Type \"A\" Reorganization: Effects. Acquiring Corporation operates a rapidly exp

Question

Type "A" Reorganization: Effects. Acquiring Corporation operates a rapidly expanding hotel business. At the beginning of the year, it had 3,000 shares of stock outstanding owned equally by X, Y. and Z. This year. Acquiring convinced Mr. Seller to join its ranks. Seller owned all of the stock of Target Corporation, which owned a string of motels on the Emerald Coast of Florida. Target Corporation had assets worth $600,000 (basis $175,000). Seller, who was nearing retirement, wanted cash for his company, but Acquiring convinced him to take stock and some cash as part of a merger of Seller's corporation with Acquiring. As part of the deal, Acquiring gave Seller 2,000 shares of Acquiring common stock worth $500,000 and cash of $100,000 in a transaction qualifying as a statutory merger. Seller had a basis in his stock of $10,000. Will the transaction qualify as a type "A" reorganization? Assuming that the transaction qualifies as an "A" reorganization, why might Seller want to merge his corporation with Acquiring rather than sell it? Explain. What is Seller's gain or loss recognized and what is its character? What is Seller's basis in the stock of Acquiring Corporation? What is the effect on Acquiring Corporation?

Explanation / Answer

Question a. Type A: Mergers and Consolidations

Section 368 of the IRS Revenue Code identifies seven types of corporate reorganizations is a statutory merger or acquisition. Mergers and consolidations are both based on the acquisition of a corporation's assets by another company.

Question b.

One of the main advantage is to deffer the capital gain tax, by By Mr. Seller.

Question c.

Sellers Gain = $600,000-$175,000 = $425,000 and the gain is Capital nature (long term Capital Gain)

Question d.

Sellers Basis of stock in acquiring company is $10,000.

Question e.

Acquiring company will get certain advantages of mergers include achieving economies of scale, combining complementary resources, garnering tax advantages, and eliminating inefficiencies. Other reasons for considering growth through acquisitions include obtaining proprietary rights to products or services, increasing market power by purchasing competitors, shoring up weaknesses in key business areas, penetrating new geographic regions, or providing managers with new opportunities for career growth and advancement.

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