Eta Corporation approaches Lily White, the CEO and sole shareholder of MuCo, reg

Question

Eta Corporation approaches Lily White, the CEO and sole shareholder of MuCo, regarding the acquisition of Muco’s cat toy division assets (worth $1.3 million). As selling the assets would create a $600,000 gain, ($1.3 million value - $700,000 basis), Lily declines the offer.

Eta counters and suggests a “Type C” reorganization as a method of acquiring all of MuCo by exchanging its voting stock for all assets (now worth $1.5 million) and all liabilities ($650,000) of MuCo. The other division of MuCo, Cat Publications, is small, with assets worth $200,000 and liabilities of $150,000. Lily agrees to the reorganization if MuCo receives the net value of the Cat Publication division ($50,000) in cash, as Lily would like money as well as stock.

Lily requests your advice on whether the transaction can be structured as a “Type C” reorganization as it is currently described. If it cannot meet the “Type C” requirements, suggest an alternative plan that will allow the transaction to qualify as a “Type C” reorganization. MuCo’s address is 3443 E. Riverbank Road, Wall Walla, WA 99362. Include your analysis in a letter to Ms. White.

Explanation / Answer

N and P CPAs

12345 B A

Mac, SC 45555

M Corporation

3443, Riverbank road Walla Walla, WA 99362 Dear Mr. L

The transaction with E corporation resembles a type C reorganization, it is one in which acquiring corporation receives all the assets of the target company and in return gives voting stock Thus it is tax free reorganization.

However if any cash is received and liability is transferred, then the liability is considered as other property. Thus if its value is more than 20% of FMV of targets assets then the C corporation qualification will not be met

In this instance assets of M corporation are valued at $1,500,000, 20% of it amounts to $300,000. Also liabilities are marked at $650,000 and cash received will be $50,000, so other property amounts to $700,000.Since it is more than 20% of FMV of the assets, it would not be undertaken as C type

transaction.

Hence in order to qualify as C type transaction either M corporation should not receive cash or first retire the liabilities and then pursue with transfer the balance assets.

For any further assistance or query feel free to write us yours sincerely

N and P CPAs

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