ACC641- corp tax 2
* Just like companies are able to be created tax free, corporations are given the ability to restructure and reorganize as long as they follow the code rules * Since the reorganizations are usually substantial, the tax implication can be significant * The taxable gain for a shareholder is likely to be treated as either a dividend or a capital gain. * These tax classifications are less then the rates for ordinary income * If gains are divendend to the corp then they will be divs for the shareholders * If it is classified as a capital gain for the corp then shareholders will be taxed at their marginal rates * Since implications can be large, corps should ask the IRS if their reorg will have a tax treatment, if they rule in their favor then the org will proceed.
7.1 REORGANIZATIONS- IN GENERAL
* reorganization for tax purposes does not only corps that are in financial trouble, but also those that want to restructure * section 388 cover tax free reorganizations
* three general rules a corp must pass along with section 388: * 1. There must be a plan of reorganization
* 2. The reorganization must meet the continuity of interest and the continuity of business enterprise tests provided in the regulations * 3. The court-imposed step transaction doctrine should not apply to reorganization * SUMMARY OF THE DIFFERENT TYPES OF REORGANIZATIONS
* A a statutory merger or consolidation
* B the acquisition by a corporation of another using solely stock of each corp * C the acquisition by a corporation of substantially all of the property of another coorp in exchange for voting stock * D the transfer of all or part of a corp’s assets to another corp when the original corps shareholders are in control of the new corp immediately after transfer * E a recapitalization
* F a mere change in identity, form , or place of organization * G a transfer buy a cop of all or a part of its assets to another corp in a bankruptcy or receiving proceeding. * SUMMARY OF TAX CONSEQUENCES IN A TAX-FREE REORGANIZATION * Tax treatment for reorganizations mirrors the treatment under the like-kind provisions of section 1031 * When boot is received a gain might be recognized
* Like kind exchange does not apply for stock or securities * However, if the exchange for stock ad securities qualifies for section 368, then the exchange receives a tax-deferent treatment. * GAIN OR LOSS
* If the acquiring company transfers property to the target corp along with its stock and securities, a gain not a loss may be recognized * If a company receives boot and does not distribute it to its shareholders, the gain can be recognized but not the loss * Other property is defined as any asset other than stock or securities * Shareholders only recognize when they receive cash or other property in addition to more stock. Can only recognize loss when they receive boot and no stock. * Gain is lesser of the boot received or the realized gain * Once gain is recognized, the gain must be characterized properly * Div to the extent of E&P, rest is a cap gain
* If section 302b is met, the transaction will qualify for stock redemption treatment * Gains from qualifying stock redemptions are treated as capital gains * Compare stock received with the number of shares the shareholder would have received if the stock was distributed in the reorganization * Debt security holders receive similar treatment to shareholders * Recognize the gain, if principal amount is greater then the amount originally surrendered * Debt instruments held longer then 10 years are treated as securities * Those with terms of less then 5 years are not
* This rule is not in effect of...
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