Chapter 7 - Reorganizations Flashcards
Reorganization
Any corporate restructuring, including when one corporation acquires another, a single corporation divides into two or more entities, a corporation makes a substantial change in its capital structure, a corporation undertakes a change in its legal name or domicile, or a corporation goes through a bankruptcy proceeding and continues to exist. The exchange of stock and other securities in a corporate reorganization can be effected favorably for tax purposes if certain statutory requirements are followed strictly. Tax consequences include the nonrecognition of any gain that is realized by the shareholders except to the extent of boot received. § 368.
What are some requirements to qualify as a tax-free reorganization?
- There must be a plan of reorganization.
- The reorganization must meet the continuity of interest and the continuity of business enterprise tests provided in the Regulations.
- The judicial doctrine of having a sound business purpose must be met.
- The court-imposed step transaction doctrine should not be applicable.
What is the most important consideration of reorganization?
Does it qualify for nonrecognition status under section 368?
Type A
A statutory merger or consolidation.
Type B
The acquisition by a corporation of another using solely stock of each corporation (voting-stock-for-stock exchange).
Type C
The acquisition by a corporation of substantially all of the property of another corporation in exchange for voting stock (voting-stock-for-asset exchange). The target liquidates after distributing all assets received in the reorganization as well as any of its own property retained.
Type D
The transfer of all or part of a corporation’s assets to another corporation when the original corporation’s shareholders are in control of the new corporation immediately after the transfer (divisive exchange: spin-off, split-off, or split-up).
Type E
A recapitalization.
Type F
A mere change in identity, form, or place of organization.
Type G
A transfer by a corporation of all or a part of its assets to another corporation in a bankruptcy or receivership proceeding. The stock and securities are distributed to the senior creditors in exchange for their claims against the debtor.
The tax treatment for the parties involved in a tax-free reorganization almost parallels which other tax treatment?
like-kind exchange provisions of § 1031
When an investor exchanges stock in one corporation for another, the exchange generally constitutes…
a taxable transaction
Corporations meeting the § 368 requirements…
do not recognize current gains or losses on reorganizations (gain recognition may occur if other property is transferred by the acquiring corporation in the reorganization)
Other Property
In a corporate reorganization, any property in the exchange that is not stock or securities, such as cash or land. This amount constitutes boot. This treatment is similar to that in a like-kind exchange.
If boot is transferred…
gain but NOT loss may be recognized
What is the gain recognized by a stockholder in a reorganization?
The lesser of the boot received of the the realized gain
What is the only instance when shareholders may recognize (deduct) losses in reorganizations?
When they receive solely boot and no stock
Gain recognized
- The gain is taxed as a dividend to the extent of the shareholder’s proportionate share of E & P. The remaining gain generally is capital gain.
- If the requirements of § 302(b) can be met, the transaction is treated similarly to a stock redemption, receiving capital gain treatment
When do debt security holders recognize gain?
Only when the principal amount of the debt received is greater than the principal of the debt surrendered
Securities
Debt instruments with terms longer than 10 years (bonds)
NOT those with terms of five years or less (notes)
Carryover basis
The assets transferred from the target corporation to the acquiring corporation retain their basis
The acquiring corporation’s carryover basis is increased by any gain recognized by…
the target corporation on the reorganization
Substituted Basis
In a tax-free reorganization, the shareholder/bondholder starts with a tax basis in the stock and securities received that is equal to the basis of the stock and securities surrendered
Substituted basis is decreased by…
FMV of boot received