CPA Tcp Quiz: Evaluate Tax Implications Of Reorganizations

What this quiz covers

This quiz focuses on Evaluate Tax Implications Of Reorganizations, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Tcp.

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Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. The entire transaction is taxable since boot was received.
2. No gain is recognized since the reorganization is tax-free.
3. Gain is recognized to the extent of boot received (the lesser of realized gain or boot), but the gain may be characterized as capital gain or dividend income depending on whether the exchange has the effect of a dividend distribution. (correct answer)
4. Loss is recognized to the extent boot received exceeds the shareholder's basis.

Explanation: In reorganizations, boot triggers gain recognition limited to the lesser of realized gain or boot received. The character may be ordinary income (dividend) if the exchange has the effect of a dividend. Answer C is correct. The overall transaction remains partially tax-free (A). Boot triggers recognition (B). Losses are not recognized in reorganizations even with boot (D).

Question 2

1. The acquirer to purchase target assets using solely its own voting stock.
2. The target to merge into the acquirer under state law.
3. The acquirer to receive at least 80% of the target's assets.
4. The acquirer to acquire control of the target (at least 80% of total voting power and value) using solely voting stock of the acquiring corporation - no cash or other property may be used. (correct answer)

Explanation: Type B requires a stock-for-stock exchange using solely voting stock - the 'solely for voting stock' requirement is strict, meaning even one dollar of cash disqualifies the exchange. Answer D is correct. Asset acquisition (A) describes Type C. Merger (B) describes Type A. 80% of assets (C) is not the Type B test.

Question 3

1. Carryover basis - the same basis the target had in the assets, preserving any built-in gain or loss for future recognition. (correct answer)
2. Fair market value of the assets at the time of the reorganization.
3. The acquiring corporation's purchase price allocated among the assets using the residual method.
4. Zero, since the assets were received tax-free.

Explanation: In a tax-free reorganization, the acquiring corporation takes a carryover basis in the target's assets - the deferred gain remains embedded in the assets. Answer A is correct. FMV step-up (B) only occurs in taxable acquisitions. Residual method (C) applies to taxable asset purchases. Zero basis (D) would be incorrect.

Question 4

1. Type A (statutory merger)
2. Type B (stock-for-stock)
3. Type C (assets-for-stock)
4. Type D (divisive) reorganization - a corporation transfers part of its assets to a newly formed or existing controlled corporation, then distributes the stock of the controlled corporation to its shareholders under Section 355. (correct answer)

Explanation: Type D can be divisive (spin-off, split-off, split-up) - the corporation transfers assets to a controlled corporation and distributes the subsidiary's stock to shareholders. Answer D is correct. Types A, B, and C are acquisitive reorganizations.

Question 5

1. Recognizes gain equal to the FMV of the subsidiary stock received.
2. Generally recognizes no gain or loss - the shareholder takes a basis in the subsidiary stock allocated from their original basis in the distributing corporation's stock. (correct answer)
3. Recognizes ordinary income equal to the distributing corporation's accumulated E&P.
4. Must hold the subsidiary stock for 5 years to maintain the tax-free treatment.

Explanation: In a qualifying Section 355 distribution, shareholders recognize no gain - basis is allocated between the original stock and the new subsidiary stock. Answer B is correct. FMV gain recognition (A) is the result of a taxable distribution. E&P ordinary income (C) applies only if Section 355 fails. No post-distribution holding period requirement (D).

Question 6

1. A substantial portion (historically interpreted as at least 40%) of the consideration paid to target shareholders must consist of acquirer stock - preserving target shareholders' equity interest in the combined enterprise. (correct answer)
2. The acquirer must be continuously engaged in business for 5 years after the reorganization.
3. The target corporation must continue as a separate legal entity after the reorganization.
4. All target shareholders must receive the same type of consideration.

Explanation: Continuity of interest requires that a meaningful portion of the consideration be equity in the acquirer - target shareholders must continue as equity holders in the combined enterprise. Answer A is correct. Continuous business operation (B) is the continuity of business enterprise requirement. The target often ceases to exist (C). Shareholders can receive different consideration (D).

Question 7

1. Fair market value of the acquirer stock received.
2. Zero, since the exchange was tax-free.
3. Carryover basis - the same as the basis in the target stock surrendered (adjusted for any boot received or gain recognized). (correct answer)
4. The original cost of the target stock when first purchased.

