Pan, an S corporation, is in the home construction business and has sustained $500,000 in losses in excess of the shareholders’ bases in their stock. Thus, these losses have been suspended and are not likely to be available to the shareholders in the near future. To finance its construction in the last couple of years, Pan has issued notes for $1 million, and it is currently in default on these notes. Pan sells its investment assets and accounts receivables. It uses the proceeds to partially pay the note holders.

Once Pan realizes that it is no longer a viable going concern, it files a petition for bankruptcy under Chapter 11 with the bankruptcy court. To rehabilitate its business, Pan is considering the following. It will create a new C corporation, called Clipper, into which Pan will merge. Thus, Clipper will be the surviving corporation. The note holders will receive 80% of the Clipper stock in exchange for relinquishing their rights to the outstanding principals on their notes. The other 20% of the stock will be exchanged with the former shareholders of Pan. Clipper will acquire 60% of the fair market value of Pan’s gross assets and 100% of the fair market value of the operating assets held at the bankruptcy filing date. The operating assets are all of Pan’s assets except those previously sold to pay the note holders. Following the merger, Clipper will continue in the home construction industry.

Will the merger, as described, meet the requirements of the “Type G” reorganization?

Specifically, explain whether the proposed reorganization meets the requirement that substantially all of the assets of the old corporation have been transferred to the new corporation.