Corporate Tax Spring 05 I. Formation of a Corporation 1. Types of Corporations a. C-Corporation: Normal Corporation 1. Taxed like an individual 2.

Has income and deductions 3. Corp pays tax on income 4. 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 Corporation 1. Less than 100 shareholders 2. Corporation is not taxed 3. Individual shareholder is taxed on their share of the Corp. (Single pass thru tax regime) 2. Transfers to Corporation: Transferring Property into Corp in Exchange for Shares. a. 351(a) Nonrecognition for shareholder: No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control of the corporation. 1. Requirements: a. One or more persons (including individuals, corporations, partnerships, and other entities) must transfer property to the corporation; [services is not property, you cant get stock in exchange for services and be under 351, and this can screw up everyone for the control part. Rev Ruling 77-37 if you get stock for services you have to put up cash = to at least 10% of the value of the stock i.e. get $150,000 worth of stock then you have to put up $15,000] b. The Transfer must be solely in exchange for stock of the corporation; [nonqualified preferred stock treated as boot 351(g)] and c. The transferor or transferors, as a group must be in control of the corporation immediately after the exchange. 2. 368(c) Control Defined: The ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of

b.

c. d.

e.

shares of all other classes of stock of the corporation. [transferors of property as a group own 80% of stock] 358(a)(1) Basis of Stock for Shareholder: The basis of the property permitted to be received under such section 351 without the recognition 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 gave 1032(a) Nonrecognition for Corp: No gain or loss shall be recognized by a corporation on the receipt of money or other property in exchange for stock of such corporation. 362(a) Basis of Property received by Corp: For basis of property acquired by corporation in connection with a 351 exchange, the basis shall be the same as it would be in the hands of the transferor. *Basis is the same as what shareholder had. *look at each thing the corp gets separately. Each asset will have a basis, same as shareholders basis + gain recognized 1223 Holding Period of Property: The taxpayers holding period for property received in an exchange shall include the period for which he held the property exchanged. *Corp will take over the holding period for 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 be recognized 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 transfer and decreased by the fair market value of the boot. d. 362(a) Basis for Corp: For basis of property acquired by corporation in connection with a 351 exchange, 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. *If shareholder gets boot later, then corps basis is increased later (when shareholder recognizes gain) e. If boot is given over time, then divide total amount of gain recognized over total amount of boot f. If you get boot and there is more than one asset, divide shareholder and each 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 into two people. When you receive boot and transfer more than 1 asset then follow rev ruling 68-55. Treat each asset individually, then allocate what b gets in exchange. 2/3 of the value is in the inventory, 1/3 in the land. B1 inv. B2 land

Fair market Value of Asset Transferred % Of Total FMV Fair market value of X stock received in exchange Cash received in exchange Amount realized Adjusted Basis Gain (loss) realized

Total $30,000 $15,000 $15,000 $30,000

Asset I (Inventory) $20,000 2/3 $10,000 $10,000 $20,000 $7,000 $13,000

Asset II (Land) $10,000 1/3 $5,000 $5,000 $10,000 $25,000 (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 (cash received). Since inventory is an ordinary asset, not a capital asset B would recognize $10,000 ordinary income. Bs basis in X stock received is $32,000 ($7,000 ab in inv. + $25,000 ab in land) Holding Period- 2/3 of the stock was exchanged for the inventory and 1/3 of 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 exchange from qualifying under 351. b. 358(d) Basis for Shareholder: The assumption of liability shall be treated 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 of federal 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

5. Incorporation of a Going Business: a. 357(c)(3) Accounts Receivables and Accounts Payable: Amount of liability is excluded in determining the amount of liabilities assumed. *Rosenberg Def: The income and deductions balance out when the Corp 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 event occurs that is fundamentally inconsistent with the premise on which the deduction was initially based, the earlier deduction must be effectively cancelled out by the recognition of income equal to the amount previously deducted. c. Organizational Expenses: 1. 248(a): A corporation can elect to amortize certain qualifying organizational expenditures over a period of sixty months or more beginning with the month in which the corporation commences business. 2. 248(b) Organizational Expenditures Defined: Any expenditure whicha. is incident to the creation of the corporation b. is chargeable to capital account; and c. is of a character which, if expended incident to the creation of a corporation having a limited life, would be amortizable over such life. 3. Specifically Excluded: Costs of issuing or selling stock and expenditures connected with the transfer of assets to the corporation.

