corp-tax rosenberg s05

8/2/2019 Corp-tax Rosenberg s05

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Corporate Tax

Spring 05

I. Formation of a Corporation

1. Types of Corporations

a. C-Corporation: Normal Corporation1. Taxed like an individual2. Has income and deductions3. Corp pays tax on income4. Shareholders taxed on dividends (15%)5. Double tax regime b/c Corp taxed on income and

shareholder is taxed on dividends.6. All publicly traded companys are C-Corps.

b. S- Corporation: Smaller Corporation1. Less than 100 shareholders2. Corporation is not taxed

3. Individual shareholder is taxed on their share of theCorp. (Single pass thru tax regime)

2. Transfers to Corporation: Transferring Property into Corp in Exchange forShares.

a. 351(a) Nonrecognition for shareholder:No gain or loss shall berecognizedif property is transferred to a corporation by one or morepersonssolely in exchange for stockin such corporation andimmediately after the exchange such person or persons are in control of

the corporation.1. Requirements:

a. One or more persons (including individuals,corporations, partnerships, and other entities) musttransfer property to the corporation; [services is notproperty, you cant get stock in exchange for servicesand be under 351, and this can screw up everyone for thecontrol part. Rev Ruling 77-37 if you get stock forservices you have to put up cash = to at least 10% of thevalue of the stock i.e. get $150,000 worth of stock thenyou have to put up $15,000]b. The Transfer must be solely in exchange for stock ofthe corporation; [nonqualified preferred stock treated asboot 351(g)] andc. The transferor or transferors, as a group must be incontrol of the corporation immediately after theexchange.

2. 368(c) Control Defined: The ownership of stock possessingat least 80% of the total combined voting power of all classes ofstock entitled to vote and at least 80% of the total number of


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shares of all other classes of stock of the corporation.[transferors of property as a group own 80% of stock]

b. 358(a)(1) Basis of Stock for Shareholder: The basis of the propertypermitted to be received under such section 351 without therecognition of gain or loss shall be the same as that of the property

exchanged. *Stock basis is the same as the basis of what they gavec. 1032(a) Nonrecognition for Corp: No gain or loss shall berecognized by a corporation on the receipt of money or other property inexchange for stock of such corporation.

d. 362(a) Basis of Property received by Corp: For basis of propertyacquired by corporation in connection with a 351 exchange, the basisshall be the same as it would be in the hands of the transferor. *Basis isthe same as what shareholder had. *look at each thing the corp getsseparately. Each asset will have a basis, same as shareholders basis +gain recognized

e. 1223 Holding Period of Property: The taxpayers holding period for

property received in an exchange shall include the period for which heheld the property exchanged. *Corp will take over the holding periodfor property exchanged under 351.

3. Treatment of Boot

a. 351(b): If an exchange otherwise would have qualified under 351(a)but for the fact that transferor received other property or money (boot)in addition to stock, then the transferors realized gain must berecognized to the extent of the boot received.

b. 351(b)(2): No loss to recipient shall be recognized.c. 358(a)(1) Basis for Shareholder: Basis will be the same as that of

property exchanged increased by the recognized gain on the transferand decreased by the fair market value of the boot.

d. 362(a) Basis for Corp: For basis of property acquired by corporationin connection with a 351 exchange, the basis shall be the same as itwould be in the hands of the transferor, increased in the amount of gainrecognized to the transferor on such transfer. *If shareholder gets bootlater, then corps basis is increased later (when shareholder recognizesgain)

e. If boot is given over time, then divide total amount of gain recognizedover total amount of boot

f. If you get boot and there is more than one asset, divide shareholder andeach asset is a separate shareholder. Example Use this Way

B gets $15,000 in stock and $15,000 in cash. Take B and slice him intotwo people. When you receive boot and transfer more than 1 asset thenfollow rev ruling 68-55. Treat each asset individually, then allocate what bgets in exchange. 2/3 of the value is in the inventory, 1/3 in the land.B1 inv.B2 land


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Total Asset I (Inventory) Asset II (Land)

Fair market Value ofAsset Transferred

$30,000 $20,000 $10,000

% Of Total FMV 2/3 1/3

Fair market value ofX stock received inexchange

$15,000 $10,000 $5,000

Cash received inexchange

$15,000 $10,000 $5,000

Amount realized $30,000 $20,000 $10,000

Adjusted Basis $7,000 $25,000

Gain (loss) realized $13,000 (15,000)

No loss recognized under 351(b)(2) so no loss recognized for Asset II(land).

Gain for Asset I (Inventory) is $13,000; Recognized Gain is $10,000 (cashreceived). Since inventory is an ordinary asset, not a capital asset B wouldrecognize $10,000 ordinary income.Bs basis in X stock received is $32,000 ($7,000 ab in inv. + $25,000 ab inland)Holding Period- 2/3 of the stock was exchanged for the inventory and 1/3of the stock was exchanged for the land.X corporation basis is adjusted basis 17 + 25 = 42,000 Under 362

4. Assumption of Liabilities/Debt Relief

a. 357(a): The assumption of a liability by a transferee corporation in a

351 exchange will neither constitute boot nor prevent the exchangefrom qualifying under 351.

b. 358(d) Basis for Shareholder: The assumption of liability shall betreated as money received by the taxpayer on the exchange.

1. Basis is reduced by the debt relief.2. If your debt relief is greater than your basis, the excess

debt relief results in a recognized gain [357(c)].c. 357(b): The assumption of liability is treated as boot if the taxpayers

principal purpose in transferring the liability was the avoidance offederal income taxes or was not a bona fide business purpose.

d. If shareholder doesnt want to recognize gain they can just put in a

promissory note equaling the amount of debt relief


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5. Incorporation of a Going Business:

a. 357(c)(3) Accounts Receivables and Accounts Payable: Amount ofliability is excluded in determining the amount of liabilities assumed.*Rosenberg Def: The income and deductions balance out when theCorp would assume accounts payable so ignore it. Ignore it for gain and

ignore it for basis.b. Tax Benefit Rule: If an amount has been deducted and a later eventoccurs that is fundamentally inconsistent with the premise on which thededuction was initially based, the earlier deduction must be effectivelycancelled out by the recognition of income equal to the amountpreviously deducted.

c. Organizational Expenses:1. 248(a): A corporation can elect to amortize certain qualifying

organizational expenditures over a period ofsixty months or more beginning with the monthin which the corporation commences business.

2. 248(b) Organizational Expenditures Defined: Anyexpenditure which-a. is incident to the creation of the corporationb. is chargeable to capital account; andc. is of a character which, if expended incident to

the creation of a corporation having alimited life, would be amortizable over suchlife.

3. Specifically Excluded: Costs of issuing or selling stock andexpenditures connected with the transfer of assets to thecorporation.


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II. Capital Structure of Corporations (NOT ON FINAL)

Ex.S and T form Company w/ 2 millionShould they put in the money in exchange for equity (stock) or debt?

