North Corporation acquires 90% of South's assets (basis of $700,000) by exchanging $600,000 of its voting stock and assuming $300,000 of South's liabilities. South distributes North stock, its remaining $100,000 in assets, and associated $40,000 in liabilities to its shareholder in exchange for his South stock (basis of $500,000). South then liquidates. How will this transaction be treated for tax purposes?

Question

Quizplus · Accepted Answer

This transaction is treated as a "Type C" reorganization because North Corporation acquires substantially all of South's assets in exchange for its voting stock and the assumption of liabilities. The shareholder recognizes a gain of $60,000, which is the difference between the fair market value of the North stock received ($600,000) and the basis of the South stock ($500,000).

North Corporation Acquires 90% of South's Assets (Basis of $700,000)