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Problem 7-32 (LO. 2, 3) The Rho Corporation was incorporated eight years ago by Tyee and Danette. Tyee received 5,000 shares of common stock
Problem 7-32 (LO. 2, 3) The Rho Corporation was incorporated eight years ago by Tyee and Danette. Tyee received 5,000 shares of common stock for his $100,000 contribution, and Danette received 10,000 shares of common stock for her $200,000 contribution. Five years ago, both Tyee and Danette acquired $50,000 of Rho bonds paying 3% Interest. In the current year, Rho's common stock is valued at $900,000. SheenCo would like to acquire a 25% interest in Rho by purchasing common stock from Rho. Tyee and Danette see this as a good time to restructure Rho's capital. They would like to own bonds paying 5% interest, instead of 3%, and each would like to receive $120,000 of preferred stock (par of $100 per share) in exchange for some of his or her common stock. Answer the following questions regarding the Federal income tax advice for Rho, a. Can Rho use a "Type E" reorganization to accomplish its restructuring? Yes b. Assuming face value of the bonds does not change, is the exchange of 3% bonds for 5% bonds taxable? No c. If the exchange of common stock for preferred stock occurs before the acquisition by SheenCo, Tyee and Danette each will receive 12,000 shares of preferred stock valued at 60 X in exchange for stock. d. Is the purchase of common stock by SheenCo a taxable event? No How many shares of common stock will SheenCo purchase in order to have a 25% interest in Rho? 2,000 shares of common 5,000 shares Feedback Check My Work Section 368(a) specifies seven corporate restructurings or reorganizations that will qualify as nontaxable exchanges. If the transaction fails to qualify as a reorganization, it will not receive the special tax-favored treatment. Therefore, a corporation considering a business reorganization
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