Equity (stock)- you get to share profits, ownership of company, voting rights, more

risk Debt- fixed interest, priority, no voting rights

Tax Consequences

Debt- Corp has to pay, and paying interest is a cost of doing business so Corp. getsa deduction. Individuals who receive the interest payments are taxed at 40%.

Stock- Paying dividends not deductible (not a cost of doing business), Shareholderswho get dividends are taxed at 15% rather than 40%.

Seemingly better for a Corp to issue debt than to issue stockbut people want right tovote, share profits, share risk. So corps came up w/stuff like convertible debt, voting debt.

Often hard to tell the difference between debt and equity b/c corp. wanted to say its debtbut they had the same rights as shareholders. Corp would pay and still get a deduction.

Section 385 authorized the Treasury Dept to make regulations to differentiate between debtand equity, but there are no regulations.Section 385(b) gives factorsSection 351(g) nonqualified preferred stock is treated as debtCases where stock is treated as debt is rare, what has developed:

Ex.Oracle worth 300 billionMakes profit 10%/yr (30 billion)

Taxes = 12 billion/yrNet profit 18 billion/yr

John buys Company for 300 billionWhat is Johns next step? Get 300, so go to investors to borrowJohn Co will take over all of Oracles assets; lenders will lend John Co 300

billion. (Leveraged buyout)Now Oracle has assets worth 300 billion, but 300 in debt, so net value is 0Instead of the shareholders, now debt-holders and will get paid more in

interest.After all the interest is paid, net profit is 3 billion, 1.8 after taxes, and that

is all Johns.

*President changed the dividend rate at 15% instead of 40% so that companies wouldntmind paying the dividends. Lowering the interest rate still isnt as good as the 40%deduction, but it makes it better for companies to pay more.

III. Non-liquidating Distributions

Basically talking about dividends


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Not every distribution is a dividend- If youre just getting back your own money itis a return of capital.

Dividend is when the Corporation is distributing its profits

When a Corporation is distributing its profits then it is taxed as a dividend (15%)

If a Corporation is just returning capital then there is no tax, just a reduction in the

shareholders basis

1. Dividends

a. 316 Dividend defined: The term dividend means any distribution ofproperty made by a corporation to its shareholders

1. out of its earnings and profits accumulated after February28, 1913, or2. out of its earnings and profits of the taxable year (computedas of the close of the taxable year without diminution by reason ofany distributions made during the taxable year), without regard tothe amount of the earnings and profits at the time the distribution

was made.3. Regulation 1.316-2(a): In determining the source of a distribution,

considerations should be given first, to the earnings and profits ofthe taxable year; and second, to the earnings and profitsaccumulated since February 28, 1913.

b. 301(c)(1) Amount constituting dividend: That portion of thedistribution which is a dividend is included in gross income.

c. 301(c)(2) Amount applied against basis: That portion of thedistribution which is not a dividend shall be applied against and reducethe adjusted basis of the stock.

d. 301(c)(3) Amount in excess of basis: That portion which is not adividend, to the extent that it exceeds the adjusted basis of the stock,shall be treated as gain from the sale of or exchange of property

2. Earnings and Profits: Measuring devise used to determine the extent to whicha distribution is made from a corporations economic income as opposed to itstaxable income or paid in capital.

*Rosenberg Definition: Net real profit the corporation has madea. 312 Effect on Earnings and Profits: On the distribution of property

by a corporation with respect to its stock, the earnings and profits of thecorporation shall be decreased by the sum of-

(a)(1) The amount of money(a)(2) The principal amount of the obligations of such corporation, or(a)(3) The adjusted basis of the other property

b. 312(b) Distributions of Appreciated Property:


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1. The earnings and profits of the corporation shall be increased bythe amount of such excess (amount FMV is greater than AB),and

2. (a)(3) will be applied by substituting FMV for AB

3. Distributions of Casha. Cash distributions are taxable as a dividend to the extent of thedistributing corporations current or accumulated earnings andprofits. [301(c)(3)]

b. Amounts distributed in excess of available earnings and profits are firstapplied against and reduce the basis of the shareholders stock. [301(c)(2)]

c. To the extent the distributions exceed the shareholders basis, they aretreated as gain from the sale or exchange of stock. [301(c)(3)]

d. When there are insufficient current e&p available to cover all cashdistributions made during the year, e&p must be allocated to the

distributions in order to determine dividend status under the followingrules.1. Current e&p, determined as of the end of the year, are prorated

among the distributions by using the following formula:Current E&P allocated to distribution = Amount of distribution x

Total Current E

&P/ Total distributions

2. Next, accumulated e&p are allocated chronologically to thedistributions on a first-come, first-served basis.

4. Distributions of Property: When Property is distributed-a. Corporation is taxed as if it sold the property at its FMV (so taxed on

any gain) [311(b)].b. Any Gain increases the Earnings and Profits of the Corp. [312(b)]c. For Shareholder: The amount of distribution is the net FMV of the

property [301(b)(1)]d. For Shareholder: The distribution is a dividend to the extent of the

earnings and profits. [301(c)(1)]e. For Shareholder: The basis is the FMV of the property [301(d)]f. Corporations ending earnings and profits is whatever it had minus the

dividend distributed. [312(a)(3), adjusted by 312(b)(2)]g. 316 tells us to do 312(b) before we do 312(a)

5. Distributions of a Corporations Own Obligations


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a. 312(a)(2): A corporations earnings and profits will be reduced by theamount of the obligations.

b. 7872(a) & (c)(1)(C): If a corporation tries to distribute its earningsand profits in a way that may be deductible at the corporate level, thenthe IRS will reclassify the distribution as a constructive dividend and

the corporate level deduction will be disallowed.1. Examples of Corporate distribution avoidance schemes:a. A corporations payment of:

1. excessive compensation to shareholders or theirrelatives;

2. expenses paid for the personal benefit ofshareholders;

3. excessive rent for corporate use of shareholderproperty

4. interest on shareholder debt that in substancerepresents equity.

*If these payments are not what they purport to be,they risk being classified as a constructive

dividend.

b. Other disguised dividend strategies:

1. Labeling a distribution a loan2. Bargain sales or rentals of corporate property to

shareholders,3. Interest free loans.

6. Anti-Avoidance Limits on the Dividends Received Deduction

a. 243 Dividends received by corporations: A corporation that receivesa dividend from another corporation can make a deduction of:

(1) 70% [243(a)(1)](2) 80% if the corporation owns 20% or more of the distributing

corporation [243(c)](3) 100% in the case of qualifying dividends.

a. 243(b)(1) Qualifying Dividends- Any dividendreceived by a corporation-

(A) if the corporation is a member of the sameaffiliated group as the corp. distributing thedividend (parent-subsidiary)

b. 246(c) Holding Requirements- The corporation receiving thedividend must hold the stock for 45 dies during the 90 day periodbeginning on the exdividend date. Ex. Hold stock for 45 days beforeexdividend date, or for 15 before and 30 after.

c. 1059 Extraordinary Dividends Basis Reduction: Corp shareholderreceiving an extraordinary dividend must reduce its basis in theunderlying stock by the amount of nontaxed (i.e. deductible) portion ifthe Corp has not held the stock for more than 2 years.


