A corporate reorganization generally involves a change in the corporate form of a business enterprise without significantly affecting the interests of the shareholders. It generally involves two corporate parties, the acquiring corporation and the target corporation. The acquiring corporation generally acquires the assets or the stock of the target corporation in exchange for its stock or securities (and sometimes some additional consideration). The target corporation usually distributes the stock or securities received from the acquiring corporation to its shareholders and the shareholders surrender their target corporation stock or securities in exchange.
If a transaction qualifies as a tax-free reorganization, neither the acquiring corporation nor the target corporation must recognize gain or loss on the transaction. The acquiring corporation takes the target corporation’s basis in the transferred assets. The target corporation’s shareholders do not identify any gain or loss on the target corporation stock or securities exchange for the acquiring corporation stock or securities. However, the target corporation shareholders may need to recognize revenue on any additional consideration (“boot”) they receive as part of the transaction.
There are seven different types of reorganizations that qualify for tax-free treatment. To qualify as a tax-free reorganization, a transaction must satisfy not only the specific statutory requirements applicable to that type of reorganization but also certain non-statutory tests, such as continuity of interest, continuity of business enterprise, and business purpose.
If you would like to discuss the requirements of the various types of tax-free reorganizations in detail, please do not hesitate to call.