This example shows the boundary of the rule illustrated in Example 1. The facts are the same except that Corporation P purchased the 60 shares of Corporation T for $60 in cash in connection with the acquisition of T’s assets, rather than years earlier in an unrelated transaction.
Because the stock purchase is part of the asset acquisition, P is treated as having acquired all of the T assets for consideration consisting of $70 of cash, $10 of liability assumption, and $30 of P voting stock. The transaction does not satisfy the solely for voting stock requirement of paragraph (d)(2)(ii) because the sum of the $70 of cash and the $10 of assumed liabilities exceeds 20 percent of the value of the properties of T.
The contrast with Example 1 is the timing and purpose of the stock purchase. A long-held, unrelated block is disregarded, but a block bought as part of the same acquisition is folded into the consideration and can cause the C reorganization to fail.
When the target stock is bought in connection with the asset acquisition, that cash is treated as consideration for the assets in applying the solely for voting stock test.
P is treated as paying $70 of cash plus assuming $10 of liabilities. That $80 exceeds 20 percent of the $110 value of T’s properties, so the transaction fails.
A long-held, unrelated block is disregarded under Example 1, but a block acquired as part of the same plan is folded into the consideration here.
Treas. Reg. § 1.368-2(d)(4)(ii), Example 2 illustrates a failed upstream C reorganization.