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1. Extraordinary Dividend Definition: A dividend isextraordinary if it exceeds 5% of shareholders preferred stockor 10% shareholders of common stock.

2. Fair Market Value Test 1059(c)(4): Can elect to substituteFMV for adjusted basis.

3. 1059(c)(3)(A) and (c)(3)(B): dividends within 85 days areaggregated (treated as one dividend) and dividends within 1year are aggregated if it exceeds 20% of basis.

c. 246A Debt-financed Portfolio Stock- A Corporations 243deduction is reduced by the amount the dividends are attributable todebt-financed portfolio stock. If the portfolio stock is entirely debtridden, then 246 denies any dividends received deduction

7. Use of Dividends in Bootstrap Sales

a. Two Factors that the Service will look at to see if it is a dividend or

a sale:

1. What was the intent of the parties? The intent cant be to makeit a disguised sale?2. If there is a dividend just prior to the sale, what is the source of

the funds?


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IV. Redemptions and Partial Liquidations

1. Intro: Simply means that the Corporation buys back its own stock.

2. How it is taxed: Depends whether it is a dividend or a sale of the stock. If it islike a dividend it is taxed like a dividend, and if it looks like a sale of the stock

then you get gain or loss and it is taxed like a sale or exchange.

3. Difference: For a dividend you get money out of the corporation, in a sale orexchange you get money in exchange for your interest in the corporation.

4. Test: Whether there has been a meaningful reduction in the shareholdersinterest.

a. Compare the percentage of the corporation ownedimmediately before and immediately after.b. Assuming there is some reduction, question whether it isa meaningful reduction.

5. 318 Attribution: This rule is the first step when looking at redemptions ofstock. Treats a taxpayer as owning stock that is actually owned by variousrelated parties. The attribution rules fall into four categories.

a. 318(a)(1) Members of the family: An individual is considered asowning stock owned by his spouse, children, grandchildren and parents.Siblings and in-laws are not part of the family for this purpose, andthere is no attribution from a grandparent to a grandchild. [318(a)(1)(B) says that a legally adopted child is treated as a child]

b. 318(a)(2)(A) Entity to Beneficiary Attribution Stock owned by orfor a partnership or estate is considered as owned by the partners orbeneficiaries in proportion to their beneficial interests. A person ceasesto be a beneficiary of an estate for this purpose when she receives allproperty to which she is entitled and the possibility s.

c. Option Attribution: 318(a)(4) If any person has an option to acquirestock, then they are treated as owning the stock. An option for an

option is an option.6. 302 Distributions of Redemptions in Stock- A redemption is treated as a sale

or exchange if it is: *For Final go CTI, SDR, RNEED (b,a,c)a. 302(b)(2) Substantially disproportionate redemptions: If a

shareholders reduction satisfies three requirements, the redemption willbe treated as an exchange. *there needs to be a redemption of common

voting stock, if you dont have that it is not substantially proportionate.The requirements:1. Immediately after the redemption, the shareholder must own

(actually and constructively) less than 50 percent of the totalcombined voting power of all classes of stock entitled to vote,

2. The percentage of total outstanding voting stock owned by theshareholder immediately after the redemption must be less


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than 80% of the percentage of total voting stock owned by theshareholder immediately before the redemption, and

3. The shareholders percentage ownership of common stockafter the redemption also must be less than 80 percent of thepercentage of common stock owned before the redemption.

b. 302(b)(3) Complete Termination of a Shareholders Interest: Acomplete termination of a shareholders interest will result in treatmentas a sale or exchange

1. Waiver of Family Attribution: In the case of a shareholdertrying to get complete termination, the shareholder can get awaiver of family attribution if (302(a)(c)(2)(A)

a. immediately after the distribution the distributehas no interest in the corporation, other than as acreditor,

b. the distributee does not acquire any such interest(other than by bequest or inheritance) within 10

years from the date of distribution.c. the distributee files an agreement to notify theSecretary of any acquisition described in clause(ii) and to retain such records as may benecessary.

d. 302(c)(2)(B) provides a 10 year look back rule,under which the family attribution rules may notbe waived during the 10 years preceding theredemption either: (1) the redeemed shareholderacquired any of the redeemed stock from asection 318 relative or (2) any such close relativeacquired stock from the redeemed shareholder.

e. The 10 year look back rule does not apply if theacquisition did not have as one if its principalpurposes the avoidance of federal income tax.

2. The only kind of attribution that can be cut off is family

attribution.

c. 302(b)(1) Redemptions Not Essentially Equivalent to a dividend

1. Subjective Test: The determination depends on the facts andcircumstances of each case.

2. Meaningful Reduction of Interest: If there is a meaningfulreduction of interest then the redemption is not essentiallyequivalent to a dividend. Meaningful reduction generallymeans a reduction in voting control and money.

3. A reduction in voting power is a key factor in determining theapplicability of 302(b)(1). If there is no real reduction invoting power then it is essentially equivalent to a dividend.

4. If the shareholder continues to have dominant voting rights,then the reduction would not be meaningful.


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5. If shareholder is in control, likely no meaningful reduction ofinterest. If shareholder is not in control, then it likely is ameaningful reduction of interest.

d. 302(b)(4) Partial liquidations

1. A shareholder who is not a corporation will get sale or

exchange treatment on a redemption that is in partialliquidation.2. 302(e)(1) a distribution qualifies as a partial liquidation if

a. it is not essentially equivalent to a dividend, andb. it is pursuant to a plan, occurs within the taxable

year in which the plan is adopted or thesucceeding year.

3. 302(e)(2) safe harbor : assures partial liquidation status ifthe distribution consists of the assets of a qualified trade orbusiness or is attributable to the termination of such a trade orbusiness, and immediately after the corporation continues to

conduct another qualified trade or business.4. 302(e)(3) Qualified Trade or Business: to be qualified atrade or business must have been actively conductedthroughout the five-year period ending on the date of thedistribution and must not have been acquired by thedistributing corporation in a taxable transaction during thatperiod.

5. Charitable Contribution and Redemption: Lets say youwant to donate to USF Law, so you want to give thempreferred stock so they cant vote.Now you really dont want them to do anything, so you havethe corp. redeem the stock for them.You have a 10 million deduction, no income, and are still soleowner.

d. Consequences to the Distributing Corporation

1. 311(a) General Rule: Except as provided in (b), no gain orloss is recognized to a corporation on the distribution (not incomplete liquidation) of its stock (or rights to acquire itsstock) or property.

2. 311(b) Appreciated Property Gain is Recognized: Indistributions of a corporations appreciated property, gain isrecognized as if the corporation sold the property at its fairmarket value.

3. 312(n)(7) Effect On Earnings and Profits: If theredemption is treated as an exchange under section 302(a) or303 to the redeemed shareholder, the part of the distribution inredemption that is properly chargeable to earnings and profitsshall be an amount which does not exceed the ratable share ofthe corporations accumulated earnings and profits attributableto the redeemed stock.


