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 E Reorganizations under Section 368(a)(1)(E)
A Type E reorganization is a recapitalization of a corporation’s capital structure, which applies to both its equity and debt.
A corporation’s shareholders and debtors may exchange stock for stock, bonds for bonds, stocks for bonds, or bonds for stock.
Example Type E Reorganization
Corporation A, a Delaware corporation, is authorized under its corporate charter to issue 1,000,000 shares of voting common stock, and the corporation can issue 100,000 shares of preferred stock with a par value of $1 per share.
The corporation issued 1,000,000 shares of common stock to Jane Doe, making her the sole owner of Corporation A. During the 2023 fiscal year, the company issued $100,000 in bonds, which mature in 5 years.
In 2028, Corporation A decided not to pay the bondholders cash to settle the debts. Instead, it will exchange the bonds for preferred stock under a Type E reorganization, which qualifies as a reorganization under the treasury regulations.1 The corporation issued $100,000 of preferred stock in exchange for the $100,000 par value bonds.
- Treas. Reg. § 1.368-2(e)(1) ↩︎