1. Corporate & Partner Tax Instructor: Dwight Drake ```````````````````````````````````````````` ```````````````````````````````````````` For 355 to Apply Four Critical Tests: - Business Purpose - Trade or Business - No Device - Continuity of Interests

2. 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(a)(3)(B) 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. ``````````````````````````````````````````````````````````````````````````

3. Corporate & Partner Tax Instructor: Dwight Drake ```````````````````````````````````````````` ```````````````````````````````````````````` ```````````````````````````````````````````` ```````````````````````````````````````````` `````````` Tax Impact to Distributing Corp if 355 Apply Trap: Do not confuse three exceptions to threshold trade or business requirements of 355(b)(2)(C) and 355(b)(2)(D): 355(b)(2)(C): Active business may not have been acquired within 5 yr period prior to redemption in transaction where gain or loss recognized. 355(b)(2)(D): Control (80% voting and 80% all classes) of corp conducting business not acquired by corporate distributee or distributing corp with 5 yr period in which gain or loss recognized. If either of these apply, active trade or business flunked and 355 benefits not available to any party.

4. Corporate & Partner Tax Instructor: Dwight Drake ```````````````````````````````````````````` ```````````````````````````````````````` Problem 560(a) Basic Facts: T Corp has sub S corp – both active business over 5 yrs. P Corp wants to buy T corp business, but not S. T and S of equal value, both with appreciated assets. T Corp S Corp 100% Shareholders 100% B Corp S Corp Stock Cash P Corp T Corp Stock Cash

5. Corporate & Partner Tax Instructor: Dwight Drake ```````````````````````````````````````````` ```````````````````````````````````````` Problem 560 Basic Facts: T Corp has sub S corp – both active business over 5 yrs. P Corp wants to buy T corp business, but not S. T and S of equal value, both with appreciated assets. (a)T sells S stock to B Corp. T shareholders sell T stock to P. T recognizes gain on the sale of S stock. T’s shareholders recognize gain on sale of T stock to P. P has 338 election option.

6. Corporate & Partner Tax Instructor: Dwight Drake ```````````````````````````````````````````` ```````````````````````````````````````` Problem 560(b) Basic Facts: T Corp has sub S corp – both active business over 5 yrs. P Corp wants to buy T corp business, but not S. T and S of equal value, both with appreciated assets. T Corp S Corp 100% Shareholders 100% B Corp 2007 S Corp Stock P Corp 2005 T Corp Stock Cash 9 Months S Corp Stock Cash

7. Corporate & Partner Tax Instructor: Dwight Drake ```````````````````````````````````````````` ```````````````````````````````````````` Problem 560(b) Basic Facts: T Corp has sub S corp – both active business over 5 yrs. P Corp wants to buy T corp business, but not S. T and S of equal value, both with appreciated assets. 2005, P buys stock in T from shareholders – no 338 election. Two yrs later, T distributes S stock to P for valid business purpose. Nine months later, P sales S stock to B. T shareholders have gain on sale of T stock. T recognizes gain on distribution of S stock per 311(b) – no hope under 355 because bought in taxable transaction within 5 yrs. 355(b)(2)(D). P receives S stock as dividend, but has 100% 243 deduction. But P’s basis in its T stock reduced by untaxed dividend. Reg. 1.1502- 14(a)(1) & 32(b)(2). P takes FMV basis in S stock per 301(d) – thus no gain on sale of S stock. S basis in assets not change.

8. Corporate & Partner Tax Instructor: Dwight Drake ```````````````````````````````````````````` ```````````````````````````````````````` Problem 560 Basic Facts: T Corp has sub of S corp – both active business over 5 yrs. P wants to buy T corp business, but not S. T and C of equal value, both with appreciated assets. (c)Same as (b), but P individual. 355(b)(2)(D) not problem because P not corporate distributee. Distribution of S stock may qualify under 355 for P if can avoid device issue on resale. If not prearranged, have shot. Rev. Rule 74-5. Per 355(d), T will recognize gain on distribution even if it otherwise qualifies under 355. (d)Same as (b), but P acquired all T stock in tax-free B reorg. No 355(b)(2)(D) issue because no taxable exchange and basis carryover. 355 may apply. P recognized full gain on sale of S stock to B.

9. Corporate & Partner Tax Instructor: Dwight Drake ```````````````````````````````````````````` ```````````````````````````````````````` Problem 560(e) Basic Facts: T Corp has sub S corp – both active business over 5 yrs. P Corp wants to buy T corp business, but not S. T and S of equal value, both with appreciated assets. T Corp S Corp 100% Shareholders 100% B Corp P Corp 50% T Stock Cash 50% T Stock Cash 50% T Stock S Stock

10. Corporate & Partner Tax Instructor: Dwight Drake ```````````````````````````````````````````` ```````````````````````````````````````` Problem 560 Basic Facts: T Corp has sub of S corp – both active business over 5 yrs. P wants to buy T corp business, but not S. T and C of equal value, both with appreciated assets. (e) 2005 P purchases 50% of T stock and B purchases other 50% of T stock from T shareholders. In 2007, T distributes all S stock to B in exchange for T stock owned by B. 355(b)(2)(D) not violated because P did not acquire control (80%) within 5 yr. period. Thus, 355 possible, but 355(d) will trigger gain recognition to T on distribution of S stock.

