Question

1.      What are the common state tax issues that arise in tax-free reorganization?

Answer 1

main use and advantage of a tax-free reorganization is to acquire or dispose of the assets of a business without generating the income tax consequences that would result in a straight sale or purchase of those assets. A tax-free reorganization may also be deemed to have occurred in other situations, such as the change of the corporate name or state of incorporation, or as a result of a bankruptcy or receivership proceeding. However, in these types of situations the rules for tax-free reorganizations are normally taken advantage of rather than planned for.
A triangular merger is a reorganization in which a subsidiary owned by the acquiring corporation merges with the target, with the target going out of business. Since it is a merger and not an acquisition, it eliminates the minority stockholders, who are legally required to accept the buyer's purchase price. In a reverse triangular merger, a subsidiary of the target is the surviving entity. A triangular merger is commonly used to keep the liabilities of the target in a separate corporation (which protects the parent from any contingent or unknown liabilities, or any future liabilities that may arise from the acquired business). A reverse triangular merger is commonly used when the target has valuable contracts that would otherwise be canceled if it did not survive the transaction.
There are many reasons for pursuing a tax-free divisive reorganization, such as (1) abandoning certain businesses that are losing money; (2) changing strategy; (3) refocusing on core business operations; (4) an inability or unwillingness to provide the money or other resources needed for the business to be successful; (5) meeting regulatory requirements; and (6) for closely held corporations, solving management or family disagreements by splitting the business geographically or separating one or more units or lines of business.

The buyer can make a direct purchase of the target's business assets in exchange for cash or a combination of cash and other property;
The buyer can purchase the target's stock directly from the target's shareholders for cash or a combination of cash and other property (the buyer could then decide whether to make the Sec. 338 election to treat the stock purchase as an asset purchase);
The buyer can purchase the target's stock for cash and then merge the target into the buyer. Such transactions are forward cash mergers and are treated for tax purposes as if the target sold its assets directly to the acquiring corporation and then liquidated by distributing the sales proceeds to the target's shareholders (Rev. Rul. 69-6); or
The buyer can undergo an acquisitive tax-free reorganization.