Corporate Reorganizations (I.R.C. 368)

August 21, 2013

General Discussion

Section 368 of the Code contains the tax-free reorganization rules which exempt from gain recognition specified corporate combinations that “effect only a readjustment of continuing interest in property under modified corporate forms.”  Treas. Reg. 1.368-1(b).  Certain types of reorganizations under I.R.C. 368(a) include:

  • A Reorganizations:  Statutory merger or consolidation;
  • B Reorganizations:  Acquirer acquires the stock of Target and thereafter has control of Target;
  • C Reorganizations:  Acquirer acquires substantially all of the properties of Target solely in exchange for voting stock of Acquirer;
  • D Reorganizations:  Target transfers all or part of its assets to Acquirer and after the transfer the Target (or its shareholders) is in control of the Acquirer;
  • E Reorganizations:  Recapitalizations;
  • F Reorganizations:  Mere change in identity, form or place of organization of a corporation, however effected; and
  • G Reorganizations:  Transfer by Target of all or part of its assets to Acquirer in a title 11 bankruptcy or similar case.

An acquisitive reorganization must satisfy the (1) business purpose, (2) continuity of interest (COI) and (3) continuity of business enterprise (COBE) requirements of Treas. Reg. 1.368-1:

  • Business purpose:  This requirement comes from the regulatory adoption of the Supreme Court’s decision in Gregory v. Helvering, 293 U.S. 465 (1935).  The transaction cannot constitute “an elaborate and devious form of conveyance masquerading as a corporate reorganization.”
  • COI:  The COI test requires that the Acquirer stock represent at least 40 percent of the aggregate consideration delivered to the shareholders of the Target.
  • COBE:  The qualifying group (the Acquirer, etc.) must either continue the Target’s historic (most recently conducted) business or use a significant portion of the Target’s historic business assets in the qualifying group’s business.

Application of Step Transaction Doctrine

The step transaction doctrine is a judicially developed variation of the substance-over-form rule articulated by the Supreme Court in Gregory which treats a series of separate steps as a single transaction if the substance of the steps is integrated, interdependent and focused toward a particular result.  “Transitory phases of an arrangement frequently are disregarded under these sections of the revenue acts where they add nothing of substance to the completed affair.”

(This post is based on Linda Z. Swartz and Richard M. Nugent, Big A, Little C: Baby Steps Toward Modernizing Reorganizations, Tax Notes, Volume 140, Number 3 at 233 (July 15, 2013).)

[More to come as needed]