Racket Corporation and Laocoon Corporation create Raccoon Corporation. Racket transfers $600,000 in assets for all of Raccoon's common stock. Racket distributes its remaining assets ($300,000) and the Raccoon common stock to its shareholder, Mia, for all of her stock in Racket (basis $950,000) and then liquidates. Laocoon receives all of the preferred stock for its $400,000 of assets. Laocoon

Question

distributes its remaining assets ($300,000) and the Raccoon preferred stock to its shareholder, Carlos, for all of his stock in Laocoon (basis $200,000) and then liquidates. How will this transaction be treated for tax purposes?
a. This qualifies as a "Type A" reorganization. Mia recognizes no gain or loss, but Carlos recognizes $300,000 gain.
b. This qualifies as a "Type C" reorganization. Mia and Carlos recognize $300,000 gain, to the extent of the boot.
c. This qualifies as a "Type D" reorganization. Neither Mia nor Carlos recognizes a gain or loss.
d. This is a taxable transaction. Mia recognizes $50,000 loss and Carlos recognizes $500,000 gain.
e. None of the above.

Answer 1

a
RATIONALE: With "Type A" consolidations, the stock exchanged can be common or preferred. The continuity of interest requirement is met. Of the $1.6 million of assets, $1 million is exchanged for stock (62.5%). Mia has a $50,000 realized loss [($600,000 + $300,000) – $950,000] that is not recognized. Carlos has a $500,000 realized gain [($400,000 + $300,000) – $200,000] of which $300,000 is recognized.