Among the tax-free reorganizations authorized by Section 368 is the F reorganization. Section 368(a)(1)(F) defines this type of reorganization as “a mere change in identity, form, or place of organization of one corporation, however effected.” This section prevents tax liability upon certain common changes in a business, including changes in a corporate name, reincorporation of a business in a new state, and changes of the form of the business for state law purposes that do not change the tax treatment of the business. F reorganizations are also valuable in certain complex transactions as a way to reposition companies as part of a merger or acquisition. Although the statute refers to one corporation, the legislative history explains more than one entity may be involved in the transaction so long as only one operating company is involved.

The regulations provide guidance on the six requirements for an F reorganization. First, all of the stock of the resulting corporation must be distributed in exchange for the stock of the transferor corporation. Second, the same persons must own all of the resulting corporation in identical proportions to their ownership of the transferor corporation. However, certain cash redemptions may be part of the transaction. Third, the resulting corporation must have owned essentially nothing prior to the reorganization, including tax attributes. Fourth, the transferor corporation must liquidate completely as a result of the transaction, although a de minimis amount of retained assets are allowed. Fifth, the resulting corporation must be the only corporation that owns the transferor corporation’s assets. Sixth, the resulting corporation must receive no assets other than from the transferor corporation.

As alluded to above as to the second requirement, certain redemption and other distributions may occur as part of an F reorganization, which allows shareholders to receive cash or other assets as part of the reorganization. However, the regulations prohibit the introduction of new assets into the resulting corporation. Thus, an F reorganization can never involve a new owner of the resulting corporation.

F reorganizations are treated separately for purposes of step-transaction analysis when they are part of a larger transaction. The regulations refer to the treatment of “F in a bubble” in explaining F reorganizations are generally not considered part of transactions that occur before or after the reorganization. F reorganizations, like other reorganizations, must meet the business purpose requirement established in Gregory v. Helvering and codified in the regulations. That doctrine states for a transaction to be tax-free, it must have a bona fide business purpose other than the avoidance of tax. However, the IRS stated in CCA 201340016 the business purpose doctrine “does not entirely proscribe the existence of a tax motive for transactions.” Thus, a tax motive may exist, but it is important for a non-tax business purpose also to motivate the F reorganization.

John G. Hodnette is an attorney with Johnson, Allison & Hord in Charlotte.

August 15, 2022/by TAX