Question

McIlroy has two shareholders, Kelsey and Katie. They purchased their stock in McIlroy ten years ago at a cost of $25,000 each. McIlroy has manufactured golf equipment and soccer equipment for the past ten years. In the current year, McIlroy transfers all the assets used to manufacture golf equipment to Koepka Corporation for all the stock in Koepka. The assets transferred to Koepka have a fair market value of $300,000 and a basis of $100,000. The stock in Koepka is also worth $300,000. McIlroy then exchanges all the stock in Koepka for all of Kelsey’s stock in McIlroy.

(1)   Does this transaction satisfy the requirements for a Type D reorganization?
In your answer, discuss the requirements for a Type D reorganization and whether they are satisfied in this case.
(2)   Without prejudice to your answer in Part (1), assume the transaction qualifies as a Type D reorganization. How much gain do McIlroy, Koepka, and Kelsey recognize?
(3)   What is Koepka’ basis in the assets transferred to it by McIlroy?
(4)   What is Kelsey’s basis in her Koepka stock?

Answer 1

Required 1

Type D reorganization: In type D reorganization, the acquiring corporation transfer its asset to another corporation in exchange of at least 80% of the shares of the target corporation.

Generally used to divide a corporation into more than one operating corporations via spin-off ,split - off , split-up , etc.

In the given case,

McIlroy transfers all the assets used to manufacture golf equipment to Koepka Corporation for all the stock in Koepka, thus it is a kind of split off of the two divisions of Mcllroy Business. So this transaction does satisfy the requirements for a Type D reorganization.

Required 2

Since Type D reorganization is an type of Tax free reorganization, no gain or loss is recognized by the transferor corporation in the transfer of property to transferee corporation.

The basis of assets received by the transferee is carried over from transferor corporation.

Basis of the new stock/ securities received by the shareholders is equal to the tax basis in their old stock/ securities.