Tax Treatment of Mergers, Acquisitions, and Reorganizations (IRC § 368 series)

The reorganization provisions permit tax-deferred combination, division, and recapitalization of corporations when specific continuity, business-purpose, and legal-form requirements are satisfied, shaping cash-tax outcomes, basis mechanics, and attribute carryovers.

Statutory reorganization types structure the deal blueprint.

Section 368 enumerates seven lettered reorganizations—A statutory merger or consolidation, B share-for-share acquisition, C asset-for-share acquisition, D divisive or acquisitive transfers, E recapitalization, F mere change in identity, and G bankruptcy reorganization.

Each type carries distinct thresholds: an A-merger demands target shareholders receive stock of the acquirer and the transaction follow applicable merger statutes; a C-reorganization limits boot to 20 percent of consideration and requires substantially all assets to pass; a B-reorganization limits consideration to voting stock. Selecting the wrong form can trigger full gain recognition.

Continuity of interest and business enterprise tests protect tax deferral.

Target shareholders must retain at least 40 percent of the value they held pre-transaction in acquiring stock, and the combined entity must continue a significant line of the target’s historic business or use a significant portion of its historic assets in an active trade or business.

Failure on either test converts the exchange into a taxable sale. Treasury rulings measure continuity at the moment of exchange, so bridging loans, options, or rapid-resale plans demand careful modeling.

Boot drives partial gain recognition and dividend treatment.

Cash or non-qualifying property received by target shareholders triggers gain up to the lesser of realized gain or boot value; when the target has earnings and profits, boot may be dividend to the extent of those E&P, altering shareholder tax basis and corporate withholding obligations.

Acquirers often cap boot at 10 percent to minimize recognition while satisfying minority liquidity demands. Election under § 83(b) on restricted stock received as boot can shift timing if vesting conditions apply.

Basis and holding period mechanics anchor future deductions.

Acquirer takes a carryover basis in assets received in A, C, or certain D reorganizations; target shareholders compute basis in acquirer stock as old basis less cash received plus gain recognized. Holding periods tack when consideration is acquirer stock, preserving long-term status for eventual exit.

Recapitalizations under § 368(a)(1)(E) preserve both corporate and shareholder basis, yet new classes of preferred stock may require § 305 treatment for distributions.

Attribute carryovers travel under § 381 but face § 382 limitations.

Net operating losses, tax credits, and overall E&P migrate to the acquirer in A, C, and D reorganizations; however, post-transaction loss utilization may be capped if the ownership change exceeds 50 percentage points within three years. Built-in gains within five years can accelerate § 382 limitation relief, but any net unrealized built-in loss shrinks the cap.

Groups planning serial acquisitions layer § 382 spreadsheets to avoid hidden ownership shifts from public float movements.

Journal entry — statutory merger under § 368(a)(1)(A).

AcquireCo issues $500 million stock, absorbs TargetCo assets fair-valued at $450 million, liabilities $100 million.

Dr Assets $450 000 000

Cr Liabilities $100 000 000

Cr Common Stock $500 000 000

Dr Additional Paid-In Capital $50 000 000

No goodwill arises for tax; book goodwill equals purchase consideration minus net identifiable assets. Deferred-tax assets or liabilities record book-tax basis differences, subject to initial recognition exception for business combinations.

Section 361 gain recognition in asset transfers balances tax-free principles.

Target recognizes gain on appreciated assets to the extent of boot received or liabilities relieved in excess of basis; the tax transfers to shareholders under § 361(c)(2), altering their stock basis and future gain on liquidation.

Proper cash-for-stock sequencing—paying boot to shareholders, not the target—avoids corporate-level gain.

Regulatory anti-abuse frameworks police step-ups and loss trafficking.

The successive-merger doctrine collapses multi-step triangular structures; the interaction with § 269 denies deductions if acquiring control is a principal purpose of evading tax; § 356 and § 357 rules prevent stuffing liabilities to inflate basis.

Pre-close covenant packages now require parties to maintain E&P, asset mix, and shareholder composition to safeguard reorganization status through closing.

Financial-statement impact under ASC 805 and IFRS 3 links purchase accounting to tax modeling.

Book goodwill follows acquisition-method fair-value rules, while tax goodwill depends on legal form. A stock acquisition electing § 338(h)(10) triggers deemed asset sale, creating deductible goodwill and new depreciable basis; journal entries reflect deferred-tax liability reversals over 15 years.

Impairment of goodwill does not affect tax amortization, widening book-tax differences and increasing deferred-tax assets subject to valuation testing.

Post-deal integration planning intersects with BEAT, CAMT, and Pillar Two.

Pushing debt into the U.S. parent raises § 163(j) limits and BEAT exposures; moving IP to the U.S. can raise regular tax yet increase CAMT foreign-tax-credit capacity; Pillar Two blending may favor distributing now-tax-free historical E&P ahead of top-up rules.

Integration models track entity rationalization, interest allocation, and QBAI shifts to optimize combined cash-tax profile.

Rigorous alignment of legal form, continuity thresholds, and attribute modeling ensures that mergers, acquisitions, and reorganizations deliver the intended tax deferral without unexpected gain recognition or attribute loss.

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