II. Capital Structure of Corporations (NOT ON FINAL) Ex. S and T form Company w/ 2 million Should 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. gets a deduction. Individuals who receive the interest payments are taxed at 40%. Stock- Paying dividends not deductible (not a cost of doing business), Shareholders who get dividends are taxed at 15% rather than 40%. Seemingly better for a Corp to issue debt than to issue stockbut people want right to vote, 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 debt but 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 debt and equity, but there are no regulations. Section 385(b) gives factors Section 351(g) nonqualified preferred stock is treated as debt Cases where stock is treated as debt is rare, what has developed: Ex. Oracle worth 300 billion Makes profit 10%/yr (30 billion) Taxes = 12 billion/yr Net profit 18 billion/yr John buys Company for 300 billion What is Johns next step? Get 300, so go to investors to borrow John 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 0 Instead 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 wouldnt mind 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

Not every distribution is a dividend- If youre just getting back your own money it is 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 of property made by a corporation to its shareholders 1. out of its earnings and profits accumulated after February 28, 1913, or 2. out of its earnings and profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the 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 of the taxable year; and second, to the earnings and profits accumulated since February 28, 1913. b. 301(c)(1) Amount constituting dividend: That portion of the distribution which is a dividend is included in gross income. c. 301(c)(2) Amount applied against basis: That portion of the distribution which is not a dividend shall be applied against and reduce the adjusted basis of the stock. d. 301(c)(3) Amount in excess of basis: That portion which is not a dividend, 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 which a distribution is made from a corporations economic income as opposed to its taxable income or paid in capital. *Rosenberg Definition: Net real profit the corporation has made a. 312 Effect on Earnings and Profits: On the distribution of property by a corporation with respect to its stock, the earnings and profits of the corporation 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:

1. The earnings and profits of the corporation shall be increased by the 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 Cash a. Cash distributions are taxable as a dividend to the extent of the distributing corporations current or accumulated earnings and profits. [301(c)(3)] b. Amounts distributed in excess of available earnings and profits are first applied against and reduce the basis of the shareholders stock. [301(c) (2)] c. To the extent the distributions exceed the shareholders basis, they are treated as gain from the sale or exchange of stock. [301(c)(3)] d. When there are insufficient current e&p available to cover all cash distributions made during the year, e&p must be allocated to the distributions in order to determine dividend status under the following rules. 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 the distributions on a first-come, first-served basis. 4. Distributions of Property: When Property is distributeda. 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

a. 312(a)(2): A corporations earnings and profits will be reduced by the amount of the obligations. b. 7872(a) & (c)(1)(C): If a corporation tries to distribute its earnings and profits in a way that may be deductible at the corporate level, then the 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 their relatives; 2. expenses paid for the personal benefit of shareholders; 3. excessive rent for corporate use of shareholder property 4. interest on shareholder debt that in substance represents 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 loan 2. 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 receives a 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 dividend received by a corporation(A) if the corporation is a member of the same affiliated group as the corp. distributing the dividend (parent-subsidiary) b. 246(c) Holding Requirements- The corporation receiving the dividend must hold the stock for 45 dies during the 90 day period beginning on the exdividend date. Ex. Hold stock for 45 days before exdividend date, or for 15 before and 30 after. c. 1059 Extraordinary Dividends Basis Reduction: Corp shareholder receiving an extraordinary dividend must reduce its basis in the underlying stock by the amount of nontaxed (i.e. deductible) portion if the Corp has not held the stock for more than 2 years.

1. Extraordinary Dividend Definition: A dividend is extraordinary if it exceeds 5% of shareholders preferred stock or 10% shareholders of common stock. 2. Fair Market Value Test 1059(c)(4): Can elect to substitute FMV for adjusted basis. 3. 1059(c)(3)(A) and (c)(3)(B): dividends within 85 days are aggregated (treated as one dividend) and dividends within 1 year are aggregated if it exceeds 20% of basis. c. 246A Debt-financed Portfolio Stock- A Corporations 243 deduction is reduced by the amount the dividends are attributable to debt-financed portfolio stock. If the portfolio stock is entirely debt ridden, 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 make it a disguised sale? 2. If there is a dividend just prior to the sale, what is the source of the funds?

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 is like 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 or exchange you get money in exchange for your interest in the corporation. 4. Test: Whether there has been a meaningful reduction in the shareholders interest. a. Compare the percentage of the corporation owned immediately before and immediately after. b. Assuming there is some reduction, question whether it is a meaningful reduction. 5. 318 Attribution: This rule is the first step when looking at redemptions of stock. Treats a taxpayer as owning stock that is actually owned by various related parties. The attribution rules fall into four categories. a. 318(a)(1) Members of the family: An individual is considered as owning stock owned by his spouse, children, grandchildren and parents. Siblings and in-laws are not part of the family for this purpose, and there 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 or for a partnership or estate is considered as owned by the partners or beneficiaries in proportion to their beneficial interests. A person ceases to be a beneficiary of an estate for this purpose when she receives all property to which she is entitled and the possibility s. c. Option Attribution: 318(a)(4) If any person has an option to acquire stock, 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 will be 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 total combined voting power of all classes of stock entitled to vote, 2. The percentage of total outstanding voting stock owned by the shareholder immediately after the redemption must be less

