Outline – Corporate Tax I - Blank
REVIEW: INCOME TAX
OVERVIEW: THE CORPORATE INCOME TAX
Subchapter C – 300s of the Code
2 Layers of Corporate Tax (Double Tax) – because we tax every transaction
 Corporate
 Shareholder
Corporate Classification
 State law corporation
 Unless, the entity made an S corp. election
 Some other eligible entities can decide if they want to be taxed as a corp. (check the box)
Outline – Corporate Tax I - Blank
FORMATION
IRC § 351
Nonrecognition provision
No gain or loss shall be recognized if property is transferred to a corporation by one or more
persons solely in exchange for stock in such corporation and immediately after the exchange
such person or persons are in control (as defined in § 368(c)) of the corporation.
Policy: Encourages corporate formation
Reasoning: There is no real change in value/wealth for the incorporators (just a change in
form)
Requirements:
 Person: § 7701(a)(1)
 Qualifying property:
o Includes cash
o Doesn’t include services
 Solely: except under § 351(b)
 Stock
o Debt isn’t stock
o NQPS isn’t stock
 Immediate control: § 351(a); § 368(c)
o At least 80% of total combined voting power of all classes of stock entitled
to vote
o At least 80% of total number of shares of all other classes of stock of the
corporation
 If there is more than one class of non-voting stock, they must own
80% of each class
Outline – Corporate Tax I - Blank
o
o
Intermountain Lumber
v. Comm’r
Who is in the control group? Doesn’t have to be simultaneous
When do you test for control? Momentary control is not enough if you lose
control as a result of taxable disposition pursuant to a “binding agreement”
or “prearranged plan”
There was not immediate control after transfer b/c SH had already sold ½ of the
shares to another person
The other SH didn’t count as part of the control group b/c he didn’t transfer
property to the corporation
Rule: Where the transferor sells shares in taxable disposition as part of the same
transaction, the transaction does not qualify under § 351 b/c there has been more
than a mere change in form
Treatment of Boot:
 Boot = nonqualifying property
 General Rule: § 351(b)
o Any gain realized is recognized to the extent of boot received
o No loss is recognized
 Flavor/Character: depends on the assets transferred
 Basis: § 358; § 362
o Boot takes FMV basis
o Stock takes exchange basis minus FMV of boot plus gain recognized
o Corporate basis is transferred basis plus gain recognized by the transferor
 Timing: (Installment Boot)
o Defer gain on boot until you receive payment
o Application for stock basis is immediate
o Corporate basis in asset is stepped upon recognition of gain by SH
Revenue Ruling 68-55:
IRC § 358
When there are multiple assets transferred, you must divide gains proportionately
Split holding period rule
Exchange basis
Basis in shares/stock gained by exchanging property is the basis that the SH had in the
property that was given in exchange for the shares
IRC § 1032
Nonrecognition provision
IRC § 362
Corporate basis
Basis is the same as it was in the hands of the transferor (SH), increased by the amount of
gain of the transferor (if the SH also got some cash)
NEBIL
Both corporation and SH cannot have high basis
Limits corporate basis to FMV
Can be flipped if elected
IRC § 1223
Holding period
For corporation, tacks from SH if basis transfers from SH
For SH, if the thing received is a share/stock, then you tack your basis in the property given
for the stock
Reasoning: Mere change in form, don’t want you to lose holding time
Problem p.60
Outline – Corporate Tax I - Blank

TREATMENT OF BOOT
Boot = nonqualifying property
 General Rule: § 351(b)
Any gain realized is recognized to the extent of boot received
No loss is recognized
 Flavor/Character: depends on the assets transferred
 Basis: § 358; § 362
o Boot takes FMV basis
o Stock takes exchange basis minus FMV of boot plus gain recognized on exchange
o Corporate basis is transferred basis plus gain recognized by the transferor
o Any unrecognized gain is preserved by adjusting the basis of non-boot property; boot just
takes FMV basis, even if not all of the boot gain is recognized
o Any gain not recognized is reflected in corporations basis in transferred asset
 Timing: (Installment Boot)
o Defer gain on boot until you receive payment
o Application for stock basis is immediate
o Corporate basis in asset is stepped upon recognition of gain by SH
Revenue Ruling 68-55:
When there are multiple assets transferred, you must divide gains proportionately
Split holding period rule
Outline – Corporate Tax I - Blank
Problem p. 79
Outline – Corporate Tax I - Blank

