Corporate Acquisitions — D Reorganizations (Portfolio 772)

Tax Management Portfolio, Corporate Acquisitions — D Reorganizations, No. 772-4th, describes the various aspects of the two basic types of transactions that qualify as reorganizations under §368(a)(1)(D) (“D reorganizations”).

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Tax Management Portfolio, Corporate Acquisitions — D Reorganizations, No. 772-4th, describes the various aspects of the two basic types of transactions that qualify as reorganizations under §368(a)(1)(D) (“D reorganizations”).

The first type of D reorganization is a transfer by a corporation of substantially all of its assets to a controlled corporation followed by the complete liquidation of the transferor corporation. This type of transaction is frequently referred to as an acquisitive D reorganization.

The second type of D reorganization is a transfer by a corporation of a part of its assets to a controlled corporation, followed by a distribution of the controlled corporation's stock pursuant to §355. This type of transaction is frequently referred to as a divisive D reorganization. Divisive D reorganizations include “spin-offs,” “split-offs,” and “split-ups.”

This Portfolio focuses primarily on acquisitive D reorganizations, although it also addresses the basic requirements and consequences of divisive D reorganizations. Specifically, this Portfolio explains: (1) the types of asset transfers that may be treated as acquisitive D reorganizations (by either the taxpayer or the IRS); (2) the requirements of a D reorganization; and (3) the tax treatment of parties to a D reorganization.

For a discussion of divisive D reorganizations, see 776-3rd T.M., Corporate Separations. For discussion of other types of reorganizations, see the Portfolios listed under “Business Entities: C Corporations” in the Tax Management U.S. Income Series Classification Guide.


Candace A. Ridgway

Candace A. Ridgway, B.A. (cum laude), University of Connecticut; M.B.A., Arizona State University; J.D. (magna cum laude), Cornell Law School; LL.M. (Taxation, with distinction), Georgetown University Law Center; member, District of Columbia Bar; member, New York State Bar; member, American Bar Association, Tax Section, Corporate Tax Committee.

