Convert Target to LLC Explained
At the initial structure, the V shareholders own 100% of Corp V (Target) and Corp Y (Acquiror) stands alone. Y then acquires the stock of V from the V shareholders in exchange for consideration consisting of 50 percent Y voting stock and 50 percent cash. After the exchange, Y owns 100% of Corp V.
Immediately after the stock acquisition, and as part of the same integrated plan, Corp V files the necessary documents to convert from a corporation to a limited liability company under state law. The acquisition of V’s stock and the conversion of V into an LLC are steps in a single integrated acquisition by Y of the assets of V.
Under Treas. Reg. § 1.368-2(b)(1)(iii), the acquisition of V’s assets does not satisfy the requirements of paragraph (b)(1)(ii)(B) because V — the combining entity of the transferor unit — does not cease its separate legal existence. Although V becomes an entity disregarded from its owner for Federal income tax purposes, it continues to exist as a juridical entity after the conversion. Accordingly, Y’s acquisition of the assets of V does not qualify as a statutory merger or consolidation for purposes of section 368(a)(1)(A). At the ending point, Y owns LLC V and the two are treated as one entity for U.S. tax purposes.
