Types of non-taxable reorganizations
This week we learned of quite a few options a business has for reorganizing which each have some advantages and disadvantages but are not taxable transactions (and of course anything outside these becomes a taxable transaction. So, one must carefully weigh the advantages and disadvantages and make decisions based on what he believes will happen once he reorganizes.
There are seven types of non-taxable reorganizations (A-G) and they are generally distinguished by whether the target or acquirer (or both) remain after the reorganization, and what is used in consideration. So, one must carefully consider what he wants to get out of the reorganization: for instance, is it better to merge or consolidate? Should he branch out into two new companies? Does he want to exchange stock or boot? Another important factor is whether the tax attributes of the target corporation are acquired in the reorganization. In types A, C, D, and G reorganizations the tax attributes are acquired from the target. In B, E, F reorganizations, the tax attributes remain with the target. It can be advantageous to acquire the tax attributes in some circumstances. If you think the target is going to perform well in the future and they have a current net operating loss (NOL) and you consolidate you can have the advantage of that NOL.
The passages we have looked at thus far in class would greatly inform the Christian’s decision in these matters that involve estimations and uncertainty. He can be obedient to the government because God has given it its authority (Romans 13, Matthew 25:15-22), and make his decision in a way that is fair and honoring to God (Ephesians 6:7, Proverbs 20:9-11). Taxes are necessary for the government to do its work (Judges 21:25, Romans 13), and so the Christian should be careful to abide by the government’s rules regarding taxes, not trying to make it only appear as if he is, but actually doing it. And he should make his decision concerning which reorganization to choose carefully, being a good steward to the gifts God has given him (1 Peter 4:10 – we did not look at this one in class, but I think it applies).
There are many non-tax reasons HugeCo would think it was a good idea to acquire their important supplier Bitty Co in consolidation:
They might earn a greater profit if the production of supplies was in-house and they gained all of Bitty Co’s customers. They’d probably have to do a cost/benefit analysis or have me do it for them.
Bitty Co is likely an expert in manufacturing their supplies and so HugeCo would benefit from that expertise as they continue to grow.
By consolidating, they could maintain their separate trademarks if they have good brand recognition and that is important to them.
Also, it could be that Bitty Co might want to join HugeCo to improve Bitty Co’s image while cutting down on purchasing costs for HugeCo. And an improvement in Bitty Co’s image would be mutually beneficial with HugeCo if they were consolidated.
They might want to isolate some assets with Bitty Co to shield them from the liabilities of their operations.
There are many tax reasons as well but as our book points out the non-tax reasons are often what motivate companies more. I feel like I would be able to give to better advice if I knew more details, but you would in real life of course. There are also several points that might make a consolidation appeal to Bitty Co (including #4 above):
Bitty Co might be in an unfriendly business environment and consolidating with Huge Co would likely open up doors in a more friendly one. I’m assuming HugeCo is in a friendly one because of their success.
If Bitty Co’s owners want to shield their true identities consolidation with HugeCo might help them to do so, especially if they have negative goodwill. This is similar to number 4 above.
Hoffman, W., Raabe, W., Maloney, D., and Young, J (2017). Corporations, Partnerships, Estates & Trusts: 2017 Edition. Stamford, CT: South-Western (Cengage Learning).
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