Review1 Corporate formation 351: tax-free exchange.

Non-recognition (no tax) treatment for contributions to corporations in exchange for stock Shareholder contributes property in exchange for corporate stock. Basis duplicated o Shareholder receives same basis in stock as he had in assets exchanged o Corporation receives the same basis in assets as shareholder had. o Duplication allows potential for double capital gains tax (shareholder, upon sale of stock, corp., upon sale of assets). Property contributed assets must be property (NOT services) Control shareholders (aggregate) that contribute property must have control immediately after the transaction o 358(c): control defined 80% of all classes of stock (voting and all other classes) o Group who must have 80% of control is everyone who contributed property in that transaction Even though services are excluded, shareholder who contributes goods and services is considered valid for purposes of the control group. Might be a de minimis exception Deliberately avoiding 351: issuing single non-voting preferred stock (to someone who contributes services, or nothing) violates control requirement and makes the transaction taxable. 2 May want to do this to realize losses o Immediately after no binding agreement ahead of time to sell the shares, but can do it immediately after o Nominal transfers: if property transfer is < 10% FMV of stock already owned Boot shareholder may receive boot in addition to stock o Boot within gain rule: boot will be taxed only to the extent of gain.3 o Assumption of liabilities: generally not treated as boot. Limitation 357(c) reduction of basis to the extent of liabilities If assumption of liabilities > basis, gain

Based on traditional life-cycle Remember, you aggregate all shareholders so if sh. 2 contributed property, would be ok. 3 Boot beyond gain is tax-free because, had this been a taxable sale, basis recovery would be possible thus, taxing boot to this extent makes it the equivalent of a sale in that respect. At the extreme can achieve diversification diversifying = no 351 treatment.
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Nature of relationship between shareholders and corp. Corporate distributions4 301 Dividends: only to the extent of E+P 3-tiered treatment dividend (301) To the extent of E+P = dividend Basis recovery Capital gains transaction o Non-liquidating distribution of appreciated assets: a recognition event - corporation recognizes gain (but not loss) 302 Redemption 4-part test5 Reduction in ownership by 20% (to < 80% original amount). Generally considers attribution, but (1) allows a showing of adverse economic interest to defeat attribution. Redemption of 100% of X shareholder stock (eliminating X) Attribution rules are considered6 Partial liquidation distribution resulting from elimination of 1 / 2+ businesses Taxable at corp. level 100% percent redemption (liquidation) 305 stock dividends Exceptions Not pro-rata (changes proportions) Choice (cash/stock) Bailouts o 304: corporate acquisition treated as dividend when one shareholder owns (50+%) of two corps (X and Y), and sells X stock to Y, dividend (rather than sale) treatment (no recover of basis).7 o 306: preferred stock use the stock dividends rule to distribute preferred dividend to your shareholders (who then sells the stock to third party at CG rates) eliminating the preferred class of stock

First ask, is it a dividend? Redemptions are treated as dividends unless they fall into one of these four categories (plus liquidation) 6 If X and Sh. 2 Y are related, this doesnt count (treated as dividend). 7 Remember, a redemption that does't change the proportions is considered a dividend.
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instead, treated as ordinary income to extent of gain (h)(10)

Taxable Acquisitions Stock or asset acquisition: Usually, purchaser gets to choose to acquire Target (T) stock from shareholders, or assets from target itself. Factors to consider: o Stock v. value of assets o Ease of transferring stock 358: allows you to treat stock as asset acquisition o P aquires T stock from shareholders and then sells them back? Result is two levels of tax unless T has losses that can offset gain H10 when P acquires T

368: Tax Free Reorganizations8 (A) merger / consolidation o A statutory o A triangular (and specific limitations) Forward9 Reverse Equivalent of stock acquisition o All three A reorgs. are only covered by the three judicial doctrines, and thus allow up to 60% (IRS safe - 50%) boot - a lenient / generous standard Specific limitations for triangulars o substantially all assets acquired by surviving corp. (90% net, 70% gross). o Reverse: acquire control in the transaction (B) stock acquisition (P acquiring T stock from shareholders) o Toughest boot rule solely for stock, preventing its use it in many circumstances o Creeping B: control can be acquired over time. o Paranthetical B But less important in light of check-thebox. (C) asset acquisition o Boot10: 20%, but includes liabilities (so not very flexible)

Divisive Reorg. D and 355 Different ways of achieving the same result S survives merger in reverse, T survives 10 boot relaxation rule
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(D) has strictest provisions/limitations o because historically, if And because only way to get around GU rule 5 yr. old active trade or business control corporate level business purpose Device: cant be a device no shareholders esp. large shareholders - sale immediately after the transaction. o recent limitations part of tightening up in 355D taxable acquisition and in 355 E as part of the same plan cant have Limits

Liquidations complete liquidation11 = CG treatment - triggers both gains and losses at a corporate level. 337 liquidation to parent: non-recognition12 for liquidation of subsidiary into 80+% parent13 o Can avoid by

to less than 80% shareholder footnote 13 who is it non-recognition for? what about for remaining 19%?
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