Question

In the merging and reorganization of corporations,  one company agrees to purchase another, or two companies decide to merge. What are the tax consequences of such transactions? As we've learned and revisited again and again, transactions between unrelated parties, such as two corporations, are generally fully taxable, and the parties involved will generally recognize gain or loss on these transactions as a result. Does this general rule apply to corporate mergers and reorganizations as well? If not, why and how?

Answer 1

Merger or Reorganization is a non taxable event whereby Corporations continues to exist, but in a modified form. In order to qualify as tax free reorganization, a corporation must:

• Have a plan of reorganization
• Satisfy the continuity of interest and continuity of business enterprise criteria
• Establish a sound business purpose for the reorganization.

In the event of reorganization, no gain or loss is generally recognized by a transferor corpoartion on transfer of the property to the transferee corpoartion.

• Basis of the assets received by the transferee is carried over from the transferor corpoation.
• Basis of the new stock / securities received by shareholders is equal to the tax basis in their old stock/ securities.  

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