Advanced Corporate Tax - Prof. Hanna
The focus of the class is on corporate reorganization.
368- Definitions relating to corporate reorganizations
(a)Reorganization
(1)In generalFor purposes of parts I and II and this part, the term “reorganization” means—
(A)a statutory merger or consolidation;
● Consolidation is where you have two or more corps and they come together into a new corp.
● Merger is where one corp merges into the other corp.
(B)the acquisition by one corporation, in exchange solely for all or a part of its voting stock (or in exchange solely
for all or a part of the voting stock of a corporation which is in control of the acquiring corporation), of stock of
another corporation if, immediately after the acquisition, the acquiring corporation has control of such other
corporation (whether or not such acquiring corporation had control immediately before the acquisition);
(C)the acquisition by one corporation, in exchange solely for all or a part of its voting stock (or in exchange
solely for all or a part of the voting stock of a corporation which is in control of the acquiring corporation), of
substantially all of the properties of another corporation, but in determining whether the exchange is solely
for stock the assumption by the acquiring corporation of a liability of the other shall be disregarded;
(REORGANIZATION)
(D)a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the
transferor, or one or more of its shareholders (including persons who were shareholders immediately before the
transfer), or any combination thereof, is in control of the corporation to which the assets are transferred; but only if,
in pursuance of the plan, stock or securities of the corporation to which the assets are transferred are distributed in a
transaction which qualifies under section 354, 355, or 356;
(E)a recapitalization;
(F)a mere change in identity, form, or place of organization of one corporation, however effected; or
(G)a transfer by a corporation of all or part of its assets to another corporation in a title 11 or similar case; but only
if, in pursuance of the plan, stock or securities of the corporation to which the assets are transferred are distributed in
a transaction which qualifies under section 354, 355, or 356.
Purpose of Reorganization - 1.368-1
(a)
(b) purpose - under general rule, upon exchange of property, gain or loss must be accounted for if the new property
differs in a material particular, either in kind or in extent, from the old property.
The geneal rule is when you exchange that is a taxable event. Reorganization rules provide exceptions to where there
are nonrecognition. Reorganization provisions are nonrecognition provisions.
Continuity business enterprise
Shareholders dispose of a corporation
● S/H disposing of T corp, P wants to acquire.
○ Stock acquisition by P(stock sale by T shareholders) is one way to accomplish
■ P acquires all of T stock.
■ Taxable
● Stock for Cash
■ Non-taxable
● P stock for T stock.
● This may not be best option despite nontaxable because stock may be from a non publicly
traded company.
○ Asset acquisition by P (asset sale by T shareholders)
■ T transfers all assets to P for consideration.
■ Taxable
● Corp Tax I
■ Non-taxable
● To pull this off in nontaxable way, consideration by P instead of cash would be P stock.
Merger of T with P Corp
● T merges into P
● P stock (plus some cash)
● For T assets and Liabilities
● 3 T S/Hs
● 3 P S/Hs
● 361 - nonrecognition of G/L
● 358 - Basis
● 357 - debt
● When a corporation uses its own stock to acquire property we need something to give nonrecognition - 1032(a)
● What is basis for assets acquired? 362(b) - basis in T assets.
● 381 - T’s Tax attributes
● 382 - T’s NOL’s
● Step 2 is distribution step.
○ T
■ 361(c) - nonrecognition
● Step 3 is a s/h level.
○ T s/h now own P stock
○ 354 or 356 - nonrecognition of gain/loss as a general rule
○ 358 - basis in what they own.
Doctrines
● Continuity of interest
○ Reg (1.368-1(b)
○ 1.368 - 1(e)
● Continuity of business enterprise
○ 1.368-1(b)
● Business purpose
○
● All these 3 have to be met to have a proper reorganization.
Cortlan Specialty
● Only 1 of the 5 cases thats not a SCOTUS case
● Cortland transfers 91.5% of its assets to Deyo (acquiring corp)
● As consideration it received cash (15%) and short term notes (85%)
● Documents all referred to this as a sale
● PArties argue that this is a reorganization
● They look at statute at the time that said if 1 corp transfers substantially all its assets to another corp that would be
a tax reorganization.
● “A sale of the assets of
● Securities we generally think of as debt
● Court said no reorganization because no continuity of interest.
● Cash and short term notes will not qualify for continuity of interest.
● What do you need for Continuity of interest?
Pinellas Ice
● PI transfers 99% of assets to NPSC
● As consideration it receives 400,00 cash + 4 mo notes
● Cash is not continuity of interest and neither are 4 mo notes
● Court sees 0 continuity of interest
Minnesota Tea
● MTC transfers assets to grand union
● MTC transfer assets to PIC
● PIC transfers to S/Hs
● Assets that it had left and transferred to Grand union and in return received GU voting stock (56%) + cash (44%)
● SCOTUS says that voting stock will meet continuity of interest and
●
●
●
Nelson
●
●
●
●
●
56% of the total consideration that is enough to meet continuity of interest.
So fact that GU is a big company acquiring small corp
We are going to look at voting stock.
Nelson transfers substantially all assets to EF
As consideration receives non-voting preferred stock (38%) + cash (62%)
Stock is good for continuity of interest, it does not matter voting or nonvoting.
Any kind of stock is good.
38% good.
LeTulle v. Schofield
● Irrigation co. transfers all assets to Water Co.
● As consideration receives 50,000 cash + 750,000 12 yr bonds.
● There no is continuity of interest because although bonds are in water co. there is no proprietary interest. It has to
be an ownership interest.
● COI means continuity of proprietary interest.
Practitioners say that they don’t like to go below 40%
Miller
● Court held 25% was continuity of interest.
1.368-1(e)(2)(v)
● 40% of interest is based on the IRS own example and that seems to be sufficient.
Problems
● RR 66-224
● T transfers all assets to P (merger)
● Consideration Cash (50%) + P stock (50%)
● T takes cash and distributed to A
● T takes stock and distributes to B
● COI exists b/c 50% stock
Lesson 11-A - pg. 68
● T assets 1200
● 200 dollar bond
● T worth $1000
● 100 shares of stock outstanding
● P is a publicly held corp.
● T transfers all assets merges with P
○ FMV of 1200 assets
● As consideration, $1000 P NVPStock + $200 of debt assumption.
Study Problem, pg 68
● T merger with P
● T’s Basis = 900
● T’s assets FMV = 1200
● Each T stock worth $10
● T s/h
○ A 50%
○ B 30%
○ C 20%
● P gives T 1000 P nonvoting preferred stock AND 200 debt assumption
● In order to have continuity look for ANY type of stock “the good stuff”
● Try to be at 48%, the higher above 40, the better you feel.
(1) STEP 1 - determine if good tax reorg
(a) T merges into P under state law. T’s shareholders receive pro rate $1000 FMV of P’s nonvoting,
nonparticipating, nonconvertible 8 percent cumulative
(b) We treat the $1000 of consideration as going to T first and then the shareholders in order to determine tax
consequences.
(c) Is this a good tax reorganization?
(i)
If no then it is treated as a tax sale.
(ii)
If yes, then all the parties are going to receive nonrecognition.
(d) Do we meet continuity of interest?
(i)
How do we measure COI?
1) Value of P stock / value of outstanding T stock
2) Look at 77-37
a) In order to get a ruling you have to represent that you have at least 50% of COI.
IRS put this in their revenue ruling.
3) 1000 P stock/1000 T stock = 100% continuity of interest.
(e) Once we determine that we have a good tax reorg, then we determine tax consequences
(i)
T tax consequences - 361, 358
1) Basis in assets = 900
2) How much did T receive in consideration?
a) 1200
b) T has 300 of realized gain
c) Section 1001(a)
d) 1001(c)
e) If realized then recognized but it is a good reorg therefore you don’t recognize
according to 361.
f) T will not recognize any gain/loss if such corporate is a party to the reorg.
g) 368(b) - Definitions relating to corporate reorganizations
i)
368(b)(2) - party to a reorganization - both corporations, in the case of a
reorganization resulting from the acquisition by one corporation of stock
or properties of another.
h) What is a merger? Merger of asset
i) NEVER do this IN THE REAL WORLD
j) T goes around statute by P creating a subsidiary of which it owns a 100%
k) Forward triangular merger
l) What gives T nonrecognition? 361(a) (a)General rule No gain or loss shall be
recognized to a corporation if such corporation is a party to a reorganization and
exchanges property, in pursuance of the plan of reorganization, solely for stock
or securities in another corporation a party to the reorganization.
m) Is this merger solely for stock or securities of P? No, there is a debt assumption.
