Diversified Corporation operates a successful bank with ten branches. Al, Bob, and Cathy created Diversified six years ago and own all the Diversified stock in equal shares. Diversified has constructed in downtown Metropolis a new building that houses a banking facility on the first floor, offices for its employees on the second and third floors, and office space to be leased out to third party lessees on the fourth through twelfth floors. Since the building was completed six months ago, approximately 75% of the floor space on the upper floors has been occupied. Under a plan of reorganization, Diversified proposes to transfer the building to Metropolis Real Estate (MRE) Corporation in exchange for all the MRE common stock. A team of commercial real estate experts has been hired to manage MRE. Following the reorganization, the building will be the only property owned by MRE. Diversified owns no other real estate because it currently leases from third parties the facilities for its ten retail banking branches. Diversified will distribute the MRE common stock ratably to Al, Bob, and Cathy, who will end up with all the Diversified and MRE common stock. Your tax manager has asked you to draft a memorandum explaining whether or not the proposed transaction will satisfy the requirements of a nontaxable divisive reorganization. At a minimum you should consult:
• IRC Sec. 368(a)(1)(D)
• Reg. Sec. 1.355-3(b), (c)
• Appleby v. Comm., 9 AFTR 2d 372, 62-1 USTC ¶9178 (3rd Cir., 1962)