Gato Corporation Exchanged 25% of Its Stock with Lobo for All

question 59

Multiple Choice

Gato Corporation exchanged 25% of its stock with Lobo for all of its assets. The Gato stock was distributed to the Lobo shareholders in exchange for all of their stock. Lobo then liquidated. At the time of the acquisition by Gato, the value of Lobo was $3 million, and the Federal long-term tax-exempt rate was 4%. In the current year, Gato has $500,000 of taxable income. Lobo has excess credits from prior years amounting to $150,000. What amount of Lobo's credits may Gato use in computing its Federal income tax for the year if Gato is in the 21% tax bracket?

• A) $150,000
• B) $105,000
• C) $79,800
• D) $40,800
• E) None of these

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Definitions:

Arbitrage

The practice of exploiting price differences for the same asset in different markets by simultaneously buying and selling the asset to take advantage of those price differences.

Risk-free Rate

A forecasted return rate on a risk-free investment, usually shown through government security yields.

Futures Price

The agreed-upon price for the underlying asset in a futures contract to be paid at a future date.

Short Position

The futures trader committing to deliver the underlying asset.