An F reorganization, as discussed in The Basics of F Reorganizations, is a tax-free “mere change in identity, form, or place of organization of one corporation, however effected” pursuant to Section 368(a)(1)(F). Although a simple example of an F reorganization is the change of a corporation’s state of incorporation, the broad definition allows for more complex transactions also to qualify as F reorganizations. F reorganizations for S corporations under Rev. Rul. 2008-18 were briefly touched on in Section 453 Trap for S Corporation Asset Sales. That revenue ruling provides guidance on two types of transactions, both of which are F reorganizations.

Situation 1 in Rev. Rul. 2008-18 involves an S corporation, Y, that is 100% owned by one individual, B. In year 1, B contributes all of the stock of Y to Newco in exchange for 100% of Newco’s stock and elects for Y to be a qualified subchapter S subsidiary (a “QSub”, see What is a QSub?), effective immediately upon the transaction.

Situation 2 in Rev. Rul. 2008-18 involves an S corporation, Z, that is 100% owned by one individual, C. In year 1, Z forms Newco, which in turn forms Mergeco. Mergeco merges into Z, with Z surviving and C receiving solely Newco stock in exchange for the Z stock. Newco timely elects for Z to be a QSub.

As to Situation 1, Rev. Rul. 2008-18 concludes the transaction is a tax-free F reorganization with Y’s original S election not terminating but continuing for Newco. Newco must obtain a new EIN. Y must continue to use its original EIN (especially for employment tax purposes) even though it becomes a QSub. As a QSub, Y is a disregarded entity for income tax purposes as long as it is 100% owned by Newco.

As to Situation 2, Rev. Rul. 2008-18 concludes the transaction is a tax-free reorganization with Z’s original S election not terminating and continuing for Newco. Newco is required to obtain a new EIN. Z must continue to use its original EIN (especially for employment tax purposes) even though it becomes a QSub. As a QSub, Z is a disregarded entity for income tax purposes as long as it is 100% owned by Newco.

Both Situation 1 and Situation 2, even though they involve new corporations (and thus at first may look as if they violate the one corporation requirement of F reorganizations) are F reorganizations because only one corporation remains in existence for income tax purposes after the application of the QSub rules. Newco succeeds to the original S election, and for income tax purposes, steps into the shoes of the original S corporation. Rev. Rul. 2008-18 F reorganizations are a useful tool in M&A transactions to prepare a target S corporation for acquisition.

John G. Hodnette is a partner with Fox Rothschild, LLP in Charlotte.

June 10, 2026/by TAX