11. Corporate & Partner Tax Instructor: Dwight Drake ```````````````````````````````````````````` ```````````````````````````````````````` Problem 568(a) Basic Facts: Basic Facts: L Corp has hotel and apparel business, of equal value and both over 5 yrs. D Corp wants to buy apparel business. L Corp M Corp M Stock Shareholders D Corp Apparel Assets D Stock Motel Assets M Stock D Stock

12. Corporate & Partner Tax Instructor: Dwight Drake ```````````````````````````````````````````` ```````````````````````````````````````` Problem 568 Basic Facts: L Corp has hotel and apparel business, of equal value and both over 5 yrs. D Corp wants to buy apparel business. (a)L transfers hotel business to sub M and distributes M stock to shareholders. Then sales apparel assets to D in exchange for D stock (less than 50%) and distributes D stock to L shareholders. - Formation of M tax free under 351. Integrated transactions so device and no 355. Really just liquidation of L - No C reorg potential on apparel sale because not “substantially all assets” under integrated approach. So income recognition to L. - Distributions to L shareholders are liquidation per 331 under integrated approach. Shareholder have gain. L would also have gain on M stock and D stock under 336 (but B stock have high basis from gain recognition on sale).

13. Corporate & Partner Tax Instructor: Dwight Drake ```````````````````````````````````````````` ```````````````````````````````````````` Problem 568(b) Basic Facts: Basic Facts: L Corp has hotel and apparel business, of equal value and both over 5 yrs. D Corp wants to buy apparel business. L Corp M Corp M Stock Shareholders D Corp Merger of L & D D Stock Motel Assets M Stock D Stock

14. Corporate & Partner Tax Instructor: Dwight Drake ```````````````````````````````````````````` ```````````````````````````````````````` Problem 568 Basic Facts: L Corp has hotel and apparel business, of equal value and both over 5 yrs. D Corp wants to buy apparel business. (b)Same as (a), but L merges with D after spin-off and L shareholders receive non-voting D stock. - Per Morris trust rationale, spin off qualifies per 355 and merger qualifies as valid A reorg. - Problem is 355(e) which will trigger gain to L on distribution of M stock. D acquired 50% or more of distributing or control corporation pursuant to plan – 4 yr period starting 2 yrs before distribution.

15. Corporate & Partner Tax Instructor: Dwight Drake ```````````````````````````````````````````` ```````````````````````````````````````` Problem 568(c) Basic Facts: Basic Facts: L Corp has hotel and apparel business, of equal value and both over 5 yrs. D Corp wants to buy apparel business. L Corp C Corp C Stock Shareholders D Corp Merger of C & D D Stock Apparel Assets C Stock

16. Corporate & Partner Tax Instructor: Dwight Drake ```````````````````````````````````````````` ```````````````````````````````````````` Problem 568 Basic Facts: L Corp has hotel and apparel business, of equal value and both over 5 yrs. D Corp wants to buy apparel business. (c)L transfer apparel to new C corp, spins off C corp stock pro rate. C merged into D corp following spin off. L shareholders get D stock. - Old rule was that step-transaction would be applied to treat as asset sale by L followed by dividend liquidation. No more per Rev. Rule 98-44. - Now, formation and spin-off of D qualify as D reorg and 355 apply. But if L shareholders do not own more than 50% of D post merger, 355(e) applies and L recognizes gain on spin off of C corporation.

17. Corporate & Partner Tax Instructor: Dwight Drake ```````````````````````````````````````````` ```````````````````````````````````````` Problem 568 Basic Facts: L Corp has hotel and apparel business, of equal value and both over 5 yrs. D Corp wants to buy apparel business. (d)Same as (c) but L shareholders end with over 50% of D stock. No 355(e) application and no gain for L. Highly unlikely that target end up with over 50%. (e)Same as (b) but merger of L into D one year after distribution. Question is plan per 355(e). Because within 2 yrs following spin off, burden on taxpayer to prove no plan to sell off. More facts needed. See Reg. 1.355-7(b) for factors and safe harbors.

18. Corporate & Partner Tax Instructor: Dwight Drake ```````````````````````````````````````````` ```````````````````````````````````````` Problem 568 Basic Facts: L Corp has hotel and apparel business, of equal value and both over 5 yrs. D Corp wants to buy apparel business. (f)Same as (b) except business purpose of spin off unrelated to apparel acquisition and merger three years after spin off. No “plan”. Within safe harbor of reg. Thus, no 355(e) and no gain at L level on spin off. (g)Is 355(e) necessary? Some think overkill, but planning to avoid “plan” requirement per Regs is possible.