Treas. Reg. § 1.368-2(b)(1)(iii), Example 4

Triangular Merger into Disregarded Entity

Corp Z merges into LLC X, a disregarded entity wholly owned by Corp Y, which is in turn wholly owned by Corp V. The Z shareholders surrender their Corp Z stock and receive stock of Corp V — the parent of the acquiring corporation — and all of Z’s assets and liabilities pass to the transferee combining unit, so the merger qualifies as a reorganization under § 368(a)(1)(A) that also satisfies § 368(a)(2)(D).

Treas. Reg. § 1.368-2(b)(1)(iii), Example 4; § 368(a)(1)(A); § 368(a)(2)(D)

Triangular Merger into DRE Explained

The diagram walks through a three-step triangular merger of one corporation into another corporation’s disregarded entity. In the Initial Structure, Corp V owns 100% of Corp Y (the acquiror and combining entity), and Corp Y owns 100% of LLC X, a disregarded entity. Corp Y together with its disregarded LLC X forms the “transferee combining unit.” Separately, the Z shareholders own Corp Z, the target and combining entity.

In the Triangular Merger step, Corp Z merges into LLC X. Because LLC X is disregarded, its assets are treated for Federal income tax purposes as the assets of Corp Y. All of Z’s assets and liabilities pass to X, the Z shareholders surrender their Corp Z stock, and — unlike the two-party version — in exchange they receive stock of Corp V, the corporation in control of the acquiring corporation Y.

At the Ending Point, the former Z shareholders own Corp V, which continues to own Corp Y 100%, which continues to own LLC X 100%. Corp Y and LLC X remain a single entity for U.S. tax purposes, and that entity now holds the former Corp Z assets and liabilities.

The transaction is not prevented from qualifying as a statutory merger under § 368(a)(1)(A), provided the requirements of § 368(a)(2)(D) are satisfied. Because the assets of X are treated as the assets of Y, Y is treated as acquiring substantially all of the properties of Z, and the Z shareholders receive stock of V — a corporation in control of Y — so the merger satisfies § 368(a)(2)(D).

Key Takeaways

A triangular merger into a DRE qualifies

A statutory merger of a target corporation into a disregarded entity of the acquiring corporation can be a forward triangular reorganization, because the disregarded entity’s assets are treated as owned by its regarded corporate owner. Treas. Reg. § 1.368-2(b)(1)(iii), Example 4.

Parent stock satisfies (a)(2)(D)

The Z shareholders exchange their Corp Z stock for stock of Corp V, the corporation in control of the acquiring corporation Corp Y, so the merger meets the stock-of-a-controlling-corporation requirement of § 368(a)(2)(D).

Disregarded entity assets are the parent’s

Because the assets of LLC X are treated as the assets of Corp Y, Y is treated as acquiring substantially all of the properties of Z in the merger for purposes of testing § 368(a)(2)(D).

Combining unit analysis

The transferee combining unit is Corp Y (the combining entity) together with its disregarded LLC X; the transferor unit is Corp Z. Z’s assets and liabilities must become those of a member of the transferee unit.

Related Tax Charts

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