Final Regulations on F Reorganizations

By:
Michael Schonig, CPA
Published Date:
Jan 1, 2016

On Sept. 21, 2015, the Treasury Department and IRS released final regulations providing clarification on the qualification of transactions as “F Reorganizations” under IRC section 368(a)(1)(F). Unlike many types of corporate reorganizations, which are deemed stock or asset sales, an F Reorganization is considered a “mere change” - meaning the business remains substantially the same despite changes in its identity, form, or place of incorporation. With a few exceptions, the ownership and assets of the resulting corporation should be identical to those of the transferor corporation.

If the criteria for an F Reorganization is met, there are usually no tax consequences for the event. Typically, when a corporation engages in this type of reorganization, the taxable year does not close and the resulting corporation assumes the tax attributes of the transferor corporation.

The 2004 temporary regulations listed four requirements for a transaction to be deemed an F Reorganization. These final regulations contain two additional requirements relating to the transfer of property and tax attributes to or from the resulting corporation. To be considered an F Reorganization, the transaction must now meet the following six requirements:

  1. Immediately after a potential F Reorganization, all stock of the resulting corporation must be exchanged for stock of the transferor corporation.

     

  2. The shareholders of the transferor corporation at the beginning of the F Reorganization must be the same as the shareholders of the resulting corporation at the end of the reorganization. The ownership percentages must be the same. Redemptions of stock by dissenting shareholders to facilitate the transaction are generally not considered a change in ownership, being deemed to occur before or after the F Reorganization. A de minimis exception exists for the resulting corporation to issue additional stock if its jurisdiction has capitalization or shareholder requirements.

     

  3. The resulting corporation may not hold property or have tax attributes before the reorganization, with the exception of assets or borrowed funds it holds to facilitate the transaction.

     

  4. The transferor corporation must be completely liquidated for federal income tax purposes in the reorganization The transferor corporation may continue to exist for legal purposes, and is permitted to retain a minimal amount of assets to maintain its legal status.

     

  5. Immediately after the reorganization, no corporation other than the resulting corporation may hold property that was held by the transferor immediately before the F Reorganization. Any transactions that give other corporations claim to the transferor corporation’s tax attributes is prohibited.

     

  6. Immediately after the reorganization, the resulting corporation may not hold property acquired from a corporation other than the transferor corporation. If multiple corporations contribute assets to the new corporation, the transaction will not be considered an F Reorganization.

An F Reorganization can occur within the context of a larger event, as a necessary step that facilitates a larger transaction. The entire transaction need not be evaluated against the six criteria. Rather, the evaluation period for an F Reorganization begins only when the transferor corporation transfers or is deemed to transfer assets to the resulting corporation. It ends when the transferor corporation has distributed or is deemed to distribute the consideration received to its shareholders, and is liquidated.

The final regulations also address outbound F Reorganizations and reaffirm the temporary regulations issued in 1990. In some cases where an actual or constructive transfer of assets or stock occur, the corporation’s tax year closes, and the tax deferral found in an F Reorganization may not apply.

Practitioners should ensure that the criteria for an F Reorganization are met during the evaluation period, lest the transaction does not receive tax-free treatment.

 


 schoningMichael Schonig, CPA, is a supervisor at Marcum LLP. He specializes in corporate and partnership taxation, providing tax planning and compliance services to closely held and middle market businesses. Michael holds a Master of Science in taxation from Baruch College, and is an active member of the NYSSCPA C Corporations Tax Committee. He can be reached at Michael.Schonig@MarcumLLP.com or 631-414-4572.

 
Views expressed in articles published in Tax Stringer are the authors' only and are not to be attributed to the publication, its editors, the NYSSCPA or FAE, or their directors, officers, or employees, unless expressly so stated. Articles contain information believed by the authors to be accurate, but the publisher, editors and authors are not engaged in redering legal, accounting or other professional services. If specific professional advice or assistance is required, the services of a competent professional should be sought.