Legal Definitions - G reorganization

A G reorganization is a specific type of corporate restructuring recognized under U.S. federal income tax law, specifically Internal Revenue Code Section 368(a)(1)(G). It applies exclusively to companies undergoing bankruptcy or similar insolvency proceedings. The primary purpose of a G reorganization is to allow a financially distressed company to transfer substantially all of its assets to another corporation as part of a court-approved reorganization plan, without triggering immediate adverse tax consequences for the company or its shareholders. This tax-favored treatment helps facilitate the company's financial recovery and ensures that the restructuring process is not hindered by significant tax liabilities that would otherwise arise from asset transfers.

• Example 1: Retail Chain Bankruptcy

  Scenario: "Trendsetter Fashions," a struggling national clothing retailer, files for Chapter 11 bankruptcy. As part of its court-approved reorganization plan, Trendsetter Fashions transfers all of its store leases, inventory, and brand assets to a newly formed subsidiary, "New Trend Co.," which will operate under a leaner business model. The original Trendsetter Fashions entity will then be liquidated.

  Illustration: This scenario qualifies as a G reorganization because Trendsetter Fashions, a company in bankruptcy, is transferring substantially all of its assets to another corporation (New Trend Co.) as part of a court-approved plan. This allows the restructuring to occur without immediate recognition of taxable gain on the asset transfer, making the financial recovery more feasible and preventing tax burdens from impeding the rescue of the business.

• Example 2: Manufacturing Company Restructuring

  Scenario: "Precision Parts Inc.," a long-standing automotive parts manufacturer, faces severe debt and enters into a court-supervised insolvency proceeding. To save the business and its jobs, the court approves a plan where Precision Parts Inc. transfers its operational assets (factories, equipment, intellectual property) to a new entity, "Precision Revived LLC," which is owned by a consortium of creditors and new investors. The old Precision Parts Inc. will then be dissolved.

  Illustration: This is a G reorganization because Precision Parts Inc. is undergoing a court-supervised insolvency proceeding and is transferring its core operating assets to a new entity as part of a restructuring plan. The G reorganization rules ensure that this critical transfer of assets to the new ownership structure does not create an immediate, burdensome tax event that would undermine the financial rescue efforts and potentially lead to liquidation rather than reorganization.

• Example 3: Healthcare Provider Merger in Bankruptcy

  Scenario: "Community Wellness Clinic," a regional healthcare provider, declares bankruptcy due to overwhelming debt. To ensure continued patient care, a larger healthcare system, "Regional Health Group," agrees to acquire Community Wellness Clinic's assets and operations. This acquisition is structured as a merger under a court-approved bankruptcy plan, where Community Wellness Clinic transfers its facilities, patient records, and staff contracts to a new subsidiary of Regional Health Group.

  Illustration: This situation exemplifies a G reorganization. Community Wellness Clinic, in bankruptcy, is transferring its assets and operations to another corporate entity (a subsidiary of Regional Health Group) as part of a court-approved plan. This tax treatment allows for the seamless transition of essential healthcare services and assets to a more stable entity without incurring immediate tax liabilities that could complicate or derail the rescue of the clinic's operations and the continuation of patient care.