Corporate & Partner Tax Instructor: Dwight Drake ```````````````````````````````````````````` ```````````````````````````````````````````` ```````````````````````````````````````````` ```````````````````````````````````````````` `````````` Tax Impact to Distributing Corp if 355 Apply General Rule: No gain or loss to distributing corp on distribution of controlled corp stock or securities. 361(c) and 355(c). If other appreciated boot also distributed, must recognize gain on it. Exception 1: Stock of controlled corp acquired by distributing corp within five yrs of distribution considered boot. Must recognize gain on it. 355(c)(2)(A) Exception 2: If after distribution 50% or more of interest in either distributing or controlled corp owned by persons who acquired by “purchase” within 5 year period, then stock distributed is “disqualified stock” in “disqualifying distribution” per 355(d). Distributing corp must recognize gain. Distributee shareholder not impacted. “Purchase” exists if no carry-over basis. Exception 3: Gain recognized as if taxable sale if “pursuant to plan” 50% or more of stock of distributing or controlled corp acquired by non-historic shareholders within 4 yr period starting 2 yrs before distribution. 355(e). Anti-Morris trust provision to prevent tax-free dumping of unwanted assets in connection with tax-free reorgs. ``````````````````````````````````````````````````````````````````````````

Corporate & Partner Tax Instructor: Dwight Drake Problem 549 Basic Facts: F sole shareholder of C Corp, operator of department store of 15 yrs. Stock basis 200k, FMV 2 mill. New branch store bought 3 yrs ago represents 500k of 2 mill value and basis of 100k. C Corp transfers branch store assets (500k) to new B Corp for 400k common stock and 100k securities; S Corp then distributes B Corp stock and securities to F; F then gifts B Corp stock to children as part of estate plan. 400k E&P. Is this valid 355 transaction? – Is estate planning valid business purpose? Probably not; split of authority. Trade or business requirement satisfied? Yes, vertical division of 15 yr old business. Device? Planned gift may kill. Continuity of interest? Planned gift may kill. Tax consequences if valid: - Transfer of assets to B Corp in exchange for stock and securities valid D reorg and S Corp recognizes no gain or loss under 361(a). 361(a), unlike 351, includes securities as nonrecognition property. 361(a) trumps 351.

Corporate & Partner Tax Instructor: Dwight Drake Problem 549 Tax consequences if valid: - C Corp basis in stock and securities substituted 100k asset basis per 358(a)(1) – 80k allocated to stock and 20k allocated to securities. - 25% of C Corp E&P allocated to B Corp (based on relative FMV of assets). Reg (a). - C Corp has no gain or loss on distribution of stock and securities to father. 362(c). C Corp’s E&P reduced by basis in securities (20k) to 280k. This done pursuant to 312(a)(3) and (b) by increasing 300k basis by 80k appreciation and then reducing by 100k FMV distributed. - B Corp no gain or loss on issuing stock Carryover 100k basis in assets. 362(b). Holding period tacking under 1223(2). Picks up 100k of C Corp E&P. - Father: Securities boot – taxed as dividend to extent of 100k FMV. Basis in securities 100k. F’s 200k stock basis allocated to C Stock and B Stock per FMV (1.5 mill v. 400k) – 158k to S; 42k to B. Full tacking.

Corporate & Partner Tax Instructor: Dwight Drake Problem 549 Tax consequences if valid: - Gift by F to son non-taxable. Son takes 42k carryover basis per 1015 with tacking of holding period per 1223(2). Transaction fails under on formation of B Corp. 100k securities are boot so C Corp has 100k gain on formation of B Corp. Basis in securities 100k. C Corp basis in B stock is carry over 100k basis. No E&P allocation to B Corp because no reorg. - C Corp distribution of B Corp stock to F triggers 300k gain on distribution (400k FMV over 100k basis) per 311(b). - C Corp E&P increased by 300k gain on B Corp stock distribution and then decreased by 500k (FMV of distribution of stock and securities distributed). - B Corp no gain or loss on stock or securities issuance Basis in assets is S Corp carryover basis (100k) plus 100k recognized by C Corp – 200k. 362.

Corporate & Partner Tax Instructor: Dwight Drake Problem 549 Transaction fails under F has 500k dividend under 301 on receipt of B Corp stock and securities (FMV). C Corp has sufficient E&P by virtue of 100k gain on formation of B Corp and 300k gain under 311 on distribution of B stock. F basis in stock is 400k, basis in securities is 100k, under 301(d). No tacking of holding period. Basis in C Corp stock remains at 200k. - Gift to child tax free and child takes carryover basis of 400k in stock and gets tacked holding period from F. 1223(2).