Final F reorganization regs. might make treatment available for reverse mergers.

• Author: Angstadt, Brian

Not every company that goes public enters into an initial public offering (IPO). When it is not a priority to accomplish the fundraising of an IPO, a common way that companies go public is through a "reverse merger" into a public shell corporation.

In a reverse merger, a private corporation (the transferor corporation) is merged into an existing public shell corporation (the resulting corporation) with the public shell corporation surviving. This is often described as the minnow swallowing the whale. The public shell corporation may be the gutted shell of a former public corporation that took its business private or may be an entity that never had an operating business and was formed solely to be a shell that reports to the SEC. Nonetheless, a reverse merger is generally a cheaper and faster process for going public than the more traditional IPO.

A company that uses a reverse merger to go public generally would like to structure the merger as a tax-free reorganization under Sec. 368 to reduce its income taxes. There are a few advantages to a tax-free reorganization under Sec. 368(a) (1)(F), commonly referred to as an "F reorganization," compared to the other tax-free reorganizations listed under Sec. 368, notably that an F reorganization does not close the tax year of the transferor corporation and that losses incurred following the F reorganization can be carried back to pre-reorganization years (Sec. 381(b) and Regs. Sec. 1.381(b)-l(a)(2)). In addition, the resulting corporation inherits the employer identification number of the transferor corporation in an F reorganization (Rev. Rul. 73-526). On Sept. 21, the IRS issued final regulations (T.D. 9739) describing six requirements for a transaction to qualify as an F reorganization (the final regulations).

F Reorganization Definition

An F reorganization is defined as "a mere change in identity, form, or place of organization of one corporation, however effected" (Sec. 368(a)(1)(F)). The final regulations clarify that this includes only transactions whereby: (1) The resulting corporation stock is distributed in exchange for transferor corporation stock; (2) the same person or persons own all the transferor corporation stock immediately before the transaction and all the resulting corporation stock immediately after the transaction; (3) the resulting corporation has no prior assets or attributes; (4) the transferor corporation liquidates; (5) the resulting corporation is the only acquiring...