Variations on a D reorganization theme.

Author:Madden, David

On Dec. 9, 2002, the Service released Rev. Rul. 2002-85, which holds that an acquirer's transfer of a target corporation's assets to the acquirer's wholly owned subsidiary, as part of a reorganization plan, will not prevent the transaction from qualifying for tax-free treatment under Sec. 368(a)(1)(D).This item will examine how Rev. Rul. 2002-85 dovetails with other published guidance on m-free reorganizations.


In general, an acquisitive D reorganization is a transfer of the assets of one corporation (a target) to another (an acquirer) in exchange for the latter's stock; thereafter, the target liquidates and distributes the acquirer's stock received in the exchange to its shareholders. In an acquisitive D reorganization, the distribution of acquirer stock must satisfy Sec. 354 requirements. In a divisive D reorganization, the distribution of acquirer stock has to satisfy the Sec. 355 requirements.

In general, Sec. 368(a)(2)(C) permits an acquirer to transfer assets to a corporation it controls (within the meaning of Sec. 368(c)) following an A, B, C or G reorganization, without disqualifying the reorganization. Why did Congress blatantly exclude D reorganizations from this provision? For many years, tax advisers were concerned that the omission could be interpreted as signaling Congress's intent to invalidate a D reorganization that is followed by a transfer of the target's assets to the acquirer's subsidiary.

In Rev. Rul. 2002-85, the Service declined to draw this negative inference. Reasoning that Sec. 368(a)(2)(C) provides a permissive (and nonexclusive list), the IRS resolved that a transfer of a target's assets to an acquirer's wholly owned subsidiary does not disqualify an otherwise qualifying D reorganization.

Rev. Rul. 2002-85

In the ruling, an individual owns all of a target (a state X corporation) and all of an acquiring corporation (a state Y corporation). For valid business reasons and pursuant to a reorganization plan, the target transfers all of its assets to the acquirer in exchange for 70% of the latter's voting stock and 30% cash. Following the exchange, the target liquidates, distributing the acquirer's voting stock and cash to the individual.

Under the reorganization plan, the acquirer subsequently contributes all of the target's assets to a pre-existing wholly owned subsidiary in exchange for additional subsidiary stock. The subsidiary will continue the target's historical business after the transfer and the...

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