Reorganizations

type F reorganization process

The corporation's assets and liabilities are transferred to a new corporation in exchange for stock and securities of the new corporation and then the new stock and debt is transferred to the shareholders and security holders in exchange for the old stock and debt

does the target recognize gains for boot received for an exchange of property?

The target corporation also recognizes no gain (loss) on any other consideration (boot) permitted to be received, as long as the target distributes the property pursuant to the reorganization

liabilities assumed in an exchange of property

The target corporation generally does not recognize gain when its liabilities are assumed as part of a reorganization (liability assumption is generally not treated as boot)

type D reorganization

The target corporation might want to sell, dispose of, or retain assets the acquirer corporation does not want; however, doing so shortly before an asset-for-stock might cause the transaction to fail the substantially all test and, thereby, disqualify it as a Type C reorganization

distributions of nonqualified property

The target corporation recognizes gain (but not loss) when it distributes nonqualified property to its shareholders as if the property was sold at its fair market value

exchange of property target corp g/l

The target corporation recognizes no gain (loss) on exchanges of property solely for stock or securities of another corporation pursuant to a plan of reorganization

distributions of qualified property

The target corporation recognizes no gain (loss) when it distributes qualified property to its shareholders, which includes stock, stock rights, and debt obligations of a corporation that is a party to the reorganization

mergers generally involve

The target corporation's assets and liabilities are transferred to the acquirer corporation in exchange for the acquirer's stock (and possibly securities and other consideration); -The target liquidates, transferring the acquirer's stock (and any other consideration) to the target's shareholders, and then is dissolved; -After the transaction is complete, the acquirer owns the assets and liabilities of the former target and the former target shareholders own stock (and possibly securities) of the acquirer corporation

distribution to creditors

The target generally does not recognize gain (loss) when it distributes property received in the reorganization to its creditors [IRC §361(b)(3) & (c)(3)]; however, if it distributes retained assets to creditors, it recognizes gain on the distribution -If a target liquidates and distributes stock, securities, or other property received in the reorganization to its creditors, the distributions are treated as "pursuant to the plan of reorganization" and do not disqualify an otherwise qualified Type C reorganization

type G overall

Title 11 bankruptcy or similar cases

under IRC 368(a)(2)(D)

"substantially all" of the target's assets must be transferred to the subsidiary and the transaction would have qualified if the target had merged directly into the acquirer corporations. Either the acquiring subsidiary or the parent corporation can assume the target's liabilities triangular merger

type c consideration

Under IRC §368(a)(1)(C), the consideration used to affect the reorganization is required to be "solely voting stock" of the acquirer corporation or the acquirer corporation's parent (but not both)

extraordinary dividend exception

Unless the "redemption" is pro-rata with respect to all shareholders, the amount treated as a dividend is an extraordinary dividend, that is, the basis of the stock received is reduced by the amount of any allowed dividends-received deduction [IRC §1059(a)(1)] and a capital gain is recognized if the dividends-received deduction exceeds the basis of the stock

basis of noncash property received by the acquirer

equals its basis to the target increased by any gain recognized by the target on the transfer The basis of the property received is not increased for any gain recognized by the acquirer due to the transfer of boot

for type c reorgs, what is disregarded for purposes of the solely-for-voting-stock requirement

generally the acquirer's assumption of the target corporation's liabilities, however, the acquirer may use additional consideration (including liabilities assumed) only if it obtains at least 80% of the target's property in exchange for voting stock

IRC 1036(a)

provides for similar nontaxable exchanges of stocks except that preferred stock cannot be exchanged for common stock

type E overall

recapitalization stock for stock stock for bonds bonds for stock

how can a reorganization go around nontransferable assets

reverse triangular merger type B reorganization

fractional shares

shareholders can receive cash for fractional shares without violating the 'solely for voting stock' requirement for type b reorgs

type A consolidations

similar to mergers except there are multiple targets and, after the transaction is complete, the acquirer owns assets and liabilities of multiple targets and former targets' shareholders own acquirer stock

Type A overall

statutory merger or consolidation

type A reorganization

statutory merger or consolidation

Type B overall

stock for voting stock

what is acquired in Type C

substantially all target's assets and some liabilities

what is acquired in acquisitive type D

substantially all target's assets and some liabilities

dissenting minority shareholders

target corp can use its cash to redeem any dissenting minority shareholders' stock before or after the type B reorg without triggering taxation; however the acquiring corp cannot

what is acquired in Type A

target's assets and liabilities

type C reorganization

the acquirer corporation must obtain substantially allof the target corporation's property solely in exchange for the acquirer's voting stock [IRC §368(a)(1)(C)] and a limited amount of other consideration

