Section 368

Front 1

What is a reorganization under Section 368(a)(1)(A)?

Back 1

A statutory merger or consolidation.

Front 2

What is a reorganization under Section 368(a)(1)(B)?

Back 2

Acquiring corporation acquires control and the stock of Target solely for all or a part of its (or its parent's) voting stock

Front 3

What is a reorganization under Section 368(a)(1)(C)?

Back 3

Acquiring corporation acquires substantially all the assets of the target corporation solely in exchange for all or a part of its (or its parent's) voting stock

Front 4

What is a reorganization under Section 368(a)(1)(D)?

Back 4

One corporation's transfers some or all of its operating assets to another corporation if, immediately after the transfer, the transferor or one or more of its shareholders are in control (basically, 80 percent voting power for corporate divisions and 50 percent for acquisitions) of the transferee corporation, provided that, pursuant to the plan of reorganization , stock or securities of the transferee corporation are distributed to its shareholders in a specified manner

Front 5

What is a reorganization under Section 368(a)(1)(E)?

Back 5

A recapitalization

Front 6

What is a reorganization under Section 368(a)(1)(F)?

Back 6

A mere change in the identity, form, or place of organization, however effected

Front 7

What is a reorganization under Section 368(a)(1)(G)?

Back 7

A transfer, pursuant to a plan of reorganization , by a corporation of some or all of its operating assets to another corporation in a title 11 or similar case , provided the transferee corporation distributes its stock or securities to its shareholders tax-free or partially tax-free

Front 8

What happens if a reorganization qualifies as both a Type C and a Type D reorganization?
(368(a)(2)(A))

Back 8

Type D reorganization provisions control

Front 9

What happens in a Type C reorganization if you exchange money or other property in addition to voting stock?

(368(a)(2)(B))

Back 9

Liabilities assumed by acquirer are treated as money paid for the assets.

Front 10

Here is an example of the 368(a)(2)(B) rule for Type C Reorganizations

Back 10

Corporation T has assets with a fair market value of $100,000 and liabilities of $10,000, and in exchange for all of T's assets, P transfers its own voting stock, assumes T's liabilities and pays $8,000 in cash. This would qualify as a Type C reorganization because the cash paid and assumed liabilities were less than 20% of the assets acquired. On the other hand, if the liabilities assumed exceeded $12,000, the transaction wouldn't qualify as a Type C reorganization because the cash and liabilities would exceed 20% of the value of the assets.

Front 11

Does Section 368 allow you to transfer assets or stock to a subsidiary after a reorganization?

Back 11

Yes. 368(a)(2)(C) provides that you can make such a transfer in an "A", "B", "C" or "G" reorganization. Rev. Rul. 2002-85 extends this to "D" reorgs. Additionally, the new regulations also extend this rule (discussed later).

Front 12

What is a forward triangular merger?

(368(a)(2)(D))

Back 12

Target merges into A's subsidiary in a reorg using A's stock.

Front 13

How do you qualify as a forward triangular merger?

Back 13

S acquires substantially all of T's properties for A's stock in a merger of Target into Subsidiary. The merger must be one that would have qualified as a normal Type A reorganization had the target merged into the parent instead of into the subsidiary.

Front 14

What is a reverse triangular merger?

(368(a)(2)(E))

Back 14

Subsidiary merges into Target, Target's shareholders exchange control to Subsidiary, New Target holds substantially all of its and Subsidiary's properties after the merger.

Front 15

What are the reorganizations rules related to investment companies?

(368(a)(2)(F))

Back 15

Usually disallowed.

Front 16

What is the distribution requirement for a Type C reorganization?

Back 16

Target must distribute to its shareholders (i.e., liquidates) under the reorganization plan the stock, securities, and other properties it gets, as well as its other properties.

Front 17

What is the problem with the distribution requirement for Type C reorganizations?

Back 17

A cant' control whether Target's shareholders make the required distribution.

Front 18

What is a potential solution for the distribution requirement for Type C reorganizations?

Back 18

Condition the transaction on the Target's shareholders making the required distribution and hold back some consideration until they do.

Front 19

What is a nondivisive D reorganization?

