The diagram walks through a statutory merger in four steps. In the Initial Structure, the Target Shareholder(s) own 100% of Target, while Acquiror stands as a separate corporation.
In the Target Asset Transfer, Target merges into Acquiror under state law. Target’s assets pass to Acquiror by operation of law, and Acquiror delivers merger consideration of 51% Acquiror stock and 49% cash. Because more than 50% of the consideration is Acquiror stock, the transaction satisfies the continuity-of-proprietary-interest requirement.
In the Target Liquidation, the Target Shareholder(s) surrender 100% of their Target stock and receive the 51% Acquiror stock and 49% cash. Acquiror now holds the former Target assets. At the Ending Point, the former Target Shareholder(s) own Acquiror, which holds Target’s assets.
The result is largely tax-free: Acquiror recognizes no gain on issuing its own stock under § 1032, Target recognizes no gain under § 361(a) & (c), and the shareholders defer gain on the stock they receive under § 354(a)(1) — though the 49% cash is boot on which shareholder gain is recognized.
An A reorganization is a statutory merger or consolidation effected under state or federal corporate law. § 368(a)(1)(A).
Beyond the statutory definition, the merger must have a business purpose and satisfy continuity of proprietary interest and continuity of business enterprise to qualify for tax-free treatment.
Unlike B and C reorganizations, an A reorganization tolerates substantial cash or other boot — here 49% cash — so long as enough Acquiror stock (51%) preserves continuity of interest.
Acquiror is protected by § 1032, Target by § 361(a) & (c), and the shareholders by § 354(a)(1); the cash boot triggers shareholder gain recognition up to the amount received.
