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Does the transaction qualify under section 368? A qualification sequence

Reviewed 2026-09-15 · AI-assisted draft and editing; sources and limitations remain visible for independent review.

Answer: Reorganization treatment is definitional before it is doctrinal. Regulations section 1.368-2(a) states that the term reorganization is to be strictly limited to the specific transactions set forth in section 368(a) and does not embrace the mere purchase by one corporation of the properties of another. So the first question is always which subparagraph of section 368(a)(1) the transaction is supposed to fit, from a statutory merger or consolidation through a recapitalization, a mere change in identity, form or place of organization, and a transfer in a title 11 case. Only then do the requirements added by regulation apply. Regulations section 1.368-1(b) states that requisite to a reorganization are a continuity of the business enterprise through the issuing corporation as described in paragraph (d), and, except as provided in section 368(a)(1)(D), a continuity of interest as described in paragraph (e); the same paragraph provides that for transactions occurring on or after February 25, 2005, neither is required for a reorganization under section 368(a)(1)(E) or (F). Business purpose is not a separately numbered element in these regulations but is carried inside the plan of reorganization rules. Statutory text read as in effect September 14, 2026; regulations from the Code of Federal Regulations edition revised as of April 1, 2025.

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Scope

Jurisdiction: United States — federal

Tax periods: Not period-specific; checked 2026-09-15, Transactions on or after 2005-02-25, Code as in effect 2026-09-14

Assumptions

Exclusions

1. Fit the transaction to a subparagraph before anything else

Section 368(a)(1) lists the transactions that can be a reorganization: a statutory merger or consolidation in subparagraph (A); an acquisition of stock in exchange solely for voting stock leaving the acquirer in control in subparagraph (B); an acquisition of substantially all of the properties of another corporation solely for voting stock in subparagraph (C); a transfer of assets leaving the transferor or its shareholders in control, followed by a distribution qualifying under section 354, 355 or 356, in subparagraph (D); a recapitalization in subparagraph (E); a mere change in identity, form, or place of organization of one corporation, however effected, in subparagraph (F); and a transfer of assets in a title 11 or similar case in subparagraph (G).

The statute itself resolves several of the pressure points. In subparagraph (C), the assumption by the acquiring corporation of a liability of the other corporation is disregarded in deciding whether the exchange is solely for stock. Section 368(a)(2)(B) relaxes that further where money or other property is also exchanged, provided the acquiring corporation acquires, solely for the voting stock described in subparagraph (C), property with a fair market value of at least 80 percent of the fair market value of all of the property of the other corporation, and for that test alone a liability assumed is treated as money paid. Section 368(a)(2)(A) resolves a transaction described in both subparagraph (C) and subparagraph (D) in favor of subparagraph (D).

Regulations section 1.368-1(b) adds a warning worth putting at the top of the memo rather than the bottom: both the terms of the statutory specifications and their underlying assumptions and purposes must be satisfied before the exception to the general recognition rule is available. Regulations section 1.368-1(a) adds that the transaction must be evaluated under relevant provisions of law, including the step transaction doctrine.

2. Identify the issuing corporation before you test continuity

The continuity requirements are framed around a defined party. Regulations section 1.368-1(b) provides that the issuing corporation means the acquiring corporation as that term is used in section 368(a), except that in determining whether a reorganization qualifies as a triangular reorganization the issuing corporation means the corporation in control of the acquiring corporation.

Section 368(a)(2)(C) permits assets or stock acquired in a transaction otherwise qualifying under subparagraph (A), (B) or (C) to be transferred to a corporation controlled by the acquiring corporation without disqualifying it, and applies a similar rule to subparagraph (G) only where the requirements of section 354(b)(1)(A) and (B) are met. Section 368(b) defines who is a party to a reorganization. Control throughout carries the section 368(c) meaning: at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes.

Getting this wrong quietly reroutes both continuity tests to the wrong corporation, which is why it belongs in step two rather than in a footnote to step three.

3. Continuity of business enterprise has two independent routes

Regulations section 1.368-1(d)(1) states the general rule: the issuing corporation must either continue the target's historic business or use a significant portion of the target's historic business assets in a business. Either route satisfies the requirement, and the regulation notes that applying the general rule to certain transactions, such as mergers of holding companies, depends on all facts and circumstances.

On the business route, Regulations section 1.368-1(d)(2)(i) provides that being in the same line of business as the target tends to establish the requisite continuity but is not alone sufficient. Paragraph (d)(2)(ii) provides that where the target has more than one line of business, only a significant line need be continued. Paragraph (d)(2)(iii) defines the historic business as the business the corporation has conducted most recently, but expressly not one it enters into as part of a plan of reorganization. Paragraph (d)(2)(iv) leaves both the timing of the plan and whether a line is significant to all the facts and circumstances.

On the asset route, Regulations section 1.368-1(d)(3)(i) is satisfied where a significant portion of the target's historic business assets is used in a business, and paragraph (d)(3)(ii) defines historic business assets as the assets used in the historic business, noting they may include stock and securities as well as intangibles. The evidence this calls for is operational rather than legal: what was being done before, what is being done after, and with which assets.