3) 357 - Assumption of liability
a) General ruleExcept as provided in subsections (b) and (c), if—
i)
(1)the taxpayer receives property which would be permitted to be
received under section 351 or 361 without the recognition of gain if it
were the sole consideration, and
ii)
(2)as part of the consideration, another party to the exchange assumes a
liability of the taxpayer,
b) then such assumption shall not be treated as money or other property, and shall
not prevent the exchange from being within the provisions of section 351 or 361,
as the case may be.
c) If you have a debt assumption like above, then 361 will still apply. It says stay in
code 361. If not solely stock or securities go to 361(b)
4) 300 of realized gain, how much will T recognize? 0 gain recognized, will have to pay
zero taxes.
5) What is T’s basis in $1000 of P nonvoting preferred stock?
a) 358 - basis to distributees
i)
(ii)
Basis where 361 applies, The basis of the property permitted to be
received under such section without the recognition of gain or loss shall
be the same as that of the property exchanged—
1. Decreased by FMV, money received, amount of loss recognized
2. Increased by amount treated as dividend and amount of gain
recognized
ii)
The basis of any other property (except money) received by the taxpayer
shall be its fair market value.
iii)
Definition of nonrecognition property in case of section 361 exchange For purposes of this section, the property permitted to be received under
section 361 without the recognition of gain or loss shall be treated as
consisting only of stock or securities in another corporation a party to the
reorganization.
1. Is the basis of this under 358(a)(1) or 358(a)(2)
2. (a)(1) because it is the nonrecognition property.
b) 358(a)(1) will determine basis for T of P stock
c) Start with exchange basis
d) $900 - 200 of debt assumption + 0 gain recognized = 700 basis in P stock
e) 358(d)(1) - debt assumption treatment - treat the debt assumption as money
received.
P tax consequences - 1032(a), 362(b), 381(a)
1) P acquiring T assets by way of merger
2) 1000 P stock and 200 of debt assumption for consideration
3) No g/l when assuming debt.
4) P is receiving assets of T in exchanges for its stock
5) What is P’s basis in its own stock?
a) 0
6) 1032 applies to P
7) 1032 -Exchange of stock for property
a) Nonrecognition of gain or loss -No gain or loss shall be recognized to a
corporation on the receipt of money or other property in exchange for stock
(including treasury stock) of such corporation. No gain or loss shall be
recognized by a corporation with respect to any lapse or acquisition of an option,
or with respect to a securities futures contract (as defined in section 1234B), to
buy or sell its stock (including treasury stock).
b) Basis - For basis of property acquired by a corporation in certain exchanges for
its stock, see section 362.
8) What is P basis in T assets?
a) 362 - Basis to Corps
b) Transfers to corporations - If property was acquired by a corporation in
connection with a reorganization to which this part applies, then the basis shall be
the same as it would be in the hands of the transferor, increased in the amount of
gain recognized to the transferor on such transfer. This subsection shall not apply
if the property acquired consists of stock or securities in a corporation a party to
the reorganization, unless acquired by the exchange of stock or securities of the
transferee (or of a corporation which is in control of the transferee) as the
consideration in whole or in part for the transfer.
c) What is T’s basis? 900 362(b)
d) Increased by any gain recognized, there was no gain recognized therefore still
900.
e) Whatever T’s E&P’s are they become Ps.
i)
381(a) - T’s tax attributes come to P
(2) STEP 2 - Distribution Step
(a) T does not exist after merger, absorbed by P.
(b) T will distribute everything that it owns to its shareholders
(c) What does T own at this step?
(i)
T is only able to distribute $1000 P nonvoting preferred stock.
(ii)
T basis is 700.
(iii)
Generally $300 of gain
(d) Whenever asset leaves corp, general proposition triggers gain/loss.
(e) T needs nonrecoginiton go to 361(c)(1) - no g/l shall be recognized as a distribution to its s/h in pursuance
of reorganization
(f) 361(c)(2) - (A)In general If—
(i)
in a distribution referred to in paragraph (1), the corporation distributes property other than
qualified property, and
(ii)
the fair market value of such property exceeds its adjusted basis (in the hands of the distributing
corporation),
then gain shall be recognized to the distributing corporation as if such property were sold to the
distributee at its fair market value.
(g) 361(c)(2)(B)(2)(i) - Qualified property-For purposes of this subsection, the term “qualified property”
means—
(i)
any stock in (or right to acquire stock in) the distributing corporation or obligation of the
distributing corporation, or
(ii)
any stock in (or right to acquire stock in) another corporation which is a party to the
reorganization or obligation of another corporation which is such a party if such stock (or right)
or obligation is received by the distributing corporation in the exchange.
(h) 361(c)(1) applies as there was qualified property and no g/l reconized.
(3) STEP 3 - shareholders
(a) A Shareholder
(i)
A owns T stock worth $500
(ii)
A is basically surrendering as part of merger and in return is receiving P stock
(iii)
A will receive 500 worth of P stock.
(iv)
A’s basis in $500 of T stock is $200
(v)
$300 of realized gain (1001(a)) if realized then recognized under 1001(c)
(vi)
We need a code section that will allow A to not recognized $300
(vii)
354-Exchanges of stock and securities in certain reorganizations
1) (a)(1) no g/l shall be rec if stock or securities in a corp (T) a party to a reorg are, in
pursuance of the plan of reorganization, exch solely for stock in such corp or in another
corp (P) a party to the reorg.
(viii)
Of $300 of realized gain, A will recognize 0 - 354(a)(1)
(ix)
A now owns $500 of P stock.
(x)
A’s basis in the $500 of P stock?
1) 358(a) - basis to distributees - in case of an exchange to which section
351,354,355,356,or 361 applies
a) Basis of property permitted to be received under such section without the
recognition of gain or loss shall be the same as that of property exchanged
2) 358(a)(1) - A’s basis is 200 based on transferred basis.
(b) B shareholder
(i)
B owns 30%
(ii)
B’s T stock worth 300
(iii)
Exchanging for $300 of P stock
(iv)
B’s basis is $400
(v)
100 realized loss
(vi)
General rule, if realized also recognized but look for exception
(vii)
354(a)(1) will apply - no gain/loss shall be recognized. Applies equally to gain/loss
(viii)
B’s basis is 400 transfer basis in P stock - 358(a)(1)
(c) C shareholder
(i)
C owns 20%
(ii)
C’s stock owns 200
(iii)
Basis 150
(iv)
Exchanging for 200 P stock
(v)
354(a)(1) - o gain recognized
(vi)
C’s basis in P stock?
(vii)
150 trasnfer basis 358
(d) Creditor L
(i)
L owns 20 year bond of T
(ii)
L by way of merger statutes will now be creditor of P
(iii)
354(a)(1) (iv)
L has T bond now P bond
(v)
Will get P bond of 200
(vi)
Could L fall under 354(a)(1)? Is bond a security?
(vii)
RR-2004-78- what is a security bond?
(viii)
A term of debt less than 5 years it is not a security. If more than 10 yes security. If between 5-10,
grey area.
(ix)
L is giving up a T security for a P security, 354(a)(1) applies because security , nonrecognition.
(x)
Same basis rules
(xi)
358(a)(1) - 200 in T bond,
(xii)
L’s basis in P bond is 200
(e) If this were a bad tax reorg, then it would benefit B because he could recognize loss
(f) P would get cost basis if bad tax reorg, P’s basis would be 1200 not 900.
01282020
A 50%
B 30%
C 20%
T shareholders → P
Assets
● Basis = 900
● Fmv = 1200
P sends
● 400 P Voting Common Stock,
● 400 P 20 yr bonds
● 200 P 2 year notes
● 200 debt assumption
COI =
● Value of P stock/Value of all outstanding T Stock
● 400/1000
Step 1 - Merger Step
● T Tax Consequences
○ 361 (a0 or (b)
■ (a)General rule No gain or loss shall be recognized to a corporation if such corporation is a party
to a reorganization and exchanges property, in pursuance of the plan of reorganization, solely for
stock or securities in another corporation a party to the reorganization.