Back 19

A reoganization where:

(1) A corporation transfers all or part of its assets to another corporation
(2) Immediately after the transfer the transferor, or one or more of its shareholders is in control of the transferee corporation.
(3) Under the plan of reorganization, the transferor distributes the stock or securities received from the transferee corporation and its other properties in a transaction which meets the requirements of Code Sec. 354.

Front 20

For a nondivisive D reorganization, how do you tell if you have control?

(368(a)(2)(H))

Back 20

Same meaning as Sec. 304(c), i.e (50% vote or value)

Front 21

For Type G reorganizations, what is a "Title 11 or similar case."

(368(a)(3))

Back 21

Title 11 case of the U.S. Code (relating to bankruptcies) or a receivership, foreclosure, or similar proceeding in a Federal or State court.

Front 22

For purposes of Section 368, who is a party to the reorganization?

(368(b))

Back 22

A “party to a reorganization” includes any corporation resulting from a reorganization; and, where the transfer of stock or properties is involved, the transferee or transferor.

Front 23

For purposes of Section 368, what does "control" mean?

(368(c))

Back 23

At least 80 percent of voting power and at least 80 percent of total shares.

Front 24

What types of transactions qualify as tax-free reorganizations?

1.368-1(a)

Back 24

Only those transactions specified in 368(a) and (b).

Front 25

What doctrine must be applied when evaluating whether a transaction qualifies as a reorganization?

Back 25

The step transaction doctrine.

Reg § 1.368-1(a).

Front 26

What is the regulatory definition of the "continuity of interest" requirement?

1.368-1(b)

Back 26

A substantial part of the value of the proprietary interests in Target corporation be preserved. A proprietary interest is preserved if:

(1) it is exchanged for a proprietary interest in the issuing corporation,
(2) it is exchanged by the acquiring corporation for a direct interest in the target corporation enterprise, or
(3) it otherwise continues as a proprietary interest in the target corporation.

Front 27

Which reorganizations does the continuity of interest requirement generally not apply to?

Back 27

Type D, E and F reorganizations.

Front 28

What is the business purpose rule for reorganizations?

1.368-1(c)

Back 28

A transaction that is not in the nature of a reorganization, but is structured as a reorganization for the purpose of making a taxable transaction nontaxable, will not be treated as a reorganization.

Front 29

What is the "continuity of business enterprise" requirement?

Back 29

For a transaction to qualify as a reorganization, it must satisfy a requirement of continuity of business enterprise. For this requirement to be satisfied, the “issuing corporation” must either:

(1) continue the acquired corporation's historic business or
(2) use a significant portion of the acquired corporation's historic business assets in a business.

Front 30

What effect does a redemption or a distribution have on the continuity of interest rule?

1.368-1(e)(1)(ii).

Back 30

Treated as boot for COI rules and may disrupt COI.

Front 31

A proprietary interest isn't preserved, if, in connection with a reorganization, T stock is sold (for consideration other than issuer stock to:

Back 31

the issuer ( Reg § 1.368-1(e)(1) ), or
a person related to the issuer. ( Reg § 1.368-1(e)(3) ).

Front 32

For COI purposes, how do you know if you are a related corporation?

Back 32

If

(1) they are members of the same affiliated group,
(2) a purchase of the stock of one corporation by the other would be a 304 transaction.

Front 33

How does the COI rule apply to partnerships?

Back 33

Each partner of a partnership is treated as owning or acquiring any stock owned or acquired by the partnership, in accordance with such partner's interest in the partnership. A partner who is treated as having acquired stock under this rule is deemed to have furnished its share of any consideration furnished by the partnership for the acquisition

Front 34

How do the COI rules treat predecessors and successors?

Back 34

Predecessors and successors of issuing or target are treated as issuing or target. 1.368-1(e)(6).

Front 35

For purposes of the 368 regulations, what is a DRE, Combining Entity and Combining Unit?

Back 35

DRE is a disregarded entity; combining entity is a coporation; combining unit is a combining entity and a DRE.

Front 36

In a good Type A merger, what events occur simultaneously under the applicable statute involved?

Back 36

(1) all of the assets and liabilities of each member of one or more combining units become the assets and liabilities of one or more members of one other combining unit, and
(2) the combining entity of each transferor unit ceases its separate legal existence for all purposes.

