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F Reorganization (§ 368(a)(1)(F))

This checklist guides the analysis of whether a corporate restructuring qualifies as a tax-free F reorganization under IRC § 368(a)(1)(F). Use it when a corporation changes its identity, form, or place of organization through reincorporation, charter renewal, conversion, or a multi-step transaction.

Step 1. The Statutory Definition and Core Concept

"a mere change in identity, form, or place of organization of one corporation, however effected" (IRC § 368(a)(1)(F))

• The statutory text. § 368(a)(1)(F) defines an F reorganization as "a mere change in identity, form, or place of organization of one corporation, however effected." The F reorganization is one of seven reorganization types defined in § 368(a)(1), alongside types A (statutory merger), B (stock acquisition), C (asset acquisition), D (transfer to controlled corporation), E (recapitalization), and G (bankruptcy reorganization).
• The "mere change" standard. F reorganizations "encompass only the simplest and least significant of corporate changes" and presume "that the surviving corporation is the same corporation as the predecessor in every respect, except for minor or technical differences." (Berghash v. Commissioner, 43 T.C. 743, 752 (1965), aff'd, 361 F.2d 257 (2d Cir. 1966) (defining the scope of F reorganization as limited to the simplest corporate changes where the surviving corporation is the same as the predecessor in all material respects)).
• Classic examples. The traditional F reorganization transactions recognized by courts and the IRS include (1) reincorporation of the same corporate business with the same assets and same stockholders under a new charter in the same or different state, (2) renewal of a corporate charter having a limited life, and (3) conversion of a U.S.-chartered savings and loan association to a state-chartered institution. (Berghash v. Commissioner, 43 T.C. 743, 752 (1965), aff'd, 361 F.2d 257 (2d Cir. 1966)).
• The "one corporation" principle. The statutory definition restricts F reorganizations to changes of "one corporation." The regulations provide that a mere change can consist of a transaction involving an actual or deemed transfer of property from one corporation (a transferor corporation) to one other corporation (a resulting corporation). (Treas. Reg. § 1.368-2(m)(1)). The core policy is that only one continuing corporation is involved. The six regulatory requirements at Treas. Reg. § 1.368-2(m)(1)(i) through (vi) are designed to ensure that an F reorganization involves only one continuing corporation and is neither an acquisitive transaction nor a divisive transaction. (T.D. 9739 Preamble, 80 Fed. Reg. 56,904 (Sep. 21, 2015)).
• Historical origin and the 2004 amendment. The F reorganization provision originated in the Revenue Act of 1921 and was carried forward into the 1954 Code with little change. § 886 of the American Jobs Creation Act of 2004 (AJCA), P.L. 108-357, added the phrase "however effected" to § 368(a)(1)(F), effective for transactions occurring after October 22, 2004.
• The significance of "however effected". The IRS and Treasury Department believe that the inclusion of the words "however effected" reflects Congressional intent to treat as an F reorganization a series of transactions that together result in a mere change. (Preamble to REG-106889-04, 69 Fed. Reg. 49,836 (Aug. 12, 2004)). The final regulations confirm that a potential F reorganization consisting of a series of related transactions that together result in a mere change of one corporation may qualify as a reorganization under § 368(a)(1)(F), whether or not certain steps in the series, viewed in isolation, could be subject to other Code provisions such as §§ 304(a), 331, 332, or 351. (Treas. Reg. § 1.368-2(m)(3)(i)).
• Both corporations treated as "party to the reorganization". Despite the statutory language limiting F reorganizations to "one corporation," each of the transferor corporation and the resulting corporation is a party to the reorganization within the meaning of § 368(b). (Treas. Reg. § 1.368-2(m)(3)(iii)). This treatment matters for provisions that refer to "a party to a reorganization" such as § 361 (nonrecognition of gain or loss to a corporation) and § 1032 (nonrecognition on stock issuance).
• Same-entity treatment for Code purposes. Treas. Reg. § 1.368-2(m)(3) embraces the "same entity" principle initially articulated in now-obsolete Rev. Rul. 96-29, 1996-1 C.B. 50 (obsoleted by T.D. 9739, 80 Fed. Reg. 56,904 (Sep. 21, 2015) effective Sep. 21, 2015). Under this principle, a reorganization under § 368(a)(1)(F) is treated for most purposes of the Code as if there had been no change in the corporation and the reorganized corporation is the same entity as the corporation that was in existence prior to the reorganization. The resulting corporation generally retains the transferor's taxable year, EIN (though Treasury continues to study this issue), accounting methods, and other federal tax attributes under § 381. (See Rev. Rul. 2004-85, 2004-2 C.B. 189 (S election continues through F reorganization). Rev. Rul. 64-250, 1964-2 C.B. 333 (same taxable year and accounting method continue)).

Step 2. What F Reorganizations Are Not

"Notwithstanding the requirements of this paragraph (b), for transactions occurring on or after February 25, 2005, a continuity of the business enterprise and a continuity of interest are not required for the transaction to qualify as a reorganization under section 368(a)(1)(E) or (F)." (Treas. Reg. § 1.368-1(b))

• No continuity of interest (COI) required. Treas. Reg. § 1.368-1(b), as amended by T.D. 9182, 70 Fed. Reg. 9219 (Feb. 25, 2005), expressly provides that for transactions occurring on or after February 25, 2005, a continuity of the business enterprise and a continuity of interest are not required for a transaction to qualify as a reorganization under § 368(a)(1)(E) or (F). The IRS and Treasury explained that the COI and COBE requirements are not necessary to protect the policies underlying the reorganization provisions in the case of F reorganizations because F reorganizations "do not resemble sales and involve only the slightest change in a corporation." (Preamble to REG-106889-04, 69 Fed. Reg. 49,836 (Aug. 12, 2004)). T.D. 9182 also obsoleted Rev. Rul. 69-516, Rev. Rul. 77-415, Rev. Rul. 77-479, and Rev. Rul. 82-34, which had addressed COI and COBE issues in F reorganizations under prior law.
• No "substantially all" requirement. Unlike C reorganizations under § 368(a)(1)(C), which require acquisition of "substantially all of the properties of another corporation," and D and G reorganizations, which carry an implied "substantially all" requirement, an F reorganization has no such threshold. The transferor corporation must completely liquidate for federal income tax purposes (see Step 6), but no minimum percentage of assets need be transferred.
• No voting-stock-only requirement. Unlike B reorganizations under § 368(a)(1)(B), which require acquisition "in exchange solely for all or a part of its voting stock," and C reorganizations, which require exchange "solely for all or a part of its voting stock," an F reorganization imposes no restriction on the class or type of stock that may be issued by the resulting corporation. Stock of any class may be used.
• No minimum stock consideration percentage. Unlike A, B, C, D, and G reorganizations, which require continuity of interest (generally meaning a substantial part of the value of the proprietary interests in the target corporation must be preserved, with case law often looking to whether at least 40% of the consideration is stock), F reorganizations require no minimum percentage of stock consideration because COI is not required at all.
• No statutory merger requirement. Unlike A reorganizations under § 368(a)(1)(A), which require a "statutory merger or consolidation" effectuated pursuant to state or federal corporate law, an F reorganization can be accomplished through any means including mergers, asset transfers, stock contributions, check-the-box elections, or conversions, provided the six regulatory requirements are satisfied. (Treas. Reg. § 1.368-2(m)(1)).
• No control requirement. Unlike D reorganizations under § 368(a)(1)(D), which require that "immediately after the transfer the transferor, or one or more of its shareholders... is in control of the corporation to which the assets are transferred," F reorganizations have no control requirement beyond the identity of stock ownership requirement at Treas. Reg. § 1.368-2(m)(1)(ii). See Step 5.
• No bankruptcy or court-approved plan requirement. Unlike G reorganizations under § 368(a)(1)(G), which require "a transfer by a corporation of all or part of its assets to another corporation in a title 11 or similar case," F reorganizations can occur in any context and do not require any connection to bankruptcy proceedings or court approval.
• No business purpose requirement in the final regulations. The final regulations under Treas. Reg. § 1.368-2(m) do not impose a separate business purpose requirement for F reorganization qualification. The regulations focus on whether the six mechanical requirements are satisfied. The business purpose doctrine may still apply to the broader transaction under general reorganization principles at Treas. Reg. § 1.368-1(b) (the reorganization must be "required by business exigencies"), but no separate business purpose test exists within the F reorganization framework itself.
• Resulting corporation as same entity. The reorganized corporation is treated as the same entity as the predecessor corporation for most Code purposes, including taxable year continuation, accounting method carryover, and S corporation election continuity. (See Treas. Reg. § 1.368-2(m)(3) (codifying the same-entity principle). Rev. Rul. 2004-85, 2004-2 C.B. 189 (S election continues through F reorganization). Rev. Rul. 64-250, 1964-2 C.B. 333 (same)).

