Chapter 7: Corporate Reorganizations Research Problem 1

Topics: Stock, Bond, Stock market Pages: 3 (660 words) Published: March 11, 2013
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 the Old Post outstanding bonds in exchange for New Gate bonds paying 6% interest annually, with an equal principal amount and a 15-year term. All of the Old Post bondholders exchange their debentures, and 90% of the Old Post shareholders exchange their stock. Can these transactions qualify as nontaxable corporate reorganizations? How should these transactions be treated by New Gate, Old Post, and Old Post’s shareholders?

From my research, this particular problem appears to be based on Section 368 and more specifically Revenue Ruling 98-10. The reason I say this is because here is the issue and facts from the IRS website:

Rev. Rul. 98-10
Where a stock for stock acquisition otherwise qualifying under § 368(a)(1)(B) of the Internal Revenue Code is accompanied by an exchange of securities, how should the transaction be treated?

The facts are substantially similar to the facts in Rev.
Rul. 69-142, 1969-1 C.B. 107.
Corporation X acquires all of the outstanding capital stock of Corporation Y in exchange for voting stock of X. Corporation Y is a solvent corporation. Prior to the exchange, Y has an issue of six percent fifteen-year debentures outstanding. Pursuant to the plan of reorganization, X...
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