Discussion:Type D Reorganization

I have a client who wants to spin off his corporation (Type D Reorganization). It is an S corporation that wants to transfer its assets to a Partnership in exchange for the Partnership's stock.

1) Can there be a transfer between two different types of entities (S corporation and Partnership) for it to be a valid Type D reorganization under Section 368)?

2) In what website can I find an example of Plan of Reorganization or Business Plan Model?

Thank you, Susana

1) What are the caveats under Section 721?

2) What about if the partnership is a general partnership instead of an LLC? Can the Section 721 transfer from a corporation to a general partnership be tax-free?

3) If the answer is that the Section 721 transfer of assets from a corporation to a partnership is taxable, what would happen if we have a corporation transfer its assets (and related liabilities) to another corporation? (Note: The liabilities exceed the basis of the assets). Would the transfer be tax free under Section 368)D)?

If the assets are contributed subject to liabilities, or liabilities are assumed by the partnership in connection with the contribution, S may have income from the cancellation of debt.

Watch out, too, for sales taxes if tangible personal property is contributed to the partnership. That may result in a sales tax liability in some states, at least to the extent of any liabilities assumed by or transferred to the partnership.

If your client, Mr. X, wants to be the partner in P in place of S, S would have to distribute its interest in P to him, and would then recognize IRC Sec. 311(d) gain to the extent of the difference between the FMV of the interest and S's basis in it. That gain would flow through to X and be taxable.

Sec. 368 applies only to corporations. A partnership cannot be a party to an IRC Sec. 368 reorg.

JR1 is telling us that property distributed from a partnership must come out at fmv, causing a gain at the corporate level. Under Sec. 311(b), JR1 would be correct. However, what JR1 did not tell you is that Sec. 721 overrides Sec. 311(b).

GAIN ON TRANSFER OF ASSETS: Let's say that the basis in the assets transferred by Corporation A to Corporation B is $80,000 and the liabilities $100,000. The gain recognized by Corporation A would be $20,000 per IRC Section 357)c). right?

Now, what would the basis of Corporation A's interest (stock) in Corporation B be?

GAIN ON TRANSFER OF STOCK TO CORPORATION A's STOCKHOLDERS: Under IRC Section 355(e) the distributing Corporation would have to recognize gain on the distribution if stockholders acquire 50% of more of the distributing corporation (Corporation A) or the controlled corporation (Corporation B). The gain would be the difference between the FMV of the stock and the basis of the stock. If the corporations are not publicly traded, how would you calculate the FMV of the stock?

Some states require a Qsub to file a separate return to report and pay its own fixed dollar minimum tax, net worth tax, etc.

'Splain it to me again, Lucy. A fundamental concept in corp tax law is that when assets move out of the corp, it's at FMV unless you're doing a reorg to another corp. And gain is recognized. Sorry if I'm missing the obvious.

But of course, as Dennis pointed out above, the assets that were contributed are still in the transferor corporation -- they've just changed their character, from real estate or machinery or whatever to an interest in a partnership or stock in another corporation. The basis of the stock or interest is the same as the transferor's basis in the assets, plus any gain that was recognized in the transfer. So the corporation hasn't avoided anything. If it sells the stock or the interest, or the transferee sells the assets, the gain will be recognized and taxed at the corporate level. It doesn't avoid the "double tax" character of the C corp -- just postpones it. You could think of it as analogous to a like-kind exchange.