Fuchsia Corporation Would Like to Merge with Mauve Corporation

question 90

Multiple Choice

Fuchsia Corporation would like to merge with Mauve Corporation. Which of the following will cause the transaction to be taxable?

• A) The shareholders holding 100% of Mauve receive only 30% of Fuchsia stock. This violates the continuity of interest because the Mauve shareholders' interest decreased by more than 50 percentage points.
• B) Mauve spins off assets not desired by Fuchsia before the transaction. This violates the continuity of business asset use test.
• C) The reason that Fuchsia desires to merge with Mauve is that Mauve has unused general business credits that Fuchsia can utilize immediately. This violates the sound business purpose doctrine.
• D) Mauve sells assets not desired by Fuchsia before the transaction. This violates the step transaction doctrine.

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Definitions:

Financial Assets

Assets that derive value because of a contractual claim, such as stocks, bonds, bank deposits, and mutual funds.

Income Trusts

Investment vehicles that hold income-producing assets and pass on earnings to investors, typically in sectors like real estate, oil and gas, or business.

Double Taxation

A taxation principle referring to income taxes paid twice on the same source of earned income, it occurs most commonly with corporate dividends.

Additional Regulations

Further rules or laws imposed by governing bodies to control or direct activities, often for safety, quality, or compliance.