The information presented is only of a general nature, intended simply as background material, is current only as of the latest revision date, October 15, 2007, omits many details and special rules and cannot be regarded as legal or tax advice.

A transaction may not qualify as a reorganization, although it is structured as such, because, for example, too much nonqualifying consideration, such as cash, is transferred to the former Target shareholders.

A failed A reorganization, a taxable merger, is treated as a taxable sale by Target of its assets to Acquiring and then a taxable dissolution of Target.

Target recognizes gain on the sale of its assets and the Target shareholders recognize gain upon the receipt of the consideration, including Acquiring stock. The Target shareholders obtain a fair market value basis for that consideration.

Acquiring recognizes gain upon any appreciated property, other than its own stock, transferred to Target and obtains a fair market value basis for the Target assets.

A failed B reorganization, a taxable stock-for-stock exchange, causes the Target shareholders to recognize gain or loss but Acquiring recognizes no gain or loss on the issuance of its own stock. Failed triangular B reorganizations have similar results except that Parent may be treated as first transferring its stock to Acquiring. Acquiring might thus have a zero basis in the Parent stock, triggering a large gain when that stock is transferred to Target or the Target shareholders. Regulations adopted in 1995 generally cure this potential zero basis problem where, as is usually the case, Parent and Acquiring join in filing a consolidated return.

A failed C reorganization or triangular C reorganization, a taxable transfer of assets in exchange for stock, is treated much like a failed merger; Target recognizes gain on the sale of its assets and Acquiring recognizes no gain upon issuance of its own stock for the Target assets, but may face a "zero basis" problem with respect to Parent stock in a failed triangular C reorganization.

So too for failed forward triangular mergers; Target recognizes gain on the deemed sale of its assets to Sub and Sub may face the "zero basis" problem with respect to Acquiring stock.

If Sub is a newly formed, transitory Acquiring subsidiary, a reverse triangular merger can also be considered an acquisition by Acquiring of the stock of Target directly, which may qualify as a B reorganization. For example, if Acquiring owns more than 20% of Target, the Target shareholders cannot exchange control of Target in a reverse triangular merger, but Acquiring may be able to acquire control of Target in that transaction solely for voting stock.

© 2005