Front 37

In a forward triangular merger, does the IRS care if you form the subsidiary or the parent is formed immediately before the transaction?

1.368-2(b)(2).

Back 37

No.

Front 38

In a forward triangular merger, a subsidiary must acqurie "substantially all" of the properties of the target. What does substantially all mean here?

Back 38

Same as in a Type C reorganization (i.e., 90% of FMV of net assets, and at least 70% of FMV of gross assets held immediately before the transfer).

Front 39

Does a Type B reorganization have to take place all at once?

Back 39

No. A stock for stock acquisition qualifying as a Type B reorganization can take place in a single transaction or in a series of transactions taking place over a relatively short period of time such as 12 months.

Front 40

Does previously acquried stock in Target jeopardize a Type B reorganization?

1.368-2(c).

Back 40

No. An acquiring corporation may acquire stock of a target solely for the acquiring corporation's own voting stock in a Type B reorganization even though the acquiring corporation already owns some of the target stock. Furthermore, the previously acquired stock is included in satisfying the control test.

Front 41

What is a triangular Type C reorganization?

Back 41

One in which only stock of the parent is used to acquire substantially all of the assets of the target.

Front 42

In a Type C reorganization, can you use both P and S's stock?

Back 42

No. The acquirer/subsidiary may not use a combination of its parent's stock and its own stock. 1.368-2(d)(1).

Front 43

Does prior ownership of target stock jeopardize a Type C reorganization?

Back 43

No.

Front 44

In a transaction in which the acquiring corporation has prior ownership of the target corporation's stock, the solely for voting stock requirement for Type C reorganizations is satisfied only if:

1.368-2(d)(4)(i)

Back 44

(1) the sum of the money or other property that is distributed under the plan of reorganization to target corporation shareholders (other than the acquiring corporation) and creditors of the target corporation; and
(2) all of the liabilities of the target corporation that are assumed by the acquiring corporation (including liabilities to which the properties of the target corporation are subject)
do not exceed 20% of the value of all of the target corporation's properties.

Front 45

Is "recapitalization" defined in the regulations?

Back 45

No. Section 368(a)(1)(E) defines a “recapitalization” to be a reorganization. However, Section 368 does not itself define the term “recapitalization.” The regulations provide several illustrations, but no specific definition, of the term “recapitalization.”

Front 46

Does the transfer of stock or assets by the acquiring corporation cause that corporation to no longer be a party to the reorganization?

Back 46

Not necessarily. Where the acquiring corporation in a Type A, B, C or G reorganization transfers part or all of the acquired assets or stock to a corporation it controls as part of the plan of reorganization, the acquiring corporation remains a party to the reorganization.

Front 47

Party to the reorganization example - Type C Reorg.

Back 47

Corporation S acquires in exchange solely for its voting stock or solely for stock in its parent P substantially all the properties of Corporation T. S, P (if P stock is used) and T are parties to the reorganization.

Front 48

Party to the Reorg example - Type D Reorg.

Back 48

Corporation A transfers all or part of its assets to Corporation B in exchange for all or part of the stock and securities of B. A and B are parties to the reorganization. (For B remaining a party to the reorganization where it drops-down its assets as part of a nondivisive Type D reorganization)

Front 49

Party to the Reorg example - Type E and F Reorgs.

Back 49

The regulations do not in this connection specifically mention these types of reorganization. In Type E reorganizations (recapitalizations) the only party is the corporation changing its capital structure. 31 Similarly, a corporation that reincorporates (changing its name) and issues new stock certificates in a Type F reorganization is a party to the reorganization. In addition, if in connection with the exchange of new shares for old shares, it issues preferred stock in exchange for its common stock in a Type E reorganization it is a party to reorganization.

Front 50

Under the regulations, what is a plan of reorganization?

1.368-2(g).

Back 50

The term “plan of reorganization” refers to a consummated transaction, i.e., the reorganization. It does not broaden the meaning of the term reorganization, but limits the nonrecognition of gain or loss to the exchanges or distributions as are directly a part of the reorganization. Transactions that fall within the plan of reorganization must be covered by Code Sec. 368(a) . When the plan is consummated, the readjustment involved in the exchanges or distributions must be undertaken for reasons significantly related to the continuance of the business of a corporation which is part of the reorganization.

