Chapter 7: Corporate Reorganizations Research Problem 1 Essays

676 WordsMar 2, 20133 Pages
Research Problem 1) New Gate corporation desires to acquire Old Post in a non-taxable transaction. Prior to entering into this transaction with New Gate, Old Post issues $800,000 worth of 15-year bonds paying 6% annually. The bonds are purchased by most of Old Post’s shareholders and also by many individuals who have no affiliation with Old Post. New Gate makes an offer to the shareholders to exchange two shares of its common voting class A stock for each common share of Old Post and 20 of common voting class B stock for each preferred share of Old Post. Most of the shareholders are reluctant to make the exchange because of the favorable terms of the Old Post bonds they are holding. Consequently, New Gate offers to acquire all of…show more content…
Some of the debentures of Y are held by its shareholders, but a substantial proportion of the Y debentures are held by persons who own no stock. Further reading indicates the reorganization of Old Post and New Gate will qualify as a “Type B” tax-free reorganization even with the bonds involved because due to the fact that there are many non-stockholders who are bond holders. Regarding the bond exchange offered by New Gate, any gain is not recognized per this IRS ruling: Section 354(a)(1) provides that no gain or loss will be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in another corporation a party to a reorganization. I’m working off of the premise is that the bond exchange is not a part of the voting stock exchange by New Gate to Old Post shareholders but rather is a separate exchange. The New Gate offer of exchanging stock of varying common classes does meet the IRS ruling requirements listed below: Section 1.368-2(c) of the Income Tax Regulations provides: In order to qualify as a "reorganization" under section 368(a)(1)(B), the acquisition by the acquiring corporation of stock of another corporation must be in exchange solely for all or a part of the voting stock of the acquiring corporation . . . , and the acquiring corporation must be in control of the other corporation immediately after the
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