Eric Notes 52 Four Conditions of a 368 Reorganization

To qualify for the tax-deferral treatment provided by Section 3681, four different
conditions must be met. These conditions are:

1) Continuity of ownership interest

2) Continuity of business enterprise
3) Valid business purpose
4) Step transaction doctrine.

5) The continuity of ownership interest condition is met by seeing that at least

40 percent of the consideration in the transaction is made up of acquirer
stock.
6) The continuity of business enterprise condition can be met by either
continuing the target company’s business or using the target company’s
assets in an existing business for at least 2 years2 following the transaction.

7) The valid business purpose condition requires that the transaction serve a
purpose beyond just the avoidance of taxes.

8) The step transaction doctrine can be used to alter the tax status of a series of
steps, if any individual step was taken solely to avoid taxes; accordingly,
parties in a 368 transaction must make sure that every action has an
independent economic motive. If these four conditions are not all met, then
the transaction will not qualify as a 368 reorganization.

1
The Asset Purchase Agreement, Doc 1730 Page 22 Reads: WHEREAS the Parties desire and intend that the
transactions set forth in this Agreement, together with the Bankruptcy Plan (as defined below), will, unless Buyer
elects otherwise pursuant to this Agreement, (i) constitute one or more plans of reorganization under section 368(a)1
of the Code (as defined below) and as qualifying as one or more reorganizations thereunder and (ii) satisfy the
ownership requirements set forth in section 382(l)(5)(A)(ii) of th e

2
This condition was met by Transform Holdco/SHLDQ as of February 2021 because the sale of substantially all the
assets of SHLDQ to ESL/Transform Holdco occurred in February 2019.