Dividend distribution prior to an F reorganization.

• Author: Barnes, Donald A.

An F reorganization is defined by Sec. 368(a)(1)(F) as "a mere change in identity, form, or place of organization of one corporation" In Rev. Rul. 96-29, the IRS stated that "[a] transaction does not qualify as a reorganization under section 368(a)(1)(F) unless there is no change in existing shareholders or in the assets of the corporation" The Service has, however, permitted changes of less than 1% in stock ownership (Kev. Rul. 66-284).

For changes in assets, the IRS has permitted F reorganizations even though they were part of an integrated plan involving another acquisitive transaction or a corporate restructuring. For example, in Rev. Rul. 96-29, the Service held that the reincorporation of a corporation in another state qualified as an F reorganization even though it was the first step in a transaction in which the corporation issued common stock in a public offering and redeemed its preferred stock. Rev. Rul. 96-29 held that the reincorporation of a parent in another state after it had acquired a target in a forward triangular merger was nevertheless an F reorganization.

Letter Ruling 9902004 now holds that a corporation can dispose of unwanted assets in a Sec. 301 distribution before conducting an F reorganization, provided that there is a time gap between the distribution and the F reorganization.

Letter Ruling 9902004 involved a corporation that had elected to be treated as a real estate investment trust (REIT) for Federal income tax purposes. The REIT conducted its business through a limited partnership (LP) of which it was the sole general partner. The REIT wanted to acquire Target corporation, without some of Target's assets.

To facilitate its anticipated acquisition, Target formed a wholly owned subsidiary and transferred to it the assets the REIT did not want to acquire. Target distributed the new subsidiary's common stock pro rata to its shareholders in a transaction that it represented was a Sec. 301 distribution. Later, Target formed another wholly owned subsidiary that formed a limited...