than 80% of the percentage of total voting stock owned by the shareholder immediately before the redemption, and 3. The shareholders percentage ownership of common stock after the redemption also must be less than 80 percent of the percentage of common stock owned before the redemption. b. 302(b)(3) Complete Termination of a Shareholders Interest: A complete termination of a shareholders interest will result in treatment as a sale or exchange 1. Waiver of Family Attribution: In the case of a shareholder trying to get complete termination, the shareholder can get a waiver of family attribution if (302(a)(c)(2)(A) a. immediately after the distribution the distribute has no interest in the corporation, other than as a creditor, 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 the Secretary of any acquisition described in clause (ii) and to retain such records as may be necessary. d. 302(c)(2)(B) provides a 10 year look back rule, under which the family attribution rules may not be waived during the 10 years preceding the redemption either: (1) the redeemed shareholder acquired any of the redeemed stock from a section 318 relative or (2) any such close relative acquired stock from the redeemed shareholder. e. The 10 year look back rule does not apply if the acquisition did not have as one if its principal purposes 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 and circumstances of each case. 2. Meaningful Reduction of Interest: If there is a meaningful reduction of interest then the redemption is not essentially equivalent to a dividend. Meaningful reduction generally means a reduction in voting control and money. 3. A reduction in voting power is a key factor in determining the applicability of 302(b)(1). If there is no real reduction in voting 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.

5. If shareholder is in control, likely no meaningful reduction of interest. If shareholder is not in control, then it likely is a meaningful 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 partial liquidation. 2. 302(e)(1) a distribution qualifies as a partial liquidation if a. it is not essentially equivalent to a dividend, and b. it is pursuant to a plan, occurs within the taxable year in which the plan is adopted or the succeeding year. 3. 302(e)(2) safe harbor : assures partial liquidation status if the distribution consists of the assets of a qualified trade or business or is attributable to the termination of such a trade or business, and immediately after the corporation continues to conduct another qualified trade or business. 4. 302(e)(3) Qualified Trade or Business: to be qualified a trade or business must have been actively conducted throughout the five-year period ending on the date of the distribution and must not have been acquired by the distributing corporation in a taxable transaction during that period. 5. Charitable Contribution and Redemption: Lets say you want to donate to USF Law, so you want to give them preferred stock so they cant vote. Now you really dont want them to do anything, so you have the corp. redeem the stock for them. You have a 10 million deduction, no income, and are still sole owner. d. Consequences to the Distributing Corporation 1. 311(a) General Rule: Except as provided in (b), no gain or loss is recognized to a corporation on the distribution (not in complete liquidation) of its stock (or rights to acquire its stock) or property. 2. 311(b) Appreciated Property Gain is Recognized: In distributions of a corporations appreciated property, gain is recognized as if the corporation sold the property at its fair market value. 3. 312(n)(7) Effect On Earnings and Profits: If the redemption is treated as an exchange under section 302(a) or 303 to the redeemed shareholder, the part of the distribution in redemption that is properly chargeable to earnings and profits shall be an amount which does not exceed the ratable share of the corporations accumulated earnings and profits attributable to the redeemed stock.

a. Example: X Corp has 1,000 shares of common stock outstanding, and A and B each acquire 500 of these shares at $20 per share. X holds $100,000 of net assets, consisting of $50,000 cash 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 redemption of As 500 shares, section 312(n)(7) reduces Xs earnings and profits by $25,000, the ratable share of Xs $50,000 earnings and profits attributable to As 50% stock interest that was redeemed. e. Redemptions through Related Corporations 304: 304 requires shareholder sales involving brother-sister and parent subsidiary corporations to satisfy one of the tests in 302 in order to qualify for capital 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 one corporation (the issuing corporation) to the other (the acquiring 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 of the 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 ParentSubsidiary). If so, 304 applies b. Go through 302(b) tests to see if it gets sale or exchange treatment. If it meets tests, it qualifies as 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 the acquiring corporation to the extent of its earnings and profits and then by the issuing corporation to the extent of its earnings and profits. 4. Coordination with Section 351: Section 351 generally will not apply to transactions described in section 304. Thus, section 351, if otherwise applicable, will generally apply only to the extent such transaction consists of an exchange of stock for stock in the acquiring corporation.

