What is IRC section 368?

IRC Section 368 mainly covers corporate reorganizations and can significantly impact the tax treatment of asset transactions.

Section 368 doesn’t directly apply to most asset purchases. Typically, asset purchases are not considered reorganizations under its rules. However, if an asset purchase is part of a qualifying reorganization, Section 368 can have an effect. Section 368 outlines how reorganizations are treated for tax purposes, including:

Non-Recognition of Gain or Loss

In some cases, a qualifying reorganization under Section 368 allows the seller to defer taxes on the gain. For example, if one company acquires another’s assets through a Type A, B, or C reorganization, the seller may not immediately recognize a gain.

Transfer of Liabilities

In qualifying reorganizations, the transfer of liabilities may be treated in a specific way that impacts the tax treatment of the transaction.

Tax Treatment of Stock vs. Assets

For reorganizations under Section 368, the acquiring company usually issues its own stock or securities as consideration. This differs from asset purchases, where the buyer typically offers cash or other forms of consideration.

Types of Reorganizations under IRC Section 368

Section 368 includes several types of reorganizations, most of which involve stock rather than assets. The main types are:

1. Type A (Statutory Merger or Consolidation)
   This is the most common reorganization. One company merges with another, and the acquiring company typically issues stock in exchange for the target’s stock. If the transaction qualifies, it can be tax-free, meaning the seller doesn’t recognize gain. While this usually involves stock, the transaction might also include asset purchases.
2. Type B (Stock-for-Stock Reorganization)
   In this type, the buyer acquires the target company’s stock. The target’s shareholders receive stock in the acquiring company. While this is generally a stock-for-stock exchange, it can also facilitate asset acquisitions, where stock plays a role.
3. Type C (Asset-for-Stock Reorganization)
   This is more closely tied to asset purchases. In a Type C reorganization, the buyer acquires substantially all of the target’s assets in exchange for stock. This can be a tax-free transaction if it meets certain conditions, like continuity of interest.
   • For the buyer: The buyer gets a step-up in the asset basis to fair market value, which can provide depreciation benefits.
   • For the seller: The transaction may avoid immediate tax recognition, meaning no gain is recognized at the time of the sale.
4. Type D (Transfer of Assets in Exchange for Stock)
   This is similar to Type C but is used in more complex reorganizations. The target transfers its assets in exchange for stock in the acquiring company. It can also qualify for tax-free treatment if certain conditions are met.
5. Type F (Change in Identity, Form, or Place of Organization)
   Type F reorganizations focus on internal corporate changes, like changing the legal form of a company or moving it to a different jurisdiction. These generally don’t involve asset purchases or sales.
6. Type G (Asset-for-Stock Acquisition)
   In this type, the acquiring company purchases assets in exchange for stock. The rules are more technical, but they offer flexibility in structuring asset purchases.