Exercise #1
Alpha Corporation purchases 20% of Theta Corporation stock from Milt on August 10 of the current year. Alpha purchases an additional 30% of the stock from Nick on November 15 of the current year. Alpha purchases the remaining 50% of the Theta stock from Phil on April 10 of the following year. The total price paid for the stock is $1.9 million. Theta's balance sheet on April 10 of the following year shows assets with a $2.5 million FMV, a $1.6 million adjusted basis, and $500,000 in liabilities.
a. What is the acquisition date for the Theta stock for Sec. 338 purposes? By what date must Alpha make the Sec. 338 election?
b. If Alpha makes a Sec. 338 election, what is the aggregate deemed sale price for the assets?
c. What is the total basis of the assets following the deemed sale, assuming a 34% corporate tax rate?
d. How does the tax liability attributable to the deemed sale affect the price Alpha should be willing to pay for the Theta stock?
e. What happens to Theta's tax attributes following the deemed sale?
Exercise #2
In a merger under state law, Anchor Corporation acquires all the assets of Tower Corporation. Tower's assets have a $5 million FMV and a $2.2 million adjusted basis. Assuming Tower liquidates, which of the following transactions qualify as a Type A reorganization?
a. The assets are exchanged for $5 million of Anchor common stock.
b. The assets are exchanged for $5 million of Anchor nonvoting preferred stock.
c. The assets are exchanged for $5 million of Anchor securities.
d. The assets are exchanged for $3.5 million of Anchor nonvoting preferred stock and $1.5 million in cash.
e. The assets are exchanged for $3 million of Anchor common stock and Anchor's assumption of $2 million of Tower liabilities.
f. The assets are exchanged for $5 million in cash provided by Anchor. An "all cash" merger transaction is permitted under state law.
Exercise #3
Murray Corporation's stock is owned by about 1,000 shareholders, none of whom own more than 1% of the outstanding shares. Pursuant to a tender offer, Said purchased all the Murray stock for $7.5 million cash at the close of business on December 31, 2014. Before the acquisition, Said owned no Murray stock. Murray had incurred substantial NOLs, which totaled $1 million at the end of 2014. Murray's taxable income is expected to be $200,000 and $600,000, respectively, for 2015 and 2016.
Assuming the long-term tax-exempt federal rate is 5% and Murray continues in the same trade or business, what amount of NOLs can Murray use in 2015 and/or 2016? What amount of NOLs and Sec. 382 limitation carryover to 2017?
Exercise #4
P Corporation owns all the stock of S1 and S2 Corporations, and the three corporations have filed consolidated tax returns on a calendar year basis for several years. P owns 2,400 shares of publicly traded stock it purchased several years ago for $30 per share. P sells all the stock to S1 for $45 per share on January 25 of the current year (Year 1). S1 sells 1,400 shares of the stock to a third party for $48 per share on December 6 of Year 1, and S1 sells the other 1,000 shares to another third party for $52 per share on March 18 of Year 2.
a. What are the intercompany item, the corresponding items, and the recomputed corresponding items for this intercompany transaction?
b. In what year(s) are P's gain or loss and S1's gain or loss included in consolidated taxable income?
c. Suppose P sells all of S1's stock to a third party on December 30 of Year 1. How would your answer to Part b change?
d. Suppose S1 sells the 1,000 shares on March 18 of Year 2, for $44 per share instead of $52 per share. How would your answers to Parts a and b change?
Exercise #5
P and S Corporations comprise an affiliated group that files separate tax returns. P and S had no intercompany inventory sales before the current year (Year 1). P and S use the first-in, first-out (FIFO) inventory method. During Year 1, S sells 40,000 widgets to P, earning $7 per unit profit on the sale. P's inventory at the end of Year 1 includes 10,000 of these widgets. During Year 2, S sells 75,000 widgets to P, earning $7.50 per unit profit on the sale. P's inventory at the end of Year 2 includes 12,000 of these widgets. During Year 3, no intercompany inventory sales occur, and P sells all widgets in beginning inventory. P's and S's taxable income each year (including any profits from intercompany inventory sales) is $380,000 and $300,000, respectively.
Prepare the journal entries to record federal income tax expense for each of Years 1, 2, and 3. Assume a 34% corporate tax rate.