Question

Kowalski Corporation is interesting in acquiring Queenie Corporation because Queenie manufactures a product that is an essential part of Kowalski Corporation’s manufacturing process. Kowalski will transfer its stock for all of Queenie’s plants, equipment and inventory valued at $2,000,000 (adjusted basis $1,500,000) and $1,000,000 of liabilities associated with those assets. Kowalski plans on continuing to use Queenie’s assets in its manufacturing process. Both Kowalski and Queenie have been in existence for more than ten years. Queenie will retain $50,000 cash and $100,000 of liquid assets to pay a product liability lawsuit. Once the lawsuit is resolve Queenie will liquidate. It is expected that this will occur within one year. Queenie has a deficit in AE&P of ($200,000). Queenie is solely owned by Tina Goldstein who has a basis in her stock of $375,000.

A) What is the most favorable corporate reorganization form for the acquisition of Queenie by Kowalski? Explain your choice.

B) What is the amount of realized gain or loss recognized by Kowalski, Queenie and Tina?

C) How much of the realized gain or loss is recognized by Kowalski, Queenie and Tina?

D) What is Kowalski’s basis in the assets it receives from Queenie?

E) What is Tina’s basis in the Kowalski stock she receives?

Answer 1

A.The most favourable corporate reorganization form for the acquisition of Queenie by Kowalski is statutory merger or acquisition since it is based on one corporation acquiring another's assets.

D.Kowalski's basis in the assets it receives from Queenie is its stocks.

E.Tina's basis in the Kowalski stock she receives is the assets.

B.Realised gain of Kowalski=15,00,000-10,00,000=5,00,000

Realised loss of Queenie=(50,000+1,00,000)-2,00,000=50,000

Realised gain of Tina=3,75,000

C.Realised gain recognised by Kowalski=15,00,000-10,00,000=5,00,000

Realised loss recognised by Queenie=(50,000+1,00,000)-2,00,000=50,000

Realised gain recognised by Tina=3,75,000