Pretransaction restructuring using an F reorg.

• Author: Klahsen, Rick

Of all types of acquisitive reorganizations, the Sec. 368(a)(1)(A) merger generally provides the most flexibility. With an A merger, the "substantially all the assets" test is not required, qualifying consideration is not limited to solely voting stock, and up to 60% boot is allowed (Regs. Sec. 1.368-1(e)(2)(v), Examples (1) and (2)). However, a variety of business reasons often make a merger less than ideal (e.g., valuable, nontransferable licenses and contracts or successor liability concerns) and lead taxpayers to look to other Sec. 368(a) transactions.

In such instances, the more stringent requirements of the other transaction forms often cause additional problems. For example, a Sec. 368(a)(1)(B), reorganization is not a viable option if the target shareholders negotiated to receive 50% cash consideration. This item explains how, within the context of a subchapter S corporation target, a Sec. 368(a)(1)(F) reorganization private letter ruling may present a structure that allows the parties to a reorganization to have their cake and eat it, too.

Letter Ruling 200835014 addressed a demutualization merger of a nonprofit target into a for-profit taxable corporation (T), followed by the merger of T with and into a wholly owned disregarded entity of the purchasing corporation (P). In line with existing authority, the IRS ruled that the demutualization merger represented and F reorganization and that the merger of T with and into the disregarded entity represented a separate A merger of T into P.

F Reorgs. in General

An F reorganization is "a mere change in identity, form, or place of organization of one corporation, however effected" (Sec. 368(a)(1)(F)). Because Treasury has not finalized regulations defining an F reorganization, taxpayers must analyze historical rulings, case law, and proposed regulations when determining whether an F reorganization has occurred. Proposed regulations under Sec. 368(a)(1)(F) provide that a mere change occurs only if:

* All the stock of the resulting corporation, including stock issued before the transfer, is issued in respect of stock of the transferring corporation;

* There is no change in the ownership of the corporation in the transaction, except a change that has no effect other than that of a redemption of less than all the shares of the corporation;

* The transferring corporation completely liquidates in the transaction; and

* The resulting corporation does not hold any property or have any tax attributes (including those specified in Sec. 381(c)) immediately before the transfer (Prop. Regs. Sec. 1.368-2(m)(l)(1)(i)).

However, a legal dissolution of the transferring corporation is not required (Prop. Regs. Sec. 1.368-2(m)(1)(ii)(A)).

Under Prop. Regs. Sec. 1.368-2(m)(3), the regulations would...