Acquiring Corporation ("P") has 500,000 shares of voting common stock outstanding valued at $10 per share and $500,000 of accumulated earnings and profits.Target Corporation ("T") has assets with an aggregate adjusted basis of $300,000 and an aggregate fair market value of $500,000.T also has $50,000 of accumulated earnings and profits and, unless otherwise indicated, no liabilities.T has 1,000 shares of stock outstanding and a total of ten shareholders, each of whom has a $20,000 basis in their 100 shares of T stock valued at $50,000.

a)If T merges into P in a qualified Type A reorganization and each T shareholder receives 4,000 shares of P voting common stock worth a total of $40,000 and 20-year market rate interest bearing P note with a principal amount and fair value of $10,000.Then:

The P notesand each T shareholder on the exchange under Sectionthat may or may not be treated as a dividend.See Clark v. Commissioner, 489 U.S. 726, 109 S.Ct. 1455 (1989).Section 302 is applied by assuming T's shareholders received shares of P common stock, shares of which is then redeemed by P in exchange for the notes.The shareholders meet the requirements of Section 302(b)(2).

ANSWER KEY

are not boot

are boot

must recognize a $10,000 gain

avoids recognizing a $10,000 gain

4,000

5,000

1,000

100

would

would not