Step 3. The Six Regulatory Requirements

"Such a transaction is a mere change and qualifies as a reorganization under section 368(a)(1)(F) only if all the requirements set forth in paragraphs (m)(1)(i) through (vi) of this section are satisfied." (Treas. Reg. § 1.368-2(m)(1), effective Sep. 21, 2015 (T.D. 9739, 80 Fed. Reg. 56,904))

• Overview of the six requirements. Treas. Reg. § 1.368-2(m)(1)(i) through (vi) sets forth six requirements that must all be satisfied for a transaction involving an actual or deemed transfer to qualify as an F reorganization. The final regulations apply to transactions occurring on or after September 21, 2015. (Treas. Reg. § 1.368-2(m)(5)).
• The six requirements at a high level. All six requirements must be satisfied. Failure to meet any single requirement disqualifies the transaction from F reorganization treatment. This is not an elective or alternative test.
  • (i) Stock issuance. All stock of the resulting corporation must have been distributed in exchange for stock of the transferor corporation. (Treas. Reg. § 1.368-2(m)(1)(i)). See Step 4.
  • (ii) Identity of ownership. The same persons must own all stock of the transferor and resulting corporation in identical proportions. (Treas. Reg. § 1.368-2(m)(1)(ii)). See Step 5.
  • (iii) Resulting corporation purity. The resulting corporation may not hold any property or have any tax attributes immediately before the transfer. (Treas. Reg. § 1.368-2(m)(1)(iii)). See Step 6A.
  • (iv) Transferor liquidation. The transferor corporation must completely liquidate for federal income tax purposes. (Treas. Reg. § 1.368-2(m)(1)(iv)). See Step 6B.
  • (v) No attribute diversion to third corporations. No corporation other than the resulting corporation may hold transferor property if it would succeed to § 381(c) tax attributes. (Treas. Reg. § 1.368-2(m)(1)(v)).
  • (vi) No attribute import from other corporations. The resulting corporation may not hold property from another corporation if it would succeed to that corporation's § 381(c) tax attributes. (Treas. Reg. § 1.368-2(m)(1)(vi)).
• Conjunctive test. All six requirements must be satisfied. If YES → the transaction qualifies as an F reorganization (assuming no other disqualifying provision applies). If NO → the transaction does not qualify as an F reorganization under § 368(a)(1)(F). The practitioner must then analyze the transaction under other reorganization types or as a taxable event.
• The policy behind the requirements. The preamble to T.D. 9739 states that "viewed together, these six requirements ensure that an F reorganization involves only one continuing corporation and is neither an acquisitive transaction nor a divisive transaction. Thus, an F reorganization does not include a transaction that involves a shift in ownership of the enterprise, an introduction of assets in exchange for equity (other than that raised by the Transferor Corporation prior to the F reorganization), or a division of assets or tax attributes of a Transferor Corporation between or among the Resulting Corporation and other acquiring corporations." (T.D. 9739 Preamble, 80 Fed. Reg. 56,904 (Sep. 21, 2015)).
• The anti-shift principle. A transaction that shifts the ownership of proprietary interests in a corporation cannot be a mere change. (Helvering v. Southwest Consolidated Corp., 315 U.S. 194 (1942) (a recapitalization that shifted proprietary interests to creditors was not a mere change under the analogous § 368(a)(1)(E) because "a transaction which shifts the ownership of the proprietary interest in a corporation is hardly a mere change in identity, form, or place of organization")). The first two requirements (stock distribution and identity of ownership) implement this principle by preventing transactions that introduce new shareholders or new capital from qualifying as F reorganizations. (Preamble to REG-106889-04, 69 Fed. Reg. 49,836 (Aug. 12, 2004)).
• Federal income tax attributes only. The reference to "tax attributes" in Requirements 3, 5, and 6 means U.S. federal income tax attributes only, not state or foreign tax attributes. Treasury officials clarified that "we intended for this to refer to federal tax attributes, not state or foreign." (Tax Management Memorandum, citing Treasury officials (Nov. 6, 2015)).
• Steps 4 through 7 of this checklist detail each requirement. See Step 4 for Requirement 1 (stock issuance), Step 5 for Requirement 2 (identity of ownership), and Step 6 for Requirements 3 and 4 (resulting corporation purity and transferor liquidation). Requirements 5 and 6 (the anti-overlap rules) are addressed in a subsequent step.

Step 4. Requirement 1 - Stock Issuance in Exchange for Transferor Stock

"Immediately after the potential F reorganization, all the stock of the resulting corporation, including any stock of the resulting corporation issued before the potential F reorganization, must have been distributed (or deemed distributed) in exchange for stock of the transferor corporation in the potential F reorganization." (Treas. Reg. § 1.368-2(m)(1)(i))

Step 4A. The General Rule

"All stock of the resulting corporation... must have been distributed in exchange for stock of the transferor corporation." (Treas. Reg. § 1.368-2(m)(1)(i))

• The distribution requirement. Treas. Reg. § 1.368-2(m)(1)(i) requires that immediately after the potential F reorganization, all the stock of the resulting corporation, including any stock of the resulting corporation issued before the potential F reorganization, must have been distributed (or deemed distributed) in exchange for stock of the transferor corporation in the potential F reorganization. If YES → Requirement 1 is satisfied (subject to the de minimis exception below). If NO → the transaction fails Requirement 1 and cannot qualify as an F reorganization.
• Purpose of the requirement. This requirement ensures that no new equity capital is introduced into the resulting corporation from outside sources. The resulting corporation must be funded exclusively through the exchange of transferor corporation stock. If outside investors contribute cash or property for newly issued resulting corporation stock → Requirement 1 fails.
• Deemed distributions. The requirement captures deemed as well as actual distributions. A deemed distribution can arise from step transaction principles or entity classification elections. (Treas. Reg. § 1.368-2(m)(1)).

Step 4B. The De Minimis Exception

"A de minimis amount of stock issued by the resulting corporation other than in respect of stock of the transferor corporation is disregarded." (Treas. Reg. § 1.368-2(m)(1)(i))

