Corporations that meet six requirements will be able to effectuate F reorganizations tax-free when those reorganizations involve a mere change of identity, form, or place of organization of one corporation, however effected, under final regulations issued by the IRS on Sept. 18 (T.D. 9739). The regulations also govern outbound F reorganizations in which the acquiring corporation is a foreign corporation. They finalize proposed regulations issued in 1990 and 2004 with certain substantive and clarifying changes.
The final rules apply a concept called a potential F reorganization, allowing the many steps of a corporate reorganization to be examined together to see if the transaction qualifies to be an F reorganization. The IRS believes that, because the statute contains the phrase "however effected," the rules should permit a series of transactions to qualify as an F reorganization.
Under the final rules, an F reorganization has occurred if the transactions meet six requirements. Four of the requirements were in the 2004 proposed regulations, and the last two were added in response to comments.
The first and second requirements reflect the concept that a transaction that shifts the ownership of the proprietary interests in a corporation cannot qualify as a mere change. Thus, a transaction that introduces a new shareholder or new equity capital into the corporation does not qualify as an F reorganization. Therefore, the first requirement in the final regulations is that immediately after the potential F reorganization, all the stock of the new corporation must have been distributed (or deemed distributed) in exchange for stock of the old transferor corporation in the potential F reorganization.
The second requirement, which is subject to certain exceptions (including a de minimis exception), is that the same person or persons must own all the stock of the old corporation at the beginning of the potential F reorganization and all of the stock of the new corporation at the end, in identical proportions.
The third and fourth requirements reflect the mandate that these reorganizations involve only one corporation. The third requirement limits the assets and attributes of the new corporation to those held immediately before the transaction. The fourth requires the old corporation to liquidate.
To facilitate the reorganization, however, the new corporation is permitted to hold a de minimis amount of assets to facilitate its organization or its existence before the reorganization and is also allowed to hold proceeds of money borrowed to facilitate the transaction. And the old corporation is not required to legally dissolve and may maintain a de minimis amount of assets to remain in existence.
Under the fifth requirement, which was added in response to comments, immediately after the potential F reorganization, no corporation other than the new corporation may hold property that was held by the old corporation immediately before the reorganization, if the new corporation would, as a result, succeed to the losses of the old corporation in Sec. 381(c). Thus, a transaction that divides the property or tax attributes of the old corporation between or among acquiring corporations, or that leads to potential competing claims to those tax attributes, will not qualify.
The sixth requirement, also added in response to comments, is a variation on the fifth requirement. Immediately after the potential F reorganization, the new corporation may not hold property acquired from a corporation other than the old corporation if the new corporation would, as a result, succeed to and take into account the items of that other corporation described in Sec. 381(c). Thus, a transaction that involves simultaneous acquisitions of property and tax attributes from multiple transferor corporations will not qualify.
The final regulations also finalize proposed rules under Sec. 367 on F reorganizations in which the old, transferor corporation is a domestic U.S. corporation and the new, acquiring corporation is a foreign corporation. In those cases, most of the nonrecognition provisions do not apply. Under the final regulations, the transferor corporation's tax year ends on the date of the transfer to the foreign corporation, and the tax year of the acquiring corporation ends with the close of the date on which the transferor's tax year would have ended but for the occurrence of the transfer.
The regulations apply to transactions occurring on or after Sept. 21, 2015.