Section 368 reorganization types are the lettered categories of tax-free reorganizations under IRC §368(a)(1). Each "type" defines a specific structure that, if its requirements are met, allows a combination to qualify for non-recognition (tax-free) treatment. The letters — A, B, C, D, F and others — are standard shorthand in deal tax structuring.
The acquisitive reorganizations
These combine two companies; the choice among them depends mainly on the form and the consideration mix the parties want.
- Type A — Statutory merger or consolidation. A merger under state law. The most flexible on consideration: it permits a relatively high proportion of cash/boot (subject to the continuity-of-interest rule, ~40% stock minimum) while still qualifying. Includes the triangular variants — the forward triangular (§368(a)(2)(D)) and reverse triangular (§368(a)(2)(E)) mergers — which use a merger subsidiary to isolate liabilities.
- Type B — Stock-for-stock. The acquirer exchanges solely its voting stock for the target's stock, and must end up with control (≥80%). Very rigid: no cash is allowed (cash would disqualify it), but it is simple and keeps the target alive as a subsidiary.
- Type C — Stock-for-assets. The acquirer exchanges its voting stock for substantially all of the target's assets, then the target liquidates. Allows a limited amount of boot. A "practical merger" used where a statutory merger is unavailable or undesirable.
- Type D — Acquisitive or divisive. The divisive Type D is the engine behind tax-free spin-offs, split-offs and split-ups under §355; an acquisitive Type D combines with a controlled corporation.
The non-acquisitive types
- Type E — Recapitalization. A reshuffling of a single company's capital structure (e.g., exchanging one class of stock or debt for another).
- Type F — Mere change in form. A change in a single corporation's identity, form or place of organization — heavily used to restructure S-corporations before a sale (see F-reorganization).
- Type G — Bankruptcy reorganization. A reorganization in a bankruptcy/insolvency proceeding.
How the choice is made
Selecting a type is a balance of legal structure, consideration mix and tax goals:
| Type | Form | Cash/boot allowed? |
|---|---|---|
| A | Merger | Yes (up to COI limit) |
| B | Stock-for-stock | No |
| C | Stock-for-assets | Limited |
| F | Form change | n/a (single company) |
A buyer wanting flexibility on cash uses a Type A (often a reverse triangular merger); a clean all-stock combination may use a Type B; a pre-sale S-corp cleanup uses a Type F. All tax-free types share the underlying doctrines — continuity of interest, continuity of business enterprise and a valid business purpose — that separate a genuine reorganization from a disguised taxable sale.
See also
- Taxable vs tax-free reorganization — The threshold tax-structure question in U.S. M&A: whether the seller recognises gain at closing (taxable) or whether the transaction qualifies for non-recognition under the reorganization rules of Section 368.
- Statutory merger — A combination governed by state corporate-law statute in which one constituent corporation absorbs the other, with the surviving entity inheriting all rights and obligations by operation of law.
- Forward triangular merger — A merger in which a wholly owned subsidiary of the buyer survives and the target merges into it. Often used for tax and liability isolation reasons.
- Reverse triangular merger — A merger in which the target survives, having absorbed a subsidiary of the buyer. The most common public-company acquisition structure because it preserves target contracts.
- F-reorganization — A tax-free 'mere change in form' reorganization under Section 368(a)(1)(F), commonly used to restructure an S-corporation prior to a sale to enable a stock deal that gets asset-deal tax treatment.
- Spin-off — A divestiture in which a parent distributes the shares of a subsidiary to its existing shareholders, creating a separately listed company.