The cash D reorganization rules contain a de minimis allowance that ignores small ownership differences between the target and the acquiror when testing for complete shareholder identity. Treas. Reg. § 1.368-2(l).
A, B, and C own 34%, 33%, and 33%, respectively, of the stock of T. A, B, and C each own 33% of the stock of S, and D owns the remaining 1% of S. The T stock has a fair market value of $100x. T sells all of its assets to S in exchange for $100x of cash and immediately liquidates.
For purposes of determining whether the distribution requirement of sections 368(a)(1)(D) and 354(b)(1)(B) is met, D’s 1% ownership of S is treated as de minimis and the transaction is treated as if there is complete shareholder identity and proportionality of ownership in T and S. Accordingly, the requirements are treated as satisfied notwithstanding that no S stock is issued. S is deemed to issue a nominal share of S stock to T in addition to the $100x of cash, T is deemed to distribute all such consideration to A, B, and C, and the nominal share is deemed transferred among the shareholders to reflect their actual ownership of S. The transaction qualifies as a reorganization described in section 368(a)(1)(D).
D’s 1% interest in S is treated as de minimis, so the ownership of T and S is tested as if it were completely identical.
Because A, B, and C own T and S in essentially the same proportions, the identity and proportionality requirements of the cash D rules are satisfied.
As with other cash D reorganizations, the requirements of sections 368(a)(1)(D) and 354(b)(1)(B) are met even though S issues no real stock for the T assets.
The deemed nominal share of S stock is treated as distributed and transferred among A, B, and C consistent with their ownership of S.
