Debtor restructuring failed Type G reorganization requirements

Plain-English summary

Chief Counsel considered whether a debtor corporation’s restructuring qualified as a Type G reorganization under section 368(a)(1)(G). No shareholder received consideration, and the debtor’s creditors did not hold instruments that counted as securities for section 354. The restructuring therefore failed the required stock-or-securities exchange. It was also not a divisive transaction under section 355, so section 356 could not supply the missing qualification. Chief Counsel agreed that the restructuring was not a Type G reorganization and expressed no view on its treatment under other tax provisions.

Ruling snapshot

• Question: Did a debtor corporation’s restructuring qualify as a Type G reorganization?
• Outcome: Advice given, it did not qualify
• Key authorities: IRC §§ 354, 355, 356, and 368(a)(1)(G)

Full text (IRS public release)

         Office of Chief Counsel
         Internal Revenue Service
         memorandum
         Number: 201523001
         Release Date: 6/5/2015
         CC:CORP:B04:ERRaineri                          Third Party Communication: None
         PREF-106376-14                                 Date of Communication: Not Applicable

UILC:    368.14-00

 date:   February 26, 2014

   to:   Steven G. Cappellino
         CC:LB&I:RFTH:DET

from:    T. Ian Russell
         Chief, Branch 6 Corporate

subject PREF-106376-14
:
This memorandum responds to your request for advice regarding whether the
restructuring of a debtor corporation (“Debtor Corp”) constituted a reorganization
within the meaning of section 368(a)(1)(G) of the Internal Revenue Code (the “Code”).

                You submitted a memorandum (the “Memorandum”) to this office in which you
         analyzed various requirements that the Debtor Corp’s restructuring had to satisfy in
         order to qualify as a Type G reorganization.1 The Memorandum concluded that the
         restructuring failed to qualify as a Type G reorganization. We agree with your
         conclusion.

                 Section 368(a)(1)(G) defines a reorganization as a transfer by a corporation of
         all or part of its assets to another corporation in a Title 11 or similar case; but only if,
         in pursuance of the plan, stock or securities of the corporation to which the assets are
         transferred are distributed in a transaction which qualifies under section 354, 355, or
         356.

                 The requirement that the stock or securities of the transferee corporation be
         distributed in a transaction that qualified under section 354, 355, or 356 was not
         satisfied.

1
We adopt the detailed description of the facts and relevant background of the parties that you have set forth in your
Memorandum. For the sake of brevity, we will not restate those facts here, except as needed.
PREF-106376-14 2

              Section 354(a)(1) provides that no gain or loss shall be recognized if stock or
       securities in a corporation a party to a reorganization are, in pursuance of the plan of
       reorganization, exchanged solely for stock or securities in such corporation or in
       another corporation a party to the reorganization. No shareholder of the Debtor Corp
       received any consideration in the restructuring. In addition, based on the terms of the
       various debt instruments, no creditor of the Debtor Corp held an instrument in the
       Debtor Corp that constituted a “security” within the meaning of section 354.
       Therefore, the restructuring failed to meet the exchange requirement of section
       354(a)(1).2

               Section 355 applies to certain divisive transactions, and section 356 applies to
       otherwise qualifying section 354 or 355 transactions but for the fact that “boot” is
       distributed in the exchange.3 The restructuring of the Debtor Corp failed the section
       355 component of section 368(a)(1)(G) because it was not a divisive transaction.
       Since the restructuring failed both the section 354 and section 355 components of
       section 368(a)(1)(G), it could not satisfy the section 356 component.

              Accordingly, we agree with the conclusion of your Memorandum that the
       restructuring failed to qualify as a reorganization under section 368(a)(1)(G).4

              No opinion is expressed about the federal income tax treatment of the
       restructuring under any other provisions of the Code or the Federal Income Tax
       Regulations. This document may not be used or cited as precedent.

                Please call (202) 317-5024 if you have any questions regarding this document.

2
In addition to failing to satisfy the exchange requirement of section 354(a)(1), we note that as of the date of this
memorandum, the Debtor Corp has not yet liquidated as required by section 354(b)(1). That section, in relevant part,
provides that section 354(a) shall not apply to an exchange in pursuance of a plan of reorganization within the
meaning of section 368(a)(1)(G) unless the transferor corporation distributes the stock, securities and other property
received in the transaction, as well as all its other properties, in pursuance of the plan of reorganization.
3
Section 356(a)(1) provides that if section 354 or 355 would apply to an exchange but for the fact that the property
received in the exchange consists not only of property permitted by section 354 or 355 to be received without
recognition of gain but also of other property or money (i.e., “boot”), then the gain, if any, to the recipient shall be
recognized, but in an amount not in excess of the sum of such money and the fair market value of such other
property.
4
Because the restructuring failed to qualify as a Type G reorganization for the reasons stated, this memorandum
does not analyze any other requirements of section 368(a)(1)(G).