Expansion of A reorg. provisions.

• Author: Schwartzman, Randy A.

Under Sec. 368(a)(1)(A), the term "reorganization" includes a "statutory merger or consolidation" The statute places no restrictions on the type of consideration used, even if money is exchanged, as long as the transaction satisfies the continuity-of-interest requirement.

A statutory merger is a tax-free, type A reorganization, representing a combination of two corporations in which the continuity-of-interest requirement is met by a sufficient amount of consideration received being the surviving corporation's stock. The A reorganization is the most flexible of all the reorganization techniques; there is no "substantially all" (of the assets) or "solely for" (voting stock) rule.

A statutory merger or consolidation was historically limited to transactions effected pursuant to the corporation laws of the U.S. (i.e., a state, a territory or the District of Columbia); the definition has not changed much since 1935.

Disregarded Entity Mergers

Treasury has been liberal in expanding the definition of an A reorganization. In January 2003 (REG-126485-01, TD 9038 (1/24/03)), it amended the regulations to expand the scope of the term "statutory merger or consolidation" to allow limited liability companies (LLCs) to be a party to an A reorganization. Consequently, it removed the word "corporation" from the regulatory definition of statutory merger or consolidation.

Foreign vs. Domestic Mergers

In January 2005 (REG-125628-01 (1/5/05)), the IRS further expanded the scope of a statutory merger or consolidation by eliminating the requirement that the transaction be effected pursuant to domestic law. As many foreign jurisdictions now have merger statutes that operate like those of the states, under which all assets and liabilities move by operation of law, the IRS changed the definition of an A reorganization to allow transactions effected pursuant to these statutes to qualify as statutory mergers or consolidations for Sec. 368(a)(1)(A) purposes. The Service believes that these transactions should be treated as reorganizations if they satisfy the functional criteria applicable to transactions under domestic statutes.

Foreign law: The applicability of the "substantially all" and the "solely for" requirements could adversely affect an otherwise "good" foreign merger. Prop. Regs. Sec. 1.368-2(b)(1)(iii), Example (9), illustrates the changes to the definition of an A reorganization in the international context. Pursuant to Country Q's merger statutes, Corp. Z...