Racket Corporation and Laocoon Corporation Create Raccoon Corporation

question 37

Multiple Choice

Racket Corporation and Laocoon Corporation create Raccoon Corporation. Racket transfers $600,000 in assets for all of Raccoon's common stock. Racket distributes its remaining assets ($300,000) and the Raccoon common stock to its shareholder, Mia, for all of her stock in Racket (basis $950,000) and then liquidates. Laocoon receives all of the preferred stock for its $400,000 of assets. Laocoon distributes its remaining assets ($300,000) and the Raccoon preferred stock to its shareholder, Carlos, for all of his stock in Laocoon (basis $200,000) and then liquidates. How will this transaction be treated for tax purposes?

• A)This qualifies as a "Type A" reorganization. Mia recognizes no gain or loss, but Carlos recognizes $300,000 gain.
• B)This qualifies as a "Type C" reorganization. Mia and Carlos recognize $300,000 gain, to the extent of the boot.
• C)This qualifies as a "Type D" reorganization. Neither Mia nor Carlos recognizes a gain or loss.
• D)This is a taxable transaction. Mia recognizes $50,000 loss and Carlos recognizes $500,000 gain.
• E)None of the above.

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Definitions:

Treasury Stock

Shares of a company's own stock that it has reacquired from shareholders but not retired, thus reducing the amount of outstanding stock on the open market.

Cash Dividend

A cash distribution given to shareholders from a company's earnings.

Unlimited Liability

A legal structure in business where the owners are personally responsible for all of the company's debts, putting their personal assets at risk.

Partnership Form

A lawful business arrangement where two or more people share both the management responsibilities and the profits.