• The exception. A de minimis amount of stock issued by the resulting corporation other than in respect of stock of the transferor corporation is disregarded if the issuance is to facilitate the organization of the resulting corporation or maintain its legal existence. (Treas. Reg. § 1.368-2(m)(1)(i)). If YES (issuance is de minimis AND for permitted purpose) → Requirement 1 still satisfied. If NO (issuance exceeds de minimis or serves a different purpose) → Requirement 1 fails.
• The 1% safe harbor from Example 3. Treas. Reg. § 1.368-2(m)(4), Example 3, illustrates a transaction in which P owns all stock of S, a Country A corporation. C, an officer of S, organizes Y, a Country B corporation, and contributes cash to Y in exchange for 10 of 1,000 authorized common shares. S then merges into Y. P surrenders its S stock and receives 990 shares of Y common stock. The regulation concludes that "the ten shares of Y stock issued to C not in respect of the S stock are de minimis and are used to facilitate the organization of Y." This represents a 1% issuance. (Treas. Reg. § 1.368-2(m)(4), Example 3).
• The NYSBA 1% recommendation. The NYSBA Tax Section, in Report No. 1349 (June 2016), recommends a 1% safe harbor presumption for de minimis issuances, based on Example 3 and historical IRS practice under Rev. Rul. 66-284, 1966-2 C.B. 115 (obsoleted by T.D. 9739), which had permitted a de minimis change in shareholder ownership of less than 1%.
• Purpose-driven interpretation. Treasury officials have commented that the interpretation of the de minimis exception is "really purpose driven" and that "de minimis requirements are restricted to a particular purpose, namely to preserve the resulting corporation's organization or preserve its existence." (Tax Management Memorandum, citing Nathan J. Richman and Amy S. Elliott, "De Minimis for Change-in-Form Regs Depends on Purpose," 2015 TNT 215-2 (Nov. 6, 2015)).
• CAUTION. Do not treat the 1% figure as a hard ceiling. An issuance above 1% may still qualify if it is genuinely to facilitate organization or preserve legal existence. Conversely, an issuance below 1% may fail if it serves a different purpose such as bringing in new capital or new strategic investors.
• TRAP. Issuances to new shareholders for cash investment, even small ones, do not fall within the de minimis exception because they introduce new equity capital rather than facilitate organization or preserve existence.

Step 4C. Different Classes and Voting Rights

"One or more holders of stock in the transferor corporation exchange stock... for stock of equivalent value in the resulting corporation, but having different terms." (Treas. Reg. § 1.368-2(m)(1)(ii))

• Different classes permitted. The regulations do not require that the resulting corporation issue the same class of stock as the transferor corporation. Shareholders may exchange stock for shares having different terms from those of the stock in the transferor corporation, provided the stock is of equivalent value. (Treas. Reg. § 1.368-2(m)(1)(ii)).
• Changes in governance rights. Stockholders may exchange shares with voting rights for nonvoting shares, or vice versa, as long as all shares received are of equivalent value. A recapitalization that converts common stock into a dual-class structure (e.g., voting and nonvoting common of equal value) does not violate Requirement 1 or Requirement 2.
• The "equivalent value" standard. The regulation uses the phrase "stock of equivalent value," not "identical value." Minor valuation differences arising from the absence of voting rights or other governance features may be acceptable if the economic value is substantially the same. There is no de minimis tolerance explicitly stated in the regulations for value disparities. If the resulting corporation stock is NOT of equivalent value → the identity of ownership requirement at Treas. Reg. § 1.368-2(m)(1)(ii) may be violated. See Step 5.

Step 5. Requirement 2 - Identity of Stock Ownership

"The same person or persons must own all of the stock of the transferor corporation, determined immediately before the potential F reorganization, and of the resulting corporation, determined immediately after the potential F reorganization, in identical proportions." (Treas. Reg. § 1.368-2(m)(1)(ii))

Step 5A. The Identical Proportions Rule

"The same person or persons must own all of the stock of the transferor corporation... and of the resulting corporation... in identical proportions." (Treas. Reg. § 1.368-2(m)(1)(ii))

• The ownership identity requirement. Treas. Reg. § 1.368-2(m)(1)(ii) requires that the same person or persons must own all of the stock of the transferor corporation, determined immediately before the potential F reorganization, and of the resulting corporation, determined immediately after the potential F reorganization, in identical proportions. If YES → Requirement 2 is satisfied. If NO → the transaction fails Requirement 2 unless a permitted exception applies.
• The anti-shift function. This is the anti-shift rule. It prevents transactions that change the ownership structure of the corporation from qualifying as F reorganizations. Every shareholder of the transferor must hold the same proportionate interest in the resulting corporation immediately after the transaction as they held in the transferor immediately before. (See also Step 3 on the anti-shift principle from Helvering v. Southwest Consolidated Corp., 315 U.S. 194 (1942) (a recapitalization that shifted proprietary interests to creditors was not a mere change)).
• Determination of ownership percentages. Test ownership immediately before the potential F reorganization for the transferor and immediately after for the resulting corporation. The testing period is defined in Treas. Reg. § 1.368-2(m)(1) as beginning when the transferor begins transferring assets to the resulting corporation and ending when the transferor has distributed consideration and completely liquidated.

Step 5B. Permitted Exceptions

"A change in ownership that has no effect other than that of a redemption of less than all shares of the corporation does not violate [the identical proportions requirement]." (Treas. Reg. § 1.368-2(m)(1)(ii))

• Different terms of equivalent value. The identical proportions requirement is not violated if one or more holders of stock in the transferor corporation exchange stock in the transferor corporation for stock of equivalent value in the resulting corporation, but having different terms from those of the stock in the transferor corporation. (Treas. Reg. § 1.368-2(m)(1)(ii)). See Step 4C.
• Distributions of money or other property. The requirement is not violated if shareholders receive a distribution of money or other property from either the transferor corporation or the resulting corporation, whether or not in exchange for stock. Any such distribution is treated as an unrelated, separate transaction from the reorganization itself. (Treas. Reg. § 1.368-2(m)(3)(iii)).
• The redemption exception. A change in ownership that has no effect other than that of a redemption of less than all shares of the corporation does not violate Requirement 2. This means a shareholder can be fully redeemed (receiving cash or property for all of their shares) without disqualifying the F reorganization, as long as the redemption is of less than all shares of the corporation. (Treas. Reg. § 1.368-2(m)(1)(ii)). Treas. Reg. § 1.368-2(m)(4), Example 2, illustrates this point. A owns 75% and B owns 25% of X. A does not wish to own stock in Y. In the merger of X into Y, A surrenders A's X stock and receives cash, and B surrenders all of B's X stock and receives all the stock of Y. The regulation concludes that the merger qualifies as an F reorganization because the redemption is of less than all shares.
• Reef Corporation v. Commissioner, 368 F.2d 125 (5th Cir. 1966), aff'g T.C. Memo 1965-72, cert. denied, 386 U.S. 1018 (1967). The Fifth Circuit held that a change of place of incorporation (from Texas to Delaware) involving a simultaneous redemption of 48% of the corporation's stock still qualified as an F reorganization, because the simultaneous transfer and redemption "must be viewed as separate and distinct occurrences." The court reasoned that an F reorganization contemplates a single corporation and the transferor "could have completely redeemed the stock of 48 percent of its shareholders without changing the state of its incorporation. A complete redemption is not a characteristic of a reorganization." (Reef Corporation v. Commissioner, 368 F.2d 125, 134 (5th Cir. 1966)).
• TRAP. If the distribution has the effect of a redemption of ALL shares of any shareholder, the analysis changes. The regulations permit a redemption of "less than all shares" of the corporation. A complete redemption of every share held by a single shareholder is permitted (as in Example 2, where A's 75% interest was fully redeemed). But if the transaction effectively redeems 100% of the transferor corporation's outstanding shares (i.e., no shareholder receives any stock of the resulting corporation) → the transaction cannot be an F reorganization. See Treas. Reg. § 1.368-2(m)(4), Example 1.

Step 5C. Pro Rata vs. Non-Pro Rata Considerations

"The same person or persons must own all of the stock of the transferor corporation... and of the resulting corporation... in identical proportions." (Treas. Reg. § 1.368-2(m)(1)(ii))

• Non-pro rata distributions permitted. The regulations explicitly permit non-pro rata distributions. A shareholder can receive cash while another receives stock. A shareholder can receive a disproportionate amount of stock. The key is that the resulting corporation's stock must end up in the hands of the transferor's shareholders in identical proportions to their pre-transaction ownership. Any deviation caused by a redemption of less than all shares is permitted. (Treas. Reg. § 1.368-2(m)(1)(ii)).
• Distributions tested under separate Code provisions. Any money or property received by a shareholder in the transaction is treated as an unrelated, separate transaction. (Treas. Reg. § 1.368-2(m)(3)(iii)). If a shareholder receives property in exchange for stock → test the exchange under § 302 (redemption) or § 331 (liquidation) as applicable. If a shareholder receives a distribution without surrendering stock → test under § 301 (dividend) or § 316.
• CAUTION. If the distribution to a shareholder is treated as a redemption under § 302 that terminates the shareholder's entire interest, the F reorganization itself still qualifies as long as the redemption is of less than all of the corporation's shares. But the redeemed shareholder will recognize gain or loss on the redemption under § 302(a) (or § 331 if in complete liquidation).