V. Stock Dividends and Section 306 Stock

1. Taxation of Stock Dividends under Section 305 a. 305(a) General Rule: Gross income does not include the amount of any distribution of the stock of a corporation made by such corporation to its shareholders with respect to its stock. *Basic idea is that they taxed 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 as there is no other preferred stock outstanding, or preferred is subordinated b. 305(b) Exceptions to the General Rule: Subsection (a) shall not apply to a distribution by a corporation of its stock, and the distribution shall be treated as a distribution to which 301 applies 1. 305(b)(1) Distributions in Lieu of Money: If the distribution 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 the distribution (or a series of distributions of which such distribution is one) has the result of (a) the receipt of property by some shareholders, and (b) an increase in the proportionate interest of other shareholders in the assets or earnings and profits 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 shareholders 4. 305(b)(4) Distributions on preferred stock: If the distribution is with respect to preferred stock, other than an increase in the conversion ratio of convertible preferred stock made solely to take account of a stock dividend or stock split with respect to the stock into which such convertible stock is convertible. 5. 305(b)(5) Distributions of convertible preferred stock: If the distribution is of convertible preferred stock, unless it is established to the satisfaction of the secretary that such distribution will not have the result described in paragraph (2).

2. Basis of Stock acquired in a 305 distribution: The basis of the new stock and of the old stock shall, in the shareholders hands, be determined by allocating between 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 or redemption of certain stock (referred to as section 306 stock) shall be treated either as ordinary income or as a distribution to which section 301 applies. 306 says that if the corp. has e&p so that a distribution would otherwise be a dividend, and it distributes non-voting preferred stock in a nontaxable distribution, then it will be called 306 stock, and it will be tainted so that when you get rid of it, it is taxed as ordinary income. Look at the value of stock at the time of distribution and the available E&P at the time of distribution b. 306(c) section 306 stock defined: Section 306 is stock that meets the requirements of subparagraph (A), (B), or (C). Section 306 provides, in general, that the proceeds from the sale or redemption of certain stock (referred to as section 306 stock) shall be treated either as ordinary income or as a distribution to which section 301 applies. 1. 306(c)(1)(A) Distributed to Seller: Stock (other than common stock issued w/respect to common stock) which was distributed to the shareholder selling or otherwise disposing of such stock if, by reason of section 305(a), any part of such distribution was not includible in the gross income of the shareholder. 2. 306(c)(1)(B) Received in a Corporate reorganization or separation: Stock which is not common stock and i. which was received, by the shareholder selling or otherwise disposing of such stock, in pursuance of a plan of reorganization (within the meaning of 368(a)), and ii. with respect to the receipt of which gain or loss to the shareholder was to any extent not recognized, but only to the extent that either the effect of the transaction was substantially the same as the receipt of a stock dividend, or stock was 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 gift that takes a transferred basis under 1015, or stock received in exchange for Section 306 stock in a 351 transaction. c. Dispositions of 306 Stock:

1. 306(a)(1) Sale of 306 Stock: On the sale of section 306 stock, the amount realized is treated as ordinary income to the extent that it would have been a dividend if the corporation 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 or accumulated e&p that it could have given instead, then it is all ordinary income. 306(a)(1)(B) says the amount that couldnt have come from the corps e&p 1st reduces the basis and if there is more left over the rest is treated as a capital gain. 2. 306(a)(2) Redemption: A redemption of 306 stock is treated as a 301 distribution. d. Exceptions 306(b): No tax avoidance purpose 1. 306(b)(1) Termination of a shareholders interest: Section 306(a) shall not apply to nonredemption distributions if the shareholder completely terminates her interest in the corporation and does not dispose of the stock to a related person within 318 attribution rules. 2. 306(b)(2) Complete liquidation: 306 does not apply if the 306 stock is redeemed in complete liquidation 3. 306(b)(3) Where gain or loss is not recognized: such as 351 transfers 4. 306(b)(4) Transactions not in avoidance: If it is established to the satisfaction of the secretary that the distribution or redemption was not made pursuant to a plan of tax avoidance.