Front 51

Does a plan of reorganization need to be in writting?

Back 51

A plan does not have to be in any particular form. Nor does it have to be in writing. C.T. Inv. Co v. Com., 88 F2d 582 (8th Cir. 1937). However, a copy of the plan must be filed with the company's income tax return.

Front 52

What does the word "or" mean in the context of the reorg rules?

1.368-2(h).

Back 52

It means "and" and "or."

In interpreting the reorganization provisions, the regs say that the word “or” means both the conjunctive and the disjunctive where the context requires it. To illustrate this, the regs state that “... the provisions of the statute are complied with if “stock and securities” are received in exchange as well as if “stock or securities” are received.”

Front 53

To qualify as a reverse triangular merger (in which P's subsidiary (S) merges into the target (T)), shareholders of T must surrender in the transaction T stock constituting control of T in exchange for parent (P)...

Back 53

Voting stock. 1.368-2(j)(3)(i).

Front 54

The surviving corporation (T) in a reverse triangular merger must hold after the transaction substantially all of its own properties and substantially all of the properties of the merged subsidiary (S) (other than stock of the parent distributed in the transaction). Does the substantially all test apply separately to S and T?

Back 54

Yes. 1.368-2(j)(3)(iii).

Front 55

May P assume T's liabilities in a reverse triangular merger?

Back 55

Yes. The controlling corporation (P) may assume liabilities of the surviving corporation (T) without disqualifying the transaction under the reverse triangular merger rules. An assumption of liabilities of T by P is a contribution to capital by P to T. 1.368-2(j)(4).

Front 56

Can you do a drop-down after a reorganization?

Back 56

Yes, provided that the requirements of §1.368-1(d) (COBE) are satisfied and the transfer(s) are meet the requirements of 1.368-2(k)(1)(i) or (k)(1)(ii).

Front 57

What are the drop-down requirements of 1.368-2(k)(1)(i)?

Back 57

Property is distributed that consists of stock/assets of acquired, acquiring or survivor; no one leaves the qualified group; doesn't cause a liquidation or a party to the reorg; doesn't consist of all of the stock of acquired.

Front 58

What are the drop-down requirements of 1.368-2(k)(1)(ii)?

Back 58

Not a (k)(1)(ii) and: consists of part/all of stock/assets of acquired, acquiring, or surviving; doesn't cause not be a qualified group member; no one terminates.

Front 59

What is the general definition of the continuity of interest doctrine?

Back 59

It is a judicial requirement imposed on corporate reorganizations, the gist of which is that the former owners of the target company in the reorganization must get a continuing proprietary stake in the acquiring corporation, represented by equity (generally common or preferred stock whether or not entitled to vote, but sometimes debt which gives the owners an intimate interest in the acquiring company. The measure is not how much of the acquiring company they become proprietors of, but how much of the consideration received is in an equity form, regardless of how long the equity is retained.

Front 60

What type of reorganization occurs when there is an upstream merger followed by a drop down?

Back 60

An upstream merger into a parent followed by a drop into a new subsidiary treated as an “A” reorganization followed by an drop down under §368(a)(2)(C).

Front 61

What is a parenthetical "B" Reorganization?

Back 61

Stock-for-Stock exchange by a subsidiary of the Acquiring Corporation, in which case the subsidiary uses stock of the parent corporation as consideration given to the shareholders of the acquired corp. See parenthetical clause in I.R.C. § 368(a)(1)(B).

Front 62

What is the general description of an acquisitive (non-divisive) D reorganization?

Back 62

P must acquire “substantially all” of T’s assets and T must distribute to its shareholders, pursuant to a plan of reorganization, the property received from P and T’s other properties.

Front 63

What is the general description of a divisive D reorganization?

Back 63

T need not (and generally does not) transfer substantially all of its assets to P, but T must distribute to is shareholder P stock representing at least 80 percent direct control of P pursuant to a spin-off.

Front 64

What is a foreign to foreign type D reorganization?

Back 64

: U.S. person owns shares in a foreign corporation which transfers its assets to another foreign corporation controlled by the same shareholders. See PLRs 893066, 8851060, 9039042

Front 65

How is a sideways merger treated?

