Final regs. issued on corporate reorganizations.

AuthorNevius, Alistair M.

The IRS has issued final regulations (TD 9361), effective October 25, 2007, that provide guidance regarding the effect of certain transfers of assets or stock on the continuing qualification of transactions as reorganizations under Sec. 368(a). The regulations also provide guidance on the continuity-of-business-enterprise requirement and the definitions of "qualified group" and "party to a reorganization."

Sec. 368 affords various types of reorganizations tax-free treatment. The theory underlying this treatment is that such transactions "effect only a readjustment of continuing interest in property under modified corporate forms" (Regs. Sec. 1.368-1(b)). This principle is expressed in the continuity-of-interest and continuity-of-business-enterprise requirements.

Sec. 368(a)(2)(C) allows tax-free reorganizations in which part or all of the acquired assets or stock is transferred to a corporation controlled (as defined in Sec. 368(c)) by the acquiring corporation. Regs. Sec. 1.368-2(k), as in effect prior to these final regulations, expanded the scope of Sec. 368(a)(2)(C) by permitting successive transfers of the acquired assets or stock to one or more corporations, provided that the transferee corporation was controlled in each transfer by the transferor corporation. Administratively, the Service has since interpreted Sec. 368(a) (2) (C) and Regs. Sec. 1.368-2(k) as permissive rather than exclusive or restrictive, concluding that certain transfers not specifically described in either of those provisions did not disqualify the reorganization. (See, e.g., Rev. Ruls. 2001-24 and 2002-85.)

The new regulations do not contain separate rules addressing remote continuity because the Service believes these issues are adequately addressed by the rules adopted to implement the continuity-of-business-enterprise requirement (see TD 8760). Similarly, the rules relating to the continuity-of-business-enterprise requirement have been broadened over the years to permit transactions that adequately preserve the link between the former target corporation's shareholders and the target's business assets. Under Regs. Sec. 1.368-1(d), as in effect prior to these final regulations, the continuity-of-business-enterprise requirement generally is satisfied as long as a member of the qualified group (or, in certain cases, a partnership) either continues the target's historic business or uses a significant portion of the target's historic business assets in a business.

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