When testing for complete shareholder identity in a cash D reorganization, stock that is plain vanilla preferred stock described in section 1504(a)(4) is disregarded. Treas. Reg. § 1.368-2(l).
A, B, and C own 34%, 33%, and 33%, respectively, of the common stock of T and S. D owns preferred stock in S described in section 1504(a)(4). 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 ownership of the section 1504(a)(4) preferred stock is ignored, 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, and T is deemed to distribute all such consideration to A, B, and C. The transaction qualifies as a reorganization described in section 368(a)(1)(D).
Section 1504(a)(4) preferred stock is plain vanilla preferred that is ignored when measuring shareholder identity between T and S.
Because A, B, and C own the common stock of both T and S in the same proportions, complete identity and proportionality exist.
D’s holding of only vanilla preferred stock of S does not disturb the shareholder identity required by the cash D rules.
S is deemed to issue a nominal share of S stock to T, which T distributes to its common shareholders, so the transaction is a section 368(a)(1)(D) reorganization.
