A B reorganization is defined as the acquisition by one corporation, in exchange solely for all or a part of its voting stock (or the voting stock of a corporation that is in control of the acquiror), of stock of another corporation if, immediately after the acquisition, the acquiror has control of that other corporation. § 368(a)(1)(B).
In addition to satisfying the definition of a B reorganization, there must be a business purpose, continuity of proprietary interest, and continuity of business enterprise to qualify for tax-free treatment.
The Code sections that provide non-recognition treatment are as follows:
In the transaction shown, the acquiror transfers solely its voting stock to the target shareholders in exchange for their target stock. After the exchange the acquiror holds 368(c) control of the target, and the former target shareholders hold acquiror stock.
The consideration must be solely voting stock of the acquiror, or of a corporation in control of the acquiror. Adding any other consideration generally disqualifies the B reorganization.
Immediately after the acquisition the acquiror must have section 368(c) control of the target, meaning at least 80 percent of the voting power and of each class of nonvoting stock.
Beyond the statutory definition, the transaction must have a business purpose, continuity of proprietary interest, and continuity of business enterprise to receive tax free treatment.
Section 1032 covers the acquiror on the stock it issues, and section 354(a)(1) covers the shareholders on the stock they receive in the exchange.