Step 6. Requirements 3 and 4 - Resulting Corporation Purity and Transferor Liquidation

"The resulting corporation may not hold any property or have any tax attributes (including those specified in section 381(c)) immediately before the potential F reorganization." (Treas. Reg. § 1.368-2(m)(1)(iii)) "The transferor corporation must completely liquidate, for federal income tax purposes, in the potential F reorganization." (Treas. Reg. § 1.368-2(m)(1)(iv))

Step 6A. Requirement 3 - Resulting Corporation May Not Hold Pre-Existing Property

"The resulting corporation may not hold any property or have any tax attributes (including those specified in section 381(c)) immediately before the potential F reorganization." (Treas. Reg. § 1.368-2(m)(1)(iii))

• The purity rule. Treas. Reg. § 1.368-2(m)(1)(iii) requires that the resulting corporation may not hold any property or have any tax attributes (including those specified in § 381(c)) immediately before the potential F reorganization. The resulting corporation must be a clean shell. It cannot be an existing operating corporation with its own business, assets, or tax history. If YES (resulting corporation is a clean shell with no pre-existing property or tax attributes) → Requirement 3 is satisfied. If NO (resulting corporation holds property or has tax attributes from prior activity) → Requirement 3 fails unless a permitted exception applies.
• Tax attributes covered. The parenthetical reference to § 381(c) specifies the tax attributes that disqualify the resulting corporation if present. These include
  • Net operating loss carryovers (§ 381(c)(1))
  • Earnings and profits (§ 381(c)(2))
  • Capital loss carryovers (§ 381(c)(3))
  • Methods of accounting (§ 381(c)(4))
  • Inventory methods (§ 381(c)(5))
  • Depreciation methods (§ 381(c)(6))
  • Foreign tax credit carryovers (§ 381(c)(15))
  • (IRC § 381(c) enumerates the full list of attributes that carry over in certain corporate acquisitions). If the resulting corporation has any of these attributes from prior activity → Requirement 3 is not satisfied.
• EXAMPLE. P owns all of the stock of S, which is engaged in a manufacturing business. P owns no assets other than the stock of S. P decides to eliminate the holding company structure by merging P into S. Because S holds property (its manufacturing business) and has tax attributes immediately before the potential F reorganization, the merger of P into S fails Requirement 3 and is not a mere change. (Treas. Reg. § 1.368-2(m)(4), Example 4).
• De minimis exception. The requirement is not violated if the resulting corporation holds or has held a de minimis amount of assets to facilitate its organization or maintain its legal existence, and has tax attributes related to holding those de minimis assets. (Treas. Reg. § 1.368-2(m)(1)(iii)). This parallels the de minimis exception in Requirement 1. A nominal amount of cash to pay incorporation fees, for example, does not violate Requirement 3.
• Borrowing proceeds exception. The resulting corporation may hold the proceeds of borrowings undertaken in connection with the potential F reorganization. (Treas. Reg. § 1.368-2(m)(1)(iii)). This exception accommodates leveraged transactions including debt refinancings and leveraged redemptions of shareholders. The borrowing must be "undertaken in connection with" the F reorganization. If YES (borrowing was undertaken in connection with the F reorganization) → the proceeds do not violate Requirement 3. If NO (borrowing was pre-existing and not connected to the F reorganization) → the proceeds may violate Requirement 3.
• TRAP. Do not assume that a newly formed corporation automatically satisfies Requirement 3. If the resulting corporation was formed more than briefly before the transaction and engaged in any activity (even holding a small amount of investment assets), it may have acquired tax attributes that disqualify it. Form the resulting corporation as close in time to the F reorganization as practicable.

Step 6B. Requirement 4 - Complete Liquidation of Transferor

"The transferor corporation must completely liquidate, for federal income tax purposes, in the potential F reorganization." (Treas. Reg. § 1.368-2(m)(1)(iv))

• The liquidation requirement. Treas. Reg. § 1.368-2(m)(1)(iv) requires that the transferor corporation must completely liquidate, for federal income tax purposes, in the potential F reorganization. This means the transferor must distribute all of its assets (directly or through the resulting corporation) to its shareholders and cease to operate as a going concern. If YES (transferor has completely liquidated for federal income tax purposes) → Requirement 4 is satisfied. If NO (transferor continues to hold assets or operate) → Requirement 4 fails.
• Federal tax liquidation vs. state law dissolution. The transferor corporation is not required to dissolve under applicable state law. (Treas. Reg. § 1.368-2(m)(1)(iv)). This distinction is critical. The regulations accommodate jurisdictions where dissolution is difficult, time-consuming, or undesirable. The transferor may remain in existence as an empty shell under state law so long as it has completely liquidated for federal income tax purposes. See also the de minimis retention exception below.
• De minimis asset retention exception. The transferor corporation may retain a de minimis amount of assets for the sole purpose of preserving its legal existence. (Treas. Reg. § 1.368-2(m)(1)(iv)). The preamble to the proposed regulations emphasized that the "sole" purpose restriction means anything more than the minimal amount necessary to preserve the corporation's legal existence may not be considered nominal. (Preamble to REG-106889-04, 69 Fed. Reg. 49,836 (Aug. 12, 2004)). A small amount of cash to pay annual franchise fees or maintain a registered agent typically satisfies this exception.
• CAUTION. The asset retention must be for the SOLE purpose of preserving legal existence. If the transferor retains assets to pursue a claim, maintain a defense, or for any business purpose other than bare legal existence → the retention likely exceeds the de minimis exception and Requirement 4 fails.
• TRAP. In some jurisdictions, maintaining a corporate existence requires more than a nominal filing fee (e.g., minimum franchise taxes, registered agent requirements). The NYSBA has recommended that any assets required by legal or regulatory requirements to preserve the corporation's existence should not violate the de minimis requirement. (NYSBA Tax Section Report No. 1349 (June 2016)). Document the specific state law requirements that necessitate the retained assets.

Step 7. Requirements 5 and 6

"Immediately after the potential F reorganization, no corporation other than the resulting corporation may hold property that was held by the transferor corporation immediately before the potential F reorganization, if such other corporation would, as a result, succeed to and take into account the items of the transferor corporation described in section 381(c)." (Treas. Reg. § 1.368-2(m)(1)(v))

"Immediately after the potential F reorganization, the resulting corporation may not hold property acquired from a corporation other than the transferor corporation if the resulting corporation would, as a result, succeed to and take into account the items of such other corporation described in section 381(c)." (Treas. Reg. § 1.368-2(m)(1)(vi))

• Conjunctive requirement. All six requirements of Treas. Reg. § 1.368-2(m)(1)(i) through (vi) must be satisfied for a transaction to qualify as an F reorganization. Requirements 5 and 6 operate as the capstone provisions that ensure only one corporation and its attributes are involved. (Treas. Reg. § 1.368-2(m)(1))
  • Requirement 5 (sole acquiring corporation). No corporation other than the resulting corporation may hold transferor property if that other corporation would succeed to § 381(c) attributes. (Treas. Reg. § 1.368-2(m)(1)(v))
  • Requirement 6 (sole acquired corporation). The resulting corporation may not hold property from another corporation if it would succeed to that other corporation's § 381(c) attributes. (Treas. Reg. § 1.368-2(m)(1)(vi))

Step 7A. Requirement 5

"Immediately after the potential F reorganization, no corporation other than the resulting corporation may hold property that was held by the transferor corporation immediately before the potential F reorganization, if such other corporation would, as a result, succeed to and take into account the items of the transferor corporation described in section 381(c)." (Treas. Reg. § 1.368-2(m)(1)(v))

