Modified Treatment of Transfers to Creditors in Certain Divisive Reorgs.

In the context of a divisive transaction under Sec. 355, the distributing corporation often transfers property to a controlled corporation in exchange for the latters stock, in a reorganization exchange under Sec. 368(a)(1)(D). Sec. 361(b)(3), prior to amendment, permitted the distributing corporation to receive, in exchange for the transferred property, money or other property from the controlled corporation without recognizing gain on the exchange, provided the distributing corporation transferred such money or other property to its creditors. Sec. 361(b)(3), prior to amendment, did not limit the amount of money or other property that could be received by the distributing corporation for transfer to its creditors.

New Law

As amended by AJCA Section 898, Sec. 361(b)(3) limits the amount of money plus the fair market value of other property that a distributing corporation, in the context of a reorganization under Secs. 368(a)(1)(D) and 355, may transfer to its creditors without gain recognition under Sec. 361(b), to the aggregate basis of the assets contributed to the controlled corporation. This provision does not take into account any pre-existing basis that the distributing corporation may have had in the controlled corporations stock.

Effective Date

This amendment applies to transfers of money or other property, or liabilities assumed, in connection with a reorganization occurring on or after Oct. 22, 2004.

From Kirsten Simpson, Washington, DC