Merger into a Partnership’s DRE Explained
The facts are the same as in Example 2 of the regulation, with one decisive difference: Y is organized as a partnership under the laws of State W and is classified as a partnership for Federal income tax purposes. In the Initial Structure, Y (the acquiror, a partnership) owns 100% of LLC X, a disregarded entity, while the Z shareholders own Corp Z, the target.
In the Merger step, Corp Z merges into LLC X under State W law. Because LLC X is disregarded, its assets are treated as owned by Y for Federal income tax purposes. All of Z’s assets and liabilities pass into X, the Z shareholders surrender their Corp Z stock, and in exchange they receive partnership interests in Y.
At the Ending Point, the former Z shareholders hold partnership interests in Y, which continues to own LLC X, and that combined entity holds the former Corp Z assets and liabilities.
The transaction does not satisfy the requirements of paragraph (b)(1)(ii)(A). All of the assets and liabilities of Z — the combining entity and sole member of the transferor unit — do not become the assets and liabilities of one or more members of a transferee unit, because neither X nor Y qualifies as a combining entity. A partnership is not a combining entity, and a disregarded entity is not a combining entity. Accordingly, the transaction cannot qualify as a statutory merger or consolidation for purposes of § 368(a)(1)(A).