VI. Complete Liquidations

1. Taxable Liquidations a. Effect on Shareholders 331 Distributions in Complete Liquidation treated as exchanges: Amounts received by a shareholder in a distribution in complete liquidation of a corporation shall be treated as in full payment in exchange for stock. (AR AB) b. Effect on Corporation 336 Gain or loss recognized on property distributed in complete liquidation: 1. General Rule 336(a): gain or loss shall be recognized to a liquidating corporation on the distribution of property in complete liquidation as if such property were sold to the distributee 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 shall be recognized to a related person if either i. The distribution is not pro rata, or ii. The distributed property is disqualified property (the distributed property was acquired by the liquidating corporation in a 351 transaction or as a contribution to capital within five years of the date of the distribution. *Related persons- Shareholder who owns directly or through attribution more than 50% of the stock of the distributing corporation. *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 of precontribution built-in losses. Applies only if the distributing corporation acquired property in a Section 351 transaction or as a contribution to capital as part of a plan the principal purpose of which was to recognize loss by the corporation on 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 within two years of the liquidation is treated as being acquired as part of a plan to recognize loss when the corp liquidates.

c. 336(d)(3)- applies to a tax free distribution to minority shareholder, distributing corp cannot recognize a loss c. Basis of Property received in liquidations 334(a): If gain or loss is recognized 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 no gain 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 to the parent corporation. Minority shareholders must determine their gain or loss under 331(a) c. Requirements for 332 1. The subsidiary must distribute property to its parent in complete cancellation or redemption of its stock pursuant to a plan 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 and 80% of the total value of all outstanding stock of the subsidiary from the date of adoption of the plan of complete liquidation and at all times thereafter until the final distribution 3. Timing: Two alternatives a. One Shot Liquidations 332(b)(2): Qualify if the subsidiary distributes all of its assets within one taxable year even if it is not the same year in which the liquidation plan is adopted. b. 332(b)(3) Where the distributions span more than one taxable year, the plan must provide that the subsidiary liquidates all of its property within three years after the close of the taxable year in which the first distribution is made. d. Basis of property in liquidation of a Subsidiary 334(b) The basis is going to be the transferred basis unless there is gain or loss recognized by the liquidating corporation. If the liquidating corp recognizes any gain or loss then the basis is going to be the fair market value at the time of the distribution. e. Effect on Liquidating Subsidiary 337: A liquidating subsidiary does not recognize gain or loss on distributions of property to its parent in a complete liquidation to which 332 applies. 1. 337: No gain or loss for the subsidiary 2. Distribution to minority shareholders: Non recognition of gain or loss is only available when the subsidiary liquidates

and gives the property to the parent. When the subsidiary distributes property to the minority shareholder, gain is recognized but not loss. Minority shareholders take a fair market 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 in satisfaction of a subsidiarys debt to its parent shall be treated as a distribution, subjecting the transfer to nonrecognition rule of 337.

VII. Taxable Corporate Acquisitions 1. Asset Acquisitions: a. Intro: A taxable asset acquisition occurs when a purchaser (P), which may be a corporation or an individual, acquires the assets of a target corporation in exchange for cash, notes, other property, or a mix of such consideration, and the acquisition does not qualify as a tax free reorganization under 368. *Rosenberg: The truth is that when there is an asset sale, T will have to liquidate, and when T liquidates the shareholders will 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 a business. Parties are required to allocate the purchase price among the various tangible and intangible assets that have been sold. This is used to determine the buyers cost basis in each asset for purposes of computing depreciation and amortization deductions. c. Amortization of Intangibles 197: Permits taxpayers to amortize virtually all intangible assets ratably over a 15-year period, regardless of their actual useful life. 1. Intangibles include: information bases, customer and subscription 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 a target 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 of their stock, measured by the difference between their amount realized and 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 more of the stock of a target corporation (T) within 12 months, it may elect within a specified time period to treat T as having sold all of its assets for their fair market value in a single transaction. T must recognize gain or loss on the hypothetical asset sale, and then T returns as a virgin corporation with a new cost basis in its assets. If T is liquidated, this cost 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 another corp. b. Qualified stock purchase: A transaction or a series of transactions 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 months of purchasing 80% of the target corp.

VIII. S Corporations 1. Intro: Types of Pass Thru Entities: a. S Corp 1.S Corp: Small Corp 2.Less than 100 shareholders b. Partnership 1.LLC 2.LLP 3.GP 4.LP 2. Similarities: a. When the entity earns the $ the entity is not taxed, only the shareholders are taxed proportionately to what they own b. Good news: No double tax c. Bad news: Shareholder or partner may be taxed even though they dont get the money. $ may stay in the corporation but the tax consequences are still there. d. When shareholder is taxed, her basis is increased by the amount that is taxed to her. Then when the money is distributed she isnt taxed again, it is treated as a reduction in basis. 3. Differences: a. More flexibility in Partnerships b. In S corp., if you own 10% youre taxed on 10% of S Corp income c. In Partnerships, you can divide up profits how you want. Doesnt have to be in accordance w/how much stock you own d. Partnerships are governed by Subchapter K, even more tax free than subchapter C 4. Eligibility for S Corporation Status: a. Small Business Corp [1361(b)(1)]: Means a domestic corporation which 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 economic rights (they get paid the same). a. Straight Debt Safe Harbor [1361(c)(5)]: Straight debt is not treated as a second class of stock b. Straight Debt Defined [1361(c)(5)(b)]: Any written unconditional promise to pay on demand or on a specified date as sum of money if:

