Lesson 4 Problem 11 Assumptions: T is a closely held corporation with 100 shares of voting common stock outstanding, which are owned 50 shares by A (adjusted basis $200), 30 shares by B (adjusted...

Operating assets $700 $900

Totals $900 $1,200

T owes outstanding liabilities of $200 (in the form of a 20-year bond held by L at an adjusted basis of $200), and T has E&P of $400. Assume each T share is worth $10. P is a publicly held corporation whose stock is listed on the NYSE. Unless otherwise indicated, (1) each transaction has a proper business purpose; (2) there is continuity of T’s “business enterprise” in P, (3) the transaction is pursuant to a “plan of reorganization,” and (4) FMV of debt is also its face amount and adjusted issue price. In each problem below, L consented to and did receive a bond of P that is identical in terms to the bond of T and L exchanged therefore.

What are the tax consequences to T, P, A, B, C, and L from the following transaction?

3. T merges into P solely in exchange for P voting stock (and the debt assumption). B, however, dissents under state law procedure for objecting shareholders. B’s T stock is purchased by T under an agreement whereby B agrees to take the $300 nonoperating assets, and whereby the stock given by P is reduced to $700. [State the results generally, but do the numbers for B only.]

4. Same as (3) above, A also dissents and likewise is bought out for $500 worth of operating assets. P gives T only $200 in value of P stock. Will P be concerned about this result (aside from the loss of T’s assets)? What would you advise P to do to protect itself?

5. T merges into P solely in exchange for P voting stock. Within six months of the merger, A, B, and C sell all of their P stock in a disposition they had planned at the time of the merger. What if, at the time of the merger, A, B, and C planned to keep the P stock.

6. S, a subsidiary of P, merges into T, exchanging solely cash for T’s outstanding stock. New T stock is issued to P for its S stock.