The Bausch & Lomb doctrine had treated an acquiror’s pre-existing ownership of target stock as non-stock consideration, which could cause an upstream asset acquisition to fail the solely for voting stock requirement of a C reorganization. Treas. Reg. § 1.368-2(d)(4)(ii) repealed that result.
Corporation P holds 60 percent of the Corporation T stock, which P purchased several years ago in an unrelated transaction. T has 100 shares outstanding; the other 40 percent of the T stock is owned by Corporation X, an unrelated corporation. T has properties with a fair market value of $110 and liabilities of $10. T transfers all of its properties to P. In exchange, P assumes the $10 of liabilities and transfers to T $30 of P voting stock and $10 of cash. T distributes the P voting stock and the $10 of cash to X and liquidates.
The transaction satisfies the solely for voting stock requirement of paragraph (d)(2)(ii) because the sum of the $10 of cash paid to X and the assumption by P of $10 of liabilities does not exceed 20 percent of the value of the properties of T. P’s pre-existing 60 percent block is disregarded in applying that test.
Stock of the target that the acquiror already owns is no longer treated as non-stock consideration when testing the solely for voting stock requirement.
Cash paid to the minority plus liabilities assumed cannot exceed 20 percent of the value of the target’s properties. Here $10 cash plus $10 of liabilities equals $20, which does not exceed 20 percent of $110.
A target may merge its assets up into a controlling corporate shareholder and still achieve C reorganization treatment after the repeal of Bausch & Lomb.
Treas. Reg. § 1.368-2(d)(4)(ii), Example 1 illustrates the repeal of the Bausch & Lomb doctrine for an upstream C reorganization.
