WILLIAM MITCHELL COLLEGE OF LAW
FINAL EXAMINATION--TAKE-HOME
CORPORATE TAX (LL.M.)
FALL 1996
Professor DENISE ROY
Handout Date: Friday, December 6, 1996, 10 a.m.
Due Date: Saturday, December 21, 1996, 2:30 p.m.
ADDITIONAL INSTRUCTIONS:
1. ONCE YOU HAVE PICKED UP THIS EXAM, YOU MAY NOT DISCUSS THE EXAM, THE ISSUES RAISED IN THE COURSE OR ANY OTHER ASPECT OF THE COURSE WITH ANY PERSON OTHER THAN MEMBERS OF THE CLASS AND ME. YOU MUST WRITE YOUR OWN EXAM ANSWERS.
2. You may use the textbook and Internal Revenue Code volume assigned for the course, your own notes and outlines and any course handouts. You may not consult any outside materials.
3. This examination must be typewritten or printed (not handwritten) and is subject to a 15-page length limitation. In addition, each section of the exam is subject to the page limitation specified on the exam. Any required diagrams must be provided on separate sheets of paper that will not be counted for purposes of the applying the page limitation(s). IF YOU EXCEED THE PAGE LIMITATION(S), YOU WILL BE GRADED ONLY ON THE PAGES THAT FALL WITHIN THE LIMITATION (E.G., ON THE FIRST 15 PAGES). Answers must be doubled spaced on 8-1/2 x 11 inch paper with non-proportional-type font (1) having no more than 12 characters per inch (CPI) (2) and normal top and bottom 1 inch margins and left and right 1 inch margins. Do not justify the right-hand margin of your text. Type only on one side of each sheet of paper. Do not use footnotes. PLACE YOUR TEST NUMBER ON EACH PAGE OF YOUR ANSWER AND NUMBER YOUR PAGES. FAILURE TO COMPLY WITH THESE INSTRUCTIONS MAY BE TAKEN INTO ACCOUNT IN YOUR GRADE.
4. Each section tells you the relative weight of the section to the exam as a whole. Do not assume that the number of pages you devote to a section must be proportional to the weight of the section.
5. You may assume that corporations mentioned in the exam are Subchapter C corporations unless the question specifically states otherwise.
6. You need not provide numerical answers but may do so if you choose. In some cases you may not have sufficient information to provide numerical answers. If you do provide numerical answers, be sure to explain how you reached your conclusions.
Good luck on your exam. It has been a pleasure working with you this semester.
I (20%)
Write no more than 3 pages total (not including diagrams) on the questions in this section.
A. When an acquiring corporation (P) wants to acquire the assets of another business (T), there are a number of ways the acquisition can be accomplished, including the following two options: (1) P purchases the stock of T from the T shareholders, after which T liquidates by distributing all its assets to P in exchange for P's T stock; (2) P purchases the assets of T from T, after which T liquidates by distributing all the sale proceeds to the T shareholders.
(1) Diagram these options.
(2) Contrast the tax consequences of these two options if P is a C corporation and T is an S corporation. Explain the tax advantages and disadvantages of each option for P and the T shareholders.
B. As we discussed in class, a Subchapter S shareholder who is also an employee of the corporation will generally prefer to receive payments from the corporation in the form of distributions with respect to stock rather than compensation to avoid payroll taxes on the payments. Do other S corporation shareholders who are not also employees have any tax-related reason to prefer distribution or compensation characterization of payments to shareholder/employees? (Focus on corporate tax considerations rather than payroll tax considerations.) Explain.
II (40%)
Write no more than 6 pages total (not including diagrams) on the questions in this section.
Avon has a parcel of land held for investment worth $30,000 with an adjusted basis of $9,000. Buddy has $30,000 in cash.
(1) Diagram and determine the tax consequences to Avon, Buddy and Xerxes Corp. of the following alternative transactions relating to the formation of Xerxes Corp. (but do not discuss the tax consequences of any loan transactions between a party and a bank except as may be necessary to analyze the transactions among Avon, Buddy and Xerxes):
(a) Avon transfers the property to Xerxes Corp. for all the Xerxes stock. Shortly thereafter, Avon sells half of her Xerxes stock to Buddy for $15,000.
(b) Prior to incorporation, Avon sells a half interest in the property to Buddy for $15,000, and then both Avon and Buddy form Xerxes Corp. by contributing their half interests in the property in exchange for half (each) of the Xerxes Corp. stock.
(c) Avon and Buddy both form Xerxes Corp., with Avon contributing her property in exchange for a 50 percent stock interest and $15,000 cash (borrowed by Xerxes from a bank), while Buddy receives a 50 percent stock interest for his cash. Xerxes uses the $15,000 received from Buddy to repay its bank debt.
(d) Avon borrows $15,000 from a bank, using her property as security. Avon then transfers the property (subject to the debt) to Xerxes Corp. in exchange for a 50 percent stock interest, while Buddy receives a 50 percent stock interest in return for his $15,000 cash. Xerxes Corp. uses the $15,000 received from Buddy to repay the bank debt.
(2) Summarize the costs and benefits of each alternative transaction for Avon, Buddy and Xerxes Corp.
(3) How would your answers to (1) and (2) change, if at all, if Xerxes were a Subchapter S corporation?
III (40%)
Write no more than 6 pages total (not including diagrams) on the questions in this section.
Howard and Janelle come to you for help in structuring a transaction. They each own fifty shares (50 percent) of the voting common stock of Quantum, Inc. There are no other classes of stock in Quantum. The value and adjusted basis of each shareholder's stock is identical, and each has a built-in gain in the stock (that is, stock value exceeds the shareholder's basis). Quantum, Inc. has $200,000 in assets (including $20,000 in available cash) and $100,000 in E&P. Howard and Janelle want to increase Howard's ownership interest to 55 percent and reduce Janelle's ownership interest to 45 percent. (They don't care how many shares they hold as long as the percentages are right.) In consideration, they want Janelle to receive $20,000 cash, and they need to get the cash from the corporation because Howard doesn't have any liquid resources. They do not want Howard's stock to lose value as a result of the transaction.
(1) Diagram the position of the parties (Howard, Janelle and Quantum, Inc.) prior to any proposed transaction and the position the parties will be in if they accomplish their goals.
(2) Using one or a combination of redemptions, distributions (of Quantum assets or Quantum stock) and cross-purchases (sales between shareholders), determine three different ways the parties could reasonably structure a transaction to accomplish their goals. Describe and diagram each alternative transaction.
(3) Describe briefly how each alternative would be taxed. (You will need to consider Section 305(a) and (b)(2) with regard to any Quantum stock distributions.) What are the tax advantages and disadvantages of the alternatives for each of Howard and Janelle?
THE END
0 Nonproportional fonts, such as Courier, have letters that are all the same size. Therefore, the number of characters per inch does not vary depending on the letters used. 0 CPI is not the same as "point" size (e.g., 10-point font). The exam questions appear in Courier font size 10, which meets the 12 CPI requirement. Use a ruler or compare with the exam questions to make sure you get the font size correct.