J owns all the stock of T. T\'s only assets is a thoroughbred racing track with

Question

J owns all the stock of T. T's only assets is a thoroughbred racing track with an adjusted basis of $1,200,000 and a fair market value of $3,000,000. J's basis in the T stock is $1,000,000. P, a corporate developer of shopping malls wants to acquire teh race track for a mall site. P and J agree on a Type C reorganization, with T trading the race track for P stock worth $2,580,000 and $20,000 in cash and then liquidating. P will give T some treasure share P bought in the market for $2,000,000. Assume this will qualify as a good Type C reorganization to which T and P are "parties to a reorganization."

a P recognizes no gain on the transfer of the treasury stock because of Section 1032.

b P takes a transferred basis from T of $1,200,000 plus $20,000 gain recognized under Section 362.

c P takes a transferred basis from T of $1,200,000 under Section 362.

d A and B

e A and C

Which one is the right answer and why?

Explanation / Answer

For a Type C Reorganisation to be effected, the moot part is the fact that : The selling entity must be liquidated It must meet the bona fide purpose rule It must meet the continuity of business enterprise rule It must meet the continuity of interest rule The seller wants to be paid in stock in order to defer the recognition of income taxes on his income. From the transaction details given above, it can be inferred that a Type C Reorganisation has been successfully implemented and hence : P recognises no gain on the transfer of the treasury stock because of Section 1032 PLUS takes a transferred basis from T of $ 1,200,000 plus $ 20,000 gain recognised under Section 362. Hence the correct option is D for the reasons as mentioned above.

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