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a. Example: X Corp has 1,000 shares of commonstock outstanding, and A and B each acquire 500of these shares at $20 per share. X holds$100,000 of net assets, consisting of $50,000cash and $50,000 of appreciated property, and X

has $50,000 of accumulated earnings and profits.If X distributes $50,000 cash to A in redemptionof As 500 shares, section 312(n)(7) reduces Xsearnings and profits by $25,000, the ratable shareof Xs $50,000 earnings and profits attributableto As 50% stock interest that was redeemed.

e. Redemptions through Related Corporations 304: 304 requiresshareholder sales involving brother-sister and parent subsidiarycorporations to satisfy one of the tests in 302 in order to qualify forcapital gain status and recovery of basis.

1. 304(a)(1) Brother Sister: applies when one or more persons

who are in control of two corporations transfer stock of onecorporation (the issuing corporation) to the other (theacquiring corporation) in exchange for cash or property.

a. Control for 304: owning at least 50%2. 304(a)(2) Parent Subsidiary: applies when a controlled

subsidiary acquires stock of its parent from a shareholder ofthe parent in return for property.

3. Steps for a 304:a. 1st see if it is a redemption through a related

corporation (Brother-Sister or Parent-Subsidiary). If so, 304 applies

b. Go through 302(b) tests to see if it gets sale orexchange treatment. If it meets tests, it qualifiesas sale or exchange.

c. If it fails 302(b) tests it is treated as a dividend.304(b)(2) says that it is a dividend by theacquiring corporation to the extent of its earningsand profits and then by the issuing corporation tothe extent of its earnings and profits.

4. Coordination with Section 351: Section 351 generally willnot apply to transactions described in section 304. Thus,section 351, if otherwise applicable, will generally apply onlyto the extent such transaction consists of an exchange of stockfor stock in the acquiring corporation.

V. Stock Dividends and Section 306 Stock


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1. Taxation of Stock Dividends under Section 305

a. 305(a) General Rule: Gross income does not include the amount ofany distribution of the stock of a corporation made by such corporationto its shareholders with respect to its stock. *Basic idea is that theytaxed all the stock distribution they could. The reality is that stock

distributions (dividends) are taxed except for:1. Pro rata distribution of common on common

2. Pro rata distribution of preferred on common as long asthere is no other preferred stock outstanding, or

preferred is subordinated

b. 305(b) Exceptions to the General Rule: Subsection (a) shall notapply to a distribution by a corporation of its stock, and the distributionshall be treated as a distribution to which 301 applies

1. 305(b)(1) Distributions in Lieu of Money: If thedistribution is, at the election of any of the shareholders(whether exercised before or after the declaration thereof),

payable either (a) in its stock, or(b) in property

2. 305(b)(2) Disproportionate Distributions: If thedistribution (or a series of distributions of which suchdistribution is one) has the result of

(a) the receipt of property by some shareholders,and(b) an increase in the proportionate interest ofother shareholders in the assets or earnings andprofits of the corporation.

3. 305(b)(3) Distributions of Common and Preferred

Stock: If the distribution has the result o f(a) the receipt of preferred stock by some common

shareholders, and(b) the receipt of common stock by other common

shareholders4. 305(b)(4) Distributions on preferred stock: If the

distribution is with respect to preferred stock, other than anincrease in the conversion ratio of convertible preferredstock made solely to take account of a stock dividend orstock split with respect to the stock into which suchconvertible stock is convertible.

5. 305(b)(5) Distributions of convertible preferred stock:If the distribution is of convertible preferred stock, unless itis established to the satisfaction of the secretary that suchdistribution will not have the result described in paragraph(2).


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2. Basis of Stock acquired in a 305 distribution: The basis of the new stock andof the old stock shall, in the shareholders hands, be determined by allocatingbetween the old stock and the new stock the adjusted basis of the old stock. Ex.Preferred Stock is worth 1, Common stock is worth 3 (total = 4), and basis

in old stock is 2. Allocate the basis so (of 2) is for the common and is

for the Preferred.

3. Section 306 Stock:

a. Section 306 provides, in general, that the proceeds from the sale orredemption of certain stock (referred to as section 306 stock) shall betreated either as ordinary income or as a distribution to which section301 applies.306 says that if the corp. has e&p so that a distributionwould otherwise be a dividend, and it distributes non-voting preferredstock in a nontaxable distribution, then it will be called 306 stock, and itwill be tainted so that when you get rid of it, it is taxed as ordinaryincome. Look at the value of stock at the time of distribution and

the available E&P at the time of distributionb. 306(c) section 306 stock defined: Section 306 is stock that meets therequirements of subparagraph (A), (B), or (C). Section 306 provides, ingeneral, that the proceeds from the sale or redemption of certain stock(referred to as section 306 stock) shall be treated either as ordinaryincome or as a distribution to which section 301 applies.

1. 306(c)(1)(A) Distributed to Seller: Stock (other thancommon stock issued w/respect to common stock) whichwas distributed to the shareholder selling or otherwisedisposing of such stock if, by reason of section 305(a), anypart of such distribution was not includible in the grossincome of the shareholder.

2. 306(c)(1)(B) Received in a Corporate reorganization orseparation: Stock which is not common stock and

i. which was received, by the shareholder selling orotherwise disposing of such stock, in pursuanceof a plan of reorganization (within the meaningof 368(a)), and

ii. with respect to the receipt of which gain or lossto the shareholder was to any extent notrecognized, but only to the extent that either theeffect of the transaction was substantially thesame as the receipt of a stock dividend, or stockwas received in exchange for section 306 stock.

3. 306(c)(1)(C) Stock having transferred or substituted

basis: This category encompasses stock received as a giftthat takes a transferred basis under 1015, or stock received inexchange for Section 306 stock in a 351 transaction.

c. Dispositions of 306 Stock:


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1. 306(a)(1) Sale of 306 Stock: On the sale of section306 stock, the amount realized is treated as ordinary incometo the extent that it would have been a dividend if thecorporation had distributed cash instead. 306(a)(1)(A)Look Back Rule: When the 306 stock is sold, you have to

look back at when the person received the 306 stock. If,when they received the stock, the corp had current oraccumulated e&p that it could have given instead, then it isall ordinary income. 306(a)(1)(B) says the amount thatcouldnt have come from the corps e&p 1st reduces the basisand if there is more left over the rest is treated as a capitalgain.2. 306(a)(2) Redemption: A redemption of 306stock is treated as a 301 distribution.

d. Exceptions 306(b): No tax avoidance purpose1. 306(b)(1) Termination of a shareholders interest:

Section 306(a) shall not apply to nonredemptiondistributions if the shareholder completely terminates herinterest in the corporation and does not dispose of the stockto a related person within 318 attribution rules.

2. 306(b)(2) Complete liquidation: 306 does not apply if the306 stock is redeemed in complete liquidation

3. 306(b)(3) Where gain or loss is not recognized: such as351 transfers

4. 306(b)(4) Transactions not in avoidance: If it isestablished to the satisfaction of the secretary that thedistribution or redemption was not made pursuant to a planof tax avoidance.

