C Corporation - Axle Corporation

Axle Corporation was formed in 1995.It is based in Iowa and operates throughout the US Midwest.Axle is owned by the Miller family.The company controls about $250 million in productive and investment assets, most of which are located in Iowa.

Axle started out as a wholesale distributor of paint and lacquer products, purchasing gallon-size and larger containers of paints from chemical companies and selling them mainly to retailers in its operating region.Over time, though, the company moved into the manufacturing process as well, purchasing raw chemicals and processing them at its Iowa plant so as to develop its own line of paints, thinners, and spray cans.These manufactured products are sold to the big-box chains, including Ace and Lowes, for retail distribution throughout the world.

Both divisions of Axle have been highly profitable, and they are almost recession-proof.The distribution division operates near the Des Moines airport and has prime access to the freeway system.There is adjacent vacant land in case Axle wants to expand those operations.The manufacturing division is located along the river in Davenport.Corporate headquarters take up an entire office building in downtown Des Moines.

Axle has been showing an annual fifteen to twenty percent return on equity for the past five years.The officer and management group, longtime employees not related to the Millers, see only future growth in operations and profits for the next decade, and they are all committed to Axle and to Iowa for the long-term.

As a profitable regional operation, Axle regularly receives offers from investors interested in a takeover.The Millers have resisted all of these offers so far, given the potential for expansion the Millers believes that the company should now seriously consider the these opportunities.The latest correspondence with the private-equity Cooke Group Inc (a closely held C corporation) is almost too tempting to refuse.The Cooke C-Corporation has a similar business and believes there is a significant earning potential to be gained by taking advantage of the symmetry created by combining the two operations.Cooke shareholders want to merge the Cooke C-Corp with Axle corporation.Cooke says that it will consider merging its C-Corp with Axle plus it would consider paying some cash to Axle's shareholders, if necessary, but only if the transaction is completed within eighteen months, and the federal income tax consequences are favorable to the group

You are Axle's regular tax consultant and you have a reputation in the Midwest is as the "Master Deal Maker," because you bring both a high level to technical tax expertise and a skill in negotiating an offer that typically is compelling to "both sides" of the transaction.In your first meeting with both Axle and Cooke Group shareholders you explain the potential for a tax free reorganization.You briefly describe the different types of reorganizations available under the US tax rules as follows:

Corporate Reorganizations

The Code provides seven different types of tax-free reorganizations [368(a)(1)].Ordinarily, no gain or loss is recognized by either the acquiring or the acquired corporations who are parties to the reorganization.In addition, no gain or loss is recognized to the security holders of the corporations involved in a tax-free reorganization in the exchange of their stock and securities.But gain may be recognized when the party receives cash or other consideration in addition to stock and securities.The like-kind exchange rules do not apply to dealings in corporate securities [1031(a)(2)(B)], but the 368 rules often result in similar treatment.

I.Type A- - a statutory merger or consolidation, controlled by US, US state, or non-US laws [Reg 1.368-2(b)(ii)].

II.Type B - the acquisition by a corporation, in exchange solely for all or part of its or its parent's voting stock, of another corporation if, immediately after the acquisition, the acquiring corporation has 80 percent control of the other corporation.

III.Type C - the acquisition by a corporation, in exchange solely for all or part of its or its parent's voting stock, of substantially all of the assets of another corporation.

IV.Type D divisive - an existing active business of the corporation, operated for at least the last five years, is transferred to another corporation, in a spin-off, split-off, or split-up.At least 80 percent of the new entity's stock must be held by the existing corporation.No boot may be used.

V.Type E - a recapitalization of the entity's common or preferred stock and/or debt. V.

VI.Type F - a change merely of the entity's identity, form, or place of organization.

VII.Type G - a takeover of a corporation's stock by its debtors, when the corporation is in a bankruptcy or receivership proceeding.At least 80 percent of the lenders' debt must be replaced by the debtor's stock.The favorable tax attributes of the loss corporation (like its NOL and credit carryovers) are eliminated to the extent of the cancelled debt principal [Reg 1.108-7].

You note that the shareholders should consider section 368(a)(1)(A), (B) or (C) type reorganizations.

I

Develop and diagram an approach for Axle and Cooke to consider, in executing Cooke's acquisition (develop & diagram the best alternative).Other advisors will focus on the legal and financial aspects of implementing your plans, which should take into account both current and future tax liabilities.For this purpose, consider federal tax consequences only.Your design and diagrams should consider Type A-, B and C reorganizations.

II

Provide a summary of the high level tax considerations that will result from a carrying-out of your plans (a type A-, B or C reorganization).Include citations to controlling tax law.Your comments should focus on the following:

A.Common Requirements

1.Plan of Reorganization

2.Business Purpose

3.Continuity of Shareholder Interest (COSI)

4.Continuity of Business Enterprise (COBE)

B.Effect on the Corporation

C.Effect on the Shareholder

D. Carryover of Tax Attributes