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 D Reorganizations under Section 368(a)(1)(D)
A Type D reorganization involves transferring all or a portion of a corporation’s assets to a different corporation. Immediately after the transfer, the transferor corporation or its shareholders control the corporation to which the assets were transferred.
A corporation typically uses a Type D reorganization to divide business operations among separate entities.
Example Type D Reorganization
Parent Company, a Delaware corporation, is 100% owned by Jane Doe. The Parent Company owns and operates several convenience stores and car wash facilities. The Parent Company wants to separate its car wash business from its convenience store business.
The Parent Company forms a new Wyoming corporation and transfers all the assets attributed to the car wash business to the newly formed Wyoming corporation. In exchange for transferring the assets, the Wyoming corporation issues voting stock to the Parent Company. The Parent Company now owns 100% of the stock in Wyoming corporation, effectively making Wyoming corporation a subsidiary.
After receipt of the voting stock, the Parent Company distributes the voting stock of Wyoming corporation as a non-dividend distribution to Jane Doe. Jane Doe receives 100% of the stock because she is the 100% shareholder of the Parent Company. Under this scenario, the property distribution to Jane is a “spin-off” transaction because the stock was distributed to all shareholders of the Parent Company. In contrast, a “split-off” transaction occurs when stock is distributed only to shareholders who want to own shares in the new corporation.
After the transaction closed, Jane Doe owned 100% of the Parent Company, which conducts the convenience store operations. Jane Doe also owns 100% of the Wyoming corporation which conducts the car wash business. She has successfully separated the two operations.