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Change in identity, form, or place of organization
Transfers in bankruptcy or receivership
Tax Free Reorganization Consequences, in General (slide 1 of 3)
Consequences to Acquiring Corporation
No gain or loss recognized unless it transfers property to the Target corporation as part of the transaction
Then gain, but not loss, may be recognized
Basis of property received retains basis it had in hands of Target corp plus any gain recognized by the target
Tax Free Reorganization Consequences, in General (slide 2 of 3)
Consequences to Target Corporation
No gain or loss unless it retains “other property” received in the exchange or it distributes its own property to shareholders
Other property is defined as anything received other than stock or securities
Treated as boot
Gain, but not loss, may be recognized
Tax Free Reorganization Consequences, in General (slide 3 of 3)
Consequences to Target or Acquiring Co. Shareholders
No gain or loss unless shareholders receive cash or other property in addition to stock
Cash or other property is considered boot
Gain recognized by the stockholder is the lesser of the boot received or the realized gain
Basis of shares received is same as basis of those surrendered, decreased by boot received, increased by gain and dividend income, if any, recognized in the transaction
The Big Picture – Example 4 Gain On Exchange Of Stock (slide 1 of 2)
Return to the facts of The Big Picture on p. 7-2.
R&W proceeds with its acquisition of BrineCo.
Sam acquired a 30% interest in BrineCo 15 years ago for $80,000.
He exchanges his BrineCo stock for $25,000 cash and stock in R&W worth $125,000.
At the time of the reorganization, BrineCo’s E & P is $50,000.
Sam has a $70,000 realized gain
$150,000 cash and stock received - $80,000 BrineCo stock basis.
Sam has a $25,000 recognized gain (cash boot received).
The first $15,000 ($50,000 BrineCo E & P X 30%) is taxable as a dividend, and
The remaining $10,000 is treated as capital gain.
Both are taxed at special tax rates.
The Big Picture – Example 4 Gain On Exchange Of Stock (slide 2 of 2)
Suppose instead that Sam receives 10% of the R&W stock with a $100,000 fair market value and $50,000 cash.
If Sam had received solely stock, he would have received 15% of the R&W stock.
Since Sam owns less than 80% of the stock he would have owned if solely stock had been distributed (10% ÷ 15% = 67%) and less than 50% of R&W, he qualifies for sale or exchange treatment under § 302(b)(2).
Therefore, Sam’s $50,000 recognized gain is a long-term capital gain.