a. Result: No change. The Continuity of Interest requirement is tested “on the last business day before the first date such contract is a binding contract, if such contract provides for fixed consideration.” See Treas. Reg. § 1.368-1(e)(2)(i). b. Transaction still qualifies for tax free reorg bc qualified under 40% COI. 5. (d) T merges directly into P and each T shareholder receives $400k of P voting stock. Pursuant to a binding commitment entered into prior to the merger, six of the former T shareholders sell their new P stock for cash to a third party three weeks after the merger. a. RESULT: Treas. Reg. § 1.368-1(e)(1)(i) and -1(e)(6) Example 1(i) now provide that the subsequent disposition of P stock by former T shareholders to unrelated parties is generally not considered in determining whether the COI test is met, even if the dispositions were pursuant to a preexisting binding contract . b. Post acquisition sale does not a affect the reorg even if the sales were pre- arranged c. If related party then wont be tax-free d. Stock buy-back plan: keep stock from getting too diluted and allow anyone who wants stock redeemed may do so at a specified time i. Wont take into account for continuity analysis if effectuated by a broker 6. (e) Same as (a) above, except shortly after the merger and as part of the original plan, P sells T’s assets to an unrelated party at a niece profit and uses the sales proceeds to expand its professional textbook business. a. COBE issue – would not qualify as a type A reorg bc lacks continuity b. Acquirer must continue business by continuing historic business or using substantial part of business in a new business c. Cannot just sell the assets and then use the cash for something else will not qualify. d. Type B Reorganization i. § 368(a)(1)(B) Stock for Stock Transaction 1. T shareholders transfer stock to P and in exchange T gets P stock a. Former T shareholders are now P shareholders b. T remains alive as a subsidiary of P ii. Statutory Requirements 1. After the transaction P must have control 80% a. Control = 80% or more of T’s voting power; and 80% or more of the total shares of each class of T’s nonvoting stock. 2. Consideration mist to be solely for voting stock of P 143
a. There is NO BOOT IN A B there can’t be a penny of boot in the transaction b. Payment of cash in lieu of fractional shares in otherwise qualifying stock for stock exchange will NOT violate the solely for voting stock requirement. 3. Can’t have a stepped transaction where acquisition of stock occur in a short period of time (i.e., 12 months). BUT if they are separated by a long interval, like 16 years, then the acquisitions will qualify as stock for control purposes. iii. Busted B reorganizations are treated as taxable stock sales (one level of tax) iv. Creeping Acquisitions 1. If P has already bought for cash a lot of T’s stock (and the stock is old and cold), P’s final transaction may qualify.
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