○ Debt assumption will not violate solely for stock assumption
○ What about bonds? Are they securities? For tax purposes, we treat , its a debt instrument if less than 5
years, we don’t treat as security. If more than 10 it is a security. Between 5-10 not clear.
○ What kicks us out in this scenario? The 2 year notes because they are not a stock or security of P
○ (b)Exchanges not solely in kind
■ (1)Gain - If subsection (a) would apply to an exchange but for the fact that the property received
in exchange consists not only of stock or securities permitted by subsection (a) to be received
without the recognition of gain, but also of other property or money, then—
● (A)Property distributed -If the corporation receiving such other property or money
distributes it in pursuance of the plan of reorganization, no gain to the corporation shall
be recognized from the exchange, but
●
●
(B)Property not distributed If the corporation receiving such other property or money
does not distribute it in pursuance of the plan of reorganization, the gain, if any, to the
corporation shall be recognized.
● The amount of gain recognized under subparagraph (B) shall not exceed the sum of the
money and the fair market value of the other property so received which is not so
distributed.
■ (2)Loss - If subsection (a) would apply to an exchange but for the fact that the property received
in exchange consists not only of property permitted by subsection (a) to be received without the
recognition of gain or loss, but also of other property or money, then no loss from the exchange
shall be recognized.
■ “If you distribute everything out to shareholders, no gain recognized however if reorg corp keeps
the property then gain is recognized”
■ Of the $300 of gain realized, $0 gain recognized. You don’t pay if T does not pay any taxes.
○ What is T’s basis in the assets is received?
○ 358 (a)General ruleIn the case of an exchange to which section 351, 354, 355, 356, or 361 applies—
■ (1)Nonrecognition propertyThe basis of the property permitted to be received under such section
without the recognition of gain or loss shall be the same as that of the property exchanged—
■ (A)decreased by—
● (i)the fair market value of any other property (except money) received by the taxpayer,
● (ii)the amount of any money received by the taxpayer, and
● (iii)the amount of loss to the taxpayer which was recognized on such exchange, and
■ (B)increased by—
● (i)the amount which was treated as a dividend, and
● (ii)the amount of gain to the taxpayer which was recognized on such exchange (not
including any portion of such gain which was treated as a dividend).
○ 358 (f) the property permitted to be received under section 361 without the recognition of gain or loss
shall be treated as consisting only of stock or securities in another corporation a party to the
reorganization.
○ Reading these together - stock or securities of P will fall in exchange basis rule of 358
○ 358(a)(1) and 358(f)
■ T now owns
● 400 of P stock
○ T Basis
■ 358(a)(1)
■ 900 decreased by FMV of any other property received by T during
exchange
■ <200> - 2 year notes
■ <200> - debt assumption, treated as money received. 358(d)(1)
■ 900-200-200=500
■ 500 basis in P stock
● 400 P 20 year bonds
○ Analysis above
● 200 P 2 year bonds
○ 358(a)(2)
○ 200 basis, whatever FMV is
P Tax consequences
○ When corp issue its own stock for property there could be some gain. We need something to protect P and
get nonrecognition of gain.
○ 1032(a) - nonrecognition of G/L one use of P stock
○ P basis in T assets
■ 362(b) = 900 transferred basis
■ T’s E&P come over to P - 381(a)
●
Step 2 - 361(c) - Distribution to shareholders
●
(1)In general Except as provided in paragraph (2), no gain or loss shall be recognized to a corporation a party to a
reorganization on the distribution to its shareholders of property in pursuance of the plan of reorganization.
● (2)Distributions of appreciated property
○ (A)In generalIf—
■ (i)in a distribution referred to in paragraph (1), the corporation distributes property other than
qualified property, and
■ (ii)the fair market value of such property exceeds its adjusted basis (in the hands of the
distributing corporation),
■ then gain shall be recognized to the distributing corporation as if such property were sold to the
distributee at its fair market value.
○ (B)Qualified propertyFor purposes of this subsection, the term “qualified property” means—
■ (i)any stock in (or right to acquire stock in) the distributing corporation or obligation of the
distributing corporation, or
■ (ii)any stock in (or right to acquire stock in) another corporation which is a party to the
reorganization or obligation of another corporation which is such a party if such stock (or right)
or obligation is received by the distributing corporation in the exchange.
● All 3 are qualified property and therefore no gain/loss recognized
● Since all 3 are qualified property we stay in 361(c) no g/l recognized
● Only stock or securities is good stuff for COI
● On distribution step, good stuff is stock of P or obligation.
● How much realized gain did T have? 300 but none recognized
● P now owns T assets
Step 3 - Shareholder Tax Consequence
● A
○ A owns $500 of T stock
○ What does A get as consideration for T stock?
■ P stock - $200
■ 20 year bonds - 200
■ 2 year notes - 100 ■ $300 of realized gain (1001(a))
○ What will give A nonrecognition? 354
■ (a)General rule (1)In general - No gain or loss shall be recognized if stock or securities in a
corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged
solely for stock or securities in such corporation or in another corporation a party to the
reorganization.
■ 2 year notes makes it not solely for stock nor securities
■ 354(a)(1) does not apply.
■ Stock not security for tax purposes
■ Security - debt instrument
■ 200 P 20 year bond will kick out of 354
○ 356 -Receipt of Additional consideration
■ You would’ve been in 354 but you received stuff that did not permit for you to stay in it.
■ You received boot.
■ (a)Gain on exchanges
■ (1)Recognition of gainIf—
● (A)section 354 or 355 would apply to an exchange but for the fact that
● (B)the property received in the exchange consists not only of property permitted by
sectionf 354 or 355 to be received without the recognition of gain but also of other
property or money,then the gain, if any, to the recipient shall be recognized, but in an
amount not in excess of the sum of such money and the fair market value of such other
property.
■ 20 uear bonds count as other property
■ 356(a)(1) says you will recognize gain equal to lower of:
● Realized gain OR
● Other property or money
■ Here $300 of realized gain, and you have to recognize all of it.
○
●
○
S/H B
○
○
○
○
○
○
○
○
○
○
○
●
■ A objects and this statute says you have to.
A now owns
■ 200 of p stock
■ 200 of 20 year bond
■ 100 p 2 year note
■ What is A’s basis in these 3 things? 358
● Property permitted to be received without recognition was only stock.
A basis in p stock - $200 <300> (property received by A, FMV )+ 300 = 200
120 p stock
60 p 2 year bond
120 20 year bond
B’s basis in T stock is 400
B receives $300 in consideration for T Stock
Realized loss of $100, how much will he get to recognize?
■ 354(a)(1) - b must give up stock or securities solely for stock or securities of P
■ Is this solely for stock or securities? No, 2 year notes are not stock or securities of T
■ 354(a)(2) - also says that if you receive P security, did you get a P security bigger than a security
you gave up? No? Then 120 security will kick you out of 354(a)(1)
■ 356(a) - Loss (c)LossIf—(1)section 354 would apply to an exchange or section 355 would apply
to an exchange or distribution, but for the fact that (2)the property received in the exchange or
distribution consists not only of property permitted by section 354 or 355 to be received without
the recognition of gain or loss, but also of other property or money, then no loss from the
exchange or distribution shall be recognized.
■ 0 loss recognized
0 loss recognized
B now owns
■ 120 p stock
■ 120 20 year bond
■ 60 P 2 year note
358(a)(1) - property permitted to be received - stock is good stuff, notes and bonds say no under 358(a)(2)
Basis
■ 120 P 20 year bond - basis - 120 358(a)(2)
■ 60 P 2 year note - 60
120 P stock basis - 358(a)(1)
■ Better come out to 220 to preserve loss
■ Exchange basis
■ $400 - any property that B received (180=120=60) - 180 - 0 loss recognized + any dividend +
any gain =
■ 400 - 180 - 0 = 220
■ If B sells for 120 then loss
T S/H
○ $500 T stock for$500 P Stock
○ What if $500 T stock for $400 P stock and $100 cash
○ What if for $400 and $100 2 year note?
