Subject to continuity requirements below, type A reorganization is defined in the Code as a statutory merger or consolidation pursuant to local or corporate law. 368(a)(1)(A).
1. T SH
  1. 354-non recognition for T SH
  2. 356(a)(2) except for boot, see below for boot treatment
  3. 358 old T shareholders basis in A stock they got is the same as T basis
2. T corporation disappears
  1. 361 non recognition for T’s gain
3. A
  1. 362(b) A takes T’s assets with T’s basis
  2. 381 A inherits T’s tax attributes
  3. 1032 when a corporation receives property in exchange for its own stock, the corporation doesn’t have to recognize gain
    1. Non recognition for A
Problem p437
1. Non qualifying preferred stock is still treated as equity under 368
2. Look at the aggregate, 40% equity
  1. This is sufficient because it’s in the example of the regulation
3. Use the value of stock at the time contract is signed. Therefore, same as b.
4. Generally we don’t care how previous T SH do with their new A stock. Since the third party has no relationship from A, we can ignore this.
5. P continues the historic business here: law school books are probably the same as lawyer books.
  1. P does not use T assets because P sells those assets.

Continuity of proprietary interest
1. Requires SH of T to receive sufficient proprietary interest in A to justify treatment of type A reorganization
2. Reg. sec. 1.368-1T(e)(2)(v), ex. 1: would rule favorable on Type A reorganization if P uses at least 40% equity consideration in making the acquisition
  1. Percentage= equity consideration/total consideration used by P to acquire T
  2. Do the continuity test in the aggregate (including multiple steps in a creeping acquisition), not by individual SH
  3. Non qualifying preferred stock is still treated as equity under 368
3. Continuity of historic target SH
  1. Mere disposition of T stock prior to a potential reorganization to buyers unrelated to T or P will be disregarded in applying the continuity of interest doctrine.
  2. Example: A owns 100% of T stock. Before merger, B, unrelated to T or P, purchase all of A’s T stock for 100 cash, and then B exchanges the T stock for 50 of P stock and 50 cash. Under the regulations, A’s sale is disregarded, and the continuity of interest test is met because 50% equity consideration.
  3. Regulations 1.338-3(d)(1): T stock acquired by P in the qualified stock purchase will count for continuity of interest purposes if T later transfers its assets to a P subsidiary
4. Post-acquisition continuity
  1. The length of time that T SH must hold the stock in A.
  2. Subsequent sale of A stock by former T SH will generally be disregarded. 1.368-1(e)(1)(i)
  3. However, the transaction may no longer satisfy the continuity requirement if the A stock is subsequently sold to A or a related party of A (subsidiary)
Continuity of business enterprise
1. Requires P either to continue T’s historic business or to use a significant portion of T’s historic business assets in a business.
2. Do not apply with respect to the assets and business of the surviving corporation. Applies only with respect to the disappearing corporation. Rev. Rul. 81-25

Type B acquisition is P’s acquisition of T stock solely in exchange for P voting stock or the voting stock of P’s parent, provided that P has control of T.
1. Control: P owns 80% or more of T’s voting power and 80% or more of the total number of shares of each class of T’s nonvoting stock
  1. Creeping acquisition
    1. Possible for a Type B reorganization to be the culmination of a series of acquisitions of T stock, as long as only voting stock is used as consideration
    2. E.g. A already owns 40% of T, old and cold, and then A acquires another 40% with voting stock
    3. E.g. A already owns 80% of T, old and cold, and then A acquires the remaining 20% with voting stock
2. Solely for voting stock
  1. After the Appellate decisions in the ITT-Hartford litigation, it is settled that P voting stock is the only permissible consideration. Even a small amount of boot will poison the B reorg.
  2. Voting stock: an unconditional right to vote on regular corporate decisions
  3. Some exceptions:
    1. Issuing cash in lieu of fractional shares.
    2. Can pay corporation’s expenses related to the reorganization
      1. But not SH’s expenses
    3. Nonqualifying stock treated as stock as long as it is voting
T SH
1. 354 non recognition for T SH
2. 358 T shareholders basis in A stock they got is the same as their old T shares basis
T corporation
1. T still exists
A
1. 362(b) A takes T’s stock with T’s basis
Type B reorg, and 351 have different 80% rule, a transaction could satisfy both requirements.
1. There is no conflict between 368 and 351. Even if you don’t qualify for 368, you can still satisfy 351.
You may make an 338 election
If B reorg failed, can turn to section 351 non-recognition
Problem p437
6. T has 10 equal SH
  1. No B reorg: because there is cash
  2. Taxable exchange
  3. T could make 338 election, in this case you don’t want to do it
7. Step one: cash consideration; step two: voting stock consideration
  1. Creeping acquisition: if step one is old and cold, then step two would qualify for Type B
  2. If step transaction applies, then not a B.
  3. Another hypo
    1. Step 1: P owns 40% T old and cold
    2. Step 2: P then acquires 35% of T for P voting stock
    3. Step 3: P then acquires last 25% of T for P voting stock
    4. Most of the time if separated by two years, no step transaction apply
    5. If we assume that they are separate transactions, then step 3 qualifies as B. Step 2, however, do not qualify (only 75%)
    6. If we assume that they are part of the same plan and step transaction applies, and analyzes 2 and 3 together. So step 2 and 3 both qualify for B.
  4. If Step 2 is for cash
    1. If we assume that they are separate transactions, then step 3 qualifies as B. Step 2, however, do not qualify (only 75%, and for cash)
    2. If we assume that they are part of the same plan and step transaction applies, and analyzes 2 and 3 together. Neither step 2 nor 3 qualify.

