The cash D reorganization rules also apply where the target and acquiror are members of an affiliated group, so that ownership identity is established indirectly through a chain of subsidiaries rather than by common individual shareholders. Treas. Reg. § 1.368-2(l).
P owns all of the stock of S1 and S2. S1 owns all of the stock of S3, which owns all of the stock of T. S2 owns all of the stock of S4, which owns all of the stock of S. The T stock has a fair market value of $70x. T sells all of its assets to S in exchange for $70x of cash and immediately liquidates.
Under paragraph (l)(2)(ii), there is indirect, complete shareholder identity and proportionality of ownership in T and S. Accordingly, the requirements of sections 368(a)(1)(D) and 354(b)(1)(B) are treated as satisfied even though no S stock is issued. S is deemed to issue a nominal share of S stock to T in addition to the $70x of cash, and the nominal share is deemed to move up the chain to P and back down to S4, reflecting the affiliated ownership. The transaction qualifies as a reorganization described in section 368(a)(1)(D).
Complete shareholder identity is established through the chain of wholly owned subsidiaries under common parent P, not through individual shareholders.
Because T and S are both indirectly wholly owned by P, the proportionality and identity requirements of the cash D rules are satisfied.
The deemed nominal share of S stock is treated as distributed up through S3, S1, and P, then down to S2 and S4, mirroring actual ownership.
T sells substantially all of its assets to S for $70x of cash and liquidates, the all-cash transfer the section 368(a)(1)(D) regulations recast as a reorganization.