VI. Complete Liquidations


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1. Taxable Liquidationsa. Effect on Shareholders 331 Distributions in Complete Liquidation

treated as exchanges: Amounts received by a shareholder in adistribution in complete liquidation of a corporation shall be treated asin full payment in exchange for stock. (AR AB)

b. Effect on Corporation 336 Gain or loss recognized on propertydistributed in complete liquidation:1. General Rule 336(a): gain or loss shall be recognized to a

liquidating corporation on the distribution of property incomplete liquidation as if such property were sold to thedistributee at its fair market value.

2. Limitations on recognition of loss 336(d):

a. 336(d)(1) No loss recognized in certain

distributions to related persons: No loss shallbe recognized to a related person if either

i. The distribution is not pro rata, or

ii. The distributed property is disqualifiedproperty (the distributed property wasacquired by the liquidating corporation ina 351 transaction or as a contribution tocapital within five years of the date of thedistribution.

*Related persons- Shareholder who ownsdirectly or through attribution more than50% of the stock of the distributingcorporation.

*Key to a corp that has loss property is to

either distribute it to an unrelated

person or sell it before liquidating.

b. 336(d)(2) Special Rule for certain property

acquired in certain carryover basis

transactions: Prevents the doubling ofprecontribution built-in losses. Applies only ifthe distributing corporation acquired property ina Section 351 transaction or as a contribution tocapital as part of a plan the principal purpose ofwhich was to recognize loss by the corporationon a liquidation.*In that event, the deductible loss is limited to

the amount of loss that accrued after the

corporation acquired the property

*336(d)(2)(B)(ii)- any property acquired withintwo years of the liquidation is treated as beingacquired as part of a plan to recognize loss whenthe corp liquidates.


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c. 336(d)(3)- applies to a tax free distribution tominority shareholder, distributing corp cannotrecognize a loss

c. Basis of Property received in liquidations 334(a): If gain or loss isrecognized on the receipt of such property, the basis of the property is

its fair market value at the time of the distribution.

2. Nontaxable Liquidations (Parent-Subsidiary Liquidations)

a. Effect on Shareholders (Parent) 332 Complete liquidations of

Subsidiaries: 332 provides that a parent corporation recognizes nogain or loss on the receipt of property in complete liquidation of an 80%or more subsidiary if certain conditions are met.

b. Effect on minority shareholder: Non recognition is only granted tothe parent corporation. Minority shareholders must determine their gainor loss under 331(a)

c. Requirements for 332

1. The subsidiary must distribute property to its parent incomplete cancellation or redemption of its stock pursuant to aplan of liquidation

2. Control: Under 332(b)(1), the parent must own at least 80%of the total voting power of the stock of the subsidiary and80% of the total value of all outstanding stock of thesubsidiary from the date of adoption of the plan of completeliquidation and at all times thereafter until the final distribution

3. Timing: Two alternativesa. One Shot Liquidations 332(b)(2): Qualifyif the subsidiary distributes all of its assets withinone taxable year even if it is not the same year inwhich the liquidation plan is adopted.b. 332(b)(3) Where the distributions spanmore than one taxable year, the plan mustprovide that the subsidiary liquidates all of itsproperty within three years after the close of thetaxable year in which the first distribution ismade.

d. Basis of property in liquidation of a Subsidiary 334(b) The basis isgoing to be the transferred basis unless there is gain or loss recognizedby the liquidating corporation. If the liquidating corp recognizes anygain or loss then the basis is going to be the fair market value at the timeof the distribution.

e. Effect on Liquidating Subsidiary 337: A liquidating subsidiary doesnot recognize gain or loss on distributions of property to its parent in acomplete liquidation to which 332 applies.

1. 337: No gain or loss for the subsidiary2. Distribution to minority shareholders: Non recognition of

gain or loss is only available when the subsidiary liquidates


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and gives the property to the parent. When the subsidiarydistributes property to the minority shareholder, gain isrecognized but not loss. Minority shareholders take a fairmarket value basis under 334(a).

3. Treatment of indebtedness of a subsidiary 337(b): If a

subsidiary is indebted to its parent, any transfer of property insatisfaction of a subsidiarys debt to its parent shall be treatedas a distribution, subjecting the transfer to nonrecognition ruleof 337.


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VII. Taxable Corporate Acquisitions

1. Asset Acquisitions:

a. Intro: A taxable asset acquisition occurs when a purchaser (P), whichmay be a corporation or an individual, acquires the assets of a targetcorporation in exchange for cash, notes, other property, or a mix of such

consideration, and the acquisition does not qualify as a tax freereorganization under 368.*Rosenberg: The truth is that when there is an asset sale, T will

have to liquidate, and when T liquidates the shareholderswill recognize gain.b. Allocation of the Purchase Price 1060: A sale of assets of a going

business for a lump sum is treated as a sale of each individual asset for abusiness. Parties are required to allocate the purchase price among thevarious tangible and intangible assets that have been sold. This is usedto determine the buyers cost basis in each asset for purposes ofcomputing depreciation and amortization deductions.

c. Amortization of Intangibles 197: Permits taxpayers to amortizevirtually all intangible assets ratably over a 15-year period, regardless oftheir actual useful life.

1. Intangibles include: information bases, customer andsubscription lists, patient files, know-how, licenses, franchises,trade names, and goodwill.

2. Stock Acquisitions:

a. Intro: In a taxable stock acquisition, the purchaser buys the stock of atarget corporation from Ts shareholders for a combination of cash,notes and other consideration.

b. What happens: Ts shareholders recognize gain or loss on the sale oftheir stock, measured by the difference between their amount realizedand stock basis, and P takes a cost basis in the T stock it acquires.

c. 338 Election: If a purchasing corporation (P) purchases 80% or moreof the stock of a target corporation (T) within 12 months, it may electwithin a specified time period to treat T as having sold all of its assetsfor their fair market value in a single transaction. T must recognize gainor loss on the hypothetical asset sale, and then T returns as a virgincorporation with a new cost basis in its assets. If T is liquidated, thiscost basis carries over to the parent.

1. Qualification for 338:a. 338 election only available to a purchasing corporation

making a qualified stock purchase of stock of anothercorp.

b. Qualified stock purchase: A transaction or a series oftransactions in which one corp buys at least 80%controlling interest in another corp within 1 year.

c. The corp must make the 338 election within 9 monthsof purchasing 80% of the target corp.


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VIII. S Corporations

1. Intro: Types of Pass Thru Entities:a. S Corp

1.S Corp: Small Corp2.Less than 100 shareholders

b. Partnership1.LLC2.LLP3.GP4.LP

2. Similarities:

a. When the entity earns the $ the entity is not taxed, only theshareholders are taxed proportionately to what they ownb. Good news: No double taxc. Bad news: Shareholder or partner may be taxed even though

they dont get the money. $ may stay in the corporation but the taxconsequences are still there.d. When shareholder is taxed, her basis is increased by theamount that is taxed to her. Then when the money is distributed sheisnt taxed again, it is treated as a reduction in basis.

