IRS expands range of D reorganizations, highlights importance of the form of a taxpayer's transaction.

• Author: Feinstein, Bruce I.

When the IRS issued Rev. Ruis. 2015-9 and 2015-10, it expanded the range of transactions that qualify as type D acquisitive asset reorganizations (under Sec. 368(a)(1)(D)) and signaled a greater willingness to accept a taxpayer's chosen form of reorganization transaction. To better understand the significance of these rulings, a little background is necessary.

Rev. Rul. 78-130: Form Controls--Except When It Doesn't

The genesis of Rev. Ruls. 2015-9 and 2015-10 can be traced to 1978, when the IRS issued Rev. Rul. 78-130. In it, a domestic parent (DP) transferred the stock of its foreign operating subsidiary (FS-1) to its foreign holding company subsidiary (FS-2) in exchange for additional FS-2 stock. Next, FS-1 and three subsidiaries of FS-2 (X, Y, and Z) transferred substantially all of their assets to N, a newly formed subsidiary of FS-2, for stock of A. In the last step, the foreign subsidiaries (FS-1,X, Y, and Z) that transferred their assets to TV liquidated, distributing the newly issued A stock to FS-2, As parent.

The IRS ruled that DP's transfer of FS-1 to FS-2 did not constitute an exchange under Sec. 351. The IRS reasoned that DP's transfer of the FS-1 stock to FS-2 followed immediately by N's acquisition of FS-1 s assets could not be viewed independently. Accordingly, the IRS ignored DP's transfer of the FS-1 stock to FS-2 and N's issuance of its own stock to FS-1.

Instead, the IRS created the fiction that A had used stock of its parent, FS-2, to effect the acquisition of FS-1's assets. The IRS ruled that the transaction qualified as a parenthetical or triangular C reorganization. Notably, the IRS said that N's acquisition of FS-1's assets in exchange for FS-2 stock (as recast) did not qualify as a D reorganization.

The IRS reasoned that neither FS-1 (the transferor) nor DP (the shareholder) "controlled" A under Sec. 368(c) immediately after the transaction. It should be noted the Sec. 368(c) control rule in effect at the time Rev. Rul. 78-130 was issued was subsequently replaced by the rule in Sec. 368(a)(2)(H). (The term "control" is based on Sec. 304(c) principles, which incorporate augmented Sec. 318 attribution rules.)

The Sec. 368(c) control issue aside, it is doubtful the 1978 transaction as recast would have qualified as a D reorganization under the Code today. By definition, under the stock distribution rules of Secs. 354(b)(1)(B) and 368(a) (1)(D), a D reorganization contemplates that acquirer stock will be used to...