Pine Corporation is the common Pine of a group of corporations and files a consolidated return.(This problem has nothing to do with the consolidated return rules so don't even go there.)Pine engages in the business of producing and distributing Drug Group A and Drug Group B. Pine has only a class of common stock outstanding and 92% of that stock is widely held and publicly traded.Ash Corporation is the only > 5% shareholder.Some of Pine's employees hold Pine stock subject to vesting requirements.This stock was issued to them in connection with the performance of services and is classified as restricted stock until it is fully vested.Drug A actually represents a series of related drugs while Drug B represents a series of different related drugs.

Pine has incurred significant research and experimental (R&E) expenses with respect to projects undertaken for the development of Drug A and has incurred significantly less related to the development of Drug B. Pine generally expenses all R&E expenses in the year incurred. Four years ago, Pine acquired a drug business from Ash Corporation in a tax-free reorganization, which is how Ash became a Pine shareholder.Ash had operated this business, the production of Drug A, for two years prior to the reorganization.Pine has produced and distributed Drug B for ten years.Pine also produces and distributes other drugs.It produces large quantities of these other drugs but they are generic versions of drugs and have a small profit margin.Drugs A and B are "named" drugs with high profit margins.Pine sells approximately the same amount of Drug A and Drug B. Subs A1, A2 and A3 produce Drug A in large quantities and Drug B in much smaller quantities (to help out when sales are particularly high) and Subs B4, B5 and B6 produced large quantities of Drug B and much smaller quantities of Drug A (to help out when sales are particularly high).All subsidiaries are owned 100% by Pine. The production of Drug A and Drug B require different ingredients and different manufacturing equipment as well as different personnel.

Pine spent last year analyzing its business operations and has determined that the operations to produce Drug A and Drug B represent different financial, operating, regulatory and risk characteristics.Drug A operations are based on and rely on significant R&E and on developed markets for the sale of its product, which is highly regulated.Drug A products have different approval and life cycles and face substantial regulatory hurdles.Drug B products require only a limited amount of R&E and their sales growth is primarily in emerging and less regulated markets outside of the US.Drug A's business model involves substantially more risk and significant funding for R&E.This risk has had a negative effect on the overall value of Pine.These differences have resulted in certain operational inefficiencies and the performance and success of each Drug group would be enhanced if the two businesses were separated.

To achieve these goals, Pine wants to separate the Drug A business from the Drug B business in a tax-free divisive Type D reorganization.

1. Discuss how Pine can achieve its goal using a tax-free Type D reorganization. Include in your discussion the following:

• Discuss how your proposed reorganization meets the IRC requirements for that type of reorganization.Discuss the specific type(s)of divisive D reorganization that you propose.
• Discus the tax consequences to the entities and to Pine's shareholders including recognized gain/loss, adjusted basis of any assets transferred and the adjusted basis of any stock exchanged.
• Discuss how you will address the issue that many of Pine's employees hold restricted stock, they work for different subsidiaries and employees from all subsidiaries are in the group holding restricted stock..