■ Still view it as a cashout of investment
○ $400 P Stock + 100 P 20 year bonds
■ This is solely for stock and securities
■ How do you explain?
● There is a continuing
● 20 year bond is a deferment of cash.
● You are cashing out your investment.
○ What about $500 20 year bond T for $500 for $500 20 year bond of P?
○ What about $500 20 year bond for $500 P stock?
■ Is it solely for stock or securities?
■ Yes nonrecognition
C S/H
●
●
●
●
●
●
●
●
●
C gives $200 T Stock, Adj Basis - 150.
P gives back $80 P Stock, $80 P 20 year Bonds, $40 P 2 year notes.
Bonds and notes are “other property or money” / boot
Realized gain of $50
First) 354(a)(1) - kicked out of 354(a)(1) because of 2 year notes and 20 year bonds. Go to 354(a)(2)
Go to 356, if 354 would have applied
356(a)(1) - recognize gain equal to lower of: realized gain or “other property or money”
Here, realized gain is $50 and “other property or money” is $120. $50 will be recognized.
You can recognize more gain than you realized.
358(a)(1) - exchange basis rule - $80 P stock
What are the adjustments for this?
● 3 decreases and 2 increases
● Exchanges basis - $150 decreased by 3 things
○ <120> - FMV of any other property except money received by taxpayer
○ 0 - Any money received
○ Amount of loss to the taxpayer recognized
● Increased by
○ Amount treated as a dividend
○ <50> Amount of gain to the TP which was recognized
● = $80
358(a)(2) - fair market value rule - $80 P 20 year bond, $40 P 2 year notes
What is basis? Go to 358.
Clark v. Commissioner.
● 356(a)(2)
● If you have gain recognized in 356(a)(1) part or all of that gain may be treated as dividend.
● Dividend withing gain
● What if $18 is dividend? $32 is gain.
● What if $49 dividend? $1 gain.
● Dividend within gain
● S/H C
Hallmarks of dividend, money goes from corp to SH
S/H owns 100%, Corp gives cash to S/H
A dividend would be corp has profits and distributes to SH and does not change percentage of owners.
What if SH owns 100% of corp, corp gives $100 Cash. -->typical dividend
SH owns corp 100% and then sells 50% to X, X gives $60 for that stock. Now shareholder owns 50% → not a
dividend because it is a sale of stock.
SH owns 100%, Corp gives $60 cash in return for 50% of corp. → dividend because ownership has not changed.
What if shareholder’s ownership drops to 25%
Clark v. Commissioner
● Clark owns 100% of Basin Corp. Adj Basis
● NL industries wants to acquire Basin.
● What happens if basin merges into NL industries?
○ NL assumes liabilities if they merge.
● NL makes new subsidiary.
● Basin merges with new subsidiary.
●
●
●
●
●
●
●
New subsidiary absorbs liabilities.
New subsidiary gives 300,000 shares of NL industries stock + 3.25 million cash to Clark.
If only NL industry stock , would have gotten 425,000 shares. Would have been 1.3 % ownership of NL
industries. But did not get that.
He actually received was 300,000 shares of NL industries → ownership of 0.92 percent of NL.
How do we know if 356(a)(1) will treat as gain or 356(a)(2) treat as dividend?
Court adopts the post-reorganization approach from Wright.
○ Why? SC says prereoorg approach ignores the reorganization that happened. At least in wright, it is
recognized that a reorganization does happen.
Post reorg approach
○ We will pretend that only consideration given was stock, followed immediately by a postreorg
redemption of a portion of the TP shares in the acquiring corp in return for a payment in an amount equal
to the boot.
○ HEre, pretend received 425K shares and a split second later NL redeemed 125K for 3.25 million of cash
to Clark.
○ If you own less than 80% of what you owned before, it will be treated as a sale exchange. 302(b)(2)
○ His ownership has dropped sufficiently it will not be treated as dividend but rather a capital gain.
○ Capital gains gets preferential tax treatment.
○ Not really beneficial now because of CG getting preferential tax treatment.
○ You would want this now however to offset a capital loss.
○ Amount of dividend under 356(a)(2) can never be more than 356(a)(1)
○ Multiply 1.3 ownership
New Prob
● A gives $500 T stock, 200 basis
● Receives
○ 200 P stock
○ 200 P 20 year bond
○ 100 P 2 year notes
● SH A had 300 of realized gain and $300 of recognized gain.
● What are we going to pretend like happens?
○ We are going to pretend that happens?
■ Pretend that A only received P stock of 500
■ One split second after reorg, pretend that P redeems $300 of its P stock from SH A for $300 of P
20 year bonds and 2 year notes.
■ Before redemption, A owned 500 and after owned 200.
■ 500 of P stock is .00012 ownership of P.
■ After redemption, owned $200, .00008%
■ Should be treated as a capital gain.
■ So long as you own less than 80% of what you owned before then capital gain.
● SH C
○ Gives 200 T stock - basis 150
○ Received
■ 80 p stock
■ 80 p 20 year bond
■ 40 p 2 year note
○ Pretend transaction
■ Pretend that C only received 200 P stock
■ .00012% ownership of P
■ One split second after the reorg, P redeems, Buys back 120 of its P stock from for 120 of P 20
year bond and 2 year notes
■ .00008 ownership of P
■ Treated as a capital gain.
● Rev rul - 76-385
PRoblem 3
● T merges into P in exchange for P voting stock ( and debt assumption)
● B dissents under state law procedure for objecting shareholders.
● B’s T stock purchased by T under agreement wher B agree to take $300 nonoperating assets, and whereby stock
given by P is reduced to$700.
● COI =
○ Value of P stock/ value of outstanding T stock
○ 700/700 = 100%
○ = 700 / 1000= 70%
○ 77-37
● There is a good A reorg
● 1.368-1(e)(8)
○ Example 9. Preacquisition redemption by target corporation.
T has two shareholders, A and B. P expresses an interest in acquiring the stock of T. A does not wish to
own P stock. T redeems A's shares in T in exchange for cash. No funds have been or will be provided
by P for this purpose. P subsequently acquires all the outstanding stock of T from B solely in exchange
for voting stock of P. The cash received by A in the prereorganization redemption is not treated as other
property or money under section 356, and would not be so treated even if A had received some stock of P
in exchange for his T stock. The prereorganization redemption by T does not affect continuity of interest,
because B's proprietary interest in T is unaffected, and the value of the proprietary interest in T is
preserved.
● Tax consequences when T redeems
○ What is T’s basis in nonoperating assets? $200
■ Potential $100 gain
○ Step 2 - distribution step 361(c)
■ 361(c)(1)
● No g/l shall be recognized to corp as a
■ 361(c)(2)(A)
● If distributes property other than qualified property.
■ Because of this above, by distributing nonoperating assets, T recognizes $100 of gain.
● B tax consequences
○ B is being redeemed out
○ B’s basis - $400
○ $300 of assets
○ $100 of realized loss
○ 1001(a),(c)
○ 302 - recognized loss of $100
Problem 4
● A also dissents and likewise is bought out for $500 worth
● 80% of shareholders vote no, then no merger.
COI = p stock / outstanding T stock
● 200/100 = 20%
Value of p stock/ value after T has been redeemed out
● 200/200 = 100%
Problem 5
● T merges into P solely in exchange for P voting stock
● w/in 6 months of merger, A.B and C sell all of their P stock in a disposition they had planned at the time of the
merger.
● What if, at time of merger, ABC planned to keep the stock?
●
●
●
●
What is the COI? 100%
2 days after reorg A sell P stock for $500 cash.
○ Law used to say that if you sold that quick after reorg, will treat as
Make determination at the time of the transaction and then move on. Don’t worry about what SH do
Reg 1.368-1(e)(8) - example 1
P makes new subsidiary “NEW S”
P transfers 1000 cash to New S
Merges into T
T owned by A,B,C
A – 500
B – 300
C - 200
Merge all of these steps together
P buying T stock for 1000 cash
What do we have? Reverse subsidiary triangular all cash merger
What if merger from T to new S?