• The only acquiring corporation rule. Immediately after the potential F reorganization, no corporation other than the resulting corporation may hold property that the transferor corporation held immediately before the potential F reorganization, if that other corporation would succeed to and take into account the transferor corporation's § 381(c) tax attributes. (Treas. Reg. § 1.368-2(m)(1)(v))
  • Purpose and scope. This provision prevents a divisive transaction in which the transferor corporation's assets and attributes are split between or among multiple acquiring corporations. It ensures that the resulting corporation is the sole successor to the transferor's tax attributes. (T.D. 9739, 80 Fed. Reg. 56,904 (Sept. 21, 2015))
  • Prohibited structure. Any transaction that divides the transferor corporation's assets between the resulting corporation and another corporation that succeeds to § 381(c) attributes will fail Requirement 5. This trap is most likely to arise when one shareholder receives assets in a separate corporate vehicle while the remaining assets pass to the resulting corporation.
• The sole successor principle. Requirement 5 eliminates uncertainty about which corporation succeeds to transferor tax attributes in overlap situations involving § 332 liquidations and similar divisive transactions. Before the 2015 final regulations, multiple corporations could claim successor status to the same transferor's attributes. (Miller Chevalier, "Treasury Issues Final Regulations on F Reorganizations" (Sept. 29, 2015))
  • Preventing attribute division among multiple corporations. Requirement 5 ensures that all § 381(c) tax attributes (NOL carryovers, E&P, capital losses, methods of accounting, credits) pass to a single resulting corporation. No attribute fragmentation is permitted. (Treas. Reg. § 1.368-2(m)(1)(v))
  • Coordination with § 332 liquidations. When a parent corporation receives assets in a complete § 332 liquidation and another corporation simultaneously receives other transferor assets, only one corporation can succeed to the attributes. The F reorganization fails if another corporation claims § 381 attributes from the same transferor. (Treas. Reg. § 1.368-2(m)(4), Example 9)
• Example 9 illustration. P owns 80 percent and A owns 20 percent of the stock of S. A and management of P determine that S should liquidate while A continues to operate part of S's business in corporate form. S distributes 80 percent of its assets to P and 20 percent of its assets to A. S's distribution of 80 percent of its property to P as part of S's complete liquidation meets the requirements of § 332. § 381(a)(1) applies to P's acquisition of 80 percent of S's property. Under Requirement 5, the potential F reorganization in which 20 percent of S's property is transferred to New S cannot qualify as a mere change. (Treas. Reg. § 1.368-2(m)(4), Example 9)
  • Factual breakdown. S held two distinct asset pools (80% business and 20% business). P received the 80% pool in a § 332 liquidation. A received the 20% pool through New S. Because two corporations (P and New S) each held property formerly held by S and each would succeed to S's § 381(c) attributes, Requirement 5 is violated. (Treas. Reg. § 1.368-2(m)(4), Example 9)
  • Key distinction. The § 332 liquidation to P is respected as a separate transaction. The failure here is that the 20% transfer to New S cannot simultaneously qualify as an F reorganization because P has already acquired a portion of S's attributes under § 381. (Treas. Reg. § 1.368-2(m)(4), Example 9)
• TRAP. Divisive distributions to multiple shareholders. Any transaction that divides the transferor corporation's assets between the resulting corporation and another corporation that succeeds to § 381(c) attributes will fail Requirement 5. This trap is most likely to arise when one shareholder receives assets in a separate corporate vehicle while the remaining assets pass to the resulting corporation.

Step 7B. Requirement 6

"Immediately after the potential F reorganization, the resulting corporation may not hold property acquired from a corporation other than the transferor corporation if the resulting corporation would, as a result, succeed to and take into account the items of such other corporation described in section 381(c)." (Treas. Reg. § 1.368-2(m)(1)(vi))

• The only acquired corporation rule. Immediately after the potential F reorganization, the resulting corporation may not hold property acquired from any corporation other than the transferor corporation if the resulting corporation would succeed to and take into account that other corporation's § 381(c) tax attributes. (Treas. Reg. § 1.368-2(m)(1)(vi))
  • Preventing combination of multiple corporate attributes. This provision prevents the resulting corporation from being used as a vehicle to combine the attributes of multiple corporations. The resulting corporation may inherit attributes from only one transferor, not from multiple transferors in simultaneous or integrated transactions. (T.D. 9739, 80 Fed. Reg. 56,904 (Sept. 21, 2015))
  • Single transferor limitation. If the resulting corporation would succeed to § 381(c) attributes of any corporation other than the transferor, the F reorganization fails even if the transferor-to-resulting-corporation leg of the transaction is otherwise flawless. (Treas. Reg. § 1.368-2(m)(1)(vi))
• Example 14 illustration. P owns all the stock of S1 and S2. Management of P determines that S1 and S2 should operate as a single corporation. P forms S3 and, under applicable corporate law, S1 and S2 simultaneously merge into S3. Immediately after the simultaneous mergers, S3 holds property acquired from a corporation other than the transferor corporation, and § 381(a) would apply to the acquisition of such property. Therefore, neither potential F reorganization qualifies as a mere change. (Treas. Reg. § 1.368-2(m)(4), Example 14)
  • Two transferors into one resulting corporation. S3 receives assets from both S1 and S2. Because S3 would succeed to § 381(c) attributes of both S1 and S2, Requirement 6 is violated for both potential F reorganizations. Each transferor must be the sole source of the resulting corporation's acquired property and attributes. (Treas. Reg. § 1.368-2(m)(4), Example 14)
  • No de minimis exception. There is no de minimis exception for property acquired from another corporation. Even a nominal amount of property carrying § 381(c) attributes from a second corporation will cause Requirement 6 to fail. (Treas. Reg. § 1.368-2(m)(1)(vi))
• CAUTION. Simultaneous mergers of multiple transferors. Requirement 6 is violated when two or more corporations simultaneously merge into a single resulting corporation, even if each merger viewed independently would otherwise satisfy the six requirements. Each transferor must be the sole source of the resulting corporation's acquired property and attributes.
• Distinction between F and A/C/D reorganizations. A transaction in which multiple corporations combine into one is by definition an acquisitive reorganization (Type A, C, or D), not a mere change of one corporation. Requirements 5 and 6 together draw this bright-line boundary. (Treas. Reg. § 1.368-2(m)(1)(v) and (vi))
  • Bright-line test. An F reorganization always involves exactly one transferor and exactly one resulting corporation. Any transaction with more than one transferor or more than one acquiring corporation is an acquisitive or divisive reorganization, not a mere change. (Treas. Reg. § 1.368-2(m)(1)(i) through (vi))
  • Regulatory purpose. The six requirements collectively ensure that an F reorganization "involves only one continuing corporation and is neither an acquisition transaction nor a divisive transaction." Requirements 5 and 6 are the capstone provisions that police this boundary. (T.D. 9739, 80 Fed. Reg. 56,904 (Sept. 21, 2015))

Step 7C. Integrated System of Six Requirements

"Such a transaction is a mere change and qualifies as a reorganization under section 368(a)(1)(F) only if all the requirements set forth in paragraphs (m)(1)(i) through (vi) of this section are satisfied." (Treas. Reg. § 1.368-2(m)(1))

