Reorganization is a process designed to revive a financially troubled or bankrupt firm. A reorganization involves the restatement of assets and liabilities, as well as holding talks with creditors in order to make arrangements for maintaining repayments. Reorganization is an attempt to extend the life of a company facing bankruptcy through special arrangements and restructuring in order to minimize the possibility of past situations reoccurring.
Corporations reorganize and restructure for various reasons and in numerous ways. The bottom line usually is, well, the bottom line. Companies reorganize to increase profits and improve efficiency. The reorganization of a company typically addresses the efficiency component in an attempt to increase profits. It's not unusual for a corporation to reorganize on the heels of changes at the top. A new CEO often sees reorganization as a cure for a company's ills, and companies sometimes hire a new leader based specifically on his vision for reorganization.
Corporate reorganization normally occurs in several ways, which includes:
Type A: Mergers and Consolidations
Section 368 of the IRS Revenue Code identifies seven types of corporate reorganizations. As reported by Tax Almanac, the first recognized reorganization type is a statutory merger or acquisition. Mergers and consolidations are both based on the acquisition of a corporation's assets by another company.
Type B: Acquisition --- Target Corporation Subsidiary
A Type B reorganization is the acquisition of one company's stock by another corporation, with the acquired company becoming a subsidiary of the acquiring corporation. The acquisition plan must be carried out in a short time period, such as 12 months, and the acquisition has to be only one in a series of moves comprising a larger plan to acquire control. The transaction also must be made solely for the purpose of acquiring voting stock.
Type C: Acquisition --- Target Corporation Liquidation
Unless the IRS waives the requirement, a targeted corporation must liquidate as a condition of a Type C acquisition plan, and target-corporation shareholders become shareholders in the acquiring company. Reorganization provisions dictate tax consequences, not liquidation rules contained in Tax Code Sections 336 and 337.
Type D: Transfer
Type D transfers are classified as acquisitive D reorganizations or divisive D restructurings, which include spinoffs and split-offs. For example, if Corporation A contains the assets of former Corporation B and of Corporation A, Corporation B goes out of business, and former Corporation B shareholders control Corporation A.
Type E: Recapitalization
A recapitalization transaction involves the exchange of stocks and securities for new stocks, securities or both by a corporation's shareholders. The move concerns just one company and the reconfiguration of the company's capital structure. Possible scenarios include a stock-for-stock recapitalization plan, a bonds-for-bonds move and a stocks-for-bonds transaction.
Type F: Identity Change
A Type F reorganization plan is defined in the Internal Revenue Code as "a mere change in identity, form or place of organization of one corporation, however (a)ffected." F reorganization rules generally apply to a corporation that changes its name, the state where it does business or if it makes changes in the company's corporate charter, in which case a transfer is deemed to occur from the prior corporation to the new company.
Type G: Transfer
Type G reorganizations involve bankruptcy by permitting the transfer of all or some of a failing company's assets to a new corporation. One caveat is that the stock and securities of the controlled corporation are distributed to the previous company's shareholders under Type D --- transfer reorganizations --- rules for distribution.
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