The future of acquisitive D reorganizations

The acquisitive D reorganization rules reflect the premise that the economic substance of a transaction in which Target transfers assets to Acquirer and liquidates may differ depending on whether the Target shareholders independently own an interest in Acquirer. If Target and Acquirer are unrelated, a transfer of assets by Target to Acquirer can qualify as a reorganization only if Acquirer provides stock as a substantial part of the consideration for the assets, allowing the Target shareholders the opportunity to preserve their interest in the transferred assets. But if the Target shareholders independently own an equity interest in Acquirer, the consideration paid by Acquirer in the transaction itself may not be as important. Recent developments in the evolution of the extrastatutory "continuity of interest" test have created some tension between that test and the premise underlying the acquisitive D rules. Regulations proposed in March 2005 that purport to add a new "net value" requirement for reorganization treatment raise further questions about the current role of the acquisitive D reorganization. A more rational system would draw its lines based on considerations of economic efficiency. These considerations support moving toward a regime in which any transfer of substantial by all of the assets of a business would be entitled to nonrecognition treatment, provided that Acquiror took a carryover basis in the transferred assets. Under a carryover basis regime, similar to those proposed in the early 1980s by the American Law Institute and the staff of the Senate Finance Committee, the specific questions regarding acquisitive D reorganizations would become moot. There would be no need for rules giving special treatment to transfers between corporations under common control. Any transfer of substantially all of the assets of a business could qualify for nonrecognition treatment, without regard to either the nature of the consideration provided by Acquiror or the extent to which Target shareholders independently own an interest in Acquiror.