Supreme Court's definition of recapitalization

the reshuffling of the corporate structure within the framework of an existing corporation

354 receipt of boot

-A shareholder that receives boot (cash or property) in an exchange that would otherwise be nontaxable under IRC §354 or IRC §355 must recognize any realized gain to the extent of boot received -loss is not recognized -If boot is in the form of an installment obligation and its receipt is not essentially equivalent to a dividend, the gain my be deferred under IRC §453 [IRC §453(f)(6)] but only if the stock or securities exchanged are not publicly-traded

reverse triangular merger

-The acquirer corporation sets up a subsidiary by transferring its stock (and possibly other consideration) to the subsidiary in exchange for the subsidiary's stock -The subsidiary merges into the target with the target corporation as the survivor and the acquirer's stock (and possibly other consideration) is transferred to the target's shareholders -After the transaction is complete, the target is a wholly owned subsidiary of the acquirer corporation and the target's shareholders own stock of the acquirer corporation

in a triangular merger

-The acquirer corporation sets up a subsidiary by transferring its stock (and possibly other consideration) to the subsidiary in exchange for the subsidiary's stock -The target merges into the subsidiary and liquidates and the target's shareholders receive the acquirer's stock (and possibly other consideration) for their target stock -After the transaction is complete, the acquirer corporation owns all of the subsidiary's stock, the subsidiary owns substantially all of the assets of the former target, and the former target shareholders own stock (and possibly securities) of the acquirer corporation

drop-down or triangular type C reorganizations

-the acquiring corporation can transfer (drop down) the acquired assets and liabilities to a controlled subsidiary without adversely affecting the nontaxable character of the transaction. -Alternatively, an acquiring subsidiary can use the parent corporation's voting stock to acquire substantially all of the target's assets; however, the voting stock used to acquire the target must be exclusively the parent's stock but the acquiring subsidiary can provide additional consideration in the form of securities, cash, or other property

354(a)(1) exceptions

1. Securities received in a reorganization are nontaxable only to the extent that their total principal amount does not exceed the total principal amount of the securities surrendered 2. Nonqualified preferred stocks (NQPS) received in exchange for anything other than existing NQPS is treated as "boot"

type C disadvantages

1. The acquirer corporation must use voting stock (cannot use nonvoting stock) and has tighter restrictions on other consideration allowed (20%) 2. The target corporation's liabilities assumed may be so substantial (exceeding 20% of total consideration) as to preclude the use of any consideration other than voting stock 3. The target corporation might want to sell, dispose of, or retain assets the acquirer corporation does not want; however, doing so shortly before an asset-for-stock might cause the transaction to fail the substantially all test and, thereby, disqualify it as a Type C reorganization

type B disadvantages

1. The acquirer corporation's voting stock is the only consideration that may be used in the transaction 2. The acquirer corporation must acquire at least 80% of the target corporation's stock even though "effective control" of a corporation can be obtained through ownership of less than 80%. The acquisition of less than 100% of target corporation stock may give rise to dissenting minority shareholders. Under state law, these shareholders have the right to have their shares appraised and purchased for cash 3. The bases of the target corporation's stock (outside basis) and assets (insider basis) are not stepped-up or stepped-down to their fair market values at the time of the transaction as would be the case in a taxable asset acquisition or in a taxable stock purchase with an IRC §338 election

advantages of type A reorganizations

1. The acquiring corporation has the most flexibility in terms of what consideration can be used 2.The acquirer does not have to acquire substantially all of the target corporation's assets; thus, the target can dispose of assets that are not wanted by the acquirer corporation before or during the acquisition without making the merger taxable

type B advantages

1. can be accomplished in a single transaction without formal shareholder approval 2. The target corporation remains in existence and its assets, liabilities, and tax attributes are maintained; however, the use of NOLs and other carryovers may be limited under IRC §302 3. The target corporation's name, goodwill, licenses, and rights are preserved after the reorganization

continuity requirements

1. continuity of interest 2. continuity of business enterprise tax-free treatment of reorganization except for Type E and F reorgs

type c advantages

1. does not have to comply with the merger laws of a state or federal government as does a Type A reorganization; however, it may have to comply with other corporate and securities laws 2. The acquirer corporation assumes only those target corporation liabilities specified in the acquisition agreement (contingent and unknown liabilities are not assumed (as they are in a merger) 3. Shareholders of the acquiring corporation generally need not approve of the acquisition, which reduces the transaction costs

