Zit corp mkes a cream that removes zits. It has long term bonds outstanding as w

Question

Zit corp mkes a cream that removes zits. It has long term bonds outstanding as well as common and preferred stock. Individual Aldo owns a $1,000 (adjusted basis $1,000) that pays interest at 6% and also, owns 400 shares of common stock (adjusted basis $10,000). What are the tax consequences to Aldo if he engages in the following independent transactions(treat each transaction as if it were the only transaction) pursuant to a plan adopted the company that allows these transactions.

a.) Aldo exchanges his bond for 100 shares of common stock

b.) Aldo exchanges his original 400 shares of commonn stock for 200 shares of Preferred stock

c.) Aldo exchamges his 400 shares of common stock (worth $100,000) for a $100,000 bond pying interest at 6%

Explanation / Answer

A. No gain is recognized if bonds are exchanged for common stock in a coompany as the same amounts to reorganization of capital structure in eyes of IRS as per section 368. Therefore, no tax will be leviable.

B. As per section 1036 of IRS, no gain or loss is required to be recognized if a voting stock is exchanged for non voting stock in the company or a of common stock for common stock, or of preferred stock for preferred stock, in the same corporation. Therefore, no tax is levied on exchange of common stock for preferred stock.

C. Section 1036 does not apply in case exchange of shares for bonds and therefore the same will be liable to capital gains. IN the given case capital will be $90,000 (100,000 - 10,000).

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