● Forward subsidiary all cash merger
● Why not use that on
What if merger from New S to T?
● S only has cash
368. Definitions relating to corporate reorganizations
(2) Special rules relating to paragraph (1)
(A) Reorganizations described in both paragraph (1)(C) and paragraph (1)(D)
● If a transaction is described in both paragraph (1)(C) and paragraph (1)(D), then, for purposes of this subchapter
(other than for purposes of subparagraph (C)), such transaction shall be treated as described only in paragraph
(1)(D).
(C) Transfers of assets or stock to subsidiaries in certain paragraph (1)(A), (1)(B), (1)(C), and (1)(G) cases
● A transaction otherwise qualifying under paragraph (1)(A), (1)(B), or (1)(C) shall not be disqualified by reason of
the fact that part or all of the assets or stock which were acquired in the transaction are transferred to a corporation
controlled by the corporation acquiring such assets or stock. A similar rule shall apply to a transaction otherwise
qualifying under paragraph (1)(G) where the requirements of subparagraphs (A) and (B) of section 354(b)(1) are
met with respect to the acquisition of the assets.
● This provision is saying that
● Ex: T merges into P , A reorg
● P takes part/all assets of T and drops half of the T assets into Sub
● 368 allows this, doesn’t destroy A reorg
● “A with a dropdown”
TYPE C Reorgs - pg 70 of problems
● According to treatise, C reorgs came about because some states did not have a merger statute
● Similar to A reorg in that it is an asset acquisition
● B is a stock acquisition
368(a)(1)(C) the acquisition by one corporation, in exchange solely for all or a part of its voting stock (or in exchange
solely for all or a part of the voting stock of a corporation which is in control of the acquiring corporation), of
substantially all of the properties of another corporation, but in determining whether the exchange is solely for stock the
assumption by the acquiring corporation of a liability of the other shall be disregarded;
368(a)(2)(G) (G) Distribution requirement for paragraph (1)(C)
(i) In general - A transaction shall fail to meet the requirements of paragraph (1)(C) unless the acquired corporation
distributes the stock, securities, and other properties it receives, as well as its other properties, in pursuance of the plan of
reorganization. For purposes of the preceding sentence, if the acquired corporation is liquidated pursuant to the plan of
reorganization, any distribution to its creditors in connection with such liquidation shall be treated as pursuant to the plan
of reorganization.
(ii) Exception - The Secretary may waive the application of clause (i) to any transaction subject to any conditions the
Secretary may prescribe.
With respect to a C reorg - 3 requirements
● T must transfer substantially all of its properties to P 368(a)(1)(C)
○ By requiring this, you make it look like a merger
○ 90 % of T’s net assets and 70% of T’s gross assets
● T must liquidate 368(a)(2)(G)
○
● Soley for P Voting Stock 368(a)(1)(C)
○ Boot relaxation rule - 368(a)(2)(B) (B) Additional consideration in certain paragraph (1)(C) casesIf—
■ (i) one corporation acquires substantially all of the properties of another corporation,
■ (ii) the acquisition would qualify under paragraph (1)(C) but for the fact that the acquiring
corporation exchanges money or other property in addition to voting stock, and
■ (iii) the acquiring corporation acquires, solely for voting stock described in paragraph (1)(C),
property of the other corporation having a fair market value which is at least 80 percent of the fair
market value of all of the property of the other corporation,
■ then such acquisition shall (subject to subparagraph (A) of this paragraph) be treated as qualifying
under paragraph (1)(C). Solely for the purpose of determining whether clause (iii) of the
preceding sentence applies, the amount of any liability assumed by the acquiring corporation shall
be treated as money paid for the property.
● T has $100 of Assets to P solely for P stock, good C reorg
● T assets of $100 but also $30 debt, T transfers all assets to P and P will assume the debt, good C reorg, liabilities
are disregarded. 368(a)(1)(C)
● What if 69 P voting stock 30 debt, AND $1 Cash, go to boot relaxation rule 368(a)(2)(B) says (iii) is we have to
see P Voting stock equal to at least 80% of T’s total assets. Do not meet boot relaxation rule, not a good C reorg.
RR 57-518 - “substantially All”
● To determine look at the nature of the properties retained, the purpose of the retention, and the amount of assets
thereof
RR 77-37 ● The substantially all requirement is satisfied if there is transfer of assets at least 90 percents of the FMV of the net
assets and at least 70 percent of the FMV of the gross assets held by the corporation immediately prior to the
transfer.
Rev Proc - 89-50
● 12 months to keep T alive because T may have some value to it
Pg 71 - Lesson 11
T owned by A
T transfers all $1200 assets to P but liabilities $200 of T will stay with T P
P will give the following consideration
P may still be held liable for T’s liability
a) Fails, not solely for P voting stock
b) Fails, not solely for P voting stock because bonds despite conversion later on
c) Fails, not voting stock, would be good for COI
d) Good c reorg
What would allow T to not recognize? 361
P? 1032
T’s basis, 362
T’s E&P 381(a)
T owns 1200 of P voting stock distributes to shareholders, Step 2, what would give T nonrecognition of
distribution 361(c)(1)
What is basis in voting stock? Exchange basis 358(a)(1)
Look at SH A
● 500 T stock for 600 P stock
● Basis 200
● 300 of realized gain, not recognized of 358(a)(1)
● A’s basis in P stock - 200 + 100 (RR 70-271)
B’s Basis in P stock
● 100 of realized loss
● Did not recognize because of 358(a)(1)
● 400 exchange basis in P stock
● + 60 (rr 70-271)
C’s Basis in P stock
● 240 of P stock
● 50 Realized gain
● 0 recognized gain
● 150 exchange basis
● 40 (rev rul 70-271
(d)(1) Alternatives T’s Debt to L is satisfied by:
● T’s transfer of $200 FMV of P stock to L;
○ T’s basis in 1200 in P voting stock is 900
○ T’s basis in 200 of voting stock is 150
○ 361(c)(1) cannot point to it because L is a shareholder and cannot distribute to a creditor
○ The way past this would be 361(c)(3) - treatment of certain transfers to creditors - any transfer of
qualified property by the corporation to its creditors shall be treated as a distribution to its shareholders
pursuant to a plan of reorganization.
● T’s Sale of enough stock to pay L; or
○ T sells to 3rd party to sell stock to L
○ General rule - T would recognize gain
○ Avoid this
● P’s assumption of the debt and reduction of the FMV stock
○ Value of stock reduced to 1000
○ $1000 P Voting Stock + 200 debt assumption
○ Good C reorg
■ It is still substantially all property
○ Is it solely for P voting stock?
○ 368(a)(1)(C) - do not get to boot relaxation rule
Problem 2 T transfers all of its operating assets to P in exchange for the following alternative types of consideration, after which T
Promptly liquidates
● $900 FMV of P voting stock. T then sells $200 worth of nonoperating assets to pay L.
Good C reorg
● Substantially all
○ 90% of net assets
■ 900/1000
■ Assets minus debts
○ 70% of gross assets
■ 900/1200
■ Total assets
○
○
■ 75%
Meet the 90/70 test.
77-37
●
●
Liquidate
Solely for P voting stock
●
Same as (a) above, except P also assumes the $200 liability to L without issuing a new bond, and T receives $700
FMV of P stock
○ $700 P voting stock + 200 debt assumption
○ Good C reorg,
■ Substantially all
● 90/70 test
○ FMV of T assets/assets-debts
○ 900/1000
● 70
○ FMV
○ 900/1200
■ Liquidate
■ Solely for P voting stock
●
Same as (a), except T also retains $100 of its operating assets and receives $800 FMV of P stock
○ Substantially all
■ 800/1000
● 80%
■ 800/1200
● 75%
■ Does not meet 90/70 test
■ Focus on the operating assets
○ 2 and 3 met
●
Problem 3
(a) $200 FMV of P NVPS and $1000 of P VCS
(i)
Good c Reorg?