Disadvantages of Type A reorganizations

1. timely and costly - shareholders of target and acquirer have to have 2/3 majority 2.Dissenting shareholders of both the acquirer and the target have the right to have their shares independently appraised and purchased for cash 3.all liabilities of target must be assumed by acquirer 4. requires the transfer of real estate titles, leases, and contracts but the target corporation may have licenses, rights, or other privileges that are not transferable

Cash, securities, other property, and assumption of target's liabilities can constitute up to ____ of the consideration and still meet the continuity of interest requirement

60% type A

what is acquired in Type B

80% of target's stock (voting and nonvoting)

how to meet the 'substantially all' requirement

A target corporation that sold 50% of its business assets and immediately thereafter transferred all of its assets (including the proceeds from the sale of the assets)

type D advantage

An acquisitive Type D is very similar to a Type C reorganization except that Type Cs have a "solely for voting stock" requirement and Type Ds do not advantages and disadvantages are very similar to type C

type E stock for bond exchange

An exchange of new bonds for existing stock is taxable

extraordinary dividend

For corporate shareholders, any amount treated as a dividend under IRC §356(a)(2) gets recharacterized as a "stock redemption" for purposes of the "extraordinary dividend" rules

type D substantially all

For the distribution of the acquirer's stock or securities to qualify as an IRC §354 transaction, the acquirer corporation must acquire "substantially all" of the assets of the transferor corporation

triangular reorganization's exchanges of Parent's Stock for Property

IRC §1032 technically only applies to the use of the acquirer's own stock but Reg. §1.1032-2(a) provides that the subsidiary recognizes no gain (loss) on the exchange of its parent's stock received pursuant to a reorganization; however, the subsidiary may have to recognize gain if it transfers its parent's stock that was received in an unrelated transaction prior to the reorganization

distribution of retained consideration

If a target corporation does not distribute all the non-security consideration received in a reorganization, it must recognize a gain (the character is determined under the general rules for property transactions)

distribution of retained assets

If a target corporation retained some of it assets in a reorganization, it must recognize gains (but not losses) on the distribution of the retained assets to its shareholders

type D overlapping transaction

If a transaction potentially qualifies as both a Type C reorganization and a Type D reorganization, then the transaction must be treated exclusively as a Type D reorganization

354 dividend treatment

If an exchange has the effect of a dividend, an individual shareholder's recognized gain is treated as a dividend to the extent of the ratable share of the corporation's accumulated earnings and profits (E&P) and any remaining gain is treated as a capital gain

exception to liabilities assumed in an exchange

If any part of the debt relief is for tax avoidance or non-business purposes, the entire amount of debt relieved is treated as boot

g/l recognition of stock given

If consideration given by the acquirer corporation in a reorganization consist exclusively of its own stock, no gain (loss) is recognized by the acquirer corporation

distribution of nonqualified property subject to a liability

If property distributed is subject to a liability (or the shareholders assume the liability), the fair market value of the property is deemed to be no less than the amount of the liability

limit of basis of property received

If property with a net foreign built-in loss (i.e., the adjusted basis of the property exceeds its fair market value) is imported to the U.S. corporation as a result of the transaction, the basis of the property transferred is limited to its fair market value

g/l recognition of boot property

If the acquirer corporation transfers boot (property other than stock or securities), any realized gain (loss) on the property is recognized under the general property transaction rules

g/l recognition of debt obligations

If the consideration given by the acquirer corporation includes the acquirer corporation's own debt obligations, it is treated as if the corporation "purchased" the assets with debt and no gain (loss) is recognized

income from cancellation of indebtedness

If the stock has a fair market value less than the principal amount of the bonds plus any accrued income type E bond for stock exchange

parent basis adjustment - prevent negative basis

If the target corporation's liabilities assume exceed the basis of it's assets, the parent does not recognize a gain under IRC §357(c) and the net adjustment to the parent's basis is zero

IRC 354(a)(1) general rule

No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization

basis of other property

Other property received takes a substituted basis; thus, the basis of property received equals the basis of the property given up plus the amount of any dividend or gain recognized and minus the amount of any cash received, the fair market value of any boot received, and the amount of any loss recognized IRC §358(a)(1)

basis of boot property

The basis of boot property received (other than an installment obligation to which IRC §453 applies) is the property's fair market value

holding period of boot

The holding period for boot property begins the day after the exchange date

holding period of stocks and securities

The holding period for stock and securities received includes the holding period for stock and securities surrendered

triangular reorganization's Exchanges of Parent's Stock for Cash or Boot Property