ASSUMPTION OF LIABILITIES
IRC § 357
Assumption of Liability
General Rule: No gain b/c not boot
 Basis in stock: gain attributable to transferred liabilities is deferred by reducing
transferor’s stock basis (§ 358(d))
 Corporation’s basis: transferor’s basis plus gain recognized (§ 362(a))
 Basis cannot be adjusted above its FMV
 Holding period should tack
Policy: don’t want to completely discourage people from transferring properties w/liability
Reasoning: not as liquid as some forms of boot
There is reduced basis (by the amount of liability transferred) in the shares instead of immediate gain
recognition
Exceptions:
 § 357(c) gain: where liabilities exceed aggregate adjusted basis of property transferred, there is gain
to the transferor
 § 357(b) tax avoidance purpose: triggers recognition of all realized gain (general boot rule)
Peracchi v. Comm’r
Ongoing capital contribution – fits § 351
Promissory note is manufacturing basis (how much does it cost?)
TC: not real indebtedness, no basis increase
IRS: note has basis of zero b/c there is no cost to taxpayer
Holding: note has basis of face value b/c there is risk/cost to taxpayer in the case of
bankruptcy, etc.
Outline – Corporate Tax I - Blank
Phantom gain: possible issue if corporation takes transfer basis of zero in the note

INCORPORATION OF GOING BUSINESS
Potential Issues:
 Assignment of Income: conflict between doctrine and § 351 (theoretically allows assignment)
 Tax benefit rule
 Aps/ARs
 Contingent liabilities
Hempt Bros. v. U.S.
§ 351 trumps the assignment of income doctrine
Limits: you cannot do it solely for tax avoidance. E.g., cannot keep payables and
assign receivables
Brown v. Comm’r
Revenue Ruling 95-74
Problem pp.108-09

CAPITAL STRUCTURE
Debt v. Equity
 These are the ways that corporations get capital
 Assets = liabilities + equity
 This line drawing in the Code creates some distortion
Considerations:
 Debt:equity (overleverage can lead to greater risk of bankruptcy; risk of recharacteriation)
 How do you get rid of your friends: pay back debt v. redeeming shareholders
 Accumulate income tax: § 541 encourages corporations to distribute earnings (but accumulation of
earnings is more acceptable if you are going to pay off debt)
Indmar Products
v. Comm’r
Factors in figuring out debt or equity:
1) names given to the instruments
2) presence or absence of a fixed maturity date & schedule of payments
3) presence or absence of a fixed rate of interest & interest payments
4) source of repayments
5) adequacy or inadequacy of capitalization (debt:equity)
6) identity of interest between the creditor & stockholder
7) security, if any, for the advances
8) corporation’s ability to obtain financing from outside lenders
9) extent to which the advances were subordinated to the claims of outside
creditors
10) extent to which the advance were used to acquire capital assets
11) presence or absence of a sinking fund to provide repayments
Problem p.142-43
NONLIQUIDATING DISTRIBUTIONS
General Rule: distribution should be included in Gross Income for the SH
Outline – Corporate Tax I - Blank
IRC § 301
Distribution Waterfall
First: dividend to extent of E & P
Second: reduce basis (return of capital)
Third: capital gain
Distribution =
Cash
+ Fair Market Value of Property Received
‒ Liabilities Assumed by the Shareholder
‒ Liabilities to Which Property Received is Subject
+ Cancellation of Shareholder Debt
IRC § 311
for corporations
IRC § 316
Distribution = dividend if it comes out of earnings & profits
IRC § 243
Dividend Received Deduction
Dividend received by corporation
Allows deduction for the amount that was included in gross income as dividend (after
application of the waterfall)
- 100% if corporation receives “qualifying dividends” from member of same “affiliated
group”
- 65% if corporation receives a dividend from a corporations in which it owns 20%-80%
of the stock
- 50% if corporation receives a dividend from a corporation in which it owns less than
20% of the stock

EARNINGS & PROFITS
Economic income rather than taxable income
IRC § 312
IRC § 316
Computing E & P:
 Start w/taxable income
 Adjustments:
o Some excluded items are added back (things that represent an increase in the wealth of the
corporation/increase corporation’s ability to pay dividends)
o Some deductions are added back (things that don’t reflect real costs/decrease in wealth of
the corporation)
o Some nondeductions are subtracted (actual expenditures)
o Timing adjustments (accurate reflection of loss of value)
Problem – Unit IIA 1

