PORTFOLIO

Corporate Acquisitions — (A), (B), and (C) Reorganizations (Portfolio 771)

Tax Management Portfolio, Corporate Acquisitions — (A), (B), and (C) Reorganizations, No. 771-3rd, discusses the requirements necessary to qualify a transaction as an “A” Reorganization, “B” Reorganization, “C” Reorganization, Forward Triangular Merger, or Reverse Triangular Merger. In addition to discussing the basic requirements, this Portfolio examines the consequences to the various parties involved in a reorganization, with an emphasis on practical problems and planning techniques.

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DESCRIPTION

Tax Management Portfolio, Corporate Acquisitions — (A), (B), and (C) Reorganizations, No. 771-3rd, discusses the requirements necessary to qualify a transaction as an “A” Reorganization, “B” Reorganization, “C” Reorganization, Forward Triangular Merger, or Reverse Triangular Merger. In addition to discussing the basic requirements, this Portfolio examines the consequences to the various parties involved in a reorganization, with an emphasis on practical problems and planning techniques.

Throughout this Portfolio, the relative advantages and disadvantages of the various types of acquisitive reorganization are compared. Through that comparison, along with an analysis of the particular facts, a practitioner should be able to make an informed judgment as to which, if any, type of acquisitive reorganization fits the circumstances of the parties.
For additional material with respect to the various means of effecting corporate acquisitions, see 770 T.M., Structuring Corporate Acquisitions — Tax Aspects.


Buy Corporate Acquisitions — (A), (B), and (C) Reorganizations (Portfolio 771) now


AUTHORS

H. KIRT SWITZER
H. Kirt Switzer, J.D. (Order of the Coif), UCLA School of Law; B.B.A. (cum laude) University of Massachusetts, Amherst; former partner, Ernst & Young LLP, Transaction Advisory Services; member, California State Bar; California C.P.A.

GARY B. WILCOX
Gary B. Wilcox, LL.M. (Taxation) New York University School of Law; J.D. (with highest honors), University of Oklahoma; B.B.A. (cum laude), Texas Tech University; former Deputy Chief Counsel, Internal Revenue Service; former Partner, PricewaterhouseCoopers, Washington National Tax Services; member, District of Columbia Bar and Pennsylvania Bar.

TABLE OF CONTENTS

Detailed Analysis

I. Overview

II. Choosing a Transaction Structure

Introductory Material

A. Description of Various Structures

1. Asset Acquisitions

2. Stock Acquisitions

B. Taxable Acquisitions

1. General Effect of the Tax Reform Act of 1986

2. Taxation of Taxable Asset Transfers

a. Use of § 338 (Including § 338(g) and § 338(h)(10))

