After operating a successful US hotel corporation (H Corp) for several years, Donald decides to set up a wholly owned subsidiary in the export business (X Corp). His initial investment in this corporation is $1,000. Through a stroke of luck, the US tax laws change and X Corp becomes worth $100,000 overnight, even though its balance still only reflects $1,000 cash and $1,000 equity.

Donald is considering selling the operation but is concerned about the tax ramifications.

a. What would H Corps gain be if it sold the stock of X Corp for $100,000?

b. Instead, Donald has offered to sell X Corp to Bill Corp in a tax free exchange of 100% of X Corp for $100,000 of Bill Corp stock. Assuming Bill Corp accepts this offer, what is Bill Corps basis in X Corp stock? What is H Corps gain, if it immediately sells its stock in Bill Corp for $100,000?

c. What alternative structure might Bill Corp offer which might provide additional tax benefits to Bill Corp? Explain and show calculations

d. What might Bill Corp do to entice H Corp to accept the revised deal?