Federal Tax – F Reorganization

April 30, 2016  | By Erik Lincoln

In a federal tax ruling (PLR 201611015) the IRS determined that a Section 368(a)(1)(F) reorganization (an F reorganization) would not be invalidated where the target in such F reorganization effectuated the F reorganization through an LLC conversion, only to be followed by a drop down to another subsidiary and conversion back to a corporation. Using simplified facts, OldCo, a state X publicly traded corporation, formed HoldCo 1, also a state X corporation. Following that, HoldCo 1 formed Merger Sub, a state X corporation. Subsequently, Merger Sub merged into OldCo with OldCo surviving. In the merger, the OldCo shareholders exchanged their OldCo shares for HoldCo 1 shares. After the merger, OldCo converted into an LLC (Old LLC) treated as a disregarded entity for US federal tax purposes. These steps constituted an F reorganization of OldCo into HoldCo 1.  Subsequently, HoldCo 1 contributed all of its interest in Old LLC to HoldCo 2, a state X wholly owned subsidiary of HoldCo 1 and Old LLC then converted back to a corporation under State X law (NewCo). The IRS ruled that the reincorporation of Old LLC will not prevent the merger of the Merger Sub into OldCo followed by the deemed liquidation of OldCo from qualifying as a Section 368(a)(1)(F) reorganization.

Notwithstanding the final regulations under Section 368(a)(1)(F) (Treas. Reg. sec. 1.368- 2(m)) and other guidance indicating that an ‘F’ reorganization transaction is unique and should stand alone in a series of integrated steps, questions may arise whether a conversion of a corporation to a disregarded entity and a subsequent reincorporation in the same state of incorporation may be viewed as transitory in certain instances. The statute defines an F reorganization as ‘a mere change in identity, form, or place of organization of one corporation, however effected.’ Here, the merger followed by the initial conversion represents a mere change in identity and, thus, a valid F reorganization.  The subsequent conversion of OldCo LLC to a corporation in the same state of incorporation was regarded as a separate transaction in the PLR and not stepped together to invalidate the F reorganization.

Erik Lincoln is a founding member of Lincoln. In addition to being an attorney he is also a CPA. Erik has consistently been recognized as one of the top attorneys in North Carolina, by Business North Carolina.