Taxes: Corporate Reorganizations

Question 1

Taxes:
Corporate Reorganizations
Acquisitions & Reorganizations

Answer 1

Acquisitions & Reorganizations

- mergers, stock acquisitions, and asset acquisitions all qualify if shareholders receive sufficient equity

Question 2

Taxes:
Corporate Reorganizations
Acquisitions & Reorganizations
Type A

Answer 2

Acquisitions & Reorganizations
Type A
- Merger: acquired dissolves into another corp
- Consolidation: both dissolve into a surviving corp
- at least 50% of consideration provided to Target must be stock of acquiring
- shareholders only defer gains/losses to extent they receive equity of acquiring (voting or non)
- payment that is non-equity = boot
acquiring must assume all liabilities of target
- boot triggers recognition of gain but not loss

Question 3

Taxes:
Corporate Reorganizations
Acquisitions & Reorganizations
Type B

Answer 3

Acquisitions & Reorganizations
Type B
- acquisition of the stock of the target solely for voting stock of acquiring
- target still exists but is owned at least 80%
- former target shareholders now own stock in acquiring
- acquiring must exchange voting stock (own or parent’s) to be tax-free type B
- 80% owned after acquisition (not acquired)
- any other consideration violates

Question 4

Taxes:
Corporate Reorganizations
Acquisitions & Reorganizations
Type C

Answer 4

Acquisitions & Reorganizations
Type C
- acquisition of “substantially all” assets of target in exchange solely for voting stock of acquiring
- target then distributes acquiring stock and assets to shareholders
- “substantially all” = 90% net asset value and 70% gross asset value
- stock acquiring transfers must be 80% consideration
- liabilities attached to targets asset are not considered boot unless other boot also given, limit 20% consideration
- shareholders of target own acquiring stock after

Question 5

Taxes:
Corporate Reorganizations
Acquisitions & Reorganizations
Type D

Answer 5

Acquisitions & Reorganizations
Type D
- divisive (not acquisitive) reorganization in that a corp (the parent) divides own assets and contributes in exchange for subsidiary shares
Spin Off
- parent then distributes shares to shareholders
Split Up
- redeems P stock with S stock or
- splits into two corps
- parent must receive and distribute control of subsidiary in exchange 80%

Question 6

Taxes:
Corporate Reorganizations
Acquisitions & Reorganizations
Other

Answer 6

Acquisitions & Reorganizations
Other
- exist to defer gains and losses on other transactions
- E & F are recapitalizations and nominal changes (change name or state)
- G are bankruptcy recapitalizations

Question 7

Taxes:
Corporate Reorganizations
Acquisitions & Reorganizations
Tax-Free Judicial Principle

Answer 7

Acquisitions & Reorganizations
Tax-Free Judicial Principle
1. Valid Business Purpose
2. Continuity of Business Test: acquiring must continue historic business of acquired or use a significant portion of acquired’s assets in continuing a business
3. Continuity of Interest: generally at least 50% of consideration (sometimes 40%) acquiring gives must be stock in acquiring
4. Step Transaction Doctrine: permits multiple steps to be collapsed into one if so interdependent that one would not occur without another

Question 8

Taxes:
Corporate Reorganizations
Acquisitions & Reorganizations
Deferral of Gains/Losses and Basis Issues

Answer 8

Acquisitions & Reorganizations
Deferral of Gains/Losses and Basis Issues
- reorg does not require income recognition at corp level by either target or acquiring
1. Acquiring Exception: acquiring distributes appreciated property (in addition to stock). Triggers gain recognition just as if sold assets.
2. Acquired Exception:
- distribution of property to shareholders in connection with acquisition will trigger gain to acquired
- basis for acquiring = basis of target + gain rec target
whenever a corporation distributes appreciated property, corp will recognize gain. Regardless of reorganization, redemption, or liquidation
3. Shareholders: no G/L to shareholders if tax-free reorg and get only stock in exchange for property of acquiring
- other property is boot and gain recognized to lower of:
a) Boot received
b) Realized gain (dividend income to proportionate share of target’s E&P. Remainder is capital gain
- basis to shareholder = Basis of Stock Received + gain received - boot received

Question 9

Taxes:
Corporate Reorganizations
Acquisitions & Reorganizations
Tax Attributes

Answer 9

Acquisitions & Reorganizations
Tax Attributes
- tax attributes of target (NOL, adj basis of assets, etc.) survive reorg
- if target disappears, then acquiring gets target’s attributes