ANSWER THE QUESTIONS BELOW

You are to sketch out the moving parts for the reorganization transactions indicated in example 7 for the transferor corp., the transferor corps shareholders, any creditor and transferee corp.

Also indicate the following consequences for the example (not all will be applicable to the example):

Transferor

1. Is there recognition of gain or loss on the reorganization?

2. What is the basis in the corp. Stock acquired in the exchange?

3. Is there recognition of gain or loss on the distribution to the transferor's shareholder?

4. Is there recognition of gain or loss on the sale of the stock received?

5. Is there gain or loss on the sale of any asset of the transferor?

Transferor corp shareholders

1. Is there gain or loss recognized on the receipt of boot?

2. What is the shareholders basis in the stock received?

Acquiring corp

1. What is the basis in the assets acquired from the transferor corp?

Remember to indicate how each transaction meets the Continuity of Interest test and if applicable the Substantially All Assets test for a Type C reorganization. To show that the transaction is a tax free reorganization and not a taxable sale. An example of schematic to follow which is based on example 6 is attached.

SHOWN ABOVE IS A PICTURE OF THE QUESTION/EXAMPLE 7, WHICH IS ALSO TYPED OUT BELOW:

In the following examples, T holds two business assets, X (with a basis of $20 and a a value of $120) and Y (with a basis of $80 and a value of $30). T also has outstanding debts of $30 (held by C). T is wholly owned by an individual shareholder. A, whose basis for the T stock is $40 (with a value of $120). acquiring corporation P will acquire Ts assets in what is assumed to be a qualified Section 368 reorganization.

EXAMPLE 7: Type C reorganization and distribution of retained asset. T transfers only the X business to P for $120 of P voting stock (P does not assume T's debt to C) in a Type C reorganization (the substantially-all requirement is satisfied under the Revenue Procedure 77-37, since the X business is 80% of T's gross assets and 100% of T's net assets). T sells $30 of P stock and pays off C with proceeds. T then liquidates, distributing the $90 of P stock and the T business (worth $30) to A. T recognizes no gain on the T-P exchange and takes a $20 basis in the P stock under Section 358(a)(1). However, T recognizes a $25 gain on the P stock sale, since Section 361(b)(3) doe snot apply here (allocable basis for the stock sold was $5). On the liquidation, T recognizes to gain on the P stock (basis $15; value $90) under Section 361(c)(1), and also recognizes no loss on the distribution of the Y business to A under Section 361(c)(1) (a Section 311 parity result in that gains, but not losses, are recognized on the distribution of unqualified property, the Y business). A recognizes $30 of boot gain under Section 356(a)(1) (the Y business) and takes a $40 substituted basis in the P stock (and a $30 stepped-down basis in the Y business boot). P takes a $20 carryover basis for the X business (and inherits all of T's tax history under Section 381). Thus, there is no heads-up tax planning here.

Textbook: Federal Income Taxation of Corporations and Shareholders, 7th Edition

Pages: 12-205 and 12-206

Course: Taxation of Reorganizations & Liquidations