3. Differences:

a. More flexibility in Partnershipsb. In S corp., if you own 10% youre taxed on 10% of S Corp incomec. In Partnerships, you can divide up profits how you want. Doesnthave to be in accordance w/how much stock you ownd. Partnerships are governed by Subchapter K, even more tax free thansubchapter C

4. Eligibility for S Corporation Status:

a. Small Business Corp [1361(b)(1)]: Means a domestic corporationwhich is not an ineligible corporation and

1. Does not have more than 75 Shareholders [1361(b)(1)(A)]2. Only shareholders who are individuals, estates, and certain

types of trusts and tax-exempt organizations [1361(b)(1)(B)]3. No nonresident aliens as shareholders [1361(b)(1)(C)]4. No more than 1 class of stock [1361(b)(1)(D)]. It can be

voting and non-voting as long as they have the same economicrights (they get paid the same).

a. Straight Debt Safe Harbor [1361(c)(5)]: Straight debtis not treated as a second class of stock

b. Straight Debt Defined [1361(c)(5)(b)]: Any writtenunconditional promise to pay on demand or on aspecified date as sum of money if:


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i. the interest rate and payment dates are notcontingent on the profits,

ii. there is no convertibility (directly or indirectly)into stock, and

iii. the creditor is an individual (other than a

nonresident alien), an estate, a trust described inparagraph 2, or a person which is activelyengaged in the business of lending money

b. Ineligible Corporation defined [1361(b)(2)]

1. Banks [1361(b)(2)(A)]2. Insurance Companies [1361(b)(2)(B)]

5. Election, Revocation and Termination

a. Election [1362(a)]

1. A Small Business Corp (it meets 1361b1) can elect to be and SCorporation [1362(a)(1)]

2. All shareholders must consent to be an S Corp [1362(a)(2)]3. The election is effective until terminationb. Revocation [1362(d)(1)]

1. The S-Corp can terminate its status by revocation [1362(d)(1)(A)]

2. Only if Shareholders holding more than of the shares ofstock of the corporation consent to the revocation [1362(d)(1)(B)]

c. Other ways the S Corp is terminated

1. If it breaks any of the rules of being a Small business Corp(defined by 1361(b)(1)) [1362(d)(2)]

2. Where passive investment income exceeds 25% of grossreceipts for 3 consecutive taxable years and corporation hasaccumulated earnings and profits [1362(d)(3)]

d. If an S Corp election is terminated, the corporation is not eligible tomake another election for five taxable years unless the Treasuryconsents to an earlier election [1362(g)]

e. Taxable Year of S Corp [1378]

1. Taxable year is a permitted year [1378(a)]2. Permitted year defined [1378(b)]: A permitted year is

either a taxable year ending on December 31, or an accountingperiod for which the taxpayer establishes a business purpose.*Very hard to convince Service of anything other thanDecember 31st.

a. Business Purpose: Satisfied if the desired taxaccounting period coincides with a natural businessyear.

b. Natural Business Year: Exists if 25% or more of the SCorps gross receipts for the selected 12-month period


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are earned in the last 2 months. Must be met in each ofthe last three years.

6. Treatment of the Shareholders

a. Entity Treatment: An S Corp must determine its gross income,

deductions and other tax items in order to establish the amounts whichpass through to the shareholders.1. An S corp computes its taxable income in the same manner as

an individual except that certain deductions to individualsarent allowed.

b. Pass-thru of Income and Losses [1366]: Income, gain and loss ispassed through to the shareholders in proportion to what they own.

c. Adjustments to basis of stock of shareholder [1367]:1. Shareholders basis is increased by their amount of income, and2. Decreased by any distributions of the S corp, and finally3. Decreased by any losses for the year.

d. Loss Limitations [1366(d)]1. Total amount of losses and deductions cannot exceedshareholders basis in stock and debt [1366(d)(1)]

2. Any disallowed loss or deduction carries over to the next year.Carryover is indefinite [1366(d)(2)]

e. Sale of S Corp Stock

1. Shareholder will not know how much gain or loss he has onthat sale until the end of that taxable year.

2. 1st thing you have to do is wait,3. Next thing is tax the shareholder on their share of income or

deductions4. Next thing is change the basis (up or down)5. Only then can you figure the gain or loss on the sale b/c the

gain is the AR AB and you dont figure out the AB until step3.

6. Income is passed thru for each day you own the stock (1377)7. 1377(a)(2)(A)- If the shareholder sells all of her stock and the

buyer agrees, then the taxable year of the corporation for themends the day of their sale. Only applies to the sellingshareholder and only if that shareholder and the buyer agree.*If you sell a portion then you have to do the waiting.

7. Distributions to Shareholders

a. S Corps without Earnings and Profits [1368(b)]: Distributions toshareholders are treated as a tax-free return of capital.

1. First it is applied to reduce the shareholders basis [1368(b)(1)]

2. Any distribution in excess of basis is treated as gain from thesale or exchange of property capital gain if the stock is acapital asset. [1368(b)(2)]


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3. Virtually all S-Corps formed after 1982 do not generateearnings and profits and are governed by this simple regime

b. S Corps with Earnings and Profits [1368(c)]: An S corp that has e& p and makes a distribution:

1. Accumulated Adjustments Account: Any distribution by an

S corp with accumulated earnings and profits is treated as atax-free return of capital to the extent it does not exceed theAAA. [1368(c)(1)]

a. AAA defined: Represents the post-1982 undistributednet income of the corporation. It begins at zero and isincreased and decreased annually in a manner similar tothe adjustment of the basis in a shareholders stock[1368(e)(1)]

2. Dividend: A distribution in excess of the AAA is treated as adividend to the extent of the accumulated earnings and profits[1368(b)(2)]

3. Treatment of Remainder: Any portion of the distributionstill remaining after both the AAA and accumulated e&p areexhausted is treated as a recovery of basis and then as capitalgains.

c. Distributions of Appreciated Property [311(b)]: At the shareholderlevel, the 1368 rules make no distinction between distributions of cashand other property.

1. At the Corporate Level [311(b)]: An S corp that distributesappreciated property recognizes gain in the same manner as ifthe property had been sold to the shareholder at its fair marketvalue. *311(b) applies to an S Corp through 1371

2. Shareholder takes a fair market value basis in the distributedproperty [301(d)]

3. Shareholdersbasis in the S Corp Stock is reduced by the fairmarket value of the distributed property [1367(a)(2)(A)].

8. Taxation of the S Corporation:

a. Tax imposed on certain built-in gains 1374:1. Applies only if the corps S election was made after December

31, 1986.2. Does not apply to a corporation that always has been subject to

Subchapter S.3. Designed to tax an S corp on the net gain that accrued while it

was subject to Subchapter C if that gain is subsequentlyrecognized on sales, distributions, and other dispositions ofproperty within a 10 year recognition period beginning withthe first taxable year in which the corporation was an Scorporation.

b. Tax imposed when passive investment income of corporation having

accumulated earnings and profits exceeds 25% 1375


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1. Passive investment income: gross receipts from royalties,rents, dividends, interest, and annuities, together with gainsfrom sales or exchanges of stock or securities.

