Tax attorneys and business attorneys often hear the term “reorganization” from business owners. The meaning behind “reorganization” may be many. Some business owners may simply be considering reorganizing certain parts or areas of their business that will have no tax consequence for the time being or ever. Some business owners may be referring to a reorganization through a bankruptcy. When a tax lawyer hears the term “reorganization” the term embraces a wide variety of corporate adjustments.
Under Internal Revenue Code Section 368(a)(1), the term reorganization includes consolidations, mergers, recapitalizations, divisions, acquisitions by one corporation of another corporation’s stock or assets or other changes within an organization. Many of these forms of reorganizations will involve the exchange of old interests in a corporation for new interests and a disposition of certain corporate assets. The commonality amongst these changes and reorganizations is, that if the changes or adjustments qualify as a reorganization under the Internal Revenue Code, neither gain nor loss will be recognized by the corporation on the transfer of property for stock or securities in another corporation that is a party to the reorganization, and shareholders and/or creditors may exchange their stock or securities for “new” stock or securities without gain or loss recognition as well. Additionally, the tax attributes of the target corporation that is acquired by another corporation in the reorganization, are generally carried over to the acquiring corporation. For example, earnings and profit, loss carryovers and accounting method to name a few are generally carried over to the acquiring corporation.
The general theory behind tax free reorganizations is that neither gain nor loss shall be recognized on changes of form when a taxpayer’s investment, such as stock or securities remains in a corporate foundation and no change to the substance in these rights has occurred. As an example, consider the situation where Corporation A merges into Corporation C. The former shareholders of Corporation A will exchange all of their stock in Corporation A for stock in Corporation C. The Corporation C stock received by the former shareholders of Corporation A is a continuation of their investment in Corporation A that has yet to be liquidated and thus create a taxable event of which gain or loss would be realized and/or recognized.
There are multiple types of tax free organizations under the Internal Revenue Code. If your corporation has been targeted by another corporation for a tax free reorganization or is considering some form of reorganization, please feel free to contact a Denver tax attorney or Denver business attorney at The McGuire Law Firm to analyze your circumstances, options and the applicable federal tax consequences.
John McGuire from The McGuire Law Firm prepared this article. John is a business attorney and tax attorney working with individuals and businesses regarding their taxation issues and business matters.
You can reach a Denver tax attorney or business attorney at The McGuire Law Firm by calling 720-833-7705 or email John@jmtaxlaw.com