IRS ruling interprets reorganization definition.

• Author: Sair, Edward A.

The IRS ruled that if, pursuant to an integrated plan, a newly formed wholly owned subsidiary of an acquiring corporation merges into a target, followed by the target's merger into the acquiring corporation, the transaction would be a single statutory merger of the target into the acquiring corporation that qualifies as a Sec. 368(a)(1)(A) reorganization, rather than as an acquisition through a Sec. 338 qualified stock purchase (QSP) followed by a liquidation under Sec. 332.

Rev. Rul. 2001-46

In Rev. Rul. 2001-46, the Service explains its position on two apparently conflicting prior revenue rulings: Rev. Rul. 67-274 is amplified and followed, and Rev. Rul. 90-95 (including a similar example in the regulations) is distinguished.

Rev. Rul. 2001-46 describes two situations:

Situation 1. Corporation X owns all the stock of Corporation Y, a newly formed wholly owned subsidiary. Pursuant to an integrated plan, X acquires all of the stock of Corporation T, an unrelated corporation, in a statutory merger of Y into T (the acquisition merger), with T surviving. In the acquisition merger, the T shareholders exchange their T stock for 70% X voting stock and 30% cash. Following the acquisition merger and as part of the plan, T merges into X in a statutory merger (the upstream merger). It is assumed that the step-transaction doctrine would apply to treat the acquisition merger and the upstream merger as a single integrated acquisition by X of all T's assets.

Situation 2. The facts are the same as in Situation 1, except that in the acquisition merger, the T shareholders receive solely X voting stock in exchange for their T stock, so that the acquisition merger, if viewed independently of the upstream merger, would qualify as a reorganization under Sec. 368(a)(1)(A) by reason of Sec. 368(a)(2)(E).

Prior Rulings

In Rev. Rul. 90-95, the merger of a newly formed wholly owned domestic subsidiary into a target with the target shareholders receiving solely cash in exchange for their stock, immediately followed by the merger of the target into the domestic parent of the merged subsidiary, was treated as a QSP of the target followed by a Sec. 332 liquidation of the target. The acquisition of the target's stock was accorded independent significance from the target's subsequent liquidation and, therefore, was treated as a QSP, regardless of whether a Sec. 338 election was made. Regs. Sec. 1.338-3(d) incorporates the approach of Rev. Rul. 90-95.

In Rev. Rul. 67-274...