IX. Acquisitive Reorganizations

1. Intro: Acquisitive organizations are transactions in which one corporation (theacquiring corporation) acquires the assets or stock of another corporation (the


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target corporation). 1st thing you want to ask is it an asset acquisition or a stockacquisition. If it is stock, it is a B. If it is statutory merger then A, if not it is aC.

2. Type A: Statutory Mergers and Consolidations [368(a)(1)(A)]: Defined as

a statutory merger or consolidation. For this purpose, statutory refers to amerger or consolidation pursuant to local law. Requirements:a. The result of the transaction must be that one corporation acquires the

assets of another (target) by operation of law, and the target must ceaseto exist.

b. Continuity of Interest: Reg. 1.368-1(e)- Continuity of Interestrequires that in substance a substantial part of the value of theproprietary interests in the target corporation be preserved in thecorporation. A proprietary interest in the target corporation is preservedif, in a potential reorganization,

1. it is exchanged for a proprietary interest in the issuing

corporation2. it is exchanged by the acquiring corporation for a directinterest in the target corporation enterprise

3. The Service has provided a practical benchmark by declaringthat it will rule favorably on a Type A reorganization if it usesat least 50% equity consideration in making the acquisition(Rev. Ruling 77-37)

4. Half (50%) of the consideration must be for stock to meetthe continuity of interest doctrine.

c. Continuity of Business Enterprise: Bentsen v. Phinney- To qualify asa reorganization under the applicable statutes, the new corporationdoes not have to engage in an identical or similar type of business. Allthat is required is there must continuity of the business activity.

1. Reg. 1.368-1(d): Continuity of business enterprise requiresthat the issuing corporation (P) either

a. Continue the target corporations historic business, ori. The continuity of business enterprise is satisfied if

P continues Ts historic business. The fact P isin the same line of business tends to establish therequisite continuity, but is not alone sufficient.

ii. If T has more than 1 line of business, continuityof business enterprise requires only that Pcontinue a significant line of business

iii. A corps historic business is the business it hasconducted most recently.

b. Use a significant portion of Ts historic assets in abusiness

i. A corporations historic business assets are theassets used in its historic business.


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ii. The determination of the portion of acorporations assets considered significant isbased on the relative importance of the assets tooperation of the business. However, all otherfacts and circumstances, such as the net fair

market value of the those assets, will beconsidered.

3. Type B Reorganizations [368(a)(1)(B)] Acquisitions of Stock Solely for

Voting Stock: The acquisition by one corporation, in exchange solely for all ora part of its voting stock, if immediately afterwards the acquiring corp is incontrol (80%+ ownership of T corp shares).

a. Three factors:

1. P acquires T stock2. Solely for P voting stock (No boot allowed)

a. If you make a deal to buy a % of a corp a few years

before and then take over rest for voting stock yearslater, make sure that it is viewed as two separatetransactions to satisfy a B reorganization. If it is partof the same transaction then it is not okay

3. Immediately after P is in control of Tb. Flexible?

1. Solely requirement is not violated if the acquiringcorporation issues cash in lieu of fractional shares.

2. The acquiring corporation also may pay the targetcorporations expenses (e.g., registration fees, legal andaccounting fees, and other administrative costs) related to thereorganization, but payment of legal, accounting or otherexpenses of the targets shareholders will constitute forbiddenboot.

3. You can have contingent payments and escrowed stockarrangements. Must be stock or securities

c. Buying Out Dissenting Shareholders:

1. Challenge: Shareholders of the target who insist on receivingcash. If the acquiring corporation pays cash directly to thesedissenters, it violates the solely for voting stock requirement.

2. Solution:

a. Target can redeem the shares of dissenters prior to avalid B reorganization provided the cash doesnt reallycome from the acquiring corp.

b. Acquiring corp can proceed w/ stock for stock exchange,then redeem the dissenters shares of acquiring corp.But if viewed as part of same transaction plan then itkills the deal.

c. Reverse Triangular Merger- see later


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4. Type C Reorganizations [368(a)(1)(C)] Acquisitions of Assets for Voting

Stock: The acquisition of one corporation, in exchange solely for all or a partof its voting stock, of substantially all of the properties of another corporation,But in determining whether the exchange is solely for stock, the assumption ofa liability by the acquiring corporation is disregarded.

a. Requirements:1. The target has to transfer substantially all of its propertiessolely in exchange for voting stock.

2. Target corp must liquidate afterwardsb. Exceptions to Solely in Type C:

1. Assumption of Liabilities: Assumption of liabilities by theacquiring corporation is not treated as disqualifying boot.

2. Boot Relaxation Rule [368(a)(2)(B)]: Acquiringcorporation can use up to 20% boot. *But if you are usingboot, then debt relief will count as part of boot. So acombination of debt relief and other boot likely will spell

doom for the transaction. The acquisition is a C as long asthere is P voting stock more than or equal to 80% of thegross fmv of the T assets.

a. Ex: Target has gross assets of $120,000 and liabilitiesof $30,000. Acquiring corp proposes to acquire all ofTs assets in exchange for the assumption of $30k ofliabilities and $90k of voting stock. This is a type C b/cliabilities are not treated as boot. But if A corp assumesthe 30k of debt and gives 80k of voting stock and 10kcash, the transaction does not qualify. The liabilities aretreated as money paid for the purposes of bootrelaxation, and A has only got 2/3 of T for voting stock,and paid 1/3 boot for the rest. A would have to use atleast 96k of voting stock (80% of 120,000).

c. Guidelines for Substantially All:

1. If Acquiring corporation acquires all of the operating assets ofTarget Corp

2. 70/90 test: If Acquiring corp acquires (1) 70% of the grossassets of Target corp and (2) 90% of the net worth of TargetCorp

d. Other rules:

1. If T redeems some shares and then does the reorganization, itcan screw up a Type C if the service treats it as onetransaction. If it is treated as one transaction then theAcquiring corp may not have gotten substantially all of theTarget. Make sure it meets the substantially all test.

2. Prior ownership of a portion of T stock will not by itselfprevent the solely for voting stock requirement, but theownership has to be old and cold Where there is priorownership of T stock, the sum of: (1) the money or other boot


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distributed to T shareholders other than P and (2) the liabilitiesof T assumed by P, may not exceed 20% of the value of all ofTs properties.

5. Treatment of the Parties:

a. Consequences to Shareholders and Security Holders1. Nonrecognition of Gain or Loss [354(a)(1)]: In general, nogain or loss is recognized to shareholder when they receivesolely stock or securities of the acquiring corporation

a. Limitation [354(a)(2)(A)]: Nonrecognition does notapply if (i) the amount of securities received exceeds theamount of securities surrendered, or (ii) any securitiesare received and no securities are surrendered.

