- 32 -
issuance to petitioner of 7,650,000 shares--51 percent of the new
common stock of Endotronics5--as consideration for petitioner’s
4(...continued)
368(a)(1)(G) as:
a transfer by a corporation of all or part of its
assets to another corporation in a title 11 or similar
case; but only if, in pursuance of the plan, stock or
securities of the corporation to which the assets are
transferred are distributed in a transaction which
qualifies under section 354, 355, or 356.
An operative requirement of both (E) and (G) reorganizations is
an exchange of stock or securities. In this case there was no
such exchange. Petitioner received the stock of Endotronics as
compensation for providing services; petitioner did not transfer
any stock or securities in itself or of any other corporation in
exchange for the Endotronics shares.
5 The premier treatise on venture capital does not discuss
the factual situation presented by the Venture Funding, Ltd.
acquisition of control of Endotronics. See Levin, Structuring
Venture Capital, Private Equity, and Entrepreneurial Transactions
(1997), especially ch. 8, Structuring a Turn-Around Investment in
an Overleveraged or Troubled Company. The role of the venture
capitalist (VC) in the example described in ch. 8, see Levin,
supra at 264-265, is to contribute $8 million in new money to
“Badco” and to receive in exchange (while preexisting creditors
and shareholders are suffering various “haircuts”):
$7.9 million face of new senior preferred stock,
mandatorily redeemable 10 years after issuance, plus
1,000 new common shares (at a stated price of $100 per
common share, i.e., an aggregate of $0.1 million).
[Levin, supra, sec. 802.1.1 at 264.]
Under the facts of the example, the new common shares received by
VC (1,000 out of 3,950) amount to 25 percent of Badco’s post
restructuring common stock. It goes without saying that the
exchange of cash by VC for newly issued preferred and common
stock of Badco is a nontaxable transaction to both of them. No
gain or loss is realized by (much less recognized to), either
party to the transaction, and the only obvious tax question
(continued...)
Page: Previous 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 NextLast modified: May 25, 2011