All good info. Hula Hula Cuckoo Penny
7. Not Part of a Plan Described in Section 355(e)
Under Section 355(e), if a Section 355 otherwise applies to a spin-off but the spin-off is part of “a plan or series of related transactions” pursuant to which one or more persons acquire directly or indirectly a “50-percent or greater interest,” measured either by total combined voting power or the total combined value of the shares in the distributing corporation or the controlled corporations, the distributing corporations must recognize gain on the shares of controlled corporation that are distributed.
8. Neither Corporation Should be a Disqualified Investment Corporation
Internal Revenue Code Section 355(g) provides that a distribution will not qualify as a tax-free distribution under Section 355 if the distribution is part of a transaction after which either the distributing corporation or a controlled corporation is a disqualified investment corporation and a person holds immediately after the transaction a 50 percent or greater interest in any corporation and a person holds immediately after the transaction a 50 percent or greater interest in any disqualified investment corporation not so held immediately before the transaction. A corporation will be a disqualified investment corporation not so held immediately before the transaction. A corporation will be treated as a disqualified investment corporation if the fair market value of its investment assets is two-thirds or more of the fair market value of all of its assets. The term “investment assets” includes: 1) cash; 2) any stocks or securities in a corporation; 3) any interest in a partnership; 4) any debt instrument or other evidence of indebtedness; 5) any option, forward or futures contract, notional principal contract, or derivative; 6) foreign currency; and 7) any similar asset. See IRC Section 355(g)(2)(B)(i). Stocks issued by a corporation with respect to which the distributing or the controlled corporations own directly or indirectly 20 percent or greater stock interest represented by vote and value is not, per se, considered to be an investment asset. However, in such cases, the distributing or controlled corporation is treated as owning a proportionate share of the 20 percent or more owned and controlled corporation’s assets.
9. Plan of Reorganization
A Section 355 tax-free reorganization must occur pursuant to a plan. This means, prior to the implementation of a tax-free Section 355 reorganization, a written plan should be entered into by the parties.
Tax Consequences to Shareholders. Very important stuff to know. Hula Hula Cuckoo Penny
A shareholder who transfers stock in connection with a reorganization and receives stock or other assets in return has realized a gain to the extent that the value of the stock or other assets received exceeds the shareholder’s basis in the stock transferred.Similarly, the shareholder has realized a loss to the extent that the shareholder’s basis in the stock transferred has realized a loss to the extent that the shareholder’s basis in the stock transferred exceeds the value of the stock or assets received in the exchange. Absent a special nonrecognition rule, gains and losses realized from these exchanges generally would be recognized for tax purposes pursuant to Sections 61(a)(3) and 1001. Losses would be recognized pursuant to Section 1001.
The Section 354 nonrecognition rule contains several parallels to the Section 351 nonrecognition rule applicable to incorporation transactions. The initial motivating policy behind each of the provisions is similar; that is, providing nonrecognition to exchanges (whether as part of the reorganization or reorganization) that reflect “merely a change in form.” In addition, a shareholder who receives nonrecognition treatment under either Section 351 or Section 354 takes a substitute basis in the stock or securities received pursuant to Section 3658. One significant distinction between Sections 351 and 354, however, is that Section 354 only permits nonrecognition upon receipt of “stock or securities” while Section 351 only permits nonrecognition upon receipt of stock. Moreover, a second significant distinction between Sections 351 and 354 is that the shareholders in the 351 context must receive a quantum of stock representing “control” whereas the shareholder of a target may receive only a minuscule ownership in the acquiring corporation and yet to be entitled to nonrecognition treatment.
While Section 354(a)(1) establishes a general nonrecognition rule, limitations are set forth in Section 354(a)(2). Nonrecognition is not available to the extent that the principal amount of any securities received exceeds the principal amount of securities surrendered. See IRC Section 354(a)(2)(A)(i). In other words, an exchange of securities for the same principal amount of securities is a reorganization will be a tax-free exchange Any excess securities that the shareholder receives will be considered boot and will be taxable. Similarly, if any securities are received and no securities are surrendered, the securities received also will be considered taxable. See IRC Section 354(a)(2)(A)(ii).
Shareholder Receipt of Boot Under Section 356
The nonrecognition language of Section 354 itself is rigid. It requires that the exchange of stock or securities in one corporate party to a reorganization must be solely for stock or securities in the same corporation or another corporate party to a reorganization. This strict requirement is loosened by Section 356, which provides that if Section 354 would apply, but for the fact that something other than stock or securities is received, “then gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of….money and the fair market value of…other property.” See IRC Section 356(a)(1)(B). For purposes of Section 356, the term “other property” includes “nonqualified preferred stock” unless the preferred stock was permitted to be received tax-free in a Section 368(a)(1)(E) recapitalization of a family-owned corporation. Thus, to the extent that shareholders receive any “boot” or property other than property permitted to be received tax-free under Section 354, the “boot” will be taxable under Section 356 to the extent of realized gain. Anybexcess securities or “nonqualified stock” received as described in Section 354(a)(2) will be considered “boot” for purposes of Section 356.
Tax Consequences to the Corporation in a Reorganization
Absent special rules, a corporation that transfers property in return for stock or securities of another corporation realizes gain or loss from the exchange under Section 61(a)(3) and 1001. In addition, corporations that distribute property to shareholders realize, and ordinarily must recognize, gains or losses. Gains and losses generally are recognized upo liquidating distributions under Section 336. In the case of nonliquidating distributions, Section 311 requires recognition of gain, but does not permit losses. A special nonrecognition rule is provided in Section 361 for a corporate “party to a reorganization” that “in pursuance of a plan of reorganization” exchanges property in return for stock or securities of another corporate “party to the reorganization.” See IRC Section 361(a). Even if the corporation receives property other than stock or securities in the exchange, the receiving corporation will not be required to recognize gain if the other property is distributed pursuant to the plan of reorganization. See IRC Section 361(b). Finally, the corporation is entitled to nonrecognition treatment on distributions to shareholders of certain qualified property in connection with the reorganization. See IRC Section 361(c).Thus, a properly properly structured corporate reorganization will be tax-free to the participating corporations.
In addition, under Section 1032, no gain or loss is recognized when a corporation receives money or property in exchange for its own stock. Thus, a corporation that acquires stock or assets in a tax-free reorganization generally will not recognize gain or loss.
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