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Acquisitive Reorganizations Type A: Statutory mergers and consolidations I.
II. 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). a. T SH i. 354-non recognition for T SH ii. 356(a)(2) except for boot, see below for boot treatment iii. 358 old T shareholders basis in A stock they got is the same as T basis b. T corporation disappears i. 361 non recognition for T's gain c. A i. 362(b) A takes T's assets with T's basis ii. 381 A inherits T's tax attributes iii. 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 a. Non qualifying preferred stock is still treated as equity under 368 b. Look at the aggregate, 40% equity i. This is sufficient because it's in the example of the regulation c. Use the value of stock at the time contract is signed. Therefore, same as b. d. 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. e. P continues the historic business here: law school books are probably the same as lawyer books. i. P does not use T assets because P sells those assets.
Continuity requirements: apply to ALL types of reorg III.
Continuity of proprietary interest a. Requires SH of T to receive sufficient proprietary interest in A to justify treatment of type A reorganization b. 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 i. Percentage= equity consideration/total consideration used by P to acquire T ii. Do the continuity test in the aggregate (including multiple steps in a creeping acquisition), not by individual SH
iii. Non qualifying preferred stock is still treated as equity under 368 c. Continuity of historic target SH i. 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. ii. 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. iii. 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 d. Post-acquisition continuity i. The length of time that T SH must hold the stock in A. ii. Subsequent sale of A stock by former T SH will generally be disregarded. 1.368-1(e)(1)(i) iii. 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 a. Requires P either to continue T's historic business or to use a significant portion of T's historic business assets in a business. b. 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: Acquisitions of stock solely for voting stock I.
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. a. 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 i. 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
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