Question

Aurora Corporation exchanges $700,000 of its voting stock for all of Theda Corporation’s single class of stock owned entirely by Kyle. Kyle’s basis in his Theda stock was $400,000.

(1)   Does this exchange satisfy the requirements for a Type B reorganization?
In your answer, discuss the requirements for a Type B reorganization and whether they are satisfied in this case.
(2)   What gain, if any, do Aurora and Kyle recognize on the exchange?
(3)   What is Kyle’s basis in his Aurora stock? What is Aurora’s basis in its Theda stock?

Answer 1

Required 1:

Requirements for type B reorganization is that, the acquiring corporation usses its voting stock to acquire atleast 80% of the shares of the target corporation. The consideration paid in cash (if any) should not exceed 20% of the total consideration.

In the given case, the entire 100% of the shares of target corporation ( Theda Corporation) are acquired by the acquiring corporation ( Aurora Corporation) using its voting stock. No consideration was paid in cash.

Therefore, the above transaction satisfy the requirements for a Type B reorganization.

Required 2:

In a liquidating distribution, gain or losses are recognized by both corporation and its shareholder.

One exception to this is - Tax free reorganization where assets and liabilities retain their tax basis in the new corporation.

In the event of reorganization, no gain or loss is generally recognized by the transferor corporation on the transfer of property to transferee corporation (non taxable event)

Also, no gain or loss is recognized by the shareholder for the exchange of shares of the transferor corporation with that of the shares of the transferee corporation.

Thus Aurora and Kyle doesnot recognize any gain or loss in the event of reorganization.

Required 3

Kyle's basis in Aurora stock = Carryover basis of the shares of Theda Corporation = $400,000

Aurora's Basis in the Theda stock = Contribution paid to acquire the stocks of Theda Corporation = $700,000

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