Back 65

Merger of one subsidiary into another – generally treated as an “A” reorganization (see PLR 9105017) and also as an acquisitive “D” reorganization if parent owns at least 50% of Acquiror. I.R.C. 368(a)(2)(H)(i); Rev. Rul. 79-289.

Front 66

What are the four types of asset reorganizations?

Back 66

There are four types of asset reorganizations: statutory mergers (“A” reorganizations), forward subsidiary mergers (Hybrid “A” reorganization #1), asset transfers solely in exchange for voting stock (“C” reorganizations), and reorganizations involving controlled corporations (“D” reorganizations).

Front 67

What are the two types of stock reorganizations?

Back 67

There are two types of stock reorganizations: stock exchanged solely for voting stock (Type “B”) and reverse subsidiary mergers (Hybrid Type “A” #2).

Front 68

What does the IRS require for rulings on COI?

Back 68

For IRS ruling purposes, the COI requirement is generally met if at least 50% of the target shareholders as a group receive an interest in the Acquirer — unless the particular reorganization provision requires a higher level of continuity.

Front 69

What do the courts say about COI?

Back 69

Based on judicial precedent, most practitioners consider 40% continuity as sufficient.

Front 70

What does the IRS say about COI?

Back 70

The IRS has stated that the continuity of interest requirement is satisfied where 40% of the target stock is exchanged for stock in the issuing corporation, even in cases in which the signing date rule does not apply.

Front 71

What section protects you against gain recognition for the issuance of stock in a parenthetical B/C or Forward Triangular Merger?

Back 71

The issuance of Parent stock by Sub in a triangular “B” or “C” Reorganization or a Forward Triangular Merger is protected from gain or loss recognition under §1032, notwithstanding that §1032 literally applies only to the issuance by a corporation of its own stock.

Front 72

Do you rely on Section 1032 in a reverse triangular merger?

Back 72

No. The use of §1032 is unnecessary in the case of a Reverse Triangular Merger, since §361(a) is considered to provide nonrecognition treatment for Sub's use of Parent stock.

Front 73

Why are forced B reorganizations helpful?

Back 73

Forced “B” Reorganizations provide a merger vehicle for effecting what is, for tax purposes, a stock–for–stock exchange. The forced “B” therefore is useful where Target either is a widely held corporation, or where there are recalcitrant Target shareholders. Once the merger has been approved by the requisite shareholder vote of Target, all the Target shareholders must either exchange their stock or exercise appraisal rights. Moreover, certain Target contracts and permits that may be invalidated by a stock–forstock exchange may not be invalidated by a transaction structured as a state law merger.

Front 74

Forced B Reorganizations can be treated as reverse triangular mergers if:

Back 74

(i) the “substantially all” requirement is satisfied, (ii) Newco is a first–tier subsidiary of the corporation whose voting stock is used as consideration in the reorganization, and (iii) an amount of stock representing control of Target is obtained in the transaction.

Front 75

Why is an A reorganization easier than a B or C reorganization?

Back 75

In a “B” Reorganization, no consideration may be given by Acquiror for Target's stock other than voting stock of Acquiror or Acquiror's parent. In a “C” Reorganization, where Acquiror is required to give voting stock of either Acquiror or Acquiror's parent as consideration for at least 80% of the value of Target's assets, there is only slightly more flexibility.

However, in an “A” Reorganization, the only statutory requirement is that the transaction be consummated pursuant to the applicable state, federal, or foreign corporate laws; there are no statutory limitations on the type of consideration given by Acquiror in a statutory merger or consolidation.

Front 76

What happens if your A reorganization fails?

Back 76

A merger of Target into Acquiror which fails to qualify as an “A” Reorganization, and which cannot be characterized as another type of tax–free reorganization, will be treated as a taxable sale of assets between Target and Acquiror followed by a liquidation of Target.

Front 77

What happens if your forward triangular merger fails?

Back 77

A merger of Target into Sub which fails to qualify as a Forward Triangular Merger, and which cannot be characterized as another type of tax–free reorganization, will generally be treated as a taxable sale of assets between Target and Sub followed by a liquidation of Target.

Front 78

What does Section 354 provide?