Explanation: In a tax-free exchange, shareholders take a carryover basis in the stock received - the deferred gain is preserved in the lower basis. Answer C is correct. FMV basis (A) would eliminate the deferred gain. Zero basis (B) is incorrect. Original cost may differ from adjusted basis if prior adjustments occurred (D).

Question 8

1. Statutory merger under applicable state law.
2. Stock-for-stock acquisition of a target corporation.
3. Divisive transaction distributing subsidiary stock to shareholders.
4. Recapitalization - a reorganization within a single corporation that changes its capital structure, such as exchanging bonds for stock, preferred stock for common stock, or modifying debt terms. (correct answer)

Explanation: A Type E reorganization is a recapitalization - a single-corporation restructuring of its capital (e.g., swapping bonds for equity, reclassifying stock). Answer D is correct. Mergers (A) are Type A. Stock-for-stock (B) is Type B. Divisive (C) is Type D.

Question 9

1. Foreign-to-domestic conversion of a corporation.
2. Mere change in identity, form, or place of organization of a single corporation - such as reincorporating in a different state or changing the corporation's name. (correct answer)
3. Reorganization involving a foreign subsidiary.
4. Conversion of a C corporation to an S corporation.

Explanation: A Type F reorganization is a mere change in identity, form, or place of organization - the simplest type, such as moving incorporation from one state to another. Answer B is correct. Foreign conversions (A, C) have specific rules. C-to-S conversions (D) are not reorganizations.

Question 10

1. Section 382 limitations on the use of NOL carryovers - an ownership change of more than 50 percentage points limits annual NOL usage to the value of the target's stock multiplied by the applicable federal rate. (correct answer)
2. Complete disallowance since the target corporation no longer exists.
3. No limitations - tax attributes carry over without restriction.
4. Limitations only if the acquiring corporation is a C corporation.

Explanation: Section 382 limits the use of acquired NOLs after an ownership change - the annual limit is the value of the target times the AFR at acquisition. Answer A is correct. Attributes carry over but are limited (B). Limitations apply (C). Section 382 applies broadly regardless of acquirer type (D).

Question 11

1. Each step in a multi-step transaction is analyzed independently.
2. Only the first transaction in a series is analyzed.
3. If separate steps are mutually interdependent or pre-planned to achieve an overall result, the IRS may combine them and tax the result of the overall transaction - potentially disqualifying a reorganization that appears tax-free if viewed step by step. (correct answer)
4. The step transaction doctrine only applies to foreign transactions.

Explanation: The step transaction doctrine collapses pre-planned steps into a single transaction, potentially triggering gain on what appeared to be a series of tax-free steps. Answer C is correct. Independent analysis (A) is the opposite of the doctrine. Not just the first step (B). Applies to domestic transactions too (D).

Question 12

1. The subsidiary must use solely its own voting stock as consideration.
2. The acquirer must pay at least 50% of the consideration in its own stock.
3. The target must remain as a separate legal entity after the merger.
4. Substantially all of the target's properties must be acquired, the target shareholders must receive parent stock, and the merger must qualify as a merger under applicable state law - meeting the same basic requirements as a direct Type A merger. (correct answer)

Explanation: In a forward triangular merger, the target merges into the acquirer's subsidiary, and the target's shareholders receive stock of the parent (not the subsidiary). To qualify as a tax-free reorganization, substantially all of the target's properties must be acquired by the subsidiary, the consideration must consist of the parent's voting stock, and the transaction must qualify as a merger under applicable state law. Answer D is correct. Answer A is incorrect because using solely the subsidiary's own stock is not a requirement of the forward triangular merger - target shareholders receive parent corporation stock, not subsidiary stock. Answer B is incorrect because the continuity of interest requirement is qualitative, not a simple 50% numerical threshold. Answer C is incorrect because in a forward triangular merger the target corporation is absorbed into the subsidiary and ceases to exist as a separate entity.

Question 13

1. Gain recognition equal to the lesser of the realized gain or the fair market value of the boot received - the nonrecognition treatment applies only to the stock received. (correct answer)
2. Ordinary income on the entire value of the boot.
3. No tax consequence since the overall transaction qualifies under Section 351.
4. Loss recognition on the difference between the boot received and the adjusted basis of property contributed.

Explanation: In Section 351, boot (non-stock consideration) triggers gain recognition limited to the lesser of realized gain or FMV of boot. Answer A is correct. Not necessarily ordinary income (B). Boot triggers recognition (C). Losses are not recognized even with boot in Section 351 (D).