DISTRIBUTIONS OF CASH
IRC § 301
Timing of taxation to shareholder is when they receive the dividend; timing to corporation is
when it pays the dividend
IRC § 312
General rule: when corporation distributes property, E & P is reduced
Outline – Corporate Tax I - Blank
IRC § 316
IRC § 311
No gain or loss to stock/property when they make a distribution
Revenue Ruling 74-164 Reduce CEP first, then AEP
Dividend deflates E & P
Deficit to CEP is applied ratably to the year
Revenue Ruling 69-440 Allocate EP to Preferred Stock first
Problem – Unit IIA 2

DISTRIBUTIONS OF PROPERTY
What happens when a corporation distributes appreciated property?
IRC § 301
IRC § 311
(b) if property is appreciated, then you recognize gain as if it was sold
SH gets FMV for implementation of the § 301 waterfall
(a) still applies to loss effect on E & P, expands with gain, reduces based on distribution
IRC § 312
Problem p. 167-68

CONSTRUCTIVE DISTRIBUTIONS
IRC § 7872
Nicholls, North, Buse Co. Raises eyebrows b/c they are a family and may be getting rid of profits by paying
v. Comm’r
excessive salaries to sons
Boat purchased by the corporation can by used personally by the sons
Use of the boat = constructive dividend; dividends can be in kind and can be use of
property
Dividend can be attributed to Dad (controlling SH) b/c
Amount of dividend = Fair rental value of the boat (not purchase price)

ANTI-AVOIDANCE LIMITATIONS ON THE DIVIDENDS RECEIVED DEDUCTION
Valuable deduction, corporations try to make everything look like a dividend
IRC § 243
IRC § 246
Special Holding Period Requirements
Denies DRD if corporate SH hasn’t held shares long enough
Policy: makes us comfortable that corporate SH took some risk
IRC § 246A
Debt-Financed Portfolio Stock
Reduces DRD by the percent of the dividend that is debt financed
Equation in (a), (d)
Outline – Corporate Tax I - Blank
E.g., 70% 𝑥 (100% −
IRC § 1059
7500
15000
) = 35% (if you only debt financed ½)
Extraordinary Dividends: Basis Reduction
Dividends are aggregated
If they are extraordinary in relation to basis and corporate SH hasn’t held them > 2 yrs., then
there is a reduction in basis and you still get DRD
Policy: if the dividend is over the threshold of basis this causes problems
Problem p. 181

USE OF DIVIDENDS IN BOOTSTRAP SALES
TSN Liquidating Corp.
v. United States
B/c the assets distributed to the SHs were not bargained for or paid for in the sale,
they were not considered gain from the sale but rather a dividend
Game = get DRD & smaller gain by emptying the corporate trunk
Looks more fishy if the dividend is some how making it back to the buyer as a
payment
Waterman
This is the horrible
“Dividend” = promissory note for cash
Sale was really soon after note but for much less
The buyer was essentially paying the dividend
Problem = circular
Coffey
Business reason for the sale of the assets prior to the sale
Couldn’t agree on value of assets
Got rid of assets and lowered price
Problem p. 193
Are you allowed to empty the corporate trunk before selling the car?
We worry when there is a conduit
We worry leess when there is a business reason for removing the assets
REDEMPTIONS & PARTIAL LIQUIDATIONS
Treatment can be as sale or dividend, kinda depends on whether SH ownership remains proportional
IRC § 302
Sale or Exchange Treatment
If requirements are met, then the SH gets sale or exchange treatment (gain w/adjustment to
basis)
If requirements aren’t met, go back to § 301 Waterfall (general distributions)
Basis: take basis of redeemed stock that remains and add it to the basis of the rest of
the stock that SH still holds, if they have been terminated then the basis goes to
stock held by family members
Requirements:
 § 302(b)(2): Substantially Disproportionate
IRC § 317

CONSTRUCTIVE OWNERSHIP OF STOCK
Outline – Corporate Tax I - Blank
Must be used when testing for complete redemption
IRC § 302
IRC § 318
Constructive Ownership
General Rule:
1. Family: narrow spousal definition, kids, grandkids, parents (about amount of
control)
2. From entities:
3. To Entities:
Cut-off Rules: § 318(a)(5)
 No family double attribution
 Blocks attribution to entity from being attributed to person (V)
Problem p. 200

