Corp Y wholly owns LLC X, a limited liability company that is disregarded as an entity separate from Y for Federal income tax purposes. Corp Z is an unrelated corporation that will acquire X’s business. Together, Corp Y and its disregarded entity X form a single “transferor combining unit” — but only X’s own assets and liabilities are in play in the merger.
Under State W law, X merges into Z. At the effective time, all of the assets and liabilities of X (but not the other assets and liabilities of Y) become the assets and liabilities of Z, and X’s separate legal existence ceases for all purposes. After the merger, Z holds X’s former assets and liabilities and Y continues to exist.
To be a statutory merger or consolidation under section 368(a)(1)(A), Treas. Reg. § 1.368-2(b)(1)(ii) requires that (A) all of the assets and liabilities of the members of the transferor unit become the assets and liabilities of one or more members of the transferee unit, or (B) that the transferor combining entity cease its separate legal existence. Neither test is satisfied here: the assets and liabilities of the transferor unit (Y plus X) do not all vest in Z because Y retains its own assets, and a disregarded entity such as X is not itself a combining “entity” whose cessation counts. Accordingly, the transaction cannot qualify under section 368(a)(1)(A).
Because LLC X is disregarded, it is not treated as a combining “entity” under Treas. Reg. § 1.368-2(b)(1). The cessation of X’s separate legal existence therefore cannot satisfy requirement (B) of paragraph (b)(1)(ii).
The transferor combining unit is Corp Y together with its disregarded entity X. Because Y keeps its own assets and liabilities, not all of the unit’s assets and liabilities become Z’s, so requirement (A) is not met.
Qualifying as a merger under State W corporate 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 independently be satisfied.
Because neither the all-assets test nor the entity-cessation test is met, the merger of disregarded entity X into Corp Z fails to qualify as a statutory merger or consolidation under section 368(a)(1)(A).
