Long Corporation has $500,000 of assets with a basis of $350,000 and liabilities of $125,000. ShortCo acquires Long's assets and $100,000 of liabilities by exchanging $400,000 of its voting stock. Long distributes the ShortCo stock and remaining liabilities to its shareholder in exchange for the shareholder's Long stock with a basis of $275,000 and then it liquidates. Which, if any, of the following statements is correct?
A) This restructuring qualifies as a "Type A" reorganization with no recognized gains or losses.
B) This restructuring qualifies as a "Type C" reorganization with no recognized gains or losses.
C) This qualifies as either a "Type A" or "Type C" and the shareholder has a $25,000 recognized gain.
D) The restructuring is taxable because liabilities cannot be distributed to shareholders in a tax-free reorganization.
E) None of these statements is correct.

Question

Quizplus · Accepted Answer

This restructuring qualifies as a "Type C" reorganization because ShortCo acquires substantially all of Long's assets in exchange for its voting stock and assumes some of Long's liabilities. No gain or loss is recognized in a Type C reorganization.

Long Corporation Has $500,000 of Assets with a Basis of $350,000