Temp. Regs. on mergers involving disregarded entities.

• Author: Packard, Pamela

The IRS issued Temp. Regs. Sec. 1.368-2T, which addresses mergers involving disregarded entities and generally focuses on limited liability companies. The temporary regulations replace proposed regulations (REG-126485-01), but are consistent with them, each permitting the merger of a target corporation into a disregarded entity of an acquiring corporation to qualify as an A reorganization, if the transaction otherwise meets certain requirements. Although the Service and Treasury are continuing to study comments on the proposed regulations, they issued the temporary regulations to provide immediate guidance. The temporary regulations are effective for transactions occurring after Jan. 24, 2003. This item reviews their basic operating rules, clarifies some of the requirements and examines two of the eight examples.

The Rules

Under the temporary regulations, a corporate merger into a disregarded entity may be treated as a statutory merger (an A reorganization) if two conditions are met. First, according to Temp. Regs. Sec. 1.368-2T(b)(1)(ii)(A), all of the assets and liabilities of each member of a combining unit (i.e., a transferor unit) must become the assets and liabilities of one or more members of the other combining unit (i.e., a transferee unit). Second, under Temp. Regs. Sec. 1.368-2T(b)(1)(ii)(B), the combining entity of each transferor unit must cease its separate legal existence for all purposes. Temp. Regs. Sec. 1.368-2T(b)(1)(i)(B) defines a "combining entity" as a business entity that is a corporation (as defined in Regs. Sec. 301.7701-2(b)) that is not a disregarded entity. Finally, Temp. Regs. Sec. 1.368-2T(b)(1)(i)(C) defines a "combining unit" as a combining entity and its disregarded entities.

Clarifications

According to the temporary regulations, the requirement that a transferor combining entity cease its legal existence will be met if it continues to exist for certain limited legal purposes, such as to defend itself against, or bring legal actions for, activities it engaged in before the merger's effective date.

According to Temp. Regs. Sec. 1.368-2T(b)(1)(iii), for transferor units with foreign disregarded entities, the domestic-entity requirement (i.e., that the transferor unit's assets be held by the transferee unit's domestic entities after the merger) will not be violated if a foreign disregarded entity is part of a transferor unit and, as a result of a merger of the transferor...