A corporate reorganization is any change to a company’s internal operating structure that aims to improve efficiency, increase revenues, decrease costs, or achieve any combination of these objectives.
Under Section 368 of the Internal Revenue Code (IRC), there are seven different types of corporate reorganizations. The seven types of reorganizations are the following:
- Type A Reorganization: Merger and Consolidation. Section 368(a)(1)(A)
- Type B Reorganization: Acquisition of Subsidiary. Section 368(a)(1)(B)
- Type C Reorganization: Acquisition with Target Liquidation. Section 368(a)(1)(C)
- Type D Reorganization: Transfers. Section 368(a)(1)(D)
- Type E Reorganization: Recapitalization. Section 368(a)(1)(E)
- Type F Reorganization: Identity Change. Section 368(a)(1)(F)
- Type G Reorganization: Transfer of Assets. Section 368(a)(1)(G)
Type C Reorganizations under Section 368(a)(1)(C)
A Type C reorganization is an asset for stock acquisition similar to a Type A Reorganization. The Type C reorganization requires the transferor corporation to transfer substantially all of its property in exchange for voting stock in the target corporation. The voting stock is then distributed out to the existing shareholders of the transferor corporation.
Example Type C Reorganization
John Smith owns 100% of Smith Corporation and wants to sell his company to Target Company. Target Company proposes a Type C reorganization.
Smith Corporation transfers 100% of its assets to Target Company in exchange for voting stock in Target Company. The balance sheet for Smith Corporation now shows no assets other than the stock held in Target Company.
Smith Corporation then distributes the stock held in Target Company to John Smith, who is the sole shareholder. The Smith Corporation is then liquidated and dissolved.
After the transaction closed, Smith Corporation no longer exists, and John Smith holds voting stock in Target Company.