Meeting the applicable corporate reorganization reporting requirements.

• Author: Ellentuck, Albert B.

THE REORGANIZATION PROVISIONS OF the Internal Revenue Code, located primarily in Secs. 354, 355, and 368, allow a variety of tax-free transactions in the form of combinations, divisions, and recapitalizations. These provisions are concerned with the form, rather than the substance, of the transaction. Therefore, it is extremely important to document that the correct procedures have been followed. Regs. Sec. 1.368-3 sets forth which records are to be kept and which information needs to be filed with tax returns for the year that such a transaction is completed.

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A reorganization plan must be adopted by each corporate party to a reorganization. The acts of the corporation's officers must show that they adopted the plan, and its adoption must appear in the official records (minutes) of the corporation. Each corporate party to a reorganization must file a statement with its tax return for the year in which the reorganization occurred that contains:

* The names and employer identification numbers (EINs) of all parties to the reorganization;

* The date of the reorganization;

* The aggregate fair market value (FMV) of the assets, stock, or securities of the target corporation transferred in the transaction; and

* The date and control number of any private letter rulings issued by the IRS in connection with the reorganization (Regs. Sec. 1.368-3(a)).

In addition, noncorporate significant holders that receive stock and other securities in a reorganization must file a statement of all facts relating to the exchange with their tax returns for the year of the exchange (Regs. Sec. 1.368-3(b)). A significant holder is a person who receives stock or securities in a Sec. 354 exchange if immediately before the exchange that holder (1) owns at least 1% by vote or value (5% if the stock is publicly traded) of the corporation's outstanding stock; or (2) owns securities in the target corporation with a basis of $1 million or more.

The statement must include the following information:

* The names and EINs of the parties to the reorganization;

* The date of the reorganization; and

* The FMV of all the target corporation's stock or securities held by the significant holder that are transferred in the transaction and the shareholder's basis in the target corporation's stock or securities.

All parties to a reorganization (corporate or noncorporate) must maintain permanent records to substantiate the cost (or other basis) of the properties...