A C 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 substantially all of the properties of another corporation. In determining whether the exchange is solely for voting stock, the assumption by the acquiror of a liability of the other corporation is disregarded. § 368(a)(1)(C).
In addition to satisfying the definition of a C 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 in exchange for substantially all of the target’s assets. The target then liquidates, surrendering its stock and distributing the acquiror stock it received to its shareholders, leaving the acquiror holding the target assets.
The acquiror must acquire substantially all of the properties of the target. For ruling purposes the IRS has applied a substantially all standard of roughly 90 percent of net assets and 70 percent of gross assets.
Consideration must be solely voting stock of the acquiror. A limited amount of other consideration is permitted under the boot relaxation rule, and liabilities assumed are disregarded in applying the solely for stock test.
The target is generally required to distribute the stock, securities, and other properties it receives, and to liquidate, pursuant to the plan of reorganization.
Section 1032 covers the acquiror, section 361(a) and (c) cover the target on the transfer and distribution, and section 354(a)(1) covers the shareholders on the stock they receive.
