Chapter 10 Pt. 2 Flashcards
What is the primary requirement for a Type C reorg?
Stock-for-Assets – Type “C” Reorganization
- Primary requirement – “substantially all of the properties” – meaning substantially all of target’s assets must be transferred to acquirer
- Two tests for ruling purposes
- 90% of net assets based on FMV of assets, and
- 70% of gross assets based on FMV of assets
- This is the IRS’s ruling position – not law but be careful!!
- Actual test is based on “facts and circumstances”
What are the facts and issues of Rev Ruling 57-518?
Revenue Ruling 57-518
Facts:
- M and N corporations were engaged in the fabrication and sale of various items of steel products
- M transferred all of its assets to N excluding sufficient assets to satisfy M’s liabilities in a C reorganization
- The assets retained by M to satisfy its liabilities were not operating assets other than 3% of the corporation’s total inventory
- Excess assets held by M following the payoff of its liabilities were transferred to N
- M was liquidated
Issue:
Is this a valid C reorganization?
Holding:
Yes.
What are the reqs for a type c reorg?
Requirements of a Type C Reorganizations – Stock-for-Assets
- Substantially all of the properties test as discussed above (90% and 70% tests)
- “Substantially all” is tested immediately before the transfer but must take into consideration any redemptions, merger expenses, distributions, etc. ocdcurring before the merger (and as part of the overall plan)
- Assets transferred solely for stock – however, 20% of total consideration may be boot (see boot relaxation rule which further limits this rule)
- Target corporation must be liquidated
- As with “A” reorganizations, overall substance of reorganization cannot be “divisive” (thus, avoiding the tests under a divisive D reorganizations)
What are the facts of Helvering vs. Elkhorn?
Helvering v. Elkhorn Coal Co.
Facts:
- Elkhorn and Mill Creek Coal & Coke (Mill Creek) engaged in negotiations for Mill Creek to acquire Elkhorn
- However, there were a group of assets held by Elkhorn which Mill Creek did not want
- As such, Elkhorn formed a new subsidiary, transferred the unwanted assets to the new subsidiary, and spun-off (in a tax-free D reorganization) the newly formed subsidiary
- 13 days later, Elkhorn transferred its remaining assets to Mill Creek in a purported C reorganization
- It was clear that each of these steps were part of a single plan
Issue:
When considered together, does this overall plan qualify as a valid C reorganization?
Holding:
No. The court held that the “substantially all” test was not met since a large portion of the assets were spun-off to the existing shareholders.
Facts of rev ruling 88-48?
Revenue Ruling 88-48
Facts:
- X and Y are unrelated corporations – both engaged in the hardware business
- X operated two significant lines of business – a retail hardware business and a wholesale plumbing supply business
- Y desired to acquire and continue to operate X’s hardware business but did not want X’s plumbing supply business
- As part of an overall plan, X sold its plumbing supply business (constituting 50% of X’s historic business) to an unrelated third party (unrelated to X and Y or its shareholders) for cash
- X then transferred all of its assets (including the cash from the sale of the plumbing supply business) to Y in a purported C reorganization
- X distributed all the Y stock to its shareholders and liquidated
Issue:
Does this overall transaction qualify as a valid C reorganization?
Holding:
Yes!!
What is the ‘boot relaxation rule’ and what section?
Boot Relaxation Rule (§368(a)(2)(B))
Facts:
- Transaction otherwise qualifies as a C reorganization except for boot is transferred along with stock
- Boot cannot exceed 20% of the total consideration
- However, if $1 (any) boot is transferred, all debt assumed by the acquirer is treated as boot!!!
- The boot relaxation rule effectively eliminates the use of boot in a C reorganization
Reqs of a B reorg?
B Reorganization – Stock-for-Stock
- Requirements of a “B” Reorganization
- Consideration given to target shareholders must be “solely voting stock”
- There is no boot relaxation rule in a B reorganization – solely for voting stock means just that – solely voting stock
- Acquiring corporation must be in control (80% test) of target corporation immediately following the B reorganization
Facts of Turnbow v Commissioner?
Turnbow v. Commissioner
Facts:
- Turnbow owned 100% of International Dairy Supply Company (International)
- In 1952, Turnbow transferred all the International stock to Foremost Dairies, Inc. (Foremost) in exchange for the following:
- 82,375 shares of Foremost’s common stock worth $1,235,625 and
- Cash of $3,000,000
- Petitioner’s basis in the International stock was $50,000 and expenses associated with the transaction amounted to $21,933.
- Overall realized gain amounts to $4,163,692!!
- Transaction was a purported “stock-for-stock” B reorganization
- On his 1952 return, Turnbow reported $3,000,000 of capital gain
- The IRS audited the return and argued that the entire gain of $4.2 million was taxable since the transaction did not qualify as a B reorganization
Issue:
Does this transaction qualify as a “stock-for-stock” B reorganization
Holding:
No. The consideration given does not meet the requirements of a B reorganization
Pigs get fat and hogs get slaughtered
What are the exceptions to the solely for stock rule?
Exceptions to the “Solely for Stock” rule
- Acquirer can pay off target’s liabilities
- Acquirer can lend money to target
- Acquirer can pay target’s and target’s shareholders’ expenses directly related to the reorganization (but be careful!)
- Acquirer can pay cash to target shareholders if it is for something other than acquiring target’s stock
- Acquirer can buy stock from target for cash (provided that the cash doesn’t go to target shareholders)
- Prior to or as part of the B reorg, target can redeem shares provided the redemption cash doesn’t come from acquirer
- Acquirer can pay cash to acquire fractional shares (for administrative ease)
What is a creeping B reorg?
B Reorganization – Stock-for-Stock
- Creeping “B” Reorganizations
- Acquirer is required to have “control” of target immediately following the “B” reorganization
- Control means 80% or more under §368(c)
- What if more than 20% of target’s stock was previously acquired by acquirer for cash?
- Not a problem unless the earlier transaction was effectively part of the B reorganization. If effectively part of the B reorganization, the cash will be treated as boot thus disqualifying the reorganization
