What will cause the corporations involved in a § 368 reorganization to recognize gain or loss? What will cause shareholders of the companies involved in the corporate reorganization to recognize gain or loss? If gain is recognized by shareholders, what are the different tax character possibilities?

Answer 1

Corporations involved in § 368 reorganizations are not permitted to recognize losses. The acquiring corporation can recognize gain if it transfers appreciated property (boot) along with its stock to the target. The target will recognize gain if it fails to distribute the boot to its shareholders. The target also can recognize gain if it distributes its own appreciated property to its shareholders.

Shareholders will recognize gains when they receive boot (non-stock property) in exchange for their stock in their corporation. Shareholders can recognize losses if they only receive boot and no stock.

Shareholder recognized gain in a corporate reorganization may have the following tax characters.
?
Dividend to the extent of the shareholder's proportionate share of corporate earnings and profits (E & P). The remaining gain is capital gain.
?
If the requirements of § 302(b) can be met, the transaction will qualify for stock redemption treatment, which is capital gain treatment.