Hawaii Corporation, which is owned equally by two brothers and their younger sister, has been in the business of growing coffee and onions for the last 10 years. Lately, the brothers have been disagreeing regarding the management, operations, and expansion of the business. A professional mediator concludes that the only way to resolve the issues is to divide the entity. The older brother will retain the coffee business and the Hawaii name. The younger brother and sister will receive stock in a newly formed entity, Maui Corporation, in exchange for their stock in Hawaii. Maui will continue growing onions, but it likely will expand into other products.
Hawaii is organized as an S corporation, and Maui will elect S status at the earliest possible date. The transaction will take place as follows. Hawaii will transfer the onion farming assets to Maui in exchange for all of its stock. Hawaii then will exchange all of the younger brother's and sister's stock in Hawaii for all of the stock in Maui. After the transaction, the older brother will own all of Hawaii, and the younger brother and sister will own all of Maui.
Will this division of Hawaii qualify as a "Type D'' reorganization? Will this division terminate Hawaii's S election or prevent Maui from electing S status? See Chapter 12 for more detailed information about S corporations.