The nonrecognition treatment of IRC §1032 is extended to a subsidiary's transfer of its parent's stock to acquire cash or other property or to pay compensation (the subsidiary is treated as a mere conduit)

triangular reorganization's parent basis adjustment

The parent corporation must adjust the basis in its controlled subsidiary in a triangular reorganization

parent basis adjustment increase

The parent corporation's basis in the subsidiary's stock is increased by the target corporation's basis (net of liabilities) in its assets (or the target's shareholders' basis in their target corporation stock)

parent basis adjustment reduction

The positive adjustment to the parent's basis in the subsidiary's stock is reduced (but not below zero) by any consideration furnished by the subsidiary rather than the parent

allocations of consideration and basis

The regulations provide flexibility in the allocations of the consideration and basis as long as the specified allocations are "economically reasonable"

type E reorganization

a "recapitalization" [IRC §368(a)(1)(E)] and the regulations provide examples of qualifying transactions but no further definition

type G reorganization

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

reorganization expenses

acquirer corp can pay reorganization expenses of target corporation without violating 'solely for voting stock' requirement for type b orgs

how to avoid taxation on debt obligation for Type B

acquiring debt obligations can be exchanged for target debt obligations owned by shareholders if the face amounts of the obligations are equal

triangular type b reorganization

an acquiring subsidiary exchanges its parent's voting stock for a controlling interest in the target corporation and the target corporation remains in existence as a second-tier subsidiary of the parent acquirer corporation

Type C overall

assets for voting stock

acquisitive Type D overall

assets for voting stock

substantially all type D percentages

at least 70% of the fair market value of the target's gross assets and 90% of the target's net assets

Type B Control

at least 80% of the total combined voting power of all classes of voting stock and at least 80% of each class of nonvoting stock acquisition of control may be in several transactions

type F overall

change in identity, form, or place of incorporation

parent basis adjustment - reverse subsidiary merger

conformed to those for a forward subsidiary merger

type F reorganization

mere change in identity, form, or place of organization of one corporation, however effected

continuity of interest requirement

met if the target shareholders maintain sufficient ownership, which is met if the acquirer's stock is a significant part of the total consideration paid

continuity of business enterprise requirement

met if there is a continuity of the target's historic business or if a significant portion of the target's business assets are used in business

do reorganizations recognize gains/losses?

no, they do not recognize g/l at the corporate or shareholder level IRC 368

what kind of stock does not qualify to be tax exempt in a stock for stock exchange

nonqualified preferred stock

definition of securities for 354(a)(1)

not specifically defined but case law has generally held that short-term debt instruments (5 years or less) do not qualify; however, the IRS issued a ruling indicating that the important issue is whether the security received is in substantially the same form as the security exchanged

type b solely for voting stock requirement

previous cash purchase of target's stock by the acquiring corporation may be disregarded for purposes of 'solely for voting stock' requirement if it was independent of the stock-for-stock exchange. However, stock acquisitions within 12 months of the reorganization must be aggregated for purposes of determining whether the "solely for voting stock" requirement is met

under IRC 368(a)(2)(E)

the surviving target must hold "substantially all" of the target's assets and the subsidiary's assets after the merger and the old target shareholders transferred 80% control of the old target for voting stock of the acquirer corporation (which precludes a "creeping" reverse merger)

type D control

the target corporation or one or more of its shareholders must control the acquirer corporation immediately after the asset transfer, where control means 50% or more of the total combined voting power of all classes of voting stock or 50% or more of the total market value of all classes of stock

Type B reorganization

the target's shareholders exchange their target corporation stock solely for voting stock in the acquiring corporation and the target corporation remains in existence as a controlled subsidiary of the acquiring corporation

what are Type F reorgs used for?

to change the jurisdiction in which the corporation is incorporated or to change the name of the corporation without requiring the shareholders to recognize gain or loss

in what type of reorg can the acquiring corporation's basis in the stock received equals its basis to the acquiring corporation's former shareholders?

type B or a reverse subsidiary merger

bond for stock exchange

type E An exchange of existing bonds for new stock is generally nontaxable (even if the stock is nonqualified preferred stock) except to the extent the shareholder receives stock in satisfaction of the corporation's liability for accrued interest

bond for bond exchange

type E An exchange of new bonds for existing bonds are generally nontaxable to the extent that the principal amount of the bonds received do not exceed the principal amount of the bonds surrendered

stock for stock exchange

type E an exchange of one type of stock for another can qualify as nontaxable if it's pursuant to a plan of reorganization

bond for bond cancellation of indebtedness

type E income must be recognized if the principal of the new debt is less than that of the old debt

definition of substantially all

type c not defined in the IRC or the regulations but for private letter rulings, the IRS requires at least 70% of the fair market value of the target's gross assets and 90% of the target's net assets

type A consideration

voting stock not required; up to 60% can be other than stock