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Sept. 18 — The IRS in final regulations clarified and expanded its list of requirements for a transaction to qualify for the F reorganization tax-free status.
The rules (T.D. 9739, RIN 1545-BF51) regarding corporate reorganizations under tax code Section 368(a)(1)(F) are an addition to proposed regulations (REG-106889-04) released in 2004 (155 DTR G-1, 8/12/04).
F reorganizations are tax-free transactions that usually involve “mere” changes in a taxpayer's name or jurisdiction. Questions about what other changes can happen in an F reorganization that don't change the “mere change” status arose after issuance of the 2004 proposed rules and drove the efforts to craft the final regulations.
The final regulations say a transaction that involves an actual or deemed transfer of property by a transferor corporation to a resulting corporation is a “mere change” that qualifies as a F reorganization if it meets six requirements, with certain exceptions. Some requirements are holdovers from the proposed rules, though IRS has added new ones as well.
The rules also add the concept of a potential F reorganization to help in determining which steps in a multi-step transaction should be considered when applying the six requirements.
The requirements are:
• immediately after a potential F reorganization, all stock of the resulting corporation must be distributed in exchange for stock of the transferor corporation in the potential F reorganization;
• the same person or persons own all the stock of the transferor corporation at the beginning of the potential F reorganization and all of the stock of the resulting corporation at the end in identical proportions;
• the resulting corporation doesn't hold any property or have any tax attributes immediately before the potential F reorganization;
• the transferor corporation must completely liquidate in the reorganization for federal income tax purposes;
• immediately after the potential F reorganization, no corporation other than the resulting corporation may hold property that was held by the transferor corporation immediately before the potential F reorganization; and
• immediately after the potential F reorganization, the resulting corporation may not hold property acquired from a corporation other than the transferor corporation if the resulting corporation would, as a result, succeed to and take into account the items of such other corporation described in Section 381(c).
“Viewed together, these six requirements ensure that an F reorganization involves only one continuing corporation and is neither an acquisitive transaction nor a divisive transaction,” the rules said.
The regulations also say a transaction or a series of related transactions to be tested against the six requirements begins when the transferor corporation begins transferring its assets to the resulting corporation and ends when the consideration it receives from the resulting corporation is distributed to its shareholders and has liquidated for federal income tax purposes.
The final rules also provide guidance related to outbound F reorganizations, in which the resulting company would be foreign. The rules adopt provisions in a 1990 set of proposed regulations (T.D. 8280) relating to Section 367(a).
The rules are scheduled to be published in the Federal Register dated Sept. 21.
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