Type B Reorganization

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Upon review, we see that you have filed a consolidated income tax return with the two subsidiaries acquired through the Type B reorganization. We also see that you have targeted the ABC Corporation for acquisition which has substantial operating losses. We also noted that you are looking to acquire the XYZ Corporation and BB Corporation as subsidiaries within the next 6 months. We think it may be beneficial for you to look at other methods of reorganization for the purposes of long term tax benefits and advantages compared to just the Type B reorganization. Under section 368 of the Internal Revenue Code, a Type A reorganization is defined as a statutory merger or consolidation. The Type A reorganization is one of the more popular ways…show more content…
In a Type D reorganization, the acquired business is subdivided into smaller components which are then either spun off, split off or split up. When the acquired business is spun off, the entity is divided into two separate entities, which are then given to the existing shareholders in the form of stock. If the acquired business is split off, the acquired business is split into different entities, with some shareholders only retaining their shares in the original entity, while the other shareholders turn in their shares in exchange for shares in the new entity. When the acquired business is split up, the corporation would create several new entities, transfers its assets and liabilities to them, and liquidates itself. Shareholders within the acquired business are now transferred to your corporation (Kibilko,…show more content…
Below we will go over disadvantageous scenarios that you may encounter when filing the considered return and what you can do to minimize or eliminate them all together. The first thing to note is filing consolidated returns requires strict compliance with the IRS Regulations. This can cause additional stress and additional costs. This can be alleviated by ensuring your accountants are properly trained and knowledgeable with all applicable tax regulations in filing a consolidated return. A consolidated return election is binding for future years. The only ways this election can only be changed or terminated is by either disbanding your group of affiliated partners or by obtaining permission from the IRS to file separate returns. If you want to keep business as usual I would recommend going with the latter. The subsidiary would have to change its tax year to the same year as that of the common parent corporation. The problem here is that this can create a short tax year for the subsidiary instead of a whole one which can create issues with the carryovers of unused losses. Losses of a subsidiary decrease the parent's tax basis in the subsidiary. In the case of the ABC Corporation, since they have losses, this will reduce the overall tax basis that your corporation is ultimately responsible
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