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Single Entity Reorganizations: Recapitalizations and F Reorganizations (Portfolio 774)

Tax Management Portfolio, Single Entity Reorganizations: Recapitalizations and F Reorganizations, No. 774-3rd, describes the special features and analyzes the tax consequences of corporate reorganizations involving a single company, specifically, the recapitalization under §368(a)(1)(E) and a mere change in identity, form or place of organization under §368(a)(1)(F).

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DESCRIPTION

Tax Management Portfolio, Single Entity Reorganizations: Recapitalizations and F Reorganizations, No. 774-3rd, describes the special features and analyzes the tax consequences of corporate reorganizations involving a single company, specifically, the recapitalization under §368(a)(1)(E) and a mere change in identity, form or place of organization under §368(a)(1)(F).

The portfolio discusses each type of reorganization separately, and in relation to one another and to the other types of reorganizations under §368. With respect to recapitalizations, the portfolio compares transactions technically qualifying under §368(a)(1)(E) with those which, while possibly not qualifying, are commonly referred to as recapitalizations. With regard to the F reorganization, a 1982 statutory amendment limited the provision to transactions involving a single corporation; special attention is paid to explaining the purpose and effect of this change, and to distinguishing the F reorganization reincorporation transaction from other types of multi-party reorganizations.

A significant portion of the portfolio is devoted to describing the tax consequences of recapitalizations and F reorganizations both to the corporations involved and to their shareholders and security holders. A special section is devoted to analyzing the tax consequences of various specific types of recapitalization transactions.


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AUTHORS

MICHAEL J. KLIEGMAN
Michael J. Kliegman, A.B., University of Pennsylvania; J.D., Boston University School of Law, LL.M. (Taxation), Georgetown University Law Center; member: American Bar Association, Tax Section (Corporate Tax Committee; Task Force on Acquisitions Involving S Corporations); New York State Bar Association, Tax Section (Committee on Reorganizations); formerly, Internal Revenue Service, Office of Chief Counsel, Reorganization Branch (1981–85), Group Chief (1984–85).

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

A. Scope

B. Distinguished from Other Reorganizations

C. Summary of Tax Consequences

D. Common Uses of Single-Entity Reorganizations

E. Private Letter Rulings

II. Requirements for an F Reorganization

A. Definitional Requirements

1. In General

a. F Reorganizations Defined

b. Proposed Regulations Defining F Reorganizations

2. Specific Types of F Reorganizations

a. Single-Entity Transactions

b. Reincorporations

c. Changes in Form of Business Organization

B. Business Purpose

C. Continuity of Interest

1. In General

a. Transactions Occurring On or After February 25, 2005

b. Transactions Occurring Before February 25, 2005

(1) Historical Overview

(2) 1998 Continuity of Interest Regulations

2. Identity of Proprietary Interest and Involvement of Only One Entity in F Reorganizations

D. Continuity of Business Enterprise

1. Transactions Occurring On or After February 25, 2005

2. Transactions Occurring Before February 25, 2005

a. Historical Overview

b. 1998 Continuity of Business Enterprise Regulations

c. The “Mere Change” Standard

E. Proposed Absence of Net Value Requirement

III. Requirements for an E Reorganization

A. Introduction

B. Definition of Recapitalization

C. Business Purpose

D. Absence of Continuity of Interest and Continuity of Business Enterprise Requirements

IV. Basic Tax Consequences of E and F Reorganizations

A. Introduction

B. Party to a Reorganization

C. Plan of Reorganization

D. Treatment of Corporation in Recapitalization

1. Issuance and Retirement of Stock

2. Issuance and Retirement of Debt

E. Treatment of Old Corporation in F Reorganization

F. Treatment of New Corporation in F Reorganization

G. Treatment of Stockholders and Security Holders

1. Definition of Security

2. Receipt of Nonrecognition Property Only

3. Receipt of Other Property or “Boot”

a. In General

b. Securities as Boot

c. Treatment of Gain as Dividend

d. Distinguishing Boot from Ordinary Distributions

e. Cash in Lieu of Fractional Shares

f. Treatment of Warrants and Other Stock Rights

g. Preferred Stock as Boot

(1) Section 351(g)