i. the interest rate and payment dates are not contingent 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 in paragraph 2, or a person which is actively engaged 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 S Corporation [1362(a)(1)] 2. All shareholders must consent to be an S Corp [1362(a)(2)] 3. The election is effective until termination b. 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 of stock 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 gross receipts for 3 consecutive taxable years and corporation has accumulated earnings and profits [1362(d)(3)] d. If an S Corp election is terminated, the corporation is not eligible to make another election for five taxable years unless the Treasury consents 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 accounting period for which the taxpayer establishes a business purpose. *Very hard to convince Service of anything other than December 31st. a. Business Purpose: Satisfied if the desired tax accounting period coincides with a natural business year. b. Natural Business Year: Exists if 25% or more of the S Corps gross receipts for the selected 12-month period

are earned in the last 2 months. Must be met in each of the 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 which pass through to the shareholders. 1. An S corp computes its taxable income in the same manner as an individual except that certain deductions to individuals arent allowed. b. Pass-thru of Income and Losses [1366]: Income, gain and loss is passed 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, and 2. Decreased by any distributions of the S corp, and finally 3. Decreased by any losses for the year. d. Loss Limitations [1366(d)] 1. Total amount of losses and deductions cannot exceed shareholders 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 on that 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 deductions 4. 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 step 3. 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 them ends the day of their sale. Only applies to the selling shareholder 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 to shareholders 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 the sale or exchange of property capital gain if the stock is a capital asset. [1368(b)(2)]

3. Virtually all S-Corps formed after 1982 do not generate earnings 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 a tax-free return of capital to the extent it does not exceed the AAA. [1368(c)(1)] a. AAA defined: Represents the post-1982 undistributed net income of the corporation. It begins at zero and is increased and decreased annually in a manner similar to the adjustment of the basis in a shareholders stock [1368(e)(1)] 2. Dividend: A distribution in excess of the AAA is treated as a dividend to the extent of the accumulated earnings and profits [1368(b)(2)] 3. Treatment of Remainder: Any portion of the distribution still remaining after both the AAA and accumulated e&p are exhausted is treated as a recovery of basis and then as capital gains. c. Distributions of Appreciated Property [311(b)]: At the shareholder level, the 1368 rules make no distinction between distributions of cash and other property. 1. At the Corporate Level [311(b)]: An S corp that distributes appreciated property recognizes gain in the same manner as if the property had been sold to the shareholder at its fair market value. *311(b) applies to an S Corp through 1371 2. Shareholder takes a fair market value basis in the distributed property [301(d)] 3. Shareholders basis in the S Corp Stock is reduced by the fair market 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 subsequently recognized on sales, distributions, and other dispositions of property within a 10 year recognition period beginning with the first taxable year in which the corporation was an S corporation. b. Tax imposed when passive investment income of corporation having accumulated earnings and profits exceeds 25% 1375

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

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

target corporation). 1st thing you want to ask is it an asset acquisition or a stock acquisition. If it is stock, it is a B. If it is statutory merger then A, if not it is a C. 2. Type A: Statutory Mergers and Consolidations [368(a)(1)(A)]: Defined as a statutory merger or consolidation. For this purpose, statutory refers to a merger 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 cease to exist. b. Continuity of Interest: Reg. 1.368-1(e)- Continuity of Interest requires that in substance a substantial part of the value of the proprietary interests in the target corporation be preserved in the corporation. A proprietary interest in the target corporation is preserved if, in a potential reorganization, 1. it is exchanged for a proprietary interest in the issuing corporation 2. it is exchanged by the acquiring corporation for a direct interest in the target corporation enterprise 3. The Service has provided a practical benchmark by declaring that it will rule favorably on a Type A reorganization if it uses at least 50% equity consideration in making the acquisition (Rev. Ruling 77-37) 4. Half (50%) of the consideration must be for stock to meet the continuity of interest doctrine. c. Continuity of Business Enterprise: Bentsen v. Phinney- To qualify as a reorganization under the applicable statutes, the new corporation does not have to engage in an identical or similar type of business. All that is required is there must continuity of the business activity. 1. Reg. 1.368-1(d): Continuity of business enterprise requires that the issuing corporation (P) either a. Continue the target corporations historic business, or i. The continuity of business enterprise is satisfied if P continues Ts historic business. The fact P is in the same line of business tends to establish the requisite continuity, but is not alone sufficient. ii. If T has more than 1 line of business, continuity of business enterprise requires only that P continue a significant line of business iii. A corps historic business is the business it has conducted most recently. b. Use a significant portion of Ts historic assets in a business i. A corporations historic business assets are the assets used in its historic business.