REDEMPTIONS TESTED AT THE SHAREHOLDER LEVEL
IRC § 302(b)(2) Substantially Disproportionate
Requirements:
1. Immediately after redemption, SH must own less than 50% of the vote
(§ 302(b)(2)(B))
2. Immediately after redemption, SH must own less than 80% of the % of voting stock
owned by SH before redemption
(§ 302(b)(2)(C))
3. Immediately after redemption, SH must own less than 80% of the % of total
common stock owned by SH before redemption
(§ 302(b)(2)(C)
Series Rule (§ 302(b)(2)(D))
Policy: Make sure you are actually changing your interest in the corporation
Revenue Ruling 85-14
Measure the transactions in the aggregate b/c the facts & circumstances point to a
plan to make a proportionate distribution and that means that you cannot qualify
for sale/exchange treatment (§ 302(b)(2)(D))
The plan does not have to be joint/agreed upon in advance
We don’t like the causal relationship between the plan b/c the resignation of B
makes A in control again after redemption (didn’t really change his interest)
What is most important timing or intent?
Problem p. 204
Problem p. 205
IRC § 302(b)(3) Complete Termination
IRC § 302(c)(2) Waiver of Family Attribution
Waives family attribution in termination situations
Requirements:
1. Immediately after redemption, SH has no interest in the corporation (including as
an officer, director, or employee) other than creditor
2. SH cannot acquire interest in the corporation (other than by bequest) for the next
10 yrs.
3. SH agrees, in writing, to notify IRS of any such reacquisition
Outline – Corporate Tax I - Blank
Look back rule: § 302(c)(2)(B)
 Cannot waive family attribution if…
 In the past 10 yrs., SH acquired any of the redeemed stock from a § 318
relative
 In the past 10 yrs., a § 318 relative acquired any share from the SH making
the redemption
 BUT, the look back rule doesn’t apply if tax avoidance was not one of your
principle purposes
Policy: Allows non-abusive termination of family members in closely held corporations
Lynch v. Comm’r
SH transferred control of corporation to his son by selling a small number of shares
to the son and the corporation redeemed the remaining shares.
After the redemption, the SH provided consulting services to the corporation.
TC: Redemption was a sale/exchange subject to capital gains treatment
Holding: SH doesn’t get sale/exchange treatment b/c he held a prohibited interest
(was an employee) in the corporation.
Cannot waive family attribution b/c Dad had interest other than creditor
No interest means no interest – ONLY exception is creditor
Policy: Intent of law was to be predictable and clear
Revenue Ruling 59-119 If the taxpayer has an agent sitting on the Board of Directors influencing things, he
has a prohibited interest b/c it is more than that of a creditor.
It would be ok if the agent were just monitoring things on behalf of the creditor.
We have a problem when it starts to look like equity.
Revenue Ruling 77-293 Dad was just trying to leave business to son (not tax avoidance)
Therefore, we don’t worry about look back rules
Problem p. 221-23
IRC § 302(b)(1) Not Essentially Equivalent
United States v. Davis
Attribution rules apply to § 302(b)(1)
TP has, by attribution, 100% of voting common; doesn’t qualify under § 302(b)(1)
b/c business purpose doesn’t eliminate attribution and there must be a meaningful
reduction of the SH’s proportionate interest in the corporation to meet the not
essentially equivalent requirement.
When there is a sole SH (by attribution) and some of the shares are redeemed, it will
always be essentially equivalent to a dividend
May have been avoided in this situation if the transaction was structured as a loan
Any redemption of stock from a SH holding only nonvoting preferred stock is never
essentially equivalent to a dividend b/c the SH has no control over when the
redemption occurs
Revenue Ruling 85-106 Redemption of nonvoting preferred stock was a dividend b/c there was no
reduction in interest b/c voting stock was not reduced
Anytime the redeemed SH has voting rights, the reduction in voting is the most
important in determining a meaning reduction in proportionate interest
Problem p. 235-36
Outline – Corporate Tax I - Blank

