7-23. Continuity of interest: Consideration. Joan, Jill and Jane each own 100% o

Question

7-23. Continuity of interest: Consideration. Joan, Jill and Jane each own 100% of the stock of three separate corporations. They combined their separate corps into a new corp called Triple J. Under state law the transaction is a consolidation. Joan receives all the common stock of triple J valued at $300,000 Jill receives all of the nonvoting preferred stock of Triple J valued at $200,000, and Jane receives all the 30year bonds (value of 100,000) issued by Triple J. Does the transaction qualify as a reorg?

Explanation / Answer

Yes, this should qualify as a reorganization. Joan and Jill received stock; therefore, their transfer would be tax free. Jane received bonds, so she does not have a proprietary interest and would be taxable. Even if the three transfers were aggregated and a valid reorganization found to exist for all three, Jane would be taxable on the receipt of bond under section 356.

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