The A, B, C, D, E, F, Gs Types of Corporate Reorganizations

The A, B, C, D, E, F, Gs Types of Corporate Reorganizations

The A, B, C, D, E, F, Gs Types of Corporate Reorganizations

It is very common for US Taxpayers to create an entity for their US or International business operations, such as a C-Corporation (aka subchapter C). And, it is also common that Taxpayers may want to modify or change their existing entity for either tax or operational purposes (e.g., improved operations or increased profitability). From a technical standpoint, this is often referred to as a “Type of Corporate Reorganization or Merger” The Internal Revenue Service has very specific rules involving the execution of certain mergers or acquisitions. And, depending on the specific type of merger or reorganization – and whether there is an international component as well – will impact the complexity of achieving the desired result.  Internal Revenue Code Section 368 refers to Definitions relating to Corporate Reorganizations. In order to minimize or avoid the potential tax implications of a merger, there are various types of Corporate Reorganizations to consider:

I.R.C. § 368(a)

(1) In General — For purposes of parts I and II and this part, the term “reorganization” means—

I.R.C. § 368(a)(1)(A) – Merger

      • a statutory merger or consolidation

Section A Summarized

In this type of merger, it is essentially acquiring or the merging of both companies resulting in the acquisition by one company of the assets of another company. In the best of circumstances, it is an agreed-upon arrangement by two companies seeking to grow and expand and the resulting company will become more profitable. It does not require the acquisition of the entire company’s assets directly.

I.R.C. § 368(a)(1)(B) – Acquisition (Stock)

      • the acquisition by one corporation, in exchange solely for all or a part of its voting stock (or in exchange solely for all or a part of the voting stock of a corporation which is in control of the acquiring corporation), of stock of another corporation if, immediately after the acquisition, the acquiring corporation has control of such other corporation (whether or not such acquiring corporation had control immediately before the acquisition);

Section B Summarized

In this type of reorganization, the corporation (using voting stock) acquires the stock of the other targeted company and the result is that the acquired company will become a subsidiary of the other company – and the acquiring company will control (generally 80%) the targeted corporation. There are very specific time limits on matters involving a type B acquisition – and nuances involving the totality of the corporate actions to ensure that the acquisition is in compliance with statutory regulations.

I.R.C. § 368(a)(1)(C) – Acquisition (Assets)

      • the acquisition by one corporation, in exchange solely for all or a part of its voting stock (or in exchange solely for all or a part of the voting stock of a corporation which is in control of the acquiring corporation), or substantially all of the properties of another corporation, but in determining whether the exchange is solely for stock the assumption by the acquiring corporation of liability of the other shall be disregarded;

Section C Summarized

With a type C acquisition, in most scenarios, the company that is being targeted will liquidate and the shareholders of the corporation that was targeted will then become shareholders of the company that acquired the liquidator company.

I.R.C. § 368(a)(1)(D) – Transfer of Assets

      • a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor, or one or more of its shareholders (including persons who were shareholders immediately before the transfer), or any combination thereof, is in control of the corporation to which the assets are transferred; 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;

Section D Summarized

Section D refers to asset transfers and recapitalization, which typically occurs in a situation in which the assets of another company are acquired by the first company, in which then the acquired company dissolves in the shareholders will become shareholders in the acquiring company.

I.R.C. § 368(a)(1)(E) – Recapitalization

      • a recapitalization;

Section E Summarized

Section E recapitalization refers to the exchange of shares for other securities or shares in order to modify the capitalization structure of the company.

I.R.C. § 368(a)(1)(F) – Change in Identity, Form or Place

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

Section F Summarized

Section F simply refers to an identity change of the corporation, which can come in one of many different forms such as a relocation or the modification or change of a name.

I.R.C. § 368(a)(1)(G) – Transfer

      • 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.

Section G Summarized

Section G is very complicated and involves bankruptcy rules. In this type of transfer, when a company is doomed financially, another company can swoop in so that the failing company’s stock, securities, and potentially other assets are transferred to the healthy company. The shareholders of the acquired company will receive shares from the transferring corporation.

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