G-Reorganizations. The G-Reorganization provisions were adopted in the Bankruptcy Tax Act of 1980 in order to bring insolvency reorganizations more in line with other reorganization provisions. The “G” reorganization is similar to a “D” reorganization in many ways and is intended to be flexible (see e.g. Ways & Means Comm. Rep., H. Rep. No. 96833, 96th Cong., 2d Sess., p. 30). (1) Overlaps. IRC § 368(a)(3)(c) provides that the “G” Reorganization takes precedence over other forms of reorganization under IRC § 368(a)(1) and over IRC § 351 (transfers to controlled corporations - see also § 351(e)(2) making that section not applicable to a transfer by a debtor in an insolvency proceeding to the extent stock or securities received are used to satisfy the debtor’s liabilities) and over IRC § 332 (liquidation of subsidiary into parent). If the transaction does not qualify as a “G” reorganization, there is no necessary preclusion from qualifying as another form of reorganization (e.g. type “B” (acquisition of stock for voting stock) or type “E” (recapitalization)). S. Rep. 96-1035 at p. 36. (2) Definitions and Basic Requirements. In order to qualify as a “reorganization” IRC § 368(a)(1)(G) requires: (a) Transfer. A transfer by a corporation of all or part of its assets to another corporation is required. (Note: under IRC § 368(a)(3)(B) the debtor corporation must be under the jurisdiction of the court in an insolvency proceeding (although not necessarily a Title 11 bankruptcy proceeding) and the transfer must be pursuant to a plan or reorganization approved by the court); (i) Although a G-Reorg does not usually require “substantially all” assets be transferred, where an IRC § 354 (acquisitive) transaction is involved, the substantially all requirement will apply. Thus, in an acquisition, the substantially all requirement will need to be met. (ii) H. Rep. No. 96-833 at p. 30 states that intent is for substantially all assets of debtor or assets consisting of active trade or business under IRC § 355 to be transferred to acquiring corporation. But the Report says the test is to be applied “flexibly”. See also S. Rep. No. 96-1035 at p. 35-36. (iii) Strip-offs for the benefit of creditors are not necessarily fatal (cf. Helvering v. Elkhorn Coal Co., 95 F.2d 732 (4th Cir. 1937)). The debtor could sell one group of assets and then reorganize. It is not clear how far one can go. (b) Insolvency Proceeding. The transaction must occur in a Title 11 or similar case (i.e., a state or federal court insolvency proceeding, including bankruptcy, receivership, foreclosure, and similar cases, IRC § 368(a)(3)(A)(ii)). (c) Stock or Securities. In pursuance of the plan, stock or securities of the corporation (note: no requirement of “solely stock”, whether voting or nonvoting, and “securities” includes debt instruments like debentures), to which the assets are transferred must be distributed in a transaction which qualifies under IRC §§ 354, 355, or 356. IRC § 354 provides for no gain or loss if stock or securities in a corporation a party to a reorganization are exchanged solely (except for for stock or securities in such corporation or another corporation a party to the reorganization, only if: the transferee (i.e., the acquiring) corporation acquires substantially all of the assets of the transferor (debtor) and the stock, securities, and property received are distributed pursuant to plan of reorganization. The distribution is usually to creditors. A) Boot results under IRC § 354(a)(2)(A) if the principal amount of securities received is in excess of the principal amount exchanged (by creditor). B) Boot is taxed under IRC § 356 and includes property received by a creditor transferee (i.e., “solely” does not necessarily really mean solely). (ii) Divisive. IRC § 355 provides for no gain or loss to a shareholder or security holder on distribution by one (distributing) corporation (e.g., debtor) of stock or securities of another corporation to shareholders or security holders in exchange for their stock or securities, if immediately before distribution the distributing corporation (debtor) has 80% control of the distributed corporation, immediately after the distribution both the controlled and distributing corporations are in an active trade or business, which business has been active five years and not acquired within five years, the distributing corporation distributes all its stock or securities in the controlled corporation (or distributes an 80% controlling interest and no tax avoidance purpose exists, and the transaction is not a device to distribute earnings and profits). A) distributed. B) Stock of an existing subsidiary may be Boot is taxable under IRC § 356 and if the principal amount of securities received exceeds those surrendered, the excess is treated as boot. C) distribution is not pro-rata. D) The transaction may qualify even if the If the distributing corporation first transfers assets to a controlling corporation, it may qualify as a reorganization under IRC § 368(a)(1)(D) with the transferor corporation not recognizing gain or loss (IRC § 361) and with a carryover basis from transferor to transferee (IRC § 362(b)). (iii) Accrued Interest. Any consideration received by a creditor security holder attributable to accrued but unpaid interest on the creditor’s security is excluded from the rules of IRC §§ 354, 355, or 356, (and from § 351 as well). See IRC § 354(a)(2)(B), § 355(a)(3)(c), § 351(d)(3). A) If accrued interest has not been reported by the creditor, ordinary income will result; if interest has been previously reported by the creditor, creditor gets a loss for the unpaid portion. Interest includes original issue discount.B) The allocation of consideration between principal and income in the plan or reorganization will generally be controlling for tax purposes as to the creditor and debtor. (E.g., principal first then interest or pro rata between principal and interest, etc.) However, allocation to principal cannot exceed the face amount of the debt security until after full allocation to accrued interest. (iv) Surviving Shareholders. Under IRC § 357(c), in a G-Reorganization to which §§ 351 or 361 also applies, the survival in the reorganization by any former shareholders will expose the transaction to taxation to the extent liabilities assumed by the transferee exceed the basis of the property transferred. See IRC § 357(c)(2)(B). (3) Triangular Reorganizations. A triangular reorganization generally involves a merger with a subsidiary paid for by the parent. It may be very important to “quarantine” the debtor company in case the business does not work out or in case of an unexpected creditor who did not receive proper notice (see Mullane v. Central Hanover Bank, 339 U.S. 306 (1950)) or is otherwise not subject to discharge. See 7 Collier on Bankruptcy, ¶ 1141.01 (16th Ed). IRC § 368(b) defines party to a reorganization to include a parent corporation in a “G” reorganization.
So if WMI transfers assets to WMIIC, or WMIIC transfer assets to WMIH it is not recognized as a gain or loss, thus does not have to be reported.
