Corporation Y (the acquiror) and Corporation Z (the target) begin as separate, unrelated corporations. Under State W law, Z transfers only some of its assets and liabilities to Y and, in the same transaction, Z receives Y stock. Z keeps the remainder of its assets and liabilities and continues to exist for Federal income tax purposes. The state law characterizes the transaction as a merger.
To be a statutory merger or consolidation under section 368(a)(1)(A), Treas. Reg. § 1.368-2(b)(1)(ii) requires either (A) that all of the assets and liabilities of the combining entity of the transferor unit become the assets and liabilities of the combining entity of the transferee unit, or (B) that the combining entity of the transferor unit cease its separate legal existence for all purposes.
Neither test is met here. Because Z transfers only part of its assets and liabilities to Y — not all of them — requirement (A) fails. And because Z remains in existence and does not cease its separate legal existence for all purposes, requirement (B) fails. Accordingly, this “divisive merger” is not a statutory merger under section 368(a)(1)(A), even though it is a merger under State W corporate law.
Qualifying under State W merger law does not make the transaction an § 368(a)(1)(A) reorganization. The Federal requirements of Treas. Reg. § 1.368-2(b)(1)(ii) must be independently satisfied.
Because Z transfers only some of its assets and liabilities to Y, not all of Z’s assets and liabilities become Y’s. Requirement (A) of paragraph (b)(1)(ii) is not met.
Z retains the remaining assets and liabilities and stays in existence for Federal income tax purposes. Because Z’s separate legal existence does not cease for all purposes, requirement (B) is not met either.
The transaction divides Z rather than combining it into Y, so it does not qualify as a statutory merger or consolidation under section 368(a)(1)(A).