4. Continuity of interest is a substance test with a valuation date

Regulations section 1.368-1(e)(1)(i) states the purpose plainly, which is to prevent transactions that resemble sales from qualifying for nonrecognition, and the standard as requiring that in substance a substantial part of the value of the proprietary interests in the target be preserved. A proprietary interest is preserved if it is exchanged for a proprietary interest in the issuing corporation, exchanged by the acquiring corporation for a direct interest in the target enterprise, or otherwise continues as a proprietary interest in the target. It is not preserved if it is acquired by the issuing corporation for consideration other than issuing corporation stock, or if issuing corporation stock furnished in the exchange is redeemed.

The regulation does not state a percentage. It says all facts and circumstances must be considered in determining whether, in substance, a proprietary interest is preserved. Any numerical threshold a practitioner has in mind comes from ruling practice guidance rather than from this regulation, and has to be located and checked on its own terms before it is relied on.

Where the regulation is precise is on timing. Regulations section 1.368-1(e)(2)(i) provides that consideration is valued on the last business day before the first date a contract to effect the potential reorganization is a binding contract, called the pre-signing date, if the contract provides for fixed consideration. Paragraph (e)(2)(ii)(A) defines a binding contract as an instrument enforceable under applicable law against the parties, and states that a condition outside the control of the parties, including for example regulatory agency approval, does not prevent an instrument from being a binding contract, nor does the fact that insubstantial terms remain to be negotiated or customary conditions remain to be satisfied. Paragraph (e)(2)(iii)(A) defines fixed consideration as a contract providing the number of shares of each class of issuing corporation stock, the amount of money, and any other property identified by value or specific description, and provides that a shareholder election among those forms does not prevent the contract from being fixed consideration.

The practical consequence is that a stock-price movement between signing and closing may not be the event it appears to be, and that the file needs the signing date, the contract's consideration terms, and any later modification of them.

5. The plan of reorganization is where business purpose lives

Regulations section 1.368-1(c) states that the provisions of the Code referred to are inapplicable unless there is a plan of reorganization, and that such a plan must contemplate the bona fide execution of one of the transactions specifically described as a reorganization in section 368(a) and the bona fide consummation of each of the requisite acts under which nonrecognition of gain is claimed. The same paragraph requires that the transaction and those acts be an ordinary and necessary incident of the conduct of the enterprise and provide for a continuation of the enterprise.

The business purpose requirement appears in the same place, in the negative. The regulation provides that a scheme involving an abrupt departure from normal reorganization procedure in connection with a transaction on which the imposition of tax is imminent, such as a mere device that puts on the form of a corporate reorganization as a disguise for concealing its real character, and the object and accomplishment of which is the consummation of a preconceived plan having no business or corporate purpose, is not a plan of reorganization. A practitioner looking for a numbered business purpose element will not find one; the requirement is carried by this sentence.

Regulations section 1.368-2(g) then limits what the plan can do. It provides that the term plan of reorganization refers to a consummated transaction specifically defined as a reorganization under section 368(a), is not to be construed as broadening the definition of reorganization, and limits nonrecognition to exchanges or distributions that are directly a part of that transaction. A plan document cannot enlarge the statute; it can only fail to support it.

6. Order of operations, and what this page does not decide

Run the sequence in this order: name the subparagraph; identify the issuing corporation and any controlled subsidiary; test continuity of business enterprise on both routes; test continuity of interest in substance and fix the valuation date; confirm a plan of reorganization exists with a business or corporate purpose; then re-read the whole record under the step transaction doctrine, which Regulations section 1.368-1(a) directs. Note one shortcut the regulation itself grants: under Regulations section 1.368-1(b), for transactions occurring on or after February 25, 2005, continuity of business enterprise and continuity of interest are not required for a reorganization under section 368(a)(1)(E) or (F).

This page decides nothing about the exchanges themselves. Whether a particular shareholder recognizes gain, how boot is treated, and what basis results are separate questions under sections 354, 356, 358 and 361. The sibling page titled Section 351 incorporation transfers: a fact-intake checklist before closing deals with organizations rather than amalgamations and shares none of these tests.

For a specific structure, ask Taxterity for the authorities on the particular subparagraph and continuity question you face, or use IRC Section History on section 368 to see how the definition has changed, and then read each cited provision in the current Code and regulations yourself.

Related research

Official sources

  1. 26 U.S.C. 368 — Definitions relating to corporate reorganizations — § 368(a)(1)(A) through (G); § 368(a)(2)(A), (B) and (C); § 368(b); § 368(c)
  2. 26 CFR 1.368-1 — Purpose and scope of exception of reorganization exchanges — § 1.368-1(a); (b) including the issuing corporation definition and the February 25, 2005 rule for (E) and (F); (c); (d)(1) to (d)(3); (e)(1)(i); (e)(2)(i), (ii)(A) and (iii)(A); 4-1-25 edition
  3. 26 CFR 1.368-2 — Definition of terms — § 1.368-2(a), strictly limited to the transactions in section 368(a); § 1.368-2(g), meaning and limiting effect of a plan of reorganization; 26 CFR ch. I, 4-1-25 edition

Limitations