Avocado Corp wants to acquire Tomato Corp because their businesses are complemen

Question

Avocado Corp wants to acquire Tomato Corp because their businesses are complementary and Tomato has unused business credits of $63,000. Avocado is a manufacturer with basis in its assets of $2.4 million (FMV $3.1 million) and liabilities of $600,000. Tomato is a distributor of a variety of products including those of Avocado’s. Tomato’s basis in its assets is $2 million (FMV $1.5 million) and it has liabilities of $400,000. Avocado is willing to acquire only $1 million of Tomato’s assets and all its liabilities for stock and $100,000 cash. Tomato will distribute its remaining assets, cash, and Avocado stock to its shareholders in exchange for their stock, and then liquidate.

What type of reorganization would you recommend for Avocado and Tomato? Explain your choice.

Explanation / Answer

Answer

Use a "Type A" merger.

Avocado should acquire Tomato Corporations using a “Type A” merger.Avocado is willing to take all of Tomato’s liabilities but not all of its assets. A"Type C" cannot be used because 50% of the consideration is cash and liabilitie

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