 4
47) Acquiring Corporation acquires all of the stock of Target Corporation in a Type B (stock-forstock) reorganization. Both corporations have always filed separate tax returns. Which one of the
following statements regarding the acquisition is correct?
A) Acquiring and Target Corporations can elect to file a consolidated tax return.
B) Acquiring and Target Corporations must file a consolidated tax return.
C) Acquiring Corporation assumes all of the tax attributes of Target Corporation.
D) Acquiring Corporation must step up or step down the basis of the Target Corporation's assets
to their FMV on the acquisition date?
Answer: A Explanation: A) Acquiring and Target Corporations can elect to file a consolidated
tax return, but they are not required to do so. Target Corporation retains its tax attributes when a

Type B reorganization occurs. No basis adjustment occurs when Acquiring acquires the Target
stock in a Type B tax-free reorganization. Page Ref.: C:7-32 Objective: 4
48) Identify which of the following statements is true.
A) A Type B reorganization must be accomplished in one transaction.
B) "Creeping acquisitions" are not allowed in a Type B reorganization.
C) Boxer Corporation acquires 81% of Excel Corporation's stock in a Type B reorganization.
When Boxer Corporation acquires an additional 11% of Excel Corporation's stock two years later
in exchange for Boxer stock, the second acquisition is also treated as a Type B reorganization.
D) All of the above are false.
Answer: C Page Ref.: C:7-30 Objective: 4
49) Identify which of the following statements is true.
A) Ann, Dewey Corporation's sole shareholder, exchanges her Dewey stock having a $400,000
FMV and a $175,000 adjusted basis for $350,000 of Heider Corporation stock and $50,000 cash.
Ann realizes a $225,000 gain on the stock transfer, none of which is recognized.
B) A Type B reorganization can be accomplished without formal shareholder approval.
C) The target corporation's tax attributes are lost in a Type B reorganization.
D) All of the above are false. Answer: B Page Ref.: C:7-31 Objective: 4
50) Table Corporation transfers one-half of its assets to Chair Corporation in exchange for 100%
of Chair Corporation's single class of stock. Following the exchange, Table Corporation
distributes the Chair stock ratably to its shareholders. This transaction will constitute a
A) Type A reorganization.
B) Type C reorganization.
C) divisive Type D reorganization.
D) acquisitive Type D reorganization.
Answer: C Page Ref.: C:7-35 Objective: 4