• Requirements 5 and 6 work with Requirements 3 and 4. Requirement 3 (resulting corporation may not hold pre-existing property or attributes) and Requirement 4 (transferor must completely liquidate) together with Requirements 5 and 6 ensure that one continuing corporation emerges from the transaction with one unified set of attributes. (Treas. Reg. § 1.368-2(m)(1)(iii), (iv), (v), and (vi))
  • Requirement 3 (clean shell). The resulting corporation may not hold any property or tax attributes (including those specified in § 381(c)) immediately before the transfer. This prevents the resulting corporation from carrying forward its own attributes to commingle with the transferor's. (Treas. Reg. § 1.368-2(m)(1)(iii))
  • Requirement 4 (complete liquidation). The transferor must completely liquidate in the transaction, though it need not legally dissolve and may retain a nominal amount of assets solely to preserve its legal existence. (Treas. Reg. § 1.368-2(m)(1)(iv))
  • Requirement 1 (identity of ownership). All the stock of the resulting corporation must be distributed in exchange for stock of the transferor corporation. The same persons must own all the stock of the transferor at the beginning and all the stock of the resulting corporation at the end, in identical proportions. (Treas. Reg. § 1.368-2(m)(1)(i) and (ii))
  • Requirement 2 (no new capital). The resulting corporation may not hold property that was previously held by any corporation other than the transferor, and no new equity capital may be introduced except for a de minimis amount to facilitate organization. (Treas. Reg. § 1.368-2(m)(1)(ii))
• No division permitted. The six requirements together prevent any division of assets or attributes among multiple corporations. The transferor must completely liquidate into a single resulting corporation. No other corporation may acquire a piece of the transferor's assets with its attributes, and the resulting corporation may not acquire property carrying another corporation's attributes. (Treas. Reg. § 1.368-2(m)(1))
  • Functional unity. The regulations state explicitly that a transaction qualifies "only if all the requirements set forth in paragraphs (m)(1)(i) through (vi) of this section are satisfied." Each requirement serves a distinct function, and all six are necessary and jointly sufficient. (Treas. Reg. § 1.368-2(m)(1))
  • Overlap with other reorganization types. A transaction that fails any one of the six requirements is not an F reorganization. It may still qualify as an A, C, D, or other reorganization type if it meets those requirements. See Step 10 for overlap analysis. (Treas. Reg. § 1.368-2(m)(3)(iv))
• Planning principle. The resulting corporation should be formed as a clean shell with no pre-existing property or tax attributes. The transferor corporation should transfer all of its assets and completely liquidate. No other corporation should receive any portion of the transferor's assets in a manner that would trigger § 381 attribute succession. (Treas. Reg. § 1.368-2(m)(1)(iii))
  • Pre-formation checklist. Before the transaction, verify that the resulting corporation has (a) no assets, (b) no tax attributes, (c) no prior taxable year, and (d) no history that could carry over. Confirm that the transferor will distribute or transfer all significant assets and retain only a nominal amount to preserve legal existence. (Treas. Reg. § 1.368-2(m)(1)(iii) and (iv))
  • Post-closing verification. After the transaction, confirm that exactly one corporation holds all former transferor assets and attributes. Verify that no other corporation has received any transferor property in a transaction to which § 381 would apply. (Treas. Reg. § 1.368-2(m)(1)(v) and (vi))

Step 8. Multi-Step Transactions and the "However Effected" Language

"A potential F reorganization consisting of a series of related transactions that together result in a mere change of one corporation may qualify as a reorganization under section 368(a)(1)(F), whether or not certain steps in the series, viewed in isolation, could be subject to other Code provisions, such as sections 304(a), 331, 332, or 351." (Treas. Reg. § 1.368-2(m)(3)(i))

• Statutory origin of "however effected". § 368(a)(1)(F) defines an F reorganization as "a mere change in identity, form, or place of organization of one corporation, however effected." The phrase "however effected" was added by the American Jobs Creation Act of 2004, § 886, and reflects Congressional intent to provide maximum flexibility in structuring F reorganizations. (IRC § 368(a)(1)(F), AJCA 2004 § 886)
  • Legislative intent. The "however effected" language reflects Congressional intent to treat as an F reorganization a series of transactions that together result in a mere change. Before this amendment, the IRS and courts sometimes questioned whether multi-step transactions could qualify. (T.D. 9739, 80 Fed. Reg. 56,904 (Sept. 21, 2015))
  • Regulatory implementation. Treas. Reg. § 1.368-2(m)(3)(i) operationalizes this statutory language by providing explicit rules for multi-step transactions. The regulation eliminates any ambiguity about whether individual steps in a series can be respected or whether they must be integrated. (Treas. Reg. § 1.368-2(m)(3)(i))
• Regulatory codification. Treas. Reg. § 1.368-2(m)(3)(i) codifies the principle that a series of related transactions may together qualify as an F reorganization even if individual steps, viewed in isolation, would be subject to other Code provisions. This regulation operationalizes the statutory "however effected" language. (Treas. Reg. § 1.368-2(m)(3)(i))
  • Steps viewed in isolation. Individual steps within a series may independently qualify as § 304(a) redemptions, § 331 liquidations, § 332 parent-subsidiary liquidations, or § 351 transfers. The regulation provides that the potential F reorganization may still qualify even when these other provisions apply to discrete steps. (Treas. Reg. § 1.368-2(m)(3)(i))
  • Integration of the series. The key requirement is that the series of steps, viewed as a whole, must result in a mere change of one corporation. If the overall effect is acquisitive or divisive, the "however effected" language does not save the transaction. (Treas. Reg. § 1.368-2(m)(3)(i))
• The beginning and end of an F reorganization. A potential F reorganization begins when the transferor corporation begins transferring (or is deemed to begin transferring) its assets, directly or indirectly, to the resulting corporation. It ends when the transferor corporation has distributed (or is deemed to have distributed) to its shareholders the consideration it receives from the resulting corporation and has completely liquidated for federal income tax purposes. (Treas. Reg. § 1.368-2(m)(1))
  • Bubble boundaries. The "bubble" for F reorganization testing begins at the first asset transfer and ends at complete liquidation. Events before the first transfer and after complete liquidation are generally tested separately under the "F in a bubble" principle. (Treas. Reg. § 1.368-2(m)(1) and (m)(3)(ii))
  • Deemed transfers. Transfers treated as occurring as a result of an entity classification election under Reg. § 301.7701-3(c)(1)(i), as well as transfers resulting from the application of step-transaction principles, may constitute the beginning of a potential F reorganization. (Treas. Reg. § 1.368-2(m)(1))
• Example 5 illustration. P owns all of the stock of S1, and S1 owns all of the stock of S2. P determines it would be in the best interest of S1 and S2 to combine the businesses. P forms S3, a new corporation, and contributes the stock of S1 to S3. Immediately thereafter, S1 merges into S2 in a statutory merger under state law. P receives additional shares of S3 in exchange for its S1 stock. The series of transactions together results in a mere change of S1. Even though the contribution of S1 stock to S3 could be a § 351 exchange and the merger of S1 into S2 could be an A reorganization, the series together qualifies as an F reorganization. (Treas. Reg. § 1.368-2(m)(4), Example 5)
  • Multi-step form flexibility. This example demonstrates that the particular sequence of steps (contribution, then merger) does not matter as long as the overall result is a mere change. The same economic result could be achieved through different step sequences. (Treas. Reg. § 1.368-2(m)(4), Example 5)
  • Overlap rule coordination. Without regard to its F qualification, the transaction in Example 5 would also qualify as an A reorganization and a D reorganization. Prong B of the overlap rule (Step 10) gives F treatment priority. (Treas. Reg. § 1.368-2(m)(3)(iv)(B) and Example 5)
• Example 6 illustration. P owns all of the stock of T. P forms New T and merges T into New T. Immediately after the merger, P sells all of its New T stock to A, an unrelated person, for cash. The merger of T into New T qualifies as a mere change of T under § 368(a)(1)(F). The subsequent sale of New T stock by P to A is an unrelated, separate transaction that does not affect F reorganization qualification. (Treas. Reg. § 1.368-2(m)(4), Example 6)
  • Post-reorganization sale principle. A sale of the resulting corporation's stock to an unrelated party immediately after an F reorganization does not affect F qualification. The sale is a separate stock sale governed by § 1001, not part of the reorganization. (Treas. Reg. § 1.368-2(m)(4), Example 6 and (m)(3)(ii))
  • Key distinction from Example 13. In Example 6, P owned 100% of T both before and after the merger, there was no boot in the merger consideration, and the sale was clearly separate. In Example 13 (Step 10C), P acquired T only momentarily, boot was included, and the overall structure was a disguised acquisition. (Treas. Reg. § 1.368-2(m)(4), Examples 6 and 13)
• Preamble guidance on Congressional intent. The preamble to T.D. 9739 states that the "however effected" language reflects Congressional intent for flexibility, and the regulations were designed to implement this intent while providing clear boundaries through the six requirements. (T.D. 9739, 80 Fed. Reg. 56,904 (Sept. 21, 2015))
  • Flexibility with boundaries. The six requirements provide the structural boundaries within which "however effected" flexibility operates. The flexibility is not unlimited. Any series that does not satisfy all six requirements cannot qualify, regardless of how the steps are structured. (T.D. 9739, 80 Fed. Reg. 56,904 (Sept. 21, 2015))
• Planning principle. Because a series of related transactions may together qualify, practitioners have significant structural flexibility. Each step in the series must still be analyzed for its independent tax consequences, and the overlap rule (Step 10) may deny F treatment in certain circumstances. (Treas. Reg. § 1.368-2(m)(3)(i) and (iv))
  • Step-by-step analysis. For each step in a multi-step F reorganization, identify the independent tax character (§ 351, § 332, § 361, § 354, etc.). Document that the overall series results in a mere change. Then verify that the overlap rule does not apply. (Treas. Reg. § 1.368-2(m)(3)(i) and (iv))
  • Documentation of sequence. The sequence in which steps are executed may affect which overlap rule prong applies. Document the order of steps, the timing between them, and the business purpose for each. Separate board resolutions for each step strengthen the argument for independent treatment. (Treas. Reg. § 1.368-2(m)(4), Examples 1-14)

