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Corporate Tax II Weisbach 2009


Taxable Acquisitions
A. Asset Purchases
2 levels of tax asset sale + liquidation
a. Forward Merger T mergers into Acq sub
i. Rev. Ruling 69-6: where Acq sub is formed for purpose of merger & T s/hs get cash, transitory existence of
Acq sub is disregarded and transaction is treated as an asset sale
Intangibles, 197: permits amortization of intangible assets over 15 year period
Purchase Price Allocation, Regs. 1.338-6: (see slide 5)
B. Stock Purchases
1 level of tax, carryover basis
a. Reverse Merger Acq sub mergers into T
Historical Treatment Kimbell-Diamond: step trans makes stock purchase + liquidation = asset purchase; eventually
repealed by statute
Current Treatment of Stock Purchases, 338 if corp makes Qualified Stock Purchase it may elect to qualify for
either asset or stock purchase treatment
a. Qualified Stock Purchase (QSP), Requirements and Consequences
i. P must make taxable purchase of 80% of value and vote of T w/in 12 month period
ii. Election must be made no later than 9.5 months from QSP
iii. In QSP, Old T treated as selling assets to New T and liquidating into P one day after stock purchase and
outside of any consolidated returns
b. 338(h)(10): If S & T eligible to file consolidated return, then P & S may make joint election to treat stock
purchase as an asset sale
c. 336(e): if corp owns 80% of vote/value of sub & owner sells, exchanges or distributes stock (Qualified Stock
Disposition, QSD), election may be made to treat the disposition as a disposition of assets w/ no gain/loss
recognized with respect to stock
d. Rev Ruling 90-95: where P created transitory acquisition sub to acquire T in reverse subsidiary cash merger;
i. Situation 1: creation of acquisition sub is disregarded, and merger is treated as QSP
ii. Situation 2: subsequent liquidation of T is given independent significance and does not result in QSP being
recast as asset purchase; step trans turned off and trans treated as stock purchase + liquidation
Rationale: Congress intended to completely repeal Kimbell-Diamond by enacting 338, thus 338
election principles control
Sale/Redemption: where subsidiary borrows and distributes cash to s/h after a merger, distribution is treated as a
redemption to be analyzed under 302

II. Corporate Reorganizations

A. Reorganization Checklist
Determine the type of reorg and check requirements
If stock/assets has been transferred check -2(k)
Make sure entities involved are parties to the reorganization under -2(f)
B. Statutory Forms
A Reorganizations, 368(a)(1)(A)
a. Requirements
i. Merger or consolidation
Rev. Rul 2000-5: where T transfers only half of assets to P and continues to exist, or where T transfers
half of assets to each of two purchasers, such transfers are not mergers b/c merger contemplates T
ceasing to exist and divisive mergers only dealt with in 355
ii. Continuity of interest (COI)
iii. Continuity of business Enterprise (COBE)
b. (a)(2)(C) may make one drop to a subsidiary
c. Disregarded Entities
i. Regs. 1.368-2(b)(1)(ii): assets/liabilities of transferors combining unit become assets/liabilities of transferee
combined unit and transferor combining unit ceases to exist
B Reorganizations, 368(a)(1)(B)
a. Requirements
i. Exchange of T stock solely for voting stock of acquiring (no boot allowed)
Creeping B: may consummate creeping B so long as exchanges are solely for stock; possibly up to 16
years required to make cash purchases old and cold
Contingent Consideration: P may agree to issue future stock under certain circumstances; contingent
consideration/poison pill does not qualify as boot