ii. The determination of the portion of a corporations assets considered significant is based on the relative importance of the assets to operation of the business. However, all other facts and circumstances, such as the net fair market value of the those assets, will be considered. 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 or a part of its voting stock, if immediately afterwards the acquiring corp is in control (80%+ ownership of T corp shares). a. Three factors: 1. P acquires T stock 2. 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 years later, make sure that it is viewed as two separate transactions to satisfy a B reorganization. If it is part of the same transaction then it is not okay 3. Immediately after P is in control of T b. Flexible? 1. Solely requirement is not violated if the acquiring corporation issues cash in lieu of fractional shares. 2. The acquiring corporation also may pay the target corporations expenses (e.g., registration fees, legal and accounting fees, and other administrative costs) related to the reorganization, but payment of legal, accounting or other expenses of the targets shareholders will constitute forbidden boot. 3. You can have contingent payments and escrowed stock arrangements. Must be stock or securities c. Buying Out Dissenting Shareholders: 1. Challenge: Shareholders of the target who insist on receiving cash. If the acquiring corporation pays cash directly to these dissenters, it violates the solely for voting stock requirement. 2. Solution: a. Target can redeem the shares of dissenters prior to a valid B reorganization provided the cash doesnt really come 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 it kills the deal. c. Reverse Triangular Merger- see later

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 part of its voting stock, of substantially all of the properties of another corporation, But in determining whether the exchange is solely for stock, the assumption of a liability by the acquiring corporation is disregarded. a. Requirements: 1. The target has to transfer substantially all of its properties solely in exchange for voting stock. 2. Target corp must liquidate afterwards b. Exceptions to Solely in Type C: 1. Assumption of Liabilities: Assumption of liabilities by the acquiring corporation is not treated as disqualifying boot. 2. Boot Relaxation Rule [368(a)(2)(B)]: Acquiring corporation can use up to 20% boot. *But if you are using boot, then debt relief will count as part of boot. So a combination of debt relief and other boot likely will spell doom for the transaction. The acquisition is a C as long as there is P voting stock more than or equal to 80% of the gross fmv of the T assets. a. Ex: Target has gross assets of $120,000 and liabilities of $30,000. Acquiring corp proposes to acquire all of Ts assets in exchange for the assumption of $30k of liabilities and $90k of voting stock. This is a type C b/c liabilities are not treated as boot. But if A corp assumes the 30k of debt and gives 80k of voting stock and 10k cash, the transaction does not qualify. The liabilities are treated as money paid for the purposes of boot relaxation, 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 at least 96k of voting stock (80% of 120,000). c. Guidelines for Substantially All: 1. If Acquiring corporation acquires all of the operating assets of Target Corp 2. 70/90 test: If Acquiring corp acquires (1) 70% of the gross assets of Target corp and (2) 90% of the net worth of Target Corp d. Other rules: 1. If T redeems some shares and then does the reorganization, it can screw up a Type C if the service treats it as one transaction. If it is treated as one transaction then the Acquiring corp may not have gotten substantially all of the Target. Make sure it meets the substantially all test. 2. Prior ownership of a portion of T stock will not by itself prevent the solely for voting stock requirement, but the ownership has to be old and cold Where there is prior ownership of T stock, the sum of: (1) the money or other boot

distributed to T shareholders other than P and (2) the liabilities of T assumed by P, may not exceed 20% of the value of all of Ts properties. 5. Treatment of the Parties: a. Consequences to Shareholders and Security Holders 1. Nonrecognition of Gain or Loss [354(a)(1)]: In general, no gain or loss is recognized to shareholder when they receive solely stock or securities of the acquiring corporation a. Limitation [354(a)(2)(A)]: Nonrecognition does not apply if (i) the amount of securities received exceeds the amount of securities surrendered, or (ii) any securities are 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 of the boot received ($ or fmv of property). a. Characterization of Gain [356(a)(2)]: Recognized gain is treated as a dividend to a target shareholder if the exchange looks like a dividend. *doesnt really matter b/c dividend or sale is taxed the same 3. Basis and Holding Period: a. Basis for Shareholder [358]: Basis is the same as what they had in their old stock, increased by any gain recognized and reduced by any boot received and liabilities assumed. *Boot takes a fmv basis under 358(a)(2). b. Holding Period [1223]: Non recognition property takes a tacked holding period and holding period of the boot commences 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 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. 2. Exchanges not solely in kind [361(b)]: If the corporation receives property or money also, then: a. Gain not recognized if the corporation distributes the property or money it received [361(b)(1)(A)], or b. Gain is recognized if the corporation does not distribute it. 3. Treatment of Distributions [361(c)]: A corporation does not recognize gain or loss on the distribution of property to its shareholders