Step 9. The "F in a Bubble" Isolation Principle

"Related events that precede or follow the potential F reorganization generally will not cause that potential F reorganization to fail to qualify as a reorganization under section 368(a)(1)(F)." (Treas. Reg. § 1.368-2(m)(3)(ii))

"Qualification of a potential F reorganization as a reorganization under section 368(a)(1)(F) will not alter the character of other transactions for federal income tax purposes, and step-transaction principles may be applied to other transactions without regard to whether certain steps qualify as a reorganization or part of a reorganization under section 368(a)(1)(F)." (Treas. Reg. § 1.368-2(m)(3)(ii))

• The foundational rule. Treas. Reg. § 1.368-2(m)(3)(ii) establishes that related events preceding or following a potential F reorganization generally do not cause that F reorganization to fail. An F reorganization is tested in isolation from surrounding transactions. This is the regulatory codification of the long-standing "F in a bubble" concept. (Treas. Reg. § 1.368-2(m)(3)(ii))
  • General rule for related events. Related events that precede or follow the potential F reorganization generally will not cause that potential F reorganization to fail to qualify. This applies both to pre-reorganization events (like asset sales by the transferor) and post-reorganization events (like stock sales by the resulting corporation's shareholders). (Treas. Reg. § 1.368-2(m)(3)(ii))
  • Independent tax character preserved. Qualification of a potential F reorganization as an F reorganization does not alter the character of other transactions for federal income tax purposes. Step-transaction principles may be applied to characterize other transactions without regard to whether certain steps qualify as an F reorganization. (Treas. Reg. § 1.368-2(m)(3)(ii))
• The Rev. Rul. 96-29 isolation principle. Rev. Rul. 96-29, 1996-1 C.B. 50, addressed an acquirer holding company that reincorporated in a different state after an operating target merged into an acquirer operating subsidiary in an unspecified type of merger. The IRS held that the reincorporation was a separate and valid F reorganization, and the step-transaction doctrine would not integrate the reincorporation with the prior acquisition. This ruling was the first explicit IRS articulation of the "F in a bubble" principle, providing the analytical foundation that the 2015 regulations codified. (Rev. Rul. 96-29, 1996-1 C.B. 50, obsoleted by T.D. 9739 for transactions on or after Sept. 21, 2015 but preserved through regulatory codification)
  • Situation 1 of Rev. Rul. 96-29. A corporation reincorporated in a new state as part of a transaction that also involved issuing common stock in a public offering and redeeming stock having a value of 40 percent of the aggregate value of its outstanding stock prior to the offering. The IRS ruled that the reincorporation qualified as an F reorganization despite being a step in the larger transaction. (Rev. Rul. 96-29, 1996-1 C.B. 50, Situation 1)
  • Situation 2 of Rev. Rul. 96-29. A parent corporation merged an unrelated target into its subsidiary solely in exchange for stock of the parent, and the parent then reincorporated by merging into a newly formed corporation organized in another state. The IRS ruled that the reincorporation of the parent was a separate and valid F reorganization, even though it was a step in a larger acquisition transaction. (Rev. Rul. 96-29, 1996-1 C.B. 50, Situation 2)
• Step-transaction "turned off" for F qualification. The "F in a bubble" concept rests on the principle that an F reorganization is by its nature essentially incapable of being "stepped" together with other transactions because it is merely a change in identity, form, or place of organization of a single corporation. Other transactions that occur in conjunction with the F reorganization are tested apart from the F reorganization, and vice versa. (Akin Gump, "Some Ado About a Nothing," Tax Management Memorandum (Jan. 30, 2016))
  • Theoretical foundation. Because an F reorganization involves only one continuing corporation and is treated "for most purposes of the Code as if there had been no change in the corporation," there is no policy reason to collapse it with surrounding transactions. The reorganization is a non-event in substance. (Rev. Rul. 96-29, 1996-1 C.B. 50)
  • Asymmetry of the rule. Step-transaction principles may still be applied to the OTHER transactions in the series. The F reorganization is protected, but the surrounding transactions are not. If the surrounding transactions, when stepped together, produce a different characterization (such as a taxable acquisition), that characterization stands. (Treas. Reg. § 1.368-2(m)(3)(ii))
• Example 7 illustration. T merges into S in a statutory merger, and immediately thereafter P (which owned all of T before the merger) redeems 50 percent of the S stock that P received in the merger. Viewed in isolation, the T-into-S merger is a mere change of T. The redemption of S stock is tested separately as a redemption under § 302. The F reorganization qualification of the merger is not affected by the redemption. However, if the redemption is part of a plan that includes a prior merger of unrelated corporations into S, the redemption may cause that prior merger to fail the continuity of interest requirement for its own reorganization qualification. (Treas. Reg. § 1.368-2(m)(4), Example 7)
  • Separate testing of the redemption. P's receipt of cash in exchange for 50% of its S stock is tested under § 302(a) or (b) as a redemption. The F reorganization of T into S is unaffected. (Treas. Reg. § 1.368-2(m)(4), Example 7)
  • Potential impact on other reorganizations. If there was a prior merger of unrelated corporations into S as part of the same plan, the redemption may reduce the continuity of interest for THAT merger. The F reorganization stands, but the other merger may fail its own requirements. (Treas. Reg. § 1.368-2(m)(4), Example 7)
• Limitation. The overlap rule still applies. The "F in a bubble" principle does not override the overlap rule in Treas. Reg. § 1.368-2(m)(3)(iv). If a step within or closely related to the F reorganization independently qualifies as another type of reorganization and the controlling corporation is a party to that other reorganization, F treatment may be denied. See Step 10 for detailed overlap rule analysis. (Treas. Reg. § 1.368-2(m)(3)(ii) and (iv))
  • Prong A denial. When a controlling corporation of the resulting corporation is a party to another reorganization that overlaps with the F reorganization steps, F treatment is denied. The "F in a bubble" principle does not protect against this result. (Treas. Reg. § 1.368-2(m)(3)(iv)(A))
  • Prong B priority. When Prong A does not apply and the transaction could qualify as both F and A/C/D, F treatment takes priority. This is a limitation on the limitation. The F reorganization prevails when the overlap is with a non-controlling-party reorganization. (Treas. Reg. § 1.368-2(m)(3)(iv)(B))
• Planning principle. F reorganization as "neutral infrastructure". Because the F reorganization is tested in isolation, it can serve as neutral infrastructure within larger transactions. A pre-transaction F reorganization can clean up corporate form before an acquisition. A post-transaction F reorganization can reorganize the acquired entity without affecting the tax treatment of the acquisition itself. The key is ensuring that the F reorganization steps and the surrounding transaction steps are independently tested under their respective rules. (Treas. Reg. § 1.368-2(m)(3)(ii))
  • Pre-transaction cleanup. A target corporation may undergo an F reorganization (e.g., reincorporation in a new state, conversion to a different entity type) before being acquired. The F reorganization does not affect the tax treatment of the subsequent acquisition. (Treas. Reg. § 1.368-2(m)(3)(ii))
  • Post-transaction reorganization. After an acquisition, the acquired entity may undergo an F reorganization to achieve a desired legal form. The F reorganization does not affect the tax treatment of the acquisition itself. Document the independence of the two transactions. (Treas. Reg. § 1.368-2(m)(3)(ii))
• Distributions treated as separate transactions. If a shareholder receives money or other property (including in exchange for shares) from the transferor or resulting corporation in a qualifying F reorganization, the receipt is treated as an unrelated, separate transaction from the reorganization. This rule reinforces the isolation principle at the shareholder level. (Treas. Reg. § 1.368-2(m)(3)(iii))
  • Shareholder-level application. Treas. Reg. § 1.368-2(m)(3)(iii) specifically addresses distributions at the shareholder level. A shareholder who receives cash or other property in the F reorganization is treated as receiving it in a transaction separate from the reorganization, typically tested under § 302 or § 301. (Treas. Reg. § 1.368-2(m)(3)(iii))
  • No reorganization taint. The fact that a shareholder receives a distribution does not affect the F reorganization qualification at the corporate level. The distribution and the reorganization are tested independently. (Treas. Reg. § 1.368-2(m)(3)(iii))

