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ch07 - H Chapter Seven H CORPORATE REORGANIZATIONS...

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H Chapter Seven H CORPORATE REORGANIZATIONS SOLUTIONS TO RESEARCH PROBLEMS RESEARCH PROBLEMS 7-53 Stable Corporation will have a difficult, but not impossible, time arguing that the transaction is a reorganization. 5- Section 368(a)(1)(B) states that ‘‘the acquisition by one corporation, in exchange solely for all or a part of its voting stock . . . [for] stock of another corporation if . . . acquiring corporation has control of such other corporation’’ is a reorganization. The effect of cash on the exchange has been considered in several important cases. The most recent case was the ITT-Hartford merger which involved cash purchases in 1969 with the acquisition of control solely for stock in 1970. 5- Initially, the Tax Court and District Court ruled that the ITT-Hartford transaction was a valid reorganization because control was acquired solely for stock. (This is the same as the Stable-Glamour transaction.) However, on appeal both the 1st and 3rd Circuit Courts of Appeals reversed this decision. (See Chapman 45 AFTR 2d 80-1290 and Heverly 45 AFTR 2d 80-1122.) The Courts reasoning was based on the legislative history of the Section and the fact that the word ‘‘solely’’ provides no leeway. 5- At the appellate level, taxpayers devised a second argument. They contended that the 1969 purchases were unrelated to the 1970 reorganization and therefore, the reorganization transaction was solely for voting stock. Although not specifically cited, this argument is based on the example in Reg. § 1.368-2(c). In this example A purchased 30 percent of W in 1939. In 1954, A acquired 60 percent of W solely for voting stock. The regulation concludes that the 1954 transaction is a non-taxable reorganization. The underlying argument is that the 1939 purchase was unrelated to the 1954 reorganization. The Court of Appeals recognized that if the 1969 purchase was separate from the 1970 transaction, then the 1970 exchange was a valid reorganization. The case was remanded to the lower court for determination of this factual question. 5- Based on the above, Glamour will have to prove that the cash purchases were not part of the reorganization. The fact that the reorganization plan was developed after the IRS audit, whereas the cash purchases were before the audit, should help Glamour. Because the question is one of fact, the final decision is uncertain. 7-54 Assuming that Jim’s basis in T Corporations stock is $360,000 or less, Jim’s realized gain will exceed $40,000, and therefore the entire $40,000 cash will be taxable. Since Jim is surrendering his T stock in the transaction, the character of the gain will be governed by § 356(a)(2), which provides that the gain will be capital except if the distribution is the equivalent of a dividend. 5- In Rev. Rul. 74-516, 1974-2 CB 121, the IRS addresses the correct approach to § 356(a)(2) in split- offs and split-ups. It concludes that boot should be treated as distributed by the distributing corporation in redemption of its own stock before the tax-free distribution under § 355. The character of the gain is
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