Back 78

Section 354(a)(1) provides that no gain or loss is recognized if stock or securities in a corporation that is a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in a corporation which is also a party to the reorganization. This provision permits shareholders and security holders of the transferor corporation in a reorganization to exchange their stock or securities in that corporation for stock (or, under certain conditions, securities) of the acquiring corporation without recognition of gain.

Front 79

Does Section 354 apply to D reorganizations?

Back 79

Only if:
(A) the corporation to which the assets are transferred acquired substantially all of the assets of the transferor of such assets; and
(B) the stock, securities, and other properties received by such transferor, as well as the other properties of such transferor, are distributed in pursuance of the plan of reorganization.

Front 80

How does a D reorganization differ from other reorganizations on the issuce of "control"?

Back 80

Unlike most acquisitive reorganizations, the “control” provisions applicable to D reorganizations require that the shareholders of the transferor corporation own a specified minimum percentage of the shares of the acquiring corporation. Section 368(a)(1)(D) permits a transaction to qualify as a D reorganization only if, immediately after the transfer, the transferor or one or more of its shareholders or former shareholders owns stock sufficient to satisfy the 50% control test of §304(c), in the case of a nondivisive D reorganization, or the control test of §368(c) (as modified by §368(a)(2)(H)) in the case of a divisive D reorganization. Any stock owned by the transferor would, with limited exceptions, have to be distributed to the shareholders of the transferor corporation in the reorganization.

Front 81

Does 381 apply to D reorganizations?

Back 81

Section 381 provides for the carryover of various tax attributes from the transferor corporation to the acquiring corporation in nondivisive D reorganizations.

The most common of these attributes are net operating loss carryovers, capital loss carryovers, credit carryovers, and earnings and profits.

Section 381(a) specifically states that the §381 carry-over provisions apply to D reorganizations only if the requirements of §354(b)(1) are met. Thus, §381 does not apply to divisive reorganizations. In a divisive reorganization (other than a split-up), the transferor/distributing corporation retains all of its tax attributes (except earnings and profits).

Front 82

Does your tax year end on the date of an F Reorg?

Back 82

No. Except in the case of an F reorganization, §381 provides that the taxable year of the transferor corporation ends on the date of the transfer.

Front 83

What is the definition of a recapitalization?

Back 83

The closest one can get to a definition of “recapitalization” is the “reshuffling of a capital structure” language from Helvering v. Southwest Consolidated Corp

Front 84

What examples do the regulatiosn provide regarding recapitalizations?

Back 84

(1) A corporation with $200,000 par value of bonds outstanding, instead of paying them off in cash, discharges them by issuing preferred shares to the bondholders.
(2) There is surrendered to a corporation for cancellation 25% of its preferred stock in exchange for no par value common stock.
(3) A corporation issues preferred stock, previously authorized but unissued, for outstanding common stock.
(4) An exchange of a corporation's outstanding preferred stock for a new issue of such corporation's common stock.
(5) An exchange of an amount of a corporation's outstanding preferred stock with dividends in arrears for other stock of the corporation.

Front 85

For recapitalizations, what do the examples in the regulations tell us?

Back 85

First, they all involve exchanges in which stock, rather than a debt security, is issued. Second, there seems to be little concern evidenced by the IRS as to the purpose for the transaction. There is a business purpose requirement for recapitalizations, as there is for all reorganizations. Nevertheless, there is great latitude to the corporation in fashioning the business purpose; it seems that a corporation may simply declare that it wishes to conserve cash as a purpose for paying off its bonds with stock instead of cash.
Third, while examples (2) and (4) are largely indistinguishable, it would appear that the regulations seek to illustrate that a recapitalization may involve all or only a portion of an outstanding class of stock. A more extreme example of this principle is contained in Rev. Rul. 77-238 109 where the IRS ruled that the isolated exercise of conversion rights in a convertible stock will be a reorganization under §368(a)(1)(E).

Front 86

How is an outbound reincorporation treated?

Back 86

In Rev. Rul. 87-27, the IRS ruled that an “outbound” reincorporation qualified as an F reorganization.

Front 87

Does a transnational reorganization end the tax year of the company?

Back 87

Ues. The regulations under §367 provide that the tax year of the transferor in such an outbound F reorganization ends on the date of the transfer, and that the transferee takes on the tax year of the transferor.