2. Recognition of Gain to extent of Boot [356(a)(1)]:

Shareholder must recognize any realized gain to the extent ofthe boot received ($ or fmv of property).

a. Characterization of Gain [356(a)(2)]: Recognizedgain is treated as a dividend to a target shareholder if theexchange looks like a dividend. *doesnt really matterb/c dividend or sale is taxed the same

3. Basis and Holding Period:

a. Basis for Shareholder [358]: Basis is the same aswhat they had in their old stock, increased by any gainrecognized and reduced by any boot received andliabilities assumed. *Boot takes a fmv basis under358(a)(2).

b. Holding Period [1223]: Non recognition property takesa tacked holding period and holding period of the bootcommences on the date of its acquisition.

b. Consequences to the Target Corporation:

1. Nonrecognition of Gain or Loss to Corporation [361(a)]:

No gain or loss is recognized to a corporation that is party to areorganization, and exchanges property, in pursuance of theplan of reorganization, solely for stock or securities in anothercorporation a party to the reorganization.

2. Exchanges not solely in kind [361(b)]: If the corporationreceives property or money also, then:

a. Gain not recognized if the corporation distributes theproperty or money it received [361(b)(1)(A)], or

b. Gain is recognized if the corporation does not distributeit.

3. Treatment of Distributions [361(c)]: A corporation doesnot recognize gain or loss on the distribution of property to itsshareholders


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a. Appreciated Property [361(c)(2)]: If the property isappreciated property, then corp recognizes gain unless itis qualified property.

b. Qualified Property [361(c)(2)(B)]: (1) stock in, orobligations of the distributing corporation, or (2) stock

in, or obligations of, another party to the reorganizationwhich were received by the distributing corporation inthe exchange.

4. Basis and Holding Period [358(a)]: If the targetcorporation retains property received from the acquiringcorporation, it is deemed to have distributed that property to itsshareholders, who are then treated as having recontributed thatproperty to a new corporation as a contribution of capital.358(a)(2) If the property is boot to the shareholders, itreceives a fair market value basis. 358(a)(1) if the propertyis Nonrecognition property (e.g., stock or securities of the

acquiring corporation), then it is an exchanged basis decreasedby the amount of boot and increased by the gain recognized.c. Consequences to the Acquiring Corporation:

1. Nonrecognition of gain or loss on issuance of stock [1032]:

The acquiring corporation does not recognize gain or loss onthe issuance of its stock or the stock of its parent in anacquisitive reorganization or, for that matter, in any othertransaction. If the acquiring corporation transfers other boot, itrecognizes any realized gain under general tax principles.

2. Basis for Acquiring Corp is transferred basis [362(b)]:

The target assets acquired in a type A, type C or forwardtriangular reorganization take a transferred basis, increased byany gain recognized on the transfer.

6. Triangular Reorganizations:

a. 368(a)(2)(C): An otherwise qualifying Type A or Type Creorganization will not lose its tax-free status merely because theacquiring corporation drops down the acquired assets to a subsidiary.

b. Forward Triangular Mergers 368(a)(2)(D): Permits S to acquire Tin a statutory merger, using P stock as consideration, provided that:

1. S acquires substantially all of the properties of T;2. No stock of S is used in the transaction; and3. The transaction would have qualified as a Type A

reorganization if T had merged directly into P.c. Reverse Triangular Mergers 368(a)(2)(E): Ultimately it looks like a

B reorganization1. 368(a)(2)(E)(ii)- The shareholders of T exchange T voting

stock constituting control.2. Merger under 368(a)(2)(e):


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a. P forms S, is a shareholder of S, and Ss only asset is Pvoting stock (351 exchange)

b. S merges into T [368(a)(1)(A)]c. When S merges into T, the S shareholders get T stock

as consideration

d. T shareholders must trade at least 80% of the T votingstock for P voting stock.e. It means that P will own all (or almost all) of T

outstanding stock, and T shareholders will own Pvoting stock.

3. Type B origins: Similar to a Type B reorganization, but therecan be boot in an (a)(2)(E) reorganization; only 80% of theT stock must be acquired for P voting stock, and the rest maybe obtained for cash or other property or simply not acquiredat all if P is willing to put up with minority shareholders

7. Carryover of Tax Attributes 381: In a tax-free liquidation of a subsidiary ora reorganization, the acquiring corporation shall succeed to and take intoaccount some 26 specified attributes of the target.

a. Limits 381(c)(2): An earnings and profits deficit inherited from LossCorp may not be applied against any earnings and profits of Profit Corpthat existed prior to acquisition. Losss deficit can only be used tooffset post-acquisition accumulated earnings and profits

X. Corporate Divisions 355:

1. Intro: 355 allows a corporation to make a tax-free distribution to itsshareholders of stock and securities in one or more controlled subsidiaries. Ifan intricate set of statutory and judicial requirements are met, neither thedistributing corporation nor its shareholders recognize gain or loss on thedistribution.

2. Three Types: Corporate Division is when a corporate enterprise is divided intotwo or more controlled corporations.

a. Spin-off: Resembles a dividend, involves a distribution of property toshareholders without surrender of any stock. Ex: Alex and Bertha each


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own 50% of D. D is required to operate chicken ranch and winery asseparate corporations. D forms a new corporation, Poultry Inc,contributing the assets of the chicken ranch. It then distributes the stockof Poultry Inc pro rata to Alex and Bertha, who emerge as equalshareholders in each corporation.

b. Split-off: Resembles a redemption b/c shareholders have surrenderedstock of D. Ex: Alex and Bertha want to go their separate ways, andAlex wants the winery. D forms new corporation, Poultry Inc,contributing the assets of the chicken ranch. D then distributes the stockof Poultry to Bertha in complete redemption of her D stock. Alexbecomes the sole shareholder of D, and Bertha is the sole shareholder ofPoultry.

c. Split-up: Resembles a complete liquidation b/c D has distributed all ofits assets and dissolved. Ex: D is required to divide its two businesses.D forms Vineyard Inc, contributing winery assets, and Poultry Inccontributing chicken assets. D then distributes the stock of the two new

corporations pro rata to Alex and Bertha in exchange for all their Dstock.3. Requirements:

a. 355(a)(1)(A)- P distributes the stock of a sole subsidiaryb. 355(a)(1)(B)- Distribution not used to get around dividendsc. 355(a)(1)(C)- Meets active business testd. 355(a)(1)(D)- As part of the distribution, the corp distributes all of the

stock of the subsidiary4. Active Business Test

a. Says in (b)(1)(A)- you must have 2 active businessesb. (b)(2)(B)- trade or business must have been actively conducted for 5

yearsc. (b)(2)(C)- cant have purchased within the last 5 years by Pd. 1.355-3(b)(3)(ii): If a corporation engaged in the active conduct of one

trade or business during that five-year period purchased, created, orotherwise acquired another trade or business in the same line ofbusiness, then the acquisition of that other business is treated as havingbeen actively conducted during that five-year period.

corp-tax rosenberg s05

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