a. Appreciated Property [361(c)(2)]: If the property is appreciated property, then corp recognizes gain unless it is qualified property. b. Qualified Property [361(c)(2)(B)]: (1) stock in, or obligations of the distributing corporation, or (2) stock in, or obligations of, another party to the reorganization which were received by the distributing corporation in the exchange. 4. Basis and Holding Period [358(a)]: If the target corporation retains property received from the acquiring corporation, it is deemed to have distributed that property to its shareholders, who are then treated as having recontributed that property to a new corporation as a contribution of capital. 358(a)(2) If the property is boot to the shareholders, it receives a fair market value basis. 358(a)(1) if the property is Nonrecognition property (e.g., stock or securities of the acquiring corporation), then it is an exchanged basis decreased by 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 on the issuance of its stock or the stock of its parent in an acquisitive reorganization or, for that matter, in any other transaction. If the acquiring corporation transfers other boot, it recognizes 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 forward triangular reorganization take a transferred basis, increased by any gain recognized on the transfer. 6. Triangular Reorganizations: a. 368(a)(2)(C): An otherwise qualifying Type A or Type C reorganization will not lose its tax-free status merely because the acquiring corporation drops down the acquired assets to a subsidiary. b. Forward Triangular Mergers 368(a)(2)(D): Permits S to acquire T in 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; and 3. 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 reorganization 1. 368(a)(2)(E)(ii)- The shareholders of T exchange T voting stock constituting control. 2. Merger under 368(a)(2)(e):

a. P forms S, is a shareholder of S, and Ss only asset is P voting 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 voting stock for P voting stock. e. It means that P will own all (or almost all) of T outstanding stock, and T shareholders will own P voting stock. 3. Type B origins: Similar to a Type B reorganization, but there can be boot in an (a)(2)(E) reorganization; only 80% of the T stock must be acquired for P voting stock, and the rest may be obtained for cash or other property or simply not acquired at 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 or a reorganization, the acquiring corporation shall succeed to and take into account some 26 specified attributes of the target. a. Limits 381(c)(2): An earnings and profits deficit inherited from Loss Corp may not be applied against any earnings and profits of Profit Corp that existed prior to acquisition. Losss deficit can only be used to offset post-acquisition accumulated earnings and profits

X. Corporate Divisions 355: 1. Intro: 355 allows a corporation to make a tax-free distribution to its shareholders of stock and securities in one or more controlled subsidiaries. If an intricate set of statutory and judicial requirements are met, neither the distributing corporation nor its shareholders recognize gain or loss on the distribution. 2. Three Types: Corporate Division is when a corporate enterprise is divided into two or more controlled corporations. a. Spin-off: Resembles a dividend, involves a distribution of property to shareholders without surrender of any stock. Ex: Alex and Bertha each

own 50% of D. D is required to operate chicken ranch and winery as separate corporations. D forms a new corporation, Poultry Inc, contributing the assets of the chicken ranch. It then distributes the stock of Poultry Inc pro rata to Alex and Bertha, who emerge as equal shareholders in each corporation. b. Split-off: Resembles a redemption b/c shareholders have surrendered stock of D. Ex: Alex and Bertha want to go their separate ways, and Alex wants the winery. D forms new corporation, Poultry Inc, contributing the assets of the chicken ranch. D then distributes the stock of Poultry to Bertha in complete redemption of her D stock. Alex becomes the sole shareholder of D, and Bertha is the sole shareholder of Poultry. c. Split-up: Resembles a complete liquidation b/c D has distributed all of its assets and dissolved. Ex: D is required to divide its two businesses. D forms Vineyard Inc, contributing winery assets, and Poultry Inc contributing chicken assets. D then distributes the stock of the two new corporations pro rata to Alex and Bertha in exchange for all their D stock. 3. Requirements: a. 355(a)(1)(A)- P distributes the stock of a sole subsidiary b. 355(a)(1)(B)- Distribution not used to get around dividends c. 355(a)(1)(C)- Meets active business test d. 355(a)(1)(D)- As part of the distribution, the corp distributes all of the stock of the subsidiary 4. Active Business Test a. Says in (b)(1)(A)- you must have 2 active businesses b. (b)(2)(B)- trade or business must have been actively conducted for 5 years c. (b)(2)(C)- cant have purchased within the last 5 years by P d. 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, or otherwise acquired another trade or business in the same line of business, then the acquisition of that other business is treated as having been actively conducted during that five-year period.