Annotated Bibliography On Corporate Reorganization

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Tax Research Memorandum
Date: November 16, 2014
To: Tax Files
From: Jonathan Ruhi
Subject: Availability of Corporate Reorganization

Summary of Facts

Chris and Sue are 50 percent shareholders in BackBone personal service corporation. Backbone provides chiropractic services in four separate offices, in four small towns: Troy, Union, Vista and Willow. Chris is the main chiropractor in the Troy office, and Sue heads up the Vista office. Charlie, the main chiropractor in the Willow office, does not see eye-to-eye with Chris and Sue on management styles. Charlie is highly competent and well-liked by patients and therefore indispensable in the eyes of Chris and Sue. Chris and Sue may be willing to give Charlie control of the Willow office,
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In addition, Chris and Sue will not have to worry about any loss of profits since the profits of the new subsidiary corporation will flow through to the BackBone personal service corporation.

Issue and Conclusion 2

How should the corporate reorganization be structured?

The corporate reorganization should be structured as a divisive “D” reorganization and the restructuring process should conform to section 355 of the tax law in order to minimize the tax consequences of the reorganization.

Law and Analysis 2

Section 368(a)(1) of the tax code provides several options for corporate reorganizations. Section 368(a)(1)(d), also known as a “divisive D reorganization”, is the best choice for this particular situation. In a divisive “D” reorganization, the controlling corporation (in this case, BackBone) will distribute assets (the Willow office) to a newly formed subsidiary corporation, in exchange for the stock of the new subsidiary corporation, in a transaction that qualifies under section 355 (Sec. 368(a)(1)(d)). After the transaction is complete, the Willow office will be its own corporation which is wholly (or at least mostly) owned by BackBone. BackBone will also still own and control the Troy, Union and Vista offices after the reorganization.

Issue and Conclusion 3

What will be the tax consequences of the reorganization?

Section 355 of the tax code will drastically reduce, or even completely eliminate, any tax liability caused by
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