Rev. Ruling 98-10: B reorg + debenture exchange does not violate B reorg rules if substantially all
holders of debentures are non-stockholders and principal of new debentures is same as old debentures
ii. Immediately after acquisition acquiring has control of target (no need to transfer control)
Rev. Ruling 67-274: B reorg + liquidation of T or acq is a C reorg b/c no control immediately after is
liquidation; no QSP b/c it is a stock for stock exchange, thus step trans applies
Rev. Ruling 55-440: preferred stock called but not presented by exchange date is disregarded for
purposes of control under 368(c)
b. (a)(2)(C) may make one drop to a subsidiary
C Reorganizations, 368(a)(1)(C)
a. Requirements
i. Exchange sub all T assets/liabilities solely for voting stock of acquiring, may include unlimited assumption
of liabilities
Rev. Ruling 57-518: substantially all assets is 90% gross, 70% net
Rev. Ruling 88-48: where T has two lines of business, sells one line of business to unrelated parties,
then transfers proceeds + other lines of business to P in exchange for P stock, sub all requirement is
Creeping C: preexisting stock of T owned by P does not count as boot in a C reorg (must be old and
ii. Boot relaxation: 20% boot allowed, but if boot used must count liabilities towards boot
iii. Target liquidates
b. (a)(2)(C) may make one drop to a subsidiary
Triangular Reorganizations
a. Triangular A by (a)(2)(D) forward triangular merger
i. Requirements
All regular A requirements met (merger, COI, COBE)
Exchange must be completely in parent stock (no S stock used in trans)
Acquire sub all target assets
ii. Drop to subsidiary via (a)(2)(C)
Rev. Ruling 2001-24: forward triangular merger w/ subsequent drop of acquiring into another wholly
owned subsidiary of P qualifies as a valid reorg via (a)(2)(C) & -2(k)/-2(f)
b. Triangular A by (a)(2)(E) reverse triangular merger
i. Requirements
All regular A requirements met (merger, COI, COBE)
Exchange must be completely in parent stock (no S stock used in trans)
T must hold sub all assets
i. Rev. Ruling 2001-25: sale of 50% of assets to unrelated party after reorg is valid if P holds
T s/hs must surrender control in exchange (no creeping (a)(2)(E)s)
ii. Drop to subsidiary via (a)(2)(C)
c. Triangular C w/ solely parent stock
d. Triangular B w/ solely parent stock
C. Continuity of Interest,
Generally, Regs. 1.368-1(e): proprietary interest in T must be preserved to get COI in a reorg
a. Proprietary interest is preserved if
i. It is exchanged for proprietary interest in P
ii. It is exchanged by acquirer for direct interest in T
iii. It otherwise continues as proprietary interest in T
b. Measured by consideration received in merger, not stake in new company
c. Amount
i. 50% or greater is always granted
ii. Regs allow as low as 40%
iii. Southwest Natural Gas: statutory merger w/ 16% stock consideration does not qualify as tax free reorg b/c
not sufficient COI
d. Dispositions of stock to unrelated parties b/f or after the reorg to persons unrelated to P or T are disregarded for
COI purposes
i. Related party: 50% or greater ownership
ii. Redemptions by P pursuant to plan of reorg count as cash/property consideration
Rev. Ruling 99-58: regular stock repurchase plan which causes P to buy back T stock on the open
market after reorg will not affect COI if not purposefully directed at T s/hs
Rev. Ruling 66-224: COI not measured w/ respect to individual s/h, instead look to s/h as a group (i.e., 50% stock to
half of s/h and 50% cash to other half is identical to each s/h receiving 50% stock and 50% cash for COI purposes)


Kass: where P purchased 80% of T stock, then T merged into P w/ P exchanging minority s/h T stock for P stock,
COI for minority s/h measured from point b/f the initial purchase, and thus 20% s/hs did not qualify for A reorg
treatment b/c they failed COI
Seagrams: where P purchases stock from old s/h, P steps into shoes of old s/h for purposes of COI
Regs 1.338-3(d): stock purchased in QSP immediately becomes old and cold
D. Continuity of Business Enterprise
Generally, Regs 1.368-1(d): P must either
a. Continue significant line of Ts historic business, or
b. Use a significant portion of Ts historic business assets in a business
i. Significant is at least 1/3 of business/assets
ii. Historic must at least be longer than 2 years
Bentsen: no need to carry on identical business of T to qualify for CBOE
Rev. Ruling 81-25: CBOE does not require the acq corp to maintain its own line of business or assets during the
Qualified Group, Regs. 1.368-1(d)(4)(i), (ii): P treated as holding all businesses and assets of al the members of the
qualified group
a. Qualified Group: P owns directly stock meeting reqs of 368(c) in at least one corp, and stock meeting the reqs
of 368(c) in each of the corps is owned by one or more of the other corps
i. Direct subsidiary
ii. Subsidiary of a subsidiary
iii. Diamond pattern
iv. Partnership if P owns of significant interest or P has active and substantial management role
v. NOT parent
vi. NOT sister corp
E. Regulatory Modifications to Reorganization Requirements
Grohman & Bashford Doctrine: dropping assets into subsidiary or using parent stock to acquire T violate reorg
requirements (has since been mitigated by regs, but still good law)
Asset/Stock Transfers, Regs. 1.368-2(k): transfer of assets/stock after a reorg in accordance w/ this rule will not
blow up an otherwise good reorg
Assets of acquired, acquiring + no liquidation
Stock w/in qualified group + not all of acquired
Assets of acquired, acquiring
Other Transfers