(1) Substantially all
a) yes
(2) Liquidates
a) yes
(3) Solely for P voting stock
a) Do we meet solely for voting stock? No
b) Go to boot relaxation rule
i)
368(a)(2)(B) - would’ve been a good C reorg but didn’t meet solely for P voting
stock
ii)
Will allow a limited amount of boot, there has to P voting stock at least 80% of
T’s total assets
iii)
1000/1200=83%
1) Use assets before
iv)
Need at least 960
(ii)
Tax consequences
(b) $40 FMV of P’s 2-year notes, assumption of $200 bond and P VCS of $960
(i)
Good c Reorg?
(1) Substantially all
a) yes
(2) Liquidates
a) yes
(3) Solely for P voting stock
a)
b)
c)
d)
e)
Do we meet solely for voting stock? No
Go to boot relaxation rule
Need p voting stock equal to at least 80% of T’s total assets
Do we have that here? yes , right on the line
What if P sends over Cash to objecting shareholders?
i)
no
(ii)
What’s going to give T nonrecognition? 361(a)
(1) No g/l but there is not solely for stock or securities
(2) Next go to 361(b)
a) Gain
b) Gain will be realized not recognized by T
(iii)
T’s basis in things received
(1) Basis determined under 358 (f)
(2) 660 to preserve no gain recognized
(3) 900-240=660
(iv)
P nonrecognition
(1) 1032(a)
(v)
P’s basis in T assets - 362(a) transfer basis - 900
(vi)
T’s E&P transfers to P
(vii)
S/H A (1) $500 of T stock for $480 P stock + 20 2 year notes
(2) A gets kicked out of 354(a)(1) because of 2 year notes
(3) Goes to 356(a) have to recognize gain of lower of $300 of Realized gain - $20
(4) Is that $20 of capital gain or dividend? REMEMBER THIS STEP
(5) During reorg, pretend,
a) One split second after reorg, P redeems 480 of P stock from A, leaving A in position that
A is really in.
(6) A has 480 P stock,
(c) T borrows $300 that it uses to redeem B’s T stock, P then assumes T’s $500 of liabilities and issues $700 FMV of
P VCS in exchange for T assets
(i)
B gets $100 of loss because of $400 basis
(1) B redeemed out
(ii)
T transfers all properties to P in exchange for $700 of P voting stock + 500 debt assumption. T liquidates
(iii)
Good C reorg?
(1) Is it solely for P voting stock? Yes, ignore debt assumption.
(iv)
What is the issue here? Why might it not be a good C reorg?
(1) It looks like consideration P is giving 200 debt assumption and $300 cash for B redemption
There is also a C with a dropdown where P transfers T assets to B
What if T transfers all to S for S voting stock owned by P?
What if T transfers to S for P stock? Triangular 368(a)(1)(C) - acquisition or in exchange of stock which is in control of
acquiring. P owns S, still good C reorg
Regulation 1.368-2(d)(1) - cautions that if you use S voting stock you cannot mix the 2 (p and s voting stock) has to be
one or the other.
02182020
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Step Transaction doctrine - pg 23 handout #3
● Another rule of substance over form
● It treats a series of formally separate step as a single transaction if such steps are in substance over integrated,
interdepent,
Binding commitment test
- Is there a binding commitment at the first step?
End result Test
● the step transaaction doctrine will be invoked if it appears that a series of formally separate steps are really
prearranged parts of a single transaction intended from the outset to reach the ultimate
● Asks “what was the intended end result”
Interdependence test
● Focuses on whether the steps are so interdependent that the legal relations created by one transaction would have
been fruitless without a completion of the series.
If the steps are separated by a lot of time, the step transaction doctrine will likely not be applied and the steps will not be
collapsed.
Generally 1 year is not long enough. 2 years maybe. 5 years should be ok.
1.368-2(c) In order to qualify as a “reorganization” under section 368(a)(1)(B), the acquisition by the acquiring
corporation of stock of another corporation must be in exchange solely for all or a part of the voting stock of the acquiring
corporation (or, in the case of transactions occurring after December 31, 1963, solely for all or a part of the voting stock of
a corporation which is in control of the acquiring corporation), and the acquiring corporation must be in control of the
other corporation immediately after the transaction. Nor is a transaction a reorganization described in section 368(a)(1)(B)
if stock is acquired in exchange for voting stock both of the acquiring corporation and of a corporation which is in control
of the acquiring corporation. The acquisition of stock of another corporation by the acquiring corporation solely for its
voting stock (or solely for voting stock of a corporation which is in control of the acquiring corporation) is permitted taxfree even though the acquiring corporation already owns some of the stock of the other corporation. Such an acquisition is
permitted tax-free in a single transaction or in a series of transactions taking place over a relatively short period of time
such as 12 months.
When would you not collapse?
1/2 - P acquires C’s T stock for $200 cash (20%)
7/1 - P acquires B’s T stock for P voting Stock 30%
12/1 - P acquires A’s T stock for P voting stock 50%
---Not a good B reorg because of cash and steps are collapsed.
What if…
1/2/15 - P acquires C’s T stock for $200 cash (20%)
● Not a good B reorg, cash, therefore taxable
7/1/17 - P acquires B’s T stock for P voting Stock 30%
● Not a Good B Reorg, although solely for stock, misses control element
12/1/19 - P acquires A’s T stock for P voting stock 50%
● Not a good B, although solely for P, P has over 80% control.
--lets assume step transaction does not apply here. Each step is it’s own step. 3 transaction
Part C What if…
1/2/17 - P acquires C’s T stock for $200 cash (20%)
7/1/19 - P acquires B’s T stock for P voting Stock 30%
12/1/19 - P acquires A’s T stock for P voting stock 50%
● First transaction is separated, treated by itself.
● Step 2 and 3 will likely be collapsed together, treat as one.
What if
1/2/17 - P acquires C’s T stock for $200 cash (20%)
7/1/17 - P acquires B’s T stock for P voting Stock 30%
12/1/19 - P acquires A’s T stock for P voting stock 50%
-- first two collapsed together, fails B reorg
-- third step, good B solely for P stock and t immediately in control of P
T redeems B’s and C’s T stock for cash and notes. - Good B reorg
What if T borrows 500 from bank because it doesnt have money to redeem B and C
P then acquires all of A’s T stock solely in exchange for P voting stock worth $500.
What if T cant pay the 500 to the bank. Therefore, when debt becomes due, we see cash infusion from P and T.
What if T doesn’t have cash to pay notes and P provides cash to T? It would not be a good reorg because it would be as
cash came from P.
COI = value of p stock/ value of outstanding T stock = 500/500 or 500/
What if A and C redeemed for Cash and notes by T. P then acquires B stock solely in exchange for P voting stocj worth
$300
We have to make sure cash and notes going to A and C are T and that the notes paid in the future has to be from T. If it
comes from P, it busts B reorg.
COI = 300 / 300 because a and c have been redeemed out.
77-37 RR - handout #1, gave use the 90/70 of substantially all.
1.368-1(e)(8) example 9
Example 9. Preacquisition redemption by target corporation.
T has two shareholders, A and B. P expresses an interest in acquiring the stock of T. A does not wish to own P stock. T
redeems A's shares in T in exchange for cash. No funds have been or will be provided by P for this purpose. P
subsequently acquires all the outstanding stock of T from B solely in exchange for voting stock of P. The cash received by
A in the prereorganization redemption is not treated as other property or money under section 356, and would not be so
treated even if A had received some stock of P in exchange for his T stock. The prereorganization redemption by T does
not affect continuity of interest, because B's proprietary interest in T is unaffected, and the value of the proprietary interest
in T is preserved.
--Looks like a B reorg,
As long as P doesnt provide funds, COI is measure in first way.
(ii) For purposes of paragraph (e)(1)(i) of this section, a proprietary interest in the target corporation (other than one held
by the acquiring corporation) is not preserved to the extent that consideration received prior to a potential reorganization,
either in a redemption of the target corporation stock or in a distribution with respect to the target corporation stock, is
treated as other property or money received in the exchange for purposes of section 356, or would be so treated if the
target shareholder also had received stock of the issuing corporation in exchange for stock owned by the shareholder in
the target corporation. A proprietary interest in the target corporation is not preserved to the extent that creditors (or
former creditors) of the target corporation that own a proprietary interest in the corporation under paragraph (e)(6) of this
section (or would be so treated if they had received the consideration in the potential reorganization) receive payment for
the claim prior to the potential reorganization and such payment would be treated as other property or money received in
the exchange for purposes of section 356 had it been a distribution with respect to stock.
