Reorganization can be defined as any restructuring that can be tax free as provided for in §368. A successful reorganization must meet some standards to qualify as a tax-free: the first requirement is that it must be having a plan for reorganization. The second is the continuity of interest and business enterprise, the third requirement demands that an organization must have a clear business purpose and finally the organization must not be a subject to step transaction doctrine. It is from this point that an IRS letter should be obtained showing the tax treatment desired by the parties intending to carry out reorganization (Richard, 2010).
There are different types of reorganization that are provided for in § 368(a) (1) and they include type A of reorganization. This type A of reorganization relies on the stock for assets; it involves merger and consolidation that is statutory. It can be a merger type of reorganization or the consolidation. Those who go for type A get a number of advantages; they may enjoy a good number of short-term advantages. Type A has no any condition that restricts the consideration got from acquiring to be a voting stock. The tax-free treatment of the sis not destroyed by any property or money that is received during the exchange, they however, is both boot and taxable under type A reorganization. This condition requires the continuity of interest to be attained as provided for in § 1.368-1T (e) (2). This type is required to abide by foreign, state or the federal statutes. In this type, the targeted firm does not have to transfer all its assets as they are allowed to dispose some asset. Disadvantages include; the organization must take all the liabilities, which may also include contingent liabilities. The target group must also liquidate.
The other type of reorganization is B: where one corporation takes control of stock interest from another through voting stock consideration. For the firm to be a parent subsidiary, it has to hold at least eighty percent stock. The parent does not necessarily hold the full eighty the transaction of reorganization but can achieve that condition after the acquisition as provided for in Reg. §1.368-2(c). The only consideration that can be used by the acquiring corporation is the voting stock. Even the slightest amount of any property will affect the tax-free benefits except for the fractional shares. The greatest advantage of type B reorganization method is that it is very simple. The next advantage shows no gain or loss that is assumed in reorganization. Its main disadvantage is consideration is restricted to voting stock only (Richard, 2012). There may raise a problem with the minor shareholders if the acquiring firm fails to attain a hundred percent of the targeted stock. Reverse triangle is a type of type B reorganization, as the acquiring firm becomes the parent.
Type C reorganization occurs when a corporation exchanges all the assets for voting stock and any limited amount of another property then liquidation of Target Corporation. “Substantially all” assets of the target firm need to be transferred to the acquiring firm. Rulings of the IRS require that target corporation must transfer on the lowest side 90% of the FMV of the net assets and 70% of the gross assets to acquiring corporations. Some of the advantages of type C reorganizations are less complicated compared to type A, the other advantage is that both cash and property can be used as consideration if the fair value of the properties transferred was 20% or less. The acquiring firm has the rights to choose which liabilities to assume from the target corporation. Disadvantages include the transfer of “substantially” all assets from the target corporation. Under “other property” liabilities can be used when 20% test of other consideration is to be used, this may prevent the use of some properties as consideration. The last disadvantage is that the target corporation is required to distribute the assets received to all shareholders Reg. § 1.368-2.
There are two types of type D reorganization: Divisive and Acquisition. Acquisition, which is also known as the minnow swallowing the whale, involves the absorption of the acquiring corporation by the target corporation. The entity that is transferring the assets is the acquiring corporation whereas the firm that receives the property is referred to the target corporation. Divisive type of reorganization D involves dividing corporation into two or more separate corporations. Common divisive D are split-offs, spin-offs and split-ups. In this case, distributing corporation is required to obtain control of Target Corporation. Disadvantage of type D is that it permits division of corporation without consequences of tax especially when boot is ignored. From the four type of reorganization discussed, the one that seem to be the best of all is type C which is simple and allows both cash and other property to be used as consideration. The acquiring corporation also has the right to choose which liability to choose. It would be the best to recommend for the clients over the other three (Richard, 2012).
The taxable acquisition to be used by the clients is to purchase all the stock from the target shareholder and maintain the target as subsidiary. The taxable reorganization will benefit the client more than non-taxable, as the client will be able to have the tax basis that equals the purchasing price. However, the target, which becomes subsidiary of the acquiring corporation, maintains its lower tax basis on its assets. There exist no deduction tax on the excess purchase price being paid over the actual target assets; the assets of the buying target will have a “step-up” in tax basis. The higher the future depreciation the lower the amortization deductions and less tax in future. The value of taxable is therefore higher than that of non-taxable reorganization, as the target firm will as a subsidiary to acquiring firm (Joan, 2013)..
Consolidation is needed when one corporation owns the majority of the other company’s common stock. Companies will be considered related when one or both are in control. Financial statements are useful when separated when the companies are closely related. Value of consolidation includes, it provides the means through which total resources can be pictured by the parent firm. Those parties with long-term interest consider it with the parent corporation. There are limitations such as, result of the consolidated firms are not disclosed which leads to poor performance being hidden. Retained earnings of the consolidated are not wholly available for the dividends (Murray, 2010). The financial rations of the consolidation are not representative. These limitations prevent financial analysts to recommend consolidation to clients.
Reference
Richard, F. (2010) Consolidated Tax Return. New York: Harcourt and Brace.
Joan, Y. (2013) State and Local Taxation. London: Oxford UP
Murray, S. (2010). Reorganization: The Seven Common One. New York: Doubleday Press
Novak, K. (2013). Federal Tax and Wholly Owned Subsidy. New York: Press Print.
Richard, H. (2012). Merger and consolidation. New York: McGraw Hill.