b. Situations in Which Taxable Asset Transfers May Be Desirable

3. Taxation of Taxable Stock Transfers

a. Effects on Target and Target Shareholders

b. Situations in Which Taxable Stock Transfers May Be Desirable

C. Nontaxable Acquisitions

1. Taxation of Tax-Free Asset Acquisitions

2. Taxation of Tax-Free Stock Acquisitions

D. General Comparison of Asset and Stock Acquisitions

1. Liabilities

2. Unwanted Assets

3. Degree of Complexity

4. Legal Restrictions

5. Financial Accounting

6. Shareholder Approval

7. Securities and Exchange Commission

8. Antitrust

E. Summary

III. Acquisitive Asset Reorganizations

A. The “A” Reorganization

1. General

a. General Description

b. Statutory Merger or Consolidation

(1) Mergers Involving Disregarded Entities

(2) Mergers Involving Foreign Entities

c. Practical Considerations

2. Consideration Given by Acquiror

a. No “Solely for Voting Stock” Requirement

b. Degree of Permissible Boot

c. Assumption of Liabilities

(1) Limitations at Definitional Level

(2) Potential for Receipt of Boot by Target

(3) Potential for Receipt of Boot by Target Shareholders

d. Application of Step Transaction Principles

3. No “Substantially All” Requirement

4. Effect of Acquiror's Pre-existing Ownership of Target

5. Mergers Within Affiliated Groups

a. Downstream Merger

(1) “A” Reorganization vs. Liquidation

(2) “A” vs. Other Reorganizations

b. Upstream Merger

c. Brother-Sister (“Sideways” ) Merger

d. Formation of Holding Company

e. Corporate Inversions

6. Consequences of Failure to Qualify as an “A” Reorganization

B. The Forward Triangular Merger

1. General

a. General Description

b. Practical Considerations

c. New or Existing Subsidiary

2. Consideration Given by Acquiror

a. No Solely for Voting Stock Requirement

b. Prohibition on Use of Subsidiary Stock

c. Degree of Permissible Boot

d. Assumption of Liabilities

3. “Substantially All” Requirement

4. Effect of Sub's Pre-existing Ownership of Target

5. Consequences of Failure to Qualify as Forward Triangular Merger

a. Taxable Sale vs. Other Type of Reorganization

b. Zero Basis Problem

C. The “C” Reorganization

1. General

a. General Description

b. Practical Considerations

2. Consideration Given by Acquiror

a. “Solely for Voting Stock” Requirement

b. Degree of Permissible Boot

c. Assumption of Liabilities

(1) Liabilities Determined and Fixed in the Reorganization

(2) Interim Financing Advances

(3) Contingent Liabilities

(4) Liabilities of Target's Shareholders

3. Definition of “Voting Stock”

a. Definition of “Stock”

b. Definition of “Voting”

c. Extent of Voting Rights Required

d. Contingent Voting Rights

e. Voting Trusts, etc.

4. Permissibility of Nonstock Consideration

a. Acquiror's Payment of Reorganization Expenses

b. Registration Rights

c. Stock vs. Debt

d. Warrants

e. Fractional Shares

f. Redemptions and Dividends

g. Payments to Dissenters

h. Capital Contributions

i. Contingent or Escrowed Stock

j. Purchase of Assets from Target Shareholders

k. Employment Agreements

l. Substitution of Acquiror Options for Target Options

m. Special Stock Rights

(1) Put and Call Rights

(2) Rescission Rights

(3) “Poison Pill” Rights

5. “Substantially All” Requirement

a. General

b. Percentage of Total Assets

(1) Treasury Position

(2) Case Law Standards

c. Assets Considered

d. Dividends or Redemptions

e. Spin-Offs of Unwanted Assets

f. Sales of Assets

g. Payment of Reorganization Expenses

h. Simultaneous Acquisition of Affiliated Targets

i. Post-Transaction Drop-Downs or Push-Ups of Target Assets

6. The Complete Distribution Requirement

7. Effect of Acquiror's Pre-existing Ownership of Target

a. Old and Cold Test

b. Newly Acquired Shares Treated as Old and Cold Stock

c. Bausch & Lomb Doctrine

8. Triangular “C” Reorganizations

a. General Description

b. Practical Considerations

c. Prohibition on Use of Subsidiary Stock

d. Prohibition on Parent's Direct Assumption of Liabilities

e. Zero Basis Problem

9. Application of Step Transaction Principles

a. General

b. Recharacterization of Other Reorganizations as “C” Reorganizations

10. Overlap with Other Reorganization Provisions

a. Overlap with § 368(a)(1)(D)

b. Overlap with § 351

IV. Acquisitive Stock Reorganizations

A. The “B” Reorganization

1. General

a. General Description

b. Practical Considerations

2. Consideration Given by Acquiror

a. “Solely for Voting Stock” Requirement

b. Degree of Permissible Boot

c. Assumption of Liabilities

d. Existence of Nonstock Consideration

3. The Control Requirement

a. “Control” Defined

b. Restructuring to Satisfy the Control Requirement

4. Effect of Parent's Pre-existing Ownership of Target

a. “Old and Cold” Test

b. Target Stock Purchased by Acquiror Affiliates, Acquiror Shareholders, or Target

