- quote -

Good point. I originally read the hypothetical as though L
was distributing all of the stock of C1 to P and all of the
stock of C2 to G. This approach would be nontaxable to the
shareholders, as long as all of the other requirements of a
split-up were met.

However, it does seem that the hypothetical proposes P & G
to get a proportionate amount of C1 & C2 and then for P & G
to exchange shares. As you correctly point out, this
exchange would be taxable. It is amazing how the "form" of
a transaction can still matter so much even though U.S. tax
law is supposed to look to the "substance".

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"Hamlet the Prince" <Hamlet_the_Prince[at]att.net> wrote:

- quote -

It doesn't seem to apply to shareholders swapping outside
stock with each other. I see this as being tax-free with
the spinoffs and with distributions to the respective
shareholders. At that point an exchange of stock between
the shareholders would be a taxable event.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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"David Woods, EA, ChFC, CLU" <dwoods[at]woods-financial.com> wrote

- quote -

I totally agree.

- quote -

You might want to look at section 354(a)(1).

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"KTAALGSTO wrote "

- quote -

This is one where you need to go to a professional, as there
are too many potential places to go wrong and have this
transaction blow up on you.

That said, it looks like it could be a candidate for tax-
free treatment at both the corporate and individual level,
using the section 355 spinoff rules. There are some tests
that you would have to look at, like having a 5 year active
business history and others, but it may well fit.

The costs of the transaction must be capitalized. Costs of
reorganizing a corporation do not count as organization
costs, so they also may not be amortized. They are capital
expenditures that provide no tax benefit until the sale or
liquidation of the company.

Brian Bivona, CPA

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- quote -

I was think of forming two new corporations: C1 and C2. L
would transfer R to C1 and S to C2 in exchange for stock in
each company. L would distribute stock to P and G who then
exchange stock so that P owns all of the stock for C2 and G
owns all of the stock for C1. L would then liquidate.

Are any of the transactions taxable? Can a reorganization
be done tax free?

Is the cost of the re-organization deductible to any of the
companies?

If anyone has any ideas on how I can reorganize, it would be
much appreciated. > > <BR> <BR
In general S corporations can do the same kinds of
reorganizations as C corporations. I would strongly suggest,
however, that you should involve legal counsel as well as
tax counsel on such a reorganization to be sure it qualifies
as tax free. If you follow any of the reorganizations of the
big public companies, you'll note that all of them have
obtained a determination from the IRS giving them comfort
that the reorganization is tax free. You would be wise to do
the same.

I think that the transaction that might generate a tax
consequence would be the distribution of C1 and C2 to G and
P if the value of one subsidiary was different from the
other.

I think that the costs of the reorganization would be
capitalized as organization costs. Each company could then
make an election to amortize those costs over 60 months.
This is the same treatment as any newly-created entity.

Thomas E Healy, CPA, PC
1650 38th St., Ste 202W
Boulder, CO 80301
Please send email to: tom[at]tomhealycpa.com, since I block all email at my
newsgroup address.
phone (303) 443-1804
fax (720) 489-3772

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"KTAALGSTO" <maxsoi4747[at]yahoo.com> wrote:

- quote -

1) If you're not a professional tax practitioner I strongly
suggest you get one. This is NOT a DIY job.

2) Without looking at the rules for reorgs, I am fairly
confident this is a tax free reorg based on the situation
you describe AT THE CORPORATE LEVEL. However the stock
exchange P and G is a taxable event no matter what. That
pretty much defeats the purpose of making the reorg a
tax-free event.

3) All of the reorg costs will be capitalized not expensed.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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Here's my situation.

L, an S corporation, owns store R and store S (both stores
are worth the same and are the entire assets of L). L has
two shareholders, P and G who own equal shares of L and who
are not getting along personally. Each wants to run stores
each in their own way. P also has better credit/access to
capital and wants to open more stores. P wants to own store
S and G wants to own store R. (G has been running store R
such that the corporate veil could be pierced.)

I was think of forming two new corporations: C1 and C2. L
would transfer R to C1 and S to C2 in exchange for stock in
each company. L would distribute stock to P and G who then
exchange stock so that P owns all of the stock for C2 and G
owns all of the stock for C1. L would then liquidate.

Are any of the transactions taxable? Can a reorganization
be done tax free?

Is the cost of the re-organization deductible to any of the
companies?

If anyone has any ideas on how I can reorganize, it would be
much appreciated.

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