Legal Definitions - D reorganization

A D reorganization refers to a specific type of corporate restructuring that qualifies for tax-deferred treatment under U.S. federal income tax law, specifically Section 368(a)(1)(D) of the Internal Revenue Code. It allows companies to reorganize their assets and ownership structure without triggering immediate tax consequences for the corporations involved or their shareholders, provided strict legal requirements are met.

Generally, a D reorganization involves:

• A corporation (the "transferor") transferring all or a portion of its assets to another corporation (the "transferee").
• Immediately after the transfer, the transferor corporation or its shareholders (or both) must control the transferee corporation (typically owning at least 80% of its voting stock and other classes of stock).
• The transferor corporation then distributes the stock or securities of the transferee corporation to its own shareholders. This distribution can be part of a "spin-off," "split-off," or "split-up" (where a business is divided), or it can be part of an acquisitive transaction where substantially all assets are transferred to a new entity.

Here are some examples illustrating a D reorganization:

• Example 1: Corporate Spin-Off

  Imagine "Global Conglomerate Inc." is a large company with two distinct business divisions: "Advanced Robotics" and "Sustainable Energy Solutions." Global Conglomerate's management believes that separating the two divisions would allow each to grow more effectively and attract different investors. To achieve this, Global Conglomerate forms a new, independent company called "Green Energy Corp." It then transfers all the assets and liabilities related to its Sustainable Energy Solutions division to Green Energy Corp. Immediately after this transfer, Global Conglomerate distributes all the shares of Green Energy Corp. to its existing shareholders, who now own stock in both Global Conglomerate Inc. and Green Energy Corp.

  How this illustrates a D reorganization: Global Conglomerate Inc. (the transferor) transferred assets to Green Energy Corp. (the transferee). Global Conglomerate's shareholders controlled Green Energy Corp. immediately after the transfer (as they received all its shares). Finally, Global Conglomerate distributed the stock of Green Energy Corp. to its shareholders. This transaction, if structured correctly, qualifies as a D reorganization, allowing the separation to occur without shareholders immediately paying capital gains tax on the value of the Green Energy Corp. shares they received.

• Example 2: Business Division for Shareholder Separation

  Consider "Family Foods Co.," a closely held business owned by two families, the Millers and the Davises. Family Foods Co. operates two distinct lines: "Gourmet Prepared Meals" and "Organic Produce Distribution." The Millers wish to focus solely on prepared meals, while the Davises want to concentrate on organic produce. To facilitate this, Family Foods Co. creates a new subsidiary, "Produce Partners Inc.," and transfers all assets and liabilities related to the Organic Produce Distribution line to it. The Davis family then exchanges all their shares in Family Foods Co. for all the shares of Produce Partners Inc., effectively exiting Family Foods Co. and taking ownership of the new produce business. The Miller family retains their shares in Family Foods Co.

  How this illustrates a D reorganization: Family Foods Co. (the transferor) transferred assets to Produce Partners Inc. (the transferee). The shareholders of Family Foods Co. (the Millers and Davises) controlled Produce Partners Inc. immediately after the transfer. Family Foods Co. then distributed the stock of Produce Partners Inc. to some of its shareholders (the Davises) in exchange for their Family Foods Co. stock. This "split-off" allows the families to separate their business interests without triggering immediate tax liabilities on the transaction.

• Example 3: Changing Corporate Domicile or Form

  Suppose "Tech Innovations LLC" is a successful software company structured as a limited liability company in Delaware. Its owners decide they want to convert it into a corporation, "Tech Innovations Inc.," incorporated in Nevada, to potentially access different capital markets or for other strategic reasons. To achieve this, Tech Innovations LLC transfers substantially all of its assets and liabilities to a newly formed corporation, Tech Innovations Inc. The LLC then liquidates, distributing all the shares of Tech Innovations Inc. to its former LLC members, who now become shareholders of the new Nevada corporation.

  How this illustrates a D reorganization: Tech Innovations LLC (the transferor, treated as a corporation for this purpose) transferred substantially all its assets to Tech Innovations Inc. (the transferee). The owners of Tech Innovations LLC controlled Tech Innovations Inc. immediately after the transfer. Finally, Tech Innovations LLC distributed the stock of Tech Innovations Inc. to its owners. This type of transaction, when structured to meet the specific requirements, can qualify as a D reorganization, allowing the business to change its legal form and state of incorporation without triggering immediate taxation on the asset transfer.