No Termination
Stock of acquired, acquiring w/in qualified group


Party to the Reorganization, Regs. 1.368-2(f)

Acquired w/in -2(k)

Stock or assets
Stock of acquiring w/in -2(k)

Step Transaction Doctrine in Reorganizations

King Enterprises: where P exchanged 51% P stock and 49% cash/notes for T, then pursuant to a plan T merged into
P in an upstream merger, the step trans doctrine operates to qualify the entire transaction as a valid A reorg
Rev. Ruling 2001-26: where P exchanges P voting stock for 51% of T stock, then S merges into T w/ T surviving and
T s/hs getting P stock + cash, such a transaction is a valid (a)(2)(E) reorg b/c step trans makes it so that 100% control
is transferred from T s/hs to P in the plan of reorganization
Rev. Ruling 2001-46: where P transfers 70% stock and 30% cash to T s/hs so as to qualify independently as a QSP
with S merging into T and T surviving, and the transaction is followed by a merger of T into P, the transaction will
be treated as a single merger by T into P qualifying as an A reorg QSP will be disregarded
Rev. Ruling 2008-25: where T is leveraged, and P transfers 90% stock and 10% cash to T s/h and S merges into T w/
T surviving, followed by a liquidation of Ts assets into P, transaction is a fully taxable QSP (which turns off step
trans) followed by an A reorg
G. Consequences to a Reorganization





To Target Shareholders
a. Recognition of Gain/Loss
i. 354(a)(1): no gain/loss if stock/securities exchanged solely for stock/securities of a party to the reorg
ii. 354(a)(2): principal amount of securities received cannot exceed principal amount of securities
surrendered (see 356(d))
iii. 356(a)(1): gain recognized to the extent of boot
iv. 356(a)(2): if gain recognized, it is considered dividend if it has the effect of dividend
Clark: where sole s/h of T receives stock + boot in connection w/ merger, exchange must be analyzed
under 302 to determine whether it qualifies for dividend treatment
v. 356(c): no loss recognized in a reorg
vi. 356(d): if principal amount of securities increased, the FMV of increase is taxed as boot
b. Basis
i. 358: basis is carryover increased by gain, decreased by boot
To Target
a. On Exchange
i. 361(a): no gain/loss recognized if T exchanges property solely for P stock/securities
ii. If boot, then no gain/loss recognized on exchange if boot is distributed
b. On Distribution
i. No gain/loss recognized on distribution of qualified property (refers to stock, securities, etc) to
ii. Gain recognized on any property distributed that is not qualified property
c. Basis
i. 358: P stock gets carryover basis + gain - boot
ii. 358(f): boot given FMV basis on exchange
To Acquiring
a. Recognition of Gain
i. 1032: no gain/loss recognized on receipt of money/property in exchange for stock
b. Basis
i. 362(b): basis is carryover increased by gain, decreased by boot
P recognizes gain/loss on all transfers of boot
Triangular Reorganizations
a. Triangular C and (a)(2)(D) Forward Triangular Merger
i. Regs. 1.358-6(c)(1)(i): Ps basis in stock adjusted as if P acquired the T assets in the reorg and dropped
them into S as a 351
b. Reverse Triangular
i. Regs. 1.358-6(c)(2)(i): Ps basis determined as if transaction were a forward triangular merger
c. Triangular B
i. Regs. 1.358-6(c)(3):
d. Consequences to S
i. Regs. 1.1032-2(b): S does not recognize gain where P stock issued to S in a triangular reorg pursuant to
plan of reorg