Table of Contents

Detailed Analysis

I. Introduction

II. Control of the Acquiring Corporation

A. Control Requirement

1. General Definition of Control

2. Control for Divisive D Reorganizations

3. Control for Nondivisive D Reorganizations

4. Constructive Ownership and Indirect Control

a. Divisive Transactions

b. Nondivisive Transactions

B. Control Immediately After the Transfer

1. In General

2. Divisive D Reorganizations

C. Who Must Have Control

1. Transferor and its Shareholders

2. Creditors as Shareholders

D. Two or More Classes of Stock

1. Voting Stock and Voting Power

2. Two or More Classes of Voting Stock

3. Value of Shares

E. Debt as Stock

III. Transfer of Assets

A. General

B. Substantially All of the Assets

1. Definition

2. The IRS's Ruling Position

3. Judicial Interpretation

4. Assets to Be Considered

a. Operating Assets

b. Cash and Liquid Assets

c. Intangibles

5. Time of Determination

6. Transfer of Acquired Assets to Subsidiary

C. Indirect Transfer of Assets

1. Transfer of Stock to Related Corporation

2. Use of Assets

IV. Distribution Requirement

A. General

B. Nondivisive Transaction Distribution Qualifying Under § 354

1. General Rule

2. Distribution by Transferor Corporation

a. Requirement that Stock Be Distributed

b. Requirement that Other Properties Be Distributed

c. Property that May Be Retained

(1) For Payment of Debt

(2) Retention of Charter

C. Distribution Qualifying Under § 355

1. General Rule

2. Corporate Separations or Divisions in General

3. Requirements of § 355

a. Introduction

b. Control

c. Active Business Requirement

d. Business Purpose

e. Device Test

f. Continuity of Interest

4. Intragroup Distributions

5. Distribution in Lieu of Interest

V. Plan of Reorganization

VI. Business Purpose Doctrine

VII. Continuity of Business Enterprise

A. In General

B. Business Continuity and D Reorganizations

VIII. Continuity of Interest

A. General Requirement

B. Continuity in a D Reorganization

C. Creditors and Continuity

IX. Step-Transaction Doctrine

A. General

B. Tests Applied by the Courts

1. End Result Test

2. Interdependence Test

3. Binding Commitment Test

C. Independent Significance and Functionally Unrelated Transactions

X. Liquidation-Reincorporation

A. Nature of Transaction

B. The IRS's Approach

C. Liquidation-Reincorporation Transaction as D Reorganization

D. Other Approaches to Liquidation-Reincorporation Transactions

XI. Comparison with Other Reorganizations

A. Overlap with Other Types of Reorganizations

1. Overlap with C Reorganizations

2. Overlap with F Reorganizations

3. Overlap with G Reorganizations

B. Advantages of D Reorganization Status

XII. Relationship to Section 351

XIII. Sale of Stock to Related Corporation

XIV. Combining Divisive and Acquisitive Reorganizations

A. Background

B. Spin-Off Followed by Reorganization Involving Distributing Corporation

C. Spin-off Followed by Reorganization Involving the Spun-off Corporation

D. Anti-Morris Trust Legislation

E. Proposed and Temporary Regulations Under § 355(e)

1. The 2001 Temporary and Proposed Regulations

2. The 2002 Temporary and Proposed Regulations

F. The 2005 Final Regulations

XV. Tax Treatment of a D Reorganization

A. In General

B. Treatment of Stockholders and Security Holders

1. Nonrecognition of Gain or Loss

a. Nondivisive Reorganizations

b. Divisive Reorganizations

2. Nonqualified Preferred Stock

3. Definition of Securities

4. Limitation on Tax-Free Receipt of Securities

5. Receipt of Other Property or “Boot”

a. Effect

b. Taxation of Boot if There Is No Exchange

c. Definition of Boot

(1) General

(2) Excess Securities

(3) Boot in D Reorganizations

d. Character of Gain

e. Extent to Which Boot Is Taxable

(1) Ratable Share of Earnings and Profits

(2) Gain Limitation

f. Dividend Received Deduction

g. Intra-Group Reorganization Boot

h. Installment Obligations Received in Reorganizations

6. Boot Received for § 306 Stock

7. Stock, Securities, or Other Property Received in Lieu of Accrued Interest

8. Market Discount Bonds

9. Basis of Stock and Securities Received

a. General

b. Allocation of Basis Among Blocks of Shares

c. Allocation of Basis Among Classes of Stock and Securities

d. Allocation of Basis in Divisive Distributions

10. Holding Period

C. Treatment of Transferor Corporation

1. Nonrecognition of Gain or Loss

2. Receipt of Boot in the Exchange

3. Distributions in Reorganizations

4. Distributions in Non-reorganization Transactions

5. Depreciation Recapture

6. Assumption of Liabilities

7. Basis

D. Treatment of Acquiring or Controlled Corporation

1. Nonrecognition of Gain or Loss

2. Basis

3. Holding Period

XVI. Carryover of Tax Attributes

A. General

B. Net Operating Loss Carryovers

C. Carryover of Credits

D. Earnings and Profits

1. Nondivisive Reorganizations

2. Divisive Distributions

XVII. Investment Tax Credit Recapture

XVIII. Section 306 Stock

XIX. Small Business Corporations

A. Section 1244 Stock

B. Qualified Small Business Stock

C. S Corporations

XX. Foreign Transactions

A. Outbound Transfers of Property

B. Inbound and Foreign Transfers of Property

XXI. Ruling Requests

XXII. Reporting Requirements

A. In General

B. Corporations

C. Other Parties

D. Acquisition of Control

Working Papers

Working Papers

Table of Worksheets

Worksheet 1 Diagram of a D Organization with Section 354 Distribution

Worksheet 2 Diagram of a D Reorganization with Section 355 Distribution [Spin-off]

Worksheet 3 Diagram of a D Reorganization with Section 355 Distribution [Split-off]

Worksheet 4 Diagram of a D Reorganization with Section 355 Distribution [Split-up]

Worksheet 5 Diagram of Liquidation-Reincorporation Transaction in which Liquidation Precedes Transfer to Transferee Corporation

Worksheet 6 Diagram of Liquidation–Reincorporation Transaction in which Transfer to Transferee Corporation Precedes Liquidation

Worksheet 7 Fact Pattern for Transaction Described in Sample Document

Worksheet 8 Minutes of Special Meeting of the Board of Directors of ABC, Inc. (the “Corporation”)

Worksheet 9 Minutes of Special Meeting of the Board of Directors of X Corporation

Worksheet 10 Minutes of Special Meeting of the Stockholders of X Corporation

Worksheet 11 Agreement and Plan of Reorganization

Worksheet 12 Bill of Sale

Worksheet 13 Assumption Agreement

Worksheet 14 Sample Request for Ruling

Worksheet 15 Excerpt from H.R. Rep. No. 861, 98th Cong., 2d Sess., 846–848 (1984), on § 64(a) of the Tax Reform Act of 1984





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