Question

Explain why the shareholder’s basis in the new stock received in a corporate reorganization is the value of the stock received less the postponed gain.

Answer 1

Solution:

The corporate reorganization is done in case of capital reconstruction of the company. The excessive loss and debit balance of the capital is restructuring through corporate reorganization. It is done by reducing the value of the share capital and other capital sources and the postponed gain is utilized to recover the heavy loss of the company. It helps the company to survive and prevent from winding up and liquidation.

Shareholders are the owner of the company. All the risk and rewards of the company is borne by them. They are sacrificed their wealth in case of capital restructuring. So the same should be done properly and effectively. The stock received by the shareholders is less by the postponed gain. The same should be calculated by considering the total loss. Also the reserve and surplus if any is there then the same should be utilized for the purpose of the corporate reorganization. The face value of the shares is reduced and the number of shares are remaining same. The reduction in face value of the share reduce the total share capital and the same will be treated as postponed gain and use to recover the loss of the company and helps the company to back in normal business.

References:

Jenkins, M., & Smith, D. (2014). Creditor conflict and the efficiency of corporate reorganization.

Zhang, Z., & Tomasic, R. (2016). Corporate reorganization reform in China: Findings from an empirical study in Zhejiang. Asian Journal of Comparative Law, 11(1), 55-85.