Step 10. The Overlap Rule

"If the potential F reorganization or a step thereof qualifies as a reorganization or part of a reorganization under another provision of section 368(a)(1), and if a corporation in control (within the meaning of section 368(c)) of the resulting corporation is a party to such other reorganization (within the meaning of section 368(b)), the potential F reorganization will not qualify as a reorganization under section 368(a)(1)(F)." (Treas. Reg. § 1.368-2(m)(3)(iv)(A))

"Except as provided in paragraph (m)(3)(iv)(A), if, but for this paragraph (m)(3)(iv)(B), the potential F reorganization would qualify as a reorganization under both section 368(a)(1)(F) and one or more of sections 368(a)(1)(A), 368(a)(1)(C), or 368(a)(1)(D), then for all federal income tax purposes the potential F reorganization will qualify as a reorganization only under section 368(a)(1)(F)." (Treas. Reg. § 1.368-2(m)(3)(iv)(B))

• The overlap rule in overview. When a transaction or series of transactions could qualify as both an F reorganization and another type of reorganization under § 368(a)(1), the overlap rule determines which characterization applies. The rule has two prongs. Prong A (Treas. Reg. § 1.368-2(m)(3)(iv)(A)) denies F treatment in certain circumstances involving controlling corporations. Prong B (Treas. Reg. § 1.368-2(m)(3)(iv)(B)) gives F treatment priority when Prong A does not apply and the transaction could qualify as F, A, C, or D. (Treas. Reg. § 1.368-2(m)(3)(iv))
  • Decision framework. Step 1. Determine whether any step independently qualifies as another reorganization type. Step 2. Determine whether a corporation in control of the resulting corporation is a party to that other reorganization. If yes, Prong A denies F treatment. If no, Prong B gives F treatment priority. (Treas. Reg. § 1.368-2(m)(3)(iv)(A) and (B))
  • Purpose of the rule. The overlap rule prevents taxpayers from using F reorganization treatment to circumvent the stricter requirements of other reorganization types (like continuity of interest for A reorganizations or the solely-for-voting-stock requirement for C reorganizations). (T.D. 9739, 80 Fed. Reg. 56,904 (Sept. 21, 2015))

Step 10A. Denial of F Treatment Under Prong A

"If the potential F reorganization or a step thereof qualifies as a reorganization or part of a reorganization under another provision of section 368(a)(1), and if a corporation in control of the resulting corporation is a party to such other reorganization, the potential F reorganization will not qualify." (Treas. Reg. § 1.368-2(m)(3)(iv)(A))

• The general rule of denial. If a potential F reorganization or a step thereof qualifies as a reorganization or part of a reorganization under another provision of § 368(a)(1), AND a corporation in control (within the meaning of § 368(c), which requires 80 percent ownership of voting power and 80 percent of all other classes of stock) of the resulting corporation is a party to such other reorganization (within the meaning of § 368(b)), then the potential F reorganization does NOT qualify as an F reorganization. (Treas. Reg. § 1.368-2(m)(3)(iv)(A))
  • Two-pronged test. Prong A applies only when both conditions are met. (1) a step qualifies as or is part of another reorganization, AND (2) a controlling corporation of the resulting corporation is a party to that other reorganization. If either condition fails, Prong A does not apply. (Treas. Reg. § 1.368-2(m)(3)(iv)(A))
  • "Party to a reorganization" defined. § 368(b) defines "party to a reorganization" to include a corporation resulting from the reorganization and the corporation controlling the corporation to which acquired assets or stock are transferred. A corporation "in control" within the meaning of § 368(c) is one that owns stock possessing at least 80 percent of the total combined voting power and at least 80 percent of the total number of shares of all other classes of stock. (IRC § 368(b) and (c))
• Policy rationale. Prong A prevents taxpayers from using F reorganization treatment to circumvent the requirements of other reorganization types. If a controlling corporation of the resulting corporation is a party to another reorganization, the IRS and courts may view the F reorganization as a disguised acquisitive transaction that should be tested under the stricter requirements of the other reorganization type. (T.D. 9739, 80 Fed. Reg. 56,904 (Sept. 21, 2015))
  • Triangular structure risk. Prong A is most likely to apply in triangular reorganizations where a parent corporation controls the resulting corporation and is also a party to a separate reorganization that overlaps with the potential F reorganization steps. (Treas. Reg. § 1.368-2(m)(3)(iv)(A))
  • Upstream merger scenario. When a target merges into a subsidiary of a parent corporation, and the parent is a party to the merger reorganization, Prong A may deny F treatment if the parent also controls the resulting corporation. (Treas. Reg. § 1.368-2(m)(4), Example 13)
• § 368(c) control threshold. "Control" for Prong A purposes requires ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock. This is the same control definition used throughout subchapter C. (IRC § 368(c))
  • Voting power and value tests. Both the voting power test (80% of combined voting power) and the value test (80% of all other classes) must be satisfied. If a controlling corporation owns less than 80% of either, it is not "in control" for Prong A purposes. (IRC § 368(c))
  • Indirect control. Control may be direct or indirect. A parent that controls a subsidiary through a chain of corporations may still be "in control" of the resulting corporation for Prong A purposes if the requisite ownership percentage is maintained through the chain. (IRC § 368(c))

Step 10B. The Sequential Transfer Exception

"Except as provided in paragraph (m)(3)(iv)(A), if, but for this paragraph (m)(3)(iv)(B), the potential F reorganization would qualify as a reorganization under both section 368(a)(1)(F) and one or more of sections 368(a)(1)(A), 368(a)(1)(C), or 368(a)(1)(D), then for all federal income tax purposes the potential F reorganization will qualify as a reorganization only under section 368(a)(1)(F)." (Treas. Reg. § 1.368-2(m)(3)(iv)(B))

• F treatment prevails under Prong B. If a potential F reorganization would qualify as both an F reorganization and an A, C, or D reorganization, AND Prong A does not apply (no controlling corporation of the resulting corporation is a party to the other reorganization), then the transaction qualifies ONLY as an F reorganization for all federal income tax purposes. (Treas. Reg. § 1.368-2(m)(3)(iv)(B))
  • Exclusive F characterization. When Prong B applies, the transaction is treated as an F reorganization for ALL federal income tax purposes. No other reorