Hefty Corporation would like to buy mineral leases owned by Tiny Corporation for $550,000. Tiny informs Hefty that these leases are not transferable under its current contract. Given that the leases are Tiny's only valuable asset, Hefty suggests a reorganization, with Tiny being the entity that survives.
Tiny has a basis in the leases of $100,000 and $25,000 of liabilities associated with the leases. Hefty's assets are valued at $3.6 million, and it holds $625,000 in liabilities.
a. How do Hefty and Tiny complete this reorganization with the least amount of taxes? Include in your discussion of the restructuring the value of the stock and assets transferred by each corporation and the resulting ownership by each former shareholder group.
b. Under what "type" of tax-free reorganization does this restructuring fall?
c. Diagram the restructuring transaction and indicate the corporate and share holder relationships after the transaction.