Y owns an interest in X, an entity classified as a partnership for federal income tax purposes, that represents a 60 percent capital and profits interest. Corp Z owns the remaining 40 percent capital and profits interest in X, and the Z shareholders own 100 percent of Corp Z. Under State W law, Z merges into X.
Pursuant to that law, the following events occur simultaneously at the effective time of the transaction: all of the assets and liabilities of Z become the assets and liabilities of X, and Z ceases its separate legal existence for all purposes. In the merger, the Z shareholders exchange their stock of Z for stock of Y. Because Y then owns 100 percent of X, X becomes an entity that is disregarded as separate from Y.
The transaction satisfies paragraph (b)(1)(ii) because all of the assets and liabilities of Z — the combining entity and sole member of the transferor unit — become the assets and liabilities of one or more members of the transferee unit (Y, the combining entity, and X, the disregarded entity whose assets Y is treated as owning), and Z ceases its separate legal existence. The transaction therefore qualifies as a statutory merger or consolidation under section 368(a)(1)(A).
A partnership that becomes wholly owned by one corporate partner is disregarded as separate from that owner, so its assets are treated as the owner’s for federal tax purposes.
Z is the combining entity and sole member of the transferor unit; Y and its disregarded entity X form the transferee unit that absorbs all of Z’s assets and liabilities.
Because all of Z’s assets and liabilities vest in the transferee unit and Z ceases to exist, the state-law merger meets the requirements of a statutory merger under section 368(a)(1)(A).
The Z shareholders surrender their Corp Z stock and receive Corp Y stock, giving them continuing proprietary interest in the combined enterprise.
