NOWv2 10nine te.. CanvasConnect New tab Besides the statutory requirements tor t
ID: 341119 • Letter: N
Question
NOWv2 10nine te.. CanvasConnect New tab Besides the statutory requirements tor tax-free treatment for c judicial requirement Tor corporate reorganizatises orporatreorganizations, there Are several ju cial fequ"iments. Which of the following Is not a a. There must be a cound business purpose for the restructufng b. The step transaction doctrine should not apply The contirity of business anterprie test must be met d, The, ownership change doctrine should be mat. ll of the above Itema are udicial requirements for retrganizationsExplanation / Answer
All of the above items are judicial requirements for reorganizations. (which is Option E)
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Explanation:
For a merger, acquisition or any other form of reorganization to be treated as tax-free, certain judicial requirements are required to be complied with. The purpose of reorganization should not be merely to avoid tax and there must be a supporting purpose for restructuring.Therefore, Option A is correct.
The business so acquired should be carried on by the acquiring company or the assets of acquired company must be used in order to obtain the status of a tax-free reorganization. This requirement is known as continuity of business enterprise doctrine. Therefore, Option C is correct.
Reorganization should not be achieved with the use of a series of interlinked/intermediate steps in order to obtain a tax-free status. This is particularly true, when the entities could have been merged in a single step but without having tax benefits. In other words, the reorganization shouldn't be constructed with the use of multiple steps solely for the purpose of obtaining tax benefits. Therefore, Option B is correct.
A substantial portion of the consideration paid to the shareholders of the acquired company must be in the form of stock of the acquiring company (as it would indicate continuity of ownership enterprise). The ownership of (shareholders of the acquired entity) would change from that of the existing corporation to that of the new entity. Therefore, Option D is also a requirement for tax-free reorganization.
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