Category: Corporations
Subject: Reorganization
Title: F Reorganization
IRC Sections: 368(a)(1)(F)
Filename: 1253.html
Date Produced: 07/95 Copyright 1998, The Tax Resource Group. All rights reserved. Telephone
800-578-3498. Internet: www.taxresourcegroup.com Background
The taxpayers in this case are A) a C corporation incorporated in California,
hereinafter referred to as OLDCO, and B) a C corporation incorporated in
Georgia, hereinafter referred to as NEWCO. At some point prior to January
of 1995, the management of OLDCO decided to stop doing business in California
and to move its headquarters to Georgia. Management decided that the interests of the business would be well served
to incorporate in the state in which its headquarters is located and to
discontinue all legal ties to California. Management expects the following
benefits to derive from that decision. -Administrative costs will be minimized by elimination of filing fees
and minimum franchise taxes in California. -California, a state in which no future business will be done, will
have no further jurisdiction over the Company. -The corporate activities of the Company will be governed by the laws
of the state in which the Company is headquartered thereby allowing the
Company to use local attorneys and eliminating the need to comply with
the laws of a foreign state jurisdiction.
Accordingly, OLDCO management resolved to reincorporate the business
in Georgia by forming NEWCO, a Georgia corporation, to which all of OLDCO's
assets and liabilities would be contributed solely in exchange for NEWCO
stock. NEWCO did not exist prior to this transaction. Management resolved
to dissolve OLDCO distributing the stock of NEWCO to the OLDCO shareholders. The shareholders of OLDCO and NEWCO are absolutely identical, and the
capital structure of OLDCO is identical to that of NEWCO. Pursuant to the plan described above, NEWCO was formed in January, 1995.
On February 1, 1995, all the assets and liabilities of OLDCO were transferred
to NEWCO solely in exchange for NEWCO stock. The stock received in the transaction
was immediately distributed to the shareholders of OLDCO. The Company has
and will continue to operate exclusively through NEWCO as of February 1,
1995. As of this date, OLDCO has not yet been formally dissolved. NEWCO
adopted a fiscal year ending March 31. Tax Consequences
You have requested that I comment on the tax ramifications of the transaction
described above. The transaction described above appears to meet the qualification of
an F-type reorganization under Section 368(a)(1)(F) of the Internal Revenue
Code. Assuming that is the case, the following tax consequences will result
from that characterization of the transaction. 1. No gain or loss is recognized by, OLDCO, NEWCO, or any of the shareholders
thereof as a result of the transaction. 2. The basis, holding periods, and depreciation lives and methods of
the assets of OLDCO carry over to NEWCO. 3. The basis of the shares of OLDCO carries over to the shares of NEWCO. Risk Factor: Single Entity Rule
Section 368(a)(1)(F) defines an F reorganization as a mere change in identity,
form, or place of organization of one corporation, however effected.
[Emphasis added.] The legislative history indicates that it is not
forbidden to use more than one entity to effect the change; rather only
one operating company can be used. H.R. Rep. No. 760, 97th Cong.,
2ond Sess. 530, 540-41 (1982). No one really knows what the terminology
"operating company" really means. Ideally, in effecting an F
reorganization, the old company should formally dissolve immediately
after the stock or assets of the old company are contributed. That did not
occur here, and there is some risk that IRS could contend that the transaction
is not a qualifying F reorganization. In my opinion, this risk cannot be
mitigated at this point. Risk Factor: Burden of Proof
As always, the taxpayers in this case have the burden of proving that the
facts set forth above are true, correct, and complete. To the extent the
taxpayers are unable meet that burden, adverse consequences can result.
As the tax advisor in this matter, you can materially assist your client
by doing the following. Make sure that the decisions made by OLDCO and NEWCO are properly and
fully documented in all relevant internal documents including but not limited
to relevant internal management writings, resolutions and minutes of the
board of directors meetings, and minutes of shareholder meetings (if any).
I have attached samples (in the version of this memo sent by mail) of such
documents. Note that these samples were prepared for the factual scenario
in which the old corporation merges into the new corporation. I suggest
that the appropriate minutes and resolutions be drawn by a competent attorney.
Also, I would like to review the finished products. Set forth below are some other essential things to keep in mind when
working with this transaction. Business Purpose Requirement
All reorganizations must be motivated by a valid business purposes other
than tax avoidance. Gregory v. Helvering, 293 U.S. 465 (1935), Regs. Sections
1.368-1(b), 1.368-1(c), and 1.368-2(g). The taxpayer must be able to prove
the existence of that business purpose. Shareholders and Capital Structure of NEWCO
The shareholders and the capital structure of NEWCO should be absolutely
identical to that of OLDCO. This is not the time to rearrange the ownership
of the corporations or rework the capital structure. The stock of the new
corporation should have exactly the same characteristics as the old. Continuity of Business Enterprise
In general, there must be a continuation of the old corporation's business
in order to have any type of valid reorganization. The regulations provide
that in order to satisfy the continuity of business enterprise requirement,
the transferee corporation in a reorganization must either: (i) continue
the transferor's historic business ("business continuity"); or
(ii) use a significant portion of the transferor's historic business assets
in a business ("asset continuity"). Where the transferor has more
than one line of business, the transferee must continue a "significant"
line of business. Regs. Section 1.368-1(d)(5).
In order to have a valid F reorganization, the continuity of business enterprise
rules are even stricter than those set forth above. The business and the
assets of the old corporation must continue substantially unchanged in the
new corporation. Plan of Reorganization
One of the essential elements of any reorganization is the existence of
a plan of reorganization. Regs. Section 1.368-3(a), describing certain information
that must be filed with the tax returns of parties to the reorganization,
provides the following.
The plan of reorganization must be adopted by each of the corporations
parties thereto; and the adoption must be shown by the acts of its duly
constituted responsible officers, and appear upon the official records of
the corporation.
The evidence must clearly show that the transaction was the result of a
preconceived plan that existed at the time the transaction was undertaken.
Mathis v. Comr., 19 T.C. 1123 (1953); Kind v. Comr., 54 T.C. 600 (1970),
acq., 1970-2 C.B. xx; Simon Trust v. U.S., 402 F.2d 272 (Ct. Cl. 1968). Practical Aspects
-OLDCO must be formally dissolved without further delay. -A final tax return for OLDCO should be filed for the period February
1, 1995 through its date of dissolution. This return will show the transfer
on February 1, 1995 all of OLDCO's assets and liabilities to NEWCO solely
in exchange for NEWCO stock. Since OLDCO's fiscal year ended January 31,
1995, no activity took place in OLDCO except for the reorganization transaction. -OLDCO's return should include all the information required by Regulation
Section 1.368-3. I would be happy to either draft or review your draft
of such disclosure statements. -Since NEWCO has adopted a fiscal year ended March 31, a return should
be filed covering February 1, 1995 through March 31, 1995 including all
operating activity as well as the reorganization event. Again, the information
required by Regulation Section 1.368-3 should be included in the NEWCO
return for the period ended March 31, 1995. -The personal returns for all the shareholders should include the information
required by Regulation Section 1.368-3.
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