IRC 368: The 7 Types of Tax-Free Reorganizations (A to G)

By Yarik Yarosh, CPA ·September 5, 2026 ·Updated October 16, 2026 ·6 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

IRC 368 defines what counts as a corporate “reorganization.” It lists seven types: (A) a statutory merger or consolidation; (B) an acquisition of another corporation’s stock solely for voting stock that leaves the buyer in control; (C) an acquisition of substantially all of another corporation’s properties solely for voting stock; (D) a transfer of assets to a corporation the transferor or its shareholders control; (E) a recapitalization; (F) a mere change in identity, form or place of organization; and (G) a transfer of assets in a bankruptcy case. Fitting a deal into one of them is what brings in IRC 354: stock exchanged solely for stock of a party to the reorganization produces no gain or loss. On top of the statute, continuity of interest, continuity of business enterprise and business purpose all have to be met.

✓Key takeaway

The seven types of tax-free reorganizations:

Type	Name	Structure	Key Requirement
A	Statutory merger or consolidation	Target merges into acquirer under state law	Must comply with state merger statute
B	Stock-for-stock	Acquirer exchanges SOLELY its voting stock for target’s stock	Must acquire at least 80% control; solely voting stock requirement (no cash or other consideration)
C	Stock-for-assets	Acquirer exchanges SOLELY its voting stock for substantially all of target’s assets	”Substantially all” = generally 90% of FMV of net assets and 70% of gross assets
D	Divisive (spin-off, split-off, split-up) or acquisitive	Corporation transfers assets to a controlled subsidiary	Control = 80% of voting + 80% of each class of non-voting
E	Recapitalization	Restructuring of a single corporation’s capital structure	Same corporation, different stock/debt mix
F	Mere change in identity, form, or place of organization	Reincorporation in another state, name change	Single operating company, same shareholders
G	Bankruptcy reorganization	Transfer of assets in a Title 11 case	Must be pursuant to a court-approved bankruptcy plan

Three overarching requirements (all types):

Doctrine	What It Means
Continuity of Interest (COI)	Target shareholders must receive a meaningful equity stake in the acquiring corporation (at least 40-50% of consideration must be stock, per IRS guidance)
Continuity of Business Enterprise (COBE)	The acquiring corporation must either continue the target’s historic business OR use a significant portion of the target’s historic business assets
Business Purpose	The reorganization must have a valid business purpose beyond tax avoidance

Tax treatment for shareholders:

Consideration Received	Tax Treatment
Stock of acquiring corporation only	No gain recognized (100% tax-free)
Stock plus cash (boot)	Gain recognized to the lesser of boot received or realized gain
Stock plus other property (non-stock)	Same as boot: taxable to the extent of gain
Assumption of liabilities by acquirer	Generally not treated as boot (IRC 357)

How does a Type A merger work in practice?

Hypothetical example

Round numbers. Company A (publicly traded, valued at $50,000,000) acquires Company B (private, valued at $10,000,000) through a statutory merger. The sole shareholder of Company B has a cost basis of $2,000,000 in their stock.

Scenario 1: 100% stock consideration (fully tax-free)

Item	Amount
Company B shareholder receives: Company A stock	$10,000,000
Company B shareholder’s basis in Company A stock	$2,000,000 (carryover)
Gain recognized	$0
Built-in gain (deferred)	$8,000,000

The $8,000,000 gain is deferred until the shareholder sells the Company A stock.

Scenario 2: 70% stock, 30% cash (boot)

Item	Amount
Company A stock received	$7,000,000
Cash received (boot)	$3,000,000
Total consideration	$10,000,000
Realized gain ($10M - $2M basis)	$8,000,000
Gain recognized (lesser of boot or realized gain)	$3,000,000 (the boot)
Tax on recognized gain (20% LTCG + 3.8% NIIT)	$714,000
Basis in Company A stock ($2M + $3M recognized - $3M boot)	$2,000,000
Remaining deferred gain	$5,000,000

Scenario 3: 100% cash (NOT a reorganization)

Item	Amount
Cash received	$10,000,000
Basis	$2,000,000
Gain recognized	$8,000,000
Tax (23.8%)	$1,904,000

Comparison:

Structure	Tax Now	Tax Deferred
100% stock (Type A)	$0	$8,000,000 gain
70/30 stock/cash	$714,000	$5,000,000 gain
100% cash (taxable)	$1,904,000	$0

Type B (stock-for-stock) example: Company A offers its voting stock in exchange for at least 80% of Company B’s stock. Company B remains a separate subsidiary.

Requirement	Type B Rule	Type A Rule
Consideration	SOLELY voting stock of acquirer	Any mix of stock and cash
Cash allowed?	NO (the “solely” requirement is absolute)	Yes, within COI limits (~40-50% stock minimum)
Target status after	Subsidiary of acquirer	Merged out of existence
Effect of ANY cash	Disqualifies the entire reorganization	Cash is boot, taxed to extent of gain

The “solely” requirement in Type B is the strictest in the code. Even paying the target’s transaction expenses in cash can disqualify the reorganization.

Type D divisive reorganization (spin-off): A corporation with two business divisions transfers one division’s assets to a new subsidiary, then distributes the subsidiary’s stock to its shareholders.

Step	Tax Result
1. Parent transfers Division B assets to new Subsidiary B	Tax-free under IRC 351 or 368(a)(1)(D)
2. Parent distributes Subsidiary B stock to shareholders	Tax-free under IRC 355 (if requirements met)
3. Shareholders now own Parent (Division A) and Subsidiary B separately	No gain recognized

IRC 355 requirements for a tax-free spin-off:

Requirement	Details
Active trade or business	Both the distributing and controlled corporation must have an active trade or business with a 5-year history
Not a device	The distribution cannot be principally a device for distributing earnings and profits
Business purpose	Must have a real business purpose (not solely tax-motivated)
Continuity of interest	Shareholders must maintain equity interest in both corporations

Type E recapitalization: A corporation exchanges new preferred stock for outstanding common stock, or exchanges new bonds for old bonds.

Exchange	Tax Treatment
Common stock for preferred stock (same corporation)	Tax-free
Bonds for stock	Tax-free (but excess principal = boot)
Stock for bonds	Taxable (treated as a distribution)

Illustrative numbers only, not a real client and not advice for your facts.

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Cite this page

Yarik Yarosh, CPA. "IRC 368: The 7 Types of Tax-Free Reorganizations (A to G)." Blue Cloud CPA, September 5, 2026, updated October 16, 2026. https://bluecloudcpa.com/guides/small-business-tax-free-reorganization-irc-368-types

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.