Section 368(a)(1)(C) requires the T to transfer substantially all of its properties solely in exchange for voting stock of A, and T completely liquidates to distribute all of its A shares to T SH. (practical merger)
1. T SH
  1. 354-non recognition for T SH
  2. 356(a)(2) except for boot, see below for boot treatment
  3. 358 old T shareholders basis in A stock they got is the same as T basis
2. T
  1. 361(a) non-recognition for T’s gain
  2. 357(a) if A assumes liability of T, T does not have to recognize gain for that
3. A
  1. 362(b) A takes T’s assets with T’s basis in those assets
  2. 381 A inherits T’s tax attributes
  3. 1032 when a corporation receives property in exchange for its own stock, the corporation doesn’t have to recognize gain
    1. Non recognition for A
Sole for A stock
1. Must be in exchange solely for A voting stock
2. Exceptions for “solely for A stock”
  1. Assumption of liability of T by A is not treated as disqualifying boot
  2. A can use boot, as long as assumed liabilities+boot<20%. 368(a)(2)(B)
  3. If T retains some assets, retained assets function like boot
    1. (Retained assets+ boot)/total asset of T<20%
    2. T has 100 assets and 0 liability. T transfers 92 of assets in exchange for 18 cash and 74 A voting share. Retained assets function like boot. So it’s NOT 18/92, it’s (18+8 retain asset)/100>20%
Substantially all of its properties
1. IRS safe harbor requires a transfer of assets representing at least
  1. 90% of net assets, and
    1. Net asset=asset-liability
  2. 70% of gross assets. Rev. Rul. 77-37
    1. Gross assets=assets
  3. Example: 100 assets, 40 liabilities
    1. 90% net =60*.9=54
    2. 70% gross=100*.7=70
    3. Then you have to transfer at least 70 (larger of both numbers above)
2. If you don’t satisfy the safe harbor, you can still argue why that should qualify as substantially all of its properties.
3. Rev. Rul. 67-274
  1. If you qualify for a B reorg, but then P completely liquidates T, (and this is a part of a whole plan) treated as C reorg, rather than a B reorg.
4. Rev. Rul. 88-48 T suggests that the “substantially all the properties” test does not involve the concept of T’s historic business assets, and as long as A retains the value of T’s historic assets this should qualify.
Liquidation requirement
1. Requires T to distribute all of its A shares to T SH
Creeping acquisitions
1. Will not necessarily disqualify a Type C transaction
2. Example: A owns 70% of T old and cold. T has $100 assets and 0 liability
  1. Step 1: A transfers $30 of A stock
  2. Step 2: T liquidates
  3. Step 3: T distributes 100 assets to A, and 30 A stock to T SH other than A.
3. Where the 368(a)(2)(B) boot relaxation rule applies to the final step of a creeping Type C reorganization, the sum of (1) the money or other boot distributed to T SH other than A and to T’s creditors, and (2) the liabilities of T assumed by A, may not exceed 20% of the value of all T’s properties.
  1. (Boot received by SH other than A+ liabilities assumed by A) / T’s total assets<20%
Problem p437

Fails, not solely for voting shares because, assumed liability+boot>20%
Satisfied.
1. Solely for stock
  1. Only debt relief, and assumption of liability of T by A is not treated as disqualifying boot.
2. Substantial all the assets satisfied
3. However, T SH has to recognize gain of 0.4 retained assets under 356

Problem2 p438
1. T is 60% owned by A, (10 is old and cold, 50 acquired last year for cash), T other SH owns 40%. A prefers to use nonvoting stock
2. B reorg:
  1. ...

#11707 - Acquisitive Reorganizations - Corporate Tax (Duke Zelenak)

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