A divisive Type D reorganization is a type of tax-free or tax-advantaged corporate reorganization allowed under the United States Internal Revenue Code that lets companies change their structure without incurring immediate tax consequences. With a Type D reorganization, the distributing corporation must transfer assets to one or more companies — and its shareholders must be in control of the corporation immediately after the transfer. The distributing corporation must also distribute stock pursuant to a reorganization plan under IRS Code § 355.
What is a Divisive Type D Reorganization?
A Type D reorganization involves transferring all or part of a corporation’s assets to another corporation. This reorganization must satisfy certain requirements under Internal Revenue Code § 368 (a)(1)(D). A divisive reorganization has three major steps:
- A new corporation is formed, initially functioning as a subsidiary
- Part of the parent company’s assets are transferred to the subsidiary
- The stock in the subsidiary is distributed to some of the parent corporation’s shareholders in exchange for their shares in the parent corporation.
If a divisive Type D reorganization is carried out correctly, a company can be reorganized with little to no tax liability.
How are Divisive Type D Reorganizations Structured?
Divisive Type D reorganizations commonly involve splitting one corporation into two or more where the two businesses would have a higher individual value individually. These reorganizations can also arise when shareholders wish to split with some owning the stock of one business and others owning the stock of another. Divisive Type D reorganizations typically involve transactions which are described as:
- Split-ups — In a split-up, a distributing company’s assets are transferred to at least controlled corporations. The stock is then distributed to the shareholders of the transferor corporation, which is liquidated. A split-up may involve distributing stock on either a pro rata or non-pro rata basis. After a split-up, the original distributing company ceases to exist.
- Split-offs — A split-off is a distribution of the subsidiary’s stock to one of more shareholders of the distributing company. The transferee shareholders then surrender their shares of stock in the parent company in exchange for shares of the subsidiary company. The result is that one shareholder group owns the original company, while another owns the new company. After a split-off, the distributing company no longer owns the subsidiary.
- Spin-offs — A spin-off is a distribution of a subsidiary’s stock on a pro rata basis to the shareholders of the distributing company to create a new, separate company. Following a spin-off, the distributing corporation’s shareholders own both the original company and the subsidiary’s shares. Shareholders do not have to surrender any stock in the distributing corporation.
The primary feature of a Type D reorganization is that shareholders of the transferring corporation must immediately gain control of the corporation to which the assets were transferred. While there are generally no tax implications for split-up, split-off, or spin-off transactions, it’s important to carefully consider the cost basis after this event. An experienced business attorney can help ensure a divisive Type D reorganization is carried out properly to ensure your company’s objectives are met.
Contact an Experienced New York Tax Attorney
Restructuring a company can be complex and it’s vital to have a knowledgeable attorney by your side who can advise you and help you avoid pitfalls. Brinen & Associates provides reliable representation to clients for various business and tax-related matters, including those involving Type D reorganizations. Call (212) 330-8151 or send us a message to learn more about how we can assist you.