c. Purging Hot Stock

d. Subsequent Cash Purchases by Acquiror

5. No “Substantially All” Requirement

6. Triangular “B” Reorganizations

a. Issuance of Parent Stock

b. Prohibition on Use of Subsidiary Stock

c. Assumption of Liabilities

d. Drop-Downs

(1) Law Prior to Final COI and COBE Regulations Effective October 25, 2007

(2) 2007 COI and COBE Regulations

e. Zero Basis Problem

7. Forced “B” Reorganization

a. Practical Considerations

b. A “Newco” Is Required

8. Overlaps with Other Reorganization Provisions

a. Section 351

b. Reverse Triangular Merger

B. The Reverse Triangular Merger

1. General

a. General Description

b. Practical Considerations

c. Use of New or Existing Subsidiary

d. Formation of Holding Company

2. Consideration Given by Parent

a. Voting Stock for Control

b. Degree of Permissible Boot

c. Assumption of Liabilities

3. Control in the Transaction

4. “Substantially All” Requirement

5. Overlaps with Other Reorganization Provisions

V. Requirements and Doctrines Common to All Acquisitive Reorganizations

A. Continuity of Interest Requirement

1. Background and History

2. Nature of Consideration Issued in Transaction

3. Percentage of Equity Retained by Target Shareholders

a. In General

b. Measurement Date for Continuity of Interest Requirement

c. IRS Challenges to Purported Stock Interest

4. Historic Shareholder Requirement

a. Law Prior to COI Regulations

b. COI Regulations

c. Stock Held by Acquiror

(1) General “Old and Cold” Stock and COI Regulations

(2) Acquiror's Acquisition of Target Stock Prior to Reorganization

(a) Qualified Stock Purchase

(b) Non-Qualified Stock Purchase

(3) Target Stock Acquired in Preceding Reorganization or Exercise of Option

d. Insolvent Target

5. Post-Transaction Continuity

a. Law Prior to COI Regulations

(1) General

(2) Unrestricted Rights of Ownership

(3) Application of Step Transaction Principles

(4) Push-Ups of Acquiror Stock

(5) Drop-Downs of Acquiror Stock

b. COI Regulations

6. Groman-Bashford Doctrine - Remote Continuity Test

a. Historical Background: Groman-Bashford Doctrine

b. Dilution of Groman-Bashford Doctrine

7. Special Rules for COI for Non-Stock Entities

a. General

b. Mutual to Mutual Mergers

c. Mutual-to-Stock Mergers

d. Stock-to-Mutual Mergers

B. Continuity of Business Enterprise Requirement

1. Background and General Rules

2. Drop-Downs by Acquiror of Target's Assets or Stock

a. 1998 Regulations

b. 2007 Regulations

C. Business Purpose Requirement

1. General Rule

2. Treasury Regulations

3. Business Purpose of Shareholders

4. Ruling Applications

D. Step Transaction Doctrine

1. General

2. Alternative Tests for Applying Step Transaction Doctrine

a. Binding Commitment Test

b. End Result Test

c. Mutual Interdependence Test

3. Application to “A” Reorganizations

4. Application to “C” Reorganizations

5. Application to “B” Reorganizations

E. Section 368(a)(2)(C): Statutory Limitation on the Step Transaction Doctrine

1. 1998 Regulations: § 1.368-2(k)

a. General

b. Acquired Stock or Assets (vs. Assets of Acquired Target)

c. Successive Drop-Downs

d. Transfers to Multiple Subsidiaries

e. Transfers to Partnerships

f. Distributions

2. 2007 Final Regulations

3. Consequences of § 368(a)(2)(C) Drops

F. Plan of Reorganization Requirement

G. Limitations on Investment Companies

H. Net Value Requirement - 2005 Proposed Regulations

VI. Treatment of Parties to a Reorganization

A. General Requirements

1. Existence of a Reorganization

2. Party to a Reorganization

3. In Pursuance of the Plan of Reorganization

4. Exchange of Stock or Securities

B. Treatment of Target

1. Nonrecognition of Gain or Loss on Asset Transfer

a. Receipt of Stock or Securities

b. Receipt of Boot

2. Target's Basis in Stock, Securities, and Property Received

3. Nonrecognition of Gain or Loss on Distributions

4. Cancellation of Debt (COD) Income

a. Acquisitive Asset Reorganizations

b. Acquisitive Stock Reorganizations

C. Treatment of Acquiror

1. Nonrecognition of Gain or Loss on Issuance of Stock or Securities

a. Stock - § 1032

b. Securities

c. Other Property - § 1001

2. Acquiror's Basis in Target's Assets in an Acquisitive Asset Reorganization

a. Section 362(b)

b. Treatment of Assumed Liabilities

c. Holding Period

3. Parent's Basis in Subsidiary Stock in Triangular Acquisitive Asset Reorganizations

4. Acquiror's Basis in Target Stock in Acquisitive Stock Reorganizations

a. “B” Reorganization

b. Triangular “B” Reorganization

c. Reverse Triangular Merger

D. Carryovers of Target Attributes

1. Acquisitive Asset Reorganization

2. Acquisitive Stock Reorganization

a. Tax Years and the SRLY Rules

b. Reverse Acquisitions

3. Section 382 - General

E. Treatment of Target Shareholders and Creditors

1. Receipt of Stock or Securities by Target Shareholders and Creditors

a. General

b. Treatment of Securities Received

c. Treatment of Nonqualified Preferred Stock

d. Treatment of Stock Warrants

e. Receipt Solely of Securities or Other Property by Shareholders

f. Considerations Unique to Target Creditors

(1) Acquisitive Asset Reorganizations

(2) Acquisitive Stock Reorganizations

(3) Accrued Interest

(4) Debt Other Than “Securities”

2. Amount and Character of Recognized Gain

a. “Boot Within Gain” Rule

b. Characterization of Shareholder's Gain as Capital or Dividend Income

(1) Dividend Equivalency Test

(2) Accumulated vs. Current Earnings and Profits

(3) Whose Earnings and Profits?

