QSP + Brother-Sister Merger Explained
P owns all of the stock of Y, a newly formed subsidiary, and all of the stock of X, another domestic corporation. S owns all of the stock of T. Each of P, S, T, X, and Y is a domestic corporation. P acquires all of the T stock in a statutory merger of Y into T, with T surviving. In that merger S receives consideration consisting of 50% P voting stock and 50% cash. Viewed independently of any other step, P’s acquisition of the T stock constitutes a qualified stock purchase.
Following P’s acquisition of the T stock, T merges into X, a domestic corporation that is a wholly owned subsidiary of P. Viewed independently of any other step, T’s merger into X qualifies as a reorganization described in section 368(a). Absent the application of paragraph (c)(2) of this section, the step transaction doctrine would apply to treat P’s acquisition of the T stock and T’s merger into X as an acquisition by X of T’s assets in a reorganization described in section 368(a).
Pursuant to paragraph (c)(2) of this section, as a result of the election under section 338(h)(10), for all Federal tax purposes P’s acquisition of the T stock is treated as a qualified stock purchase and is not treated as part of a reorganization described in section 368(a). Old T is deemed to sell its assets and new T (held by X after the brother-sister merger) takes those assets with a stepped-up basis.