REDEMPTIONS TESTED AT THE CORPORATE LEVEL: PARTIAL LIQUIDATIONS
IRC § 302(b)(4) Partial Liquidation
General Rule: Non-corporate SHs get exchange treatment for distributions in “partial
liquidation” of distributing corporation
Tested at corporate level, so don’t worry if distribution is pro rata
IRC § 302(e)
Partial Liquidation Definition
Distribution is in partial liquidation if…
1. Not essentially equivalent to a dividend (tested at corporate level)
a. Genuine contract of the corporate business
i. Need genuine corporate contraction (Imler). Genuine corporate
contraction test highly fact specific.
ii. Distribution of unused insurance proceeds recovered as a result of
a fire, which destroyed part of the business causing a cessation of
part of its activities (Reg § 1.346-1(a)(2)).
iii. BUT: sale of stock of sub and distribution of its proceeds not
distribution in partial liquidation of corp. This is not a corporate
business contraction but merely sale of an investment. (Rev Ruling
79-184).
b. Safe Harbor: § 302(e)(2)
Not Essentially Equivalent if…
i. attributable to the corporation’s ceasing to conduct a QTB (a 5
year-old business actively conducted in the 5 year period ending on
date of redemption AND was not acquired by the corp. within such
period in a recognition transaction), and
ii. immediately after the distribution, the distributing corporation
must be engaged in a separate QTB (5 year-old active business)
Policy: Prevent corporate bailouts
2. Pursuant to a plan
a. Writing required
b. Must be within next year; no extended plans
3. Distribution occurs within the tax yr. in which plan is adopted or within the next yr.
Revenue Ruling 79-184 P owns all stock of S and sells stock to third party and distributes cash proceeds to
SHs.
Issue is whether this is a partial liquidation.
Holding: not a partial liquidation bc distribution of stock would not qualify as a
distribution and thus distribution of proceeds from a stock sale will not qualify.
To qualify for exchange treatment, (1) liquidate sub and distribute assets or (2)
liquidate sub, sell assets and distribute proceeds. Distribution of stock or sale of
stock will not qualify.
First step to avoid this outcome is dissolving sub!
Hypo: what if sub sells all assets and gets cash? Sub will probably distribute cash as
dividends to parent under 243.
Problem p. 240

See john’s notes
CONSEQUENCE TO DISTRIBUTING CORPORATION
IRC § 311(b)
Applies to nonliquidating distributions
Corporation distributing property in redemption recognizes gain but not loss
Outline – Corporate Tax I - Blank
IRC § 312(n)(7) Charge to E & P is limited to ratable share of E & P of the corporation attributable to the
stock redeemed
E.g., Corp. has 100 common shares. A and B each acquire 500 shares at $20/share. Corp. has
100,000 assets (50K cash and 50K appreciated real property). Corp has $50,000 AEP.
If corp. distributes $50K to A in redemption of A’s 500 shares, Corp’s AEP is reduce by $25K
(i.e., 50% of $50K AEP). AEP reduction is less than if a dividend.
Takeaway: AEP reduction is different, but 311(b) recognition rule is the same.

REDEMPTION PLANNING TECHNIQUES
Revenue Ruling 75-447 Sequence of events is irrelevant as long as they are part of an overall plan and you
test substantially disproportionate from beginning to end of plan (§ 302(b)(2))
Zenz
Zenzing out = sale of stock and then redemption to fully terminate ownership
Test at beginning and end (§ 302(b)(3))
Don’t worry about the order of the steps in the plan
This was a plan to terminate
Problem p. 251
§ 312(n)(7) – if there is a redemption, then there is a reduction in E & P
A straight sale or sale followed by a redemption should have the same effect on
basis
A corporate seller may want a dividend so they can get a deduction
High basis may lead you to prefer Zenz (sale) over TSN (dividend) because it might
lead to capital loss
A corporation probably prefers dividend then sale (TSN)
Individual probably prefers sale then redemption (Zenz)
LIQUIDATIONS
Options for taxing the end of corporate life:
 Nonrecognition – if there is a mere change in form
 Sale or exchange – allows recovery of basis
 Dividend – “The ultimate corporate distribution,” allows for consideration of E & P
IRC § 331
Gives sale or exchange treatment in liquidations
IRC § 334
Basis = FMV at the time of distribution (Philadelphia Park)

COMPLETE LIQUIDATIONS UNDER § 331
During a regular liquidation:
IRC § 331
SHs get sale or exchange treatment
 AR = FMV of property received by SH
 AB = SH’s basis in shares
IRC § 334
SH’s basis in property distributed is FMV
Problem p. 322-23
IRC § 336
Consequences to the Liquidating Corporation
 Corporation will recognize gain/loss as if it sold the property at FMV
Outline – Corporate Tax I - Blank