--
T merges with P, A reorg, COI is important in an A reorg. What happens if you are redeeming shareholders out? How do
you measure COI? Is it before SH were redeemed out? Or after? If cash comes from T, then measure after. If P supplies
the cash, then measure COI before SH has been redeemed out. LOOK AT SOURCE OF FUNDS
What if all SHs give up T stock to S and in return S gives all of its S voting stock to T. Good B reorg.
What if it was for P voting stock? Good B reorg, as a triangular B reorg. All 3 corps parties to the reorg.
What if 500 P voting stock and 500 S voting stock? Not a good. 1.368-2(c). You cannot mix voting stock.
B is a stock acquisition.
P acquires all T stock, then T stock is dropped to down into S. Will dropdown bust B reorg? Look at 368(a)(2)(C) - still a
good B reorg, B with a dropdown.
(C) Transfers of assets or stock to subsidiaries in certain paragraph (1)(A), (1)(B), (1)(C), and (1)(G) cases - A transaction
otherwise qualifying under paragraph (1)(A), (1)(B), or (1)(C) shall not be disqualified by reason of the fact that part or all
of the assets or stock which were acquired in the transaction are transferred to a corporation controlled by the corporation
acquiring such assets or stock. A similar rule shall apply to a transaction otherwise qualifying under paragraph (1)(G)
where the requirements of subparagraphs (A) and (B) of section 354(b)(1) are met with respect to the acquisition of the
assets.
Handout Reorgs - D and F reorgs handout #4
D Reorg ● Acquisitive “D
○ Non-divisive “D”
● Divisive “D”
○ “Non-acquisitive D”
Acquisitive “D” Requirements
● (1) substantially all assets of transferor go to transferee. 354(b)(1)(A)
● (2) transferor must liquidate 354(b)(1)(B)
○ Interpreted the same way as a c reorg
● (3) the transferor’s shareholders in control of the transferee, immediately afterwards. 368(a)(1)(D)->368(a)(2)(H)(i)--> 304(c)
● (4) stock or securities of transferee distributed under 354 or 356
● 90/70 test applies here
Assume AB own 50% of T and own 50 % of P
What if A owns 100% of T and 100% of P? T transfers substantially all assets (FMV-100) to P for 100 Cash. 100 cash
goes to A. P doesn’t exist anymore. Transfer is step 1 and step 2 is distribution
● Good acquisitive D
What if instead 100 cash + 1 P stock?
● Share of P stock is meaningless because he already owns P
What if A owns 100 % of T and A and B own 50% of P? T transfers sub all assets to P for 100 cash.
● It is not a good acquisitive because no P stock
What if 100 cash + 1 p stock? Meets the 4th requirement. Here, it is not a meaningless transaction because A gets control
when gets P stock.
What if A owns 100% of T and 100% of P. T merges into P. P gives 100 P voting stock to T. 100 Stock goes to A.
● Is this a good reorg? Good C reorg
● T assets gives all assets to P
● Acquisitive D met
Problems handout Page 74
(1) A owns X 100%, basis 200, A owns 45%, basis 90 Y, B owns 55% Y, basis 110, both have 100 E&P
(a) A sells all X stock to Y for 400 cash.
(i)
400 - 200 = 200
(b) Gain 200 1001(a),(c)
(2) Look at 304
(a) A is not in control of 2 or more corps, therefore 304 does not apply. Therefore the result is that it is
treated as a sale of stock.
(3) what if A and B are father and son?
(a) Attribution rules apply 318(b)
(b) Go to 318, constructive ownership of stock
(i)
An individual shall be considered as owning the stock owned, directly or indirectly, by or for—
(ii) his children, grandchildren, and parents.
(c) Here A will be treated as owning 100 % of Y.
(d) Will it convert gain into dividend? IF applicable then yes
(e) After picture is that Y owns 100% of the X stock.
(f) A’s Ownership of X stock
(i)
Before sale to y: 100%
(ii)
After sale to Y: 45% directly
1) 55% indirectly
(iii)
A’s ownership of X has not dropped therefore it will be treated as a dividend.
(g) Tentative 400 dividend, limited to E&P of Y then to E&P of X.
(i)
Therefore dividend of 100 of Y and dividend of 100 of X. 200 dividend, the other 200 is
reduction of basis.
(h) What if E&P of a corp are 600 and there’s a 700 dividend. 600 dividend, 100 as reduction of basis.
(4) What if X sells its operating assets to Y for cash and Y notes totaling 300 after which time X dissolves?
(a) Operating assets
(i)
basis of 10
(ii)
FMV of 300
(b) For 300 cash
(c) 304 will not apply because there is a sale of assets and 304 is stock sale.
(d) Acquisitive D requirements
(i)
1 and 2 met
(ii)
Look at 3. Is A immediately in control of Y afterwards.
3/31/2020
A owns 100 % of X, AB of 200
A owns 45%, AB of 90 , B owns 55%, AB of 110 of Y
Y operating assets, basis of 100, FMV of 300, Cash 100
Pg 74 of Handout
(F) what if Y sells its operating assets to X for 180 X stock and 120 Cash
180 X Stock will go to A and 220 of cash will go to B
Is this a good acquisitive “D”?
● Target(Y) transfers substantially all assets to acquiring corp - 354(b)(1)(A)
○ Yes, transferring all assets. RR 77-37, 90/70 test, it wouldn’t meet 90% of the test
○ Fallback position is that it gave up its operating assets and can no longer operate.
● Target liquidates
●
●
●
○ Yes, the second requirement was met.
Target S/Hs in control of acquiring corp immediately after
○ Yes, it is met.
Stock/securities of acquiring corp distributed under 354/356
○ Yes, it is met.
Here, we do have a good acquisitive “D” reorg.
What if A sells Y stock to X for 180 cash?
● 304
● In order for 304 to apply, TP must be in control of 2 or more corps. Here, A is in control of X but is not in control
of Y.
Problem 2
● A and B each owns 50 % of X
○ Each have AB of 100
○ X has
■ Cash - 100
■ Operating assets
● Basis - 100
● FMV - 300
● A and B each own 50% of Y
○ Each have AB of 100
○ Y has
● X is going to liquidate
○ A will get 50 Cash,
■ Plus operating assets of 150
○ 331 recognize gain
○ 334 FMV Basis
○ B will get 50 Cash
■ Plus operating assets of 150
○ 331 recognize gain
○ 334 FMV Basis
○ When X liquidates, go to 336.
○
● Y acquires X operating assets
● The goal for the government is to have basis of 100
○ Govt wants y to take transfer basis and not FMV of 300
● Immediately after A and B own 100
● Requirement 4 says Y stock/securities must be given as consideration and distributed out to a and B.
○ Not met here, however, it is irrelevant because they own 50/50 of both X and Y therefore irrelevant.
● This is a good acquisitive “D”
● Current 336
○ Says there is recognition of gain to X
What if X has Cash of 300 and operating assets with a basis of 50 and FMV 100 and transfers all operating assets to Y for
100 cash?
Gov will argue good acquisitive D and argue for a transfer basis of 50.
Requirements 1-3 are met. Requirement not met, no but irrelevant because both A and B own 50/50 of X and Y.
A and B sell their X stock to Y for 300 cash. Both own 50 of X and Y.
● Stock sale followed by liquidation
● There will be nonrecognition
● Basis is 250 and selling for 200
● 50 loss
●
●
●
●
●
●
●
●
●
●
●
Looks like they want to get a $50 loss
Nonrecognition of loss - 267- sale to a related party
It is a dividend from Y to A and B
Collapse steps together and we have
X’s assets will end in Y
Has x liquidated? Yes
Are SHs of X immediately in control of Y? Yes
Req. 4 - no y stock given as consideration but not relevant because both a and b each own 50%
○ A and B each own X and Y in the same percentage.
This is a good acquisitive D
Funds given out from Y can be treated as a dividend.