Question 14

1. Type A and Type D reorganizations.
2. All reorganization types - voting stock must be used in every tax-free reorganization.
3. Type B and Type C reorganizations - these reorganizations have strict 'solely for voting stock' requirements that disqualify the transaction if any cash or other property is included. (correct answer)
4. Type E and Type F reorganizations.

Explanation: Types B and C require solely voting stock - even de minimis cash disqualifies them. Type A is more flexible and allows some boot. Answer C is correct. Type A is flexible (A). Not all types have this strict requirement (B). Types E and F are internal reorganizations (D).

Question 15

1. At least 51% of the target's assets must be transferred.
2. At least 90% of the FMV of net assets and 70% of the FMV of gross assets must be transferred - though courts and the IRS may apply the standard flexibly based on facts and circumstances. (correct answer)
3. All assets without exception must be transferred.
4. The target must retain no more than $1 million of assets.

Explanation: The IRS safe harbor for 'substantially all' is 90% of net assets and 70% of gross assets FMV, though qualitative factors also matter. Answer B is correct. 51% (A) is too low. Not literally all assets (C). Dollar amounts (D) are not the standard.

Question 16

1. Is preserved in the carryover basis of the acquirer stock received - when the shareholder ultimately sells the acquirer stock, the previously deferred gain is recognized at that time. (correct answer)
2. Is permanently excluded from taxation.
3. Is forgiven if the acquirer stock is held for more than one year.
4. Is eliminated when the shareholder dies due to the step-up in basis at death.

Explanation: Reorganization nonrecognition is temporary deferral - the gain is embedded in the carryover basis of the acquirer stock and recognized when that stock is eventually sold. Answer A is correct. Gain is deferred, not excluded (B). No one-year rule forgives the gain (C). Step-up at death does eliminate the gain (D - this is actually true but the question asks about what happens to the deferred gain in general, not at death).

Question 17

1. All tax attributes acquired in a reorganization without limitation.
2. Only credits, not NOL carryovers.
3. NOL carryovers and certain built-in losses - the annual limitation is the equity value of the loss corporation at the time of the ownership change multiplied by the applicable federal long-term tax-exempt rate. (correct answer)
4. Only reorganizations involving public companies.

Explanation: Section 382 limits the use of NOLs and certain built-in losses after an ownership change, with an annual limit based on the company's equity value times the AFR. Answer C is correct. Not unlimited (A). NOLs are the primary limitation (B). Applies to public and private companies (D).

Question 18

1. Recognize gain on the deemed sale of their target shares.
2. Recognize no gain or loss - the exchange qualifies as a nonrecognition event under Section 354, and shareholders take a carryover basis in the acquirer stock equal to their basis in the surrendered target shares. (correct answer)
3. Must pay an excise tax on the appreciation in the target shares.
4. Recognize income equal to the E&P of the target corporation.

Explanation: Section 354 provides nonrecognition to target shareholders who exchange solely for acquirer stock in a qualifying reorganization, with a carryover basis. Answer B is correct. No gain recognition without boot (A). No excise tax applies (C). E&P income applies to dividends, not reorganizations (D).

Question 19

1. The parent corporation merges into the target corporation.
2. A subsidiary of the acquirer merges into the target corporation, leaving the target as a surviving subsidiary of the acquirer - the target's shareholders receive parent corporation stock. (correct answer)
3. The target corporation's assets are transferred to the acquirer's subsidiary.
4. Two subsidiaries of the same parent merge together.

Explanation: In a reverse triangular merger, the subsidiary merges into the target (the opposite direction of a forward merger), leaving the target as a surviving subsidiary. Answer B is correct. Parent merging into target (A) is a direct Type A. Asset transfer (C) describes a Type C. Two subsidiary merger (D) is a different structure.

Question 20

1. A governmental reorganization involving a state or federal agency.
2. A reorganization involving the issuance of guaranteed stock.
3. A general reorganization applicable when other types don't apply.
4. A reorganization of insolvent corporations - specifically, the transfer of assets of an insolvent corporation to another corporation in a bankruptcy or insolvency proceeding. (correct answer)

Explanation: Type G reorganizations apply to financially distressed corporations in bankruptcy proceedings - allowing tax-free restructuring of insolvent entities. Answer D is correct. Government involvement (A), guaranteed stock (B), and general fallback (C) are not the correct descriptions.