3. Section 306 Stock

a. Receipt of § 306 Stock

b. Exchange of § 306 Stock

4. Application of § 305

a. Redemption Premiums on Preferred Stock

(1) Background

(2) Treatment Under Former Regulations

(3) 1990 Legislative Override of Former Regulations; Issuance of New Regulations

b. Exchange of Preferred Stock

5. Basis of Stock or Securities Received by Target Shareholders and Creditors

a. Section 358 - General

b. Allocation of Basis

(1) In General

(2) Individual vs. Gross Allocation

c. Holding Period

6. Treatment of Post-Reorganization Consideration

a. Installment Sale Rules

b. Release of Contingent or Escrowed Stock

c. Settlement Proceeds

VII. Reorganizations Involving S Corporations and Noncorporate Entities

A. General

B. S Corporation as Acquiror

1. “A” Reorganizations

2. “C” Reorganizations

3. Acquisitive Stock Reorganizations

C. S Corporation as Target

1. “A” Reorganizations

2. “C” Reorganizations

3. Acquisitive Stock Reorganizations

D. Noncorporate Entities

1. Partnerships and Limited Liability Companies Taxable as Corporations

2. Disregarded Entities

VIII. Reorganizations Involving Foreign Corporations

A. General

B. “Outbound” Transfers

C. “Inbound” and Foreign-to-Foreign Transfers

IX. Obtaining Rulings from the IRS

A. When a Ruling Should Be Sought

B. Procedure for Requesting a Ruling

C. “No Ruling” Areas

X. Reporting Requirements

A. General

B. Corporation a Party to the Reorganization

C. Other Parties

D. Liquidations Accompanying Reorganizations

E. Changes in Control

XI. Tax Treatment of Reorganization Expenses

Introductory Material

A. Regs. § 1.263(a)-4 - Amounts Paid to Acquire or Create Intangibles

B. Regs. § 1.263(a)-5 - Amounts Paid or Incurred to Facilitate an Acquisition of a Trade or Business, a Change in Capital Structure, and Certain Other Transactions


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Diagram of “A” Reorganization

Worksheet 2 Diagram of Forward Triangular Merger

Worksheet 3 Diagram of “C” Reorganization

Worksheet 4 Diagram of Triangular “C” Reorganization

Worksheet 5 Diagram of “B” Reorganization

Worksheet 6 Diagram of Forced “B” Reorganization

Worksheet 7 Diagram of Reverse Triangular Merger

Worksheet 8 Introductory Note and Agreement and Plan of Reorganization

Worksheet 9 Agreement of Merger

Worksheet 10 Employment Agreement

Worksheet 11 Agreement Not to Compete

Worksheet 12 Pledge and Escrow Agreement

Worksheet 13 Legal Opinion of Parent's General Counsel

Worksheet 14 Legal Opinion of Target's Outside Counsel

Worksheet 15 Election to Receive Parent Stock in Cancellation of Stock Options

Worksheet 16 Tax Opinion of Parent's Outside Counsel

Worksheet 17 Tax Opinion for Registration Statement

Worksheet 18 Representation Letter from Target for Tax Opinion

Worksheet 19 Representation Letter from Parent for Tax Opinion

Worksheet 20 Tax Discussion for Registration Statement

Worksheet 21 Examples of Documentation for Intragroup Reorganization

Worksheet 22 Articles of Merger

Worksheet 23 Resolution of Acquiror's Board of Directors

Worksheet 24 Resolution of Acquiror's Shareholders

Worksheet 25 Resolution of Target's Board of Directors

Worksheet 26 Resolution of Target's Shareholders

Worksheet 27 Request for Ruling on Nontaxability of “B” Reorganization

Worksheet 28 Information to be Filed by All Parties to a Reorganization Exchange: Treasury Regulations Under 1986 Internal Revenue Code

Bibliography

OFFICIAL

Statutes and Regulations:

Legislative History:

Miscellaneous (Non-tax Items):

Treasury Rulings:

Cases:

UNOFFICIAL

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Periodicals:

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