RR-2004
(C) Y is a newly incorporated
X owned 50/50 by A and B
● Cash - 100
● Operating assets
○ 100
○ Fmv - 300
X transfers all assets to Y in exchange for Y voting stock
Could be “A”, “C” Acquisitive “D”
“F” Reorg
● (F) a mere change in identity, form, or place of organization of one corporation, however effected;
● You’re changing the place of a corporation
● 1.368-2(m)
○ (i) Resulting corporation stock distributed in exchange for transferor corporation stock.
○ (ii) Identity of stock ownership.
○ (iii) Prior assets or attributes of resulting corporation.
○ (iv) Liquidation of transferor corporation.
○ (v) Resulting corporation is the only acquiring corporation
○ (vi) Transferor corporation is the only acquired corporation.
04142020
Forward triangular merger
Problem 5 of study problems
P merges into S in consideration for 100% of its own stock. T merges into S. T is owned 100% by A. As consideration S
gives 1000 P non voting stock + 200 debt assumption. T gives 1200 FMV assets.
Do we have a good forward triangular merge under 368(a)(2)(D)?
S acuires substantially all property of T
No S stock can be used, here P stock is being used
Gotta meet business purposes, continuity of interest.
Continuity of interest here A is getting of $1000 of P nonvoting stock + debt assumption. Here 1000/1000. Meets
continuity of interest because it is 100%.
Tax consequences
● T consequences
○ Basis - 900
○ 1200 of consideration
○ $300 gain
○ What gives T nonrecognition? 361(a)
■ No gain or loss shall be recognized to a corporation if such corporation is a party to a
reorganization and exchanges property, in pursuance of the plan of reorganization, solely for
stock or securities in another corporation a party to the reorganization.
○ Here, question is if P a party to a reorg?
■ Go to 368(b)
●
In the case of a reorganization qualifying under paragraph (1)(B) or (1)(C) of subsection
(a), if the stock exchanged for the stock or properties is stock of a corporation which is in
control of the acquiring corporation, the term “a party to a reorganization” includes the
corporation so controlling the acquiring corporation.
○ T’s basis in P stock - 368(a)(1) - exchange basis of 900 for assets and treat debt as casha and subtract debt
assumption. 900-200 = 700.
● S consequences
○ 1032(a) gives nonrecognition.
■ Applies to give corp nonrecognition of gain/loss when it uses its own stock.
■ Here, its not using its own stock, its using the parent company’s stock.
■ Reg 1.1032-2
● Disposition by a corporation of stock of a controlling corporation in certain
triangular reorganizations.
● General nonrecognition of gain or loss. For purposes of § 1.1032-1(a), in the case of a
forward triangular merger, a triangular C reorganization, or a triangular B reorganization
(as described in § 1.358-6(b)), P stock provided by P to S, or directly to T or T's
shareholders on behalf of S, pursuant to the plan of reorganization is treated as a
disposition by P of shares of its own stock for T's assets or stock, as applicable. For rules
governing the use of P stock in a reverse triangular merger, see section 361.
● © Treatment of S. S must recognize gain or loss on its exchange of P stock as
consideration in a forward triangular merger, a triangular C reorganization, or a triangular
B reorganization (as described in § 1.358-6(b)), if S did not receive the P stock from P
pursuant to the plan of reorganization. See § 1.358-6(d) for the effect on P's basis in its S
or T stock, as applicable. For rules governing S's use of P stock in a reverse triangular
merger, see section 361.
○ 362(b) - transfer basis - 900
○ 381(a) Distribution Step
● 361(c)
● 361(c)(2)(A) - exception. You do not want to be in this exception or you will recognize gain.
○ (2) Distributions of appreciated property
○ (A) In generalIf—
○ (i) in a distribution referred to in paragraph (1), the corporation distributes property other than qualified
property, and
○ (ii) the fair market value of such property exceeds its adjusted basis (in the hands of the distributing
corporation),
○ then gain shall be recognized to the distributing corporation as if such property were sold to the
distributee at its fair market value.
● Is it qualified property? If yes, then nonrecognition.
○ Qualified propertyFor purposes of this subsection, the term “qualified property” means—
○ (i) any stock in (or right to acquire stock in) the distributing corporation or obligation of the distributing
corporation, or
○ (ii) any stock in (or right to acquire stock in) another corporation which is a party to the reorganization or
obligation of another corporation which is such a party if such stock (or right) or obligation is received by
the distributing corporation in the exchange.
○
● P stock is qualified proprety under 361(c)(2)(B)(ii)
● Therefore nonrecognition.
Shareholder step
● A
○ Go to 354(a)(1)
● A’s basis in P stock - 700
○ Exchange basis - 358(a)(1)
● P’s basis in its s stock is $100
○ Do we need to make an adjustment in P’s basis in S?
○ What if T merges into P and then P takes assets and liabilities and drops to S?
■
■
■
■
■
■
○
Basis would change as in a 361
1.358-6(c)(1)
Over and down method
Assets and liabilites come over to P and down to S
P’s basis in T assets would be 900 transfer basis
P takes T assets and liabilites in an exchange basis of 900 in stock and debt would be treated as
cash received. 900-200 = 700
P’s basis in its S stock is adjusted by 700 through the over and down method. 700+100=800
What if this time S transfers 600 P stock + 400 S bonds + 200 debt assumption
● Do we meet 4 requirements of
○ T into S
○ S acquires substantially all
○ Solely for S stock?
■ Here no S stock being used
○ Business purpose, COI
■ COI = 600/1000
■ 60%, COI met
● 368(a)(2)(D)
A is gonna give up 600 in P stock and 400 in S bonds
● Tax consequences
○ A has 300 realized gain, 1000-700
○ How much does A recognize under 356(a)?
■ All 300 because lower of realized gain or boot.
How is this transaction different than the basic fact pattern? Its giving its own bonds. 1.358-6(d)
Over and down says basis is 700 then subtract out consideration given by S (400
What if this time S transfers 600 P stock + 400 cash + 200 debt assumption? Good forward triangular merger
S using its own 960 voting stock, does not meet requirements for forward traingular merger stock.
P transfers all S stock to S2 after original transaction. S2 now owns S. It is a forward trinagular to a dropdown. S stock is
being dropped down. 1.368-2(k) regulation says you can drop down after any reorganization.
Afterwards, A has P stock and S acquires assets from T1 and T2.
What if assets are being pushed up? From subsidiary to parent. 1.368-2(k)
fbe
Reverse triangular merger
P transfers voting stock to S, S merges into T. A is a shareholder of T. The T stock goes to P. P now owns all of T. A is
now a voting shareholder of P.
368(a)(2)(E)
● (E) Statutory merger using voting stock of corporation controlling merged corporationA transaction otherwise
qualifying under paragraph (1)(A) shall not be disqualified by reason of the fact that stock of a corporation
(referred to in this subparagraph as the “controlling corporation”) which before the merger was in control of the
merged corporation is used in the transaction, if—
○ (i) after the transaction, the corporation surviving the merger holds substantially all of its properties and
of the properties of the merged corporation (other than stock of the controlling corporation distributed in
the transaction); and
○
(ii) in the transaction, former shareholders of the surviving corporation exchanged, for an amount of
voting stock of the controlling corporation, an amount of stock in the surviving corporation which
constitutes control of such corporation.
In reverse triangular merger, 368(a)(2)(E)
1. New S merges into T
2. T retains substantially all of its properties
3. T acquires/retains substantially all of the properties of S
4. T S/Hs give up control of T for P voting stock.
(E) Statutory merger using voting stock of corporation controlling merged corporationA transaction otherwise qualifying
under paragraph (1)(A) shall not be disqualified by reason of the fact that stock of a corporation (referred to in this
subparagraph as the “controlling corporation”) which before the merger was in control of the merged corporation is used
in the transaction, if—
(i) after the transaction, the corporation surviving the merger holds substantially all of its properties and of the
properties of the merged corporation (other than stock of the controlling corporation distributed in the transaction); and
(ii) in the transaction, former shareholders of the surviving corporation exchanged, for an amount of voting stock
of the controlling corporation, an amount of stock in the surviving corporation which constitutes control of such
corporation.
Tax consequences
Distribution 361(c)
1.358-6(c)(2)
PART C
Part D
RR 2001-26 you can do a reverse triangular merger in one step.