(a) In General

(b) Conversion Privilege

(c) Certain Exchanges Excluded From Gain Recognition and Not Treated as Boot

(2) Regulatory Guidance

H. Carryover of Tax Attributes

I. Treatment of Transaction Costs

V. Detailed Consequences of Various Recapitalization Exchanges

Introductory Material

A. Exchanges of Preferred Stock

1. Preferred for Common

2. Preferred with Dividend Arrearages

B. Exchanges of Common Stock or Stock Generally

1. Common for Common

2. Common for Preferred

3. Common for Debt

C. Exchanges of Debt for Debt

1. In General

2. Securities for Securities

a. Treatment of Holder

b. Treatment of Issuer

(1) Taxable “Exchange” of Debt Instruments - In General

(2) Taxable “Exchange” of Debt Instruments - Current Law

(3) Taxable “Exchange” of Debt Instruments - Prior Law

(4) Taxable “Exchange” of Debt Instruments - Impact to Issuer

3. Securities with Interest Arrearages

4. Exchange of Non-Security Debt

5. Reacquisition of a Debt Instrument: Deferral of Cancellation of Indebtedness Income

D. Exchanges of Debt for Stock

E. Exchanges of Warrants for Stock

VI. Application of § 305 to Recapitalizations

A. Introduction

B. Distinguishing Exchange from Distribution

C. Application of § 305 Regulations to Recapitalizations

D. Preferred Stock and Redemption Premium

VII. Liquidation-Reincorporation and Multiple F Reorganizations

A. 1986 Tax Reform Act Changes

B. Nature of the Transaction

C. Liquidation-Reincorporation Transactions as F Reorganizations

D. F Reorganizations Involving Multiple Operating Corporations

VIII. The Step-Transaction Doctrine as Applied to F Reorganizations

IX. Cross-Border F Reorganizations

A. Introduction

B. Outbound Reincorporations

C. Inbound Reincorporations

X. Mutual-to-Stock Conversions

Introductory Material

A. Savings and Loan Conversions

B. Insurance Company Demutualizations

1. In General

2. Tax-Free Reorganization

a. Type E Reorganization (Recapitalization) - § 368(a)(1)(E)

b. Type A Reorganization (Statutory Merger) - § 368(a)(1)(A)

c. Type F Reorganization (Change in Form of Doing Business) - § 368(a)(1)(F)

3. Treatment for Tax Purposes

a. For Former Policyholders of Mutual Insurance Companies

b. For Demutualized Insurance Company

4. Other Considerations

a. Holders of § 408 IRAs, § 401(k) Plans, and § 403(b) Tax-Sheltered Annuities (TSAs)

b. Foreign Policyholders - Withholding Issues

c. Consolidated Tax Return Issues

d. Closed Block

e. Grandfathering of Existing Policies

f. Mutual Insurance Holding Companies

XI. Estate Freeze Recapitalizations

A. Background

B. Sections 2701–2704

XII. Section 306 Stock

A. Introduction

B. Definition of § 306 Stock

C. Treatment of Shareholder on Disposition of § 306 Stock

1. Redemptions

2. Dispositions Other Than Redemptions

3. Exception for Transactions Not in Avoidance

XIII. Reporting Requirements

A. Reporting Requirements Under § 368

1. In General

2. Corporation a Party to the Reorganization

3. Other Parties

B. Reporting Requirements Under § 6043(c)

C. Reporting Requirements Under § 6043A


WORKING PAPERS

Working Papers

Table of Worksheets

Other Resources:

Content

Worksheet 1 Diagram of F Reorganization -- Simple Reincorporation

Worksheet 2 Fact Pattern for Transaction Described in Sample Documents

Worksheet 3 Minutes of Special Meeting of Board of Directors of Widget Manufacturing Corporation

Worksheet 4 Unanimous Consent of the Board of Directors and of the Sole Shareholder of Newco, Inc.

Worksheet 5 Agreement of Merger and Plan of Reorganization

Worksheet 6 Conference Report to Accompany H.R. 4961 Tax Equity and Fiscal Responsibility Act of 1982 (P.L. 97-248) H.R. Rep. No. 760, 97th Cong., 2d Sess. (1982) Excerpt Concerning TEFRA § 225(a) Amendment to § 368(a)(1)(F)

Worksheet 7 General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984 concerning amendments to § 108

Worksheet 8 Committee Reports to Accompany H.R. 5835 (the Omnibus Budget Reconciliation Act of 1990 (amendments to § 108 concerning debt for debt and stock for debt exchanges))

Worksheet 9 Committee Reports to Accompany H.R. 5835 (the Omnibus Budget Reconciliation Act of 1990 (amendments to § 305 concerning redemption premium on preferred stock))

Worksheet 10 Committee Reports to Accompany H.R. 5835 (the Omnibus Budget Reconciliation Act of 1990 (repeal of § 2036(c))

Worksheet 11 Preamble to Proposed Regulations Published in Federal Register August 12, 2004, REG-106889-04, 69 Fed. Reg. 49836 (8/12/04)

Bibliography

OFFICIAL

Statutes: Internal Revenue Code

Treasury Regulations:

Legislative History:

Revenue Rulings:

Cases:

UNOFFICIAL

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