Loss Limitation Rule:
 1) if “related person” (276) & not a pro rata distribution, or property is
disqualified (acquired by corporation in 351 transaction in the last 5 years);
 2) general anti-abuse rule/carryover basis transactions – if at the time of
contribution it was loss property (AB>FMV) & it was less than 2 years
before liquidation, then you must reduce basis to FMV at time of acquisition
(takes away pre-contribution built in loss) (overlaps w/362(e)(2))
Comm’r v.
Court Holding Co.
Corporation transferred apt. building to SHs as liquidating dividend
Then SHs sold building to purchaser that had negotiated deal w/Corporation
Court says this is really a sale by the corporation
Substance of the transaction holds – True nature cannot be disguised by mere
formalisms
United States v.
Cumberland Public
Service Co.
Corporation transferred assets to SHs as liquidating dividend
SHs sold assets to purchaser
This was a sale by the SHs b/c there wasn’t a plan to sell prior to the liquidation
These cases are old law – they don’t really make a difference anymore b/c the
treatment between sale by Corporation & sale by SH is now the same
Problem p. 335

LIQUIDATION OF SUBSIDIARY
Consequences to the SHs:
IRC § 332
80% parent (80% of vote & value) gets nonrecognition treatment in the liquidation of a
subsidiary b/c it is a mere change in form
Timing requirements:
 1) either all at once (one-shot) or;
 2) within 3 years
Minority SHs will recognize gain/loss under § 331 and continue to take FMV basis
IRC § 334(b)
80% parent takes transferred basis b/c they haven’t yet recognized gain
George L. Riggs, Inc. v.
Comm’r
Parent corporation wanted to make sure that it met the 80% parent requirement
Liquidation plan must be adopted after they are an 80% parent
Here the corporation met the test b/c the plan was adopted when it was adopted by
the SHs (had not been adopted before 80% requirement met)
General intent/contemplation of liquidation is not the same as adopting a plan
Makes § 332 elective
Consequences to the Liquidating Subsidiary:
IRC § 337
Subsidiary does not recognize gain or loss on distributions to the 80% parent
Subsidiary recognizes gain on distributions to minority SHs
Subsidiary does not recognize loss on distribution to minority SHs (§ 336(d))
Problem p. 347
TAXABLE CORPORATE ACQUISITIONS
Options – Tax Results are the Same:
Outline – Corporate Tax I - Blank
1.
2.
Target sells assets directly to Purchaser
a. Target receives consideration from Purchaser – Tax on gain of sale (§ 1001)
b. Target makes a liquidating distribution to SHs – Tax on distribution (§ 331/336)
c. Purchaser’s basis is cost basis/FMV
Target makes liquidating distribution of assets to SHs – Tax on gain from liquidating distribution
a. SHs receive assets of Target – Tax on liquidating distribution
b. SHs sell assets to Purchaser – Tax on sale
c. Purchaser’s basis is cost basis/FMV
Stock Acquisition = sale of stock rather than assets
 Target SHs – tax on sale of shares to purchaser
 Purchaser – basis in T shares = cost basis
 Target’s basis in assets stays the same
Kimbell-Diamond Milling Where a purchaser buys stock but really just wanted the assets (they liquidate
Co. v. Comm’r
immediately following purchase), we will treat it as an asset sale.
There was one transaction and the purchaser gets cost basis in the assets.
Look at the substance of the transaction.
IRC § 338
General Rule: If Purchasing Corporation (P) makes 338 election (or is deemed to make
election under 338(e) consistency rule), then, in the case of a “qualified stock purchase”, (1)
T is treated as having sold all its assets at the close of the acquisition date at FMV in a single
transaction, AND (2) T is treated as a brand new company that purchased all its assets as of
the beginning of the day after the acquisition date. 338(a).
Requirements:
 338(d)(3) – must be a qualified stock purchase by a 80% parent w/in 12 months
 338(g) – timing rule (must elect within 9 months of acquisition)
 338(b) – Basis Rule: Assets of T shall be treated as purchased (by P) for an amount
equal to the sum of (1) the grossed up basis of P’s recently purchased stock AND (2)
the basis of the purchasing corporation’s nonrecently purchased stock. This
implements P’s cost basis, with adjustments.
Consequences:
 T recognizes gain on hypothetical asset sale (T’s AR = ADSP)

Allocation of Purchase Price – what if Purchaser buys less than 100% of Target?
 Target will recognize gain/loss on ADSP
o ADSP = gross up the sales price to find out what the price would have been if P had
purchased all of the T stock, this provides T’s AR
 P gets cost basis in the shares (FMV)
 P’s basis in T’s assets = AGUB
o AGUB = sum of 1) the grossed-up basis in P’s recently purchased T stock, 2) P’s basis in
nonrecently purchased T stock, and 3) liabilities of new T
o AGUB is also used to bind the basis when some of the T stock was purchased previously
Allocation of Basis – what if Target has more than one asset?
 § 1060 residual method of allocating basis through the classes
Consistency Period
 Purchaser cannot pick and choose different basis for different assets within a time period
 Applied if you purchase some assets before others
Outline – Corporate Tax I - Blank
IRC § 338
Acquisition of Stock of Subsidiary – Parent is seller
 338(h)(10) – allows you to ignore the sale of the stock and treat it like a sale of assts
to avoid multiple taxation (you do not lose the § 332/337 benefit)
 Seller recognizes no gain or loss on sale of Target stock
o Treat like liquidating distribution (§ 332/337)
 Seller inherits T’s tax attributes (like a parent-sub liquidation)
 Treat T as if it sold assets at FMV in a taxable transaction
o T recognizes gain/loss and it is included in the consolidation return filed by
S and its affiliates.
 New T (now owned by P) takes cost basis/FMV
o New T is treated as having acquired old T assets for an amount equal to
AGUB
ACQUISITIVE REORGANIZATIONS
Acquisition where instead of cashing out SHs you given them stock in the purchasing company makes it a
reorganization b/c it is a mere change in form.
IRC § 368
Meaning/Types of Reorganization
A. Statutory merger or consolidation
B. Controlling acquisition (stock sale, no boot allowed)
C. Asset acquisition
Consequences for SHs:
IRC § 354
No gain/loss if there is a plan and there is just exchange of stock
IRC § 356
Recognize gain to the extent of boot
IRC § 358
Basis = carryover as adjusted for boot gain (same as § 351)
Consequences for Target/Purchaser Corporations:
IRC § 361
No gain/loss to Target
IRC § 362
Basis = carryover (increased by amount of gain recognized to the transferor)
IRC § 381
Tax attributes
IRC § 1032
No gain/loss to the acquirer

CONTINUITY OF PROPRIETARY INTEREST (COPI)
Southwest Natural Gas
Co. v. Comm’r
Statutory test for COPI is no fulfilled in the absence of:
(1) that the transferor corporation or its SHs retained a substantial
proprietary stake in the enterprise represented by a material interest in the
affairs of the transferee corporation, and
(2) that such retained interest represents a substantial part of the value of
the property transferred
In this merger, most of the Target SHs got cash.
Outline – Corporate Tax I - Blank
Therefore, there was not a real continuity of interest and it wasn’t a real
reorganization under the Code
Buying the shares w/cash is not a reorganization – must be mere change in form
Revenue Ruling 66-224 Continuity of interest was satisfied b/c it was only 50% a cash deal
Those who got cash recognize gain b/c it is boot but it doesn’t bust the
reorganization for everyone else
The cash can distributed however they want, what matters is overall continuity
Reg. 1.368-1
no lower than 40% stock exchange will be ok
J.E. Seagram Corp. v.
Comm’r
Transferor could not take a loss on exchange of shares b/c it was part of the
reorganization, which is a nonrecognition transaction
Seagram was in the shoes of the historic SHs and so when they traded for Dupont
shares it was part of the reorganization transaction
Policy – it is difficult to tell who is a true historic SH b/c of the open market so the
rule is not strict
Revenue Ruling 99-58
You can have a vague plan to buy back shares from the T SHs after the
reorganization, as long as you don’t force them to sell
The old T SHs don’t have to hold their new shares for very long
Bentsen
Continuity of Business Enterprise rule
Going from being a land company to an life insurance company is ok
But this is a liberal case
Reg.
Must use historic business or a significant part of the assets in ongoing business
Must be mere change in form
Disregarded Entities
 Wants to merge DE into T
 Parent now owns T w/T’s old SHs
 Not a good reorganization b/c it doesn’t really combine the assets b/c Purchaser and Target remain
separate
 But if the assets are split between two entities then it is a good reorganization