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In 2015 Ebay, Inc. spun off PayPal, Inc. its 100% owned subsidiary.
Answer the following about this spin off:
A) What is the business (nontax) reason(s) for this split up? (Do a google search to find articles regarding this spin off)
B) What were the terms of the deal? That is, how were the Ebay, Inc shareholders compensated?
C) This appears to have been a Type D-Divisive Reorganization. What are the requirements to ensure that this type of reorganization is a “tax-free” reorganization. Be sure to include an in-depth discussion of the IRC Section 355 requirements.
D) Do you think that Ebay, Inc qualified for tax free reorganization treatment when it spun off PayPal, Inc.? Explain your answer in detail.
E) Taxpayers may use the tax-free provisions of corporate reorganizations under IRC 354-368 to avoid the taxable provisions of corporate liquidations. The courts have formulated three doctrines to help determine whether a business transaction is truly a tax-free reorganization. Name these three doctrines and describe how these doctrines are applied to business transactions labeled as “tax-free reorganizations”.
F) Blake, a shareholder of Ebay, Inc stock owned 1,000 shares of Ebay, Inc (before the spin off). Blake’s cost basis in the 1,000 Ebay shares was $21,000. The number of shares Blake will receive in PayPal after the spinoff is based on the ratio you determined in “B” above. In addition, Blake, for whatever reason will also receive $2,500 cash. Blake owns less than 50% of either Ebay, Inc or PayPal Inc. The fair market value of the Ebay shares after spin off was $50 per share and the fair market value of the PayPal shares after spin off was $30 per share. What are the tax ramifications, if any, to Blake on the PayPal shares and cash of $2,500 received by him upon spin off? If Blake needs to report income from the spin off, how much is the income to be reported and what is the character of the income? What is Blake’s basis in his Ebay, Inc and PayPal, Inc. shares that he owns after the spin off?
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