1. Paternal is a corporation that wishes to acquire Mark Corp. Mark has 4,000 shares of common stock held by 10 shareholders, each with 400 shares. Mark has assets with a FMV of $5 million and a bank loan for $1 million. Mark’s adjusted basis in the assets is $1.6 million. Individually consider the tax consequences of each of the following, focusing on whether the acquisition will qualify as a tax-free reorganization. You may cross-reference between answers to the extent your explanations are duplicative but be clear about what you are referencing.
a. In exchange for their respective 400 shares of Mark stock, Paternal transfers to each Mark shareholder $360,000 of Paternal voting stock and $40,000 cash.
b. Paternal purchases 400 shares from a single shareholder, Aim, for $400,000 cash. Nine months later, Paternal transfers $400,000 of Paternal stock to each of the other nine Mark shareholders in exchange for their respective 400 shares of Mark stock.
c. Paternal acquires all the assets of Mark and assumes the $1 million liability in exchange for $3.6 million of Paternal voting common stock and Notes Payable in the amount of $400,000. Immediately after, Mark completely liquidates distributing the Paternal shares and Notes pro rata to the Mark shareholders. Lastly, then Paternal drops the assets acquired from Mark into a new subsidiary Subbie Corp.
d. Same as c. except Mark retains $400,000 of its cash and therefore Paternal exchanges $3.6 million of voting common (no Notes). Mark distributes the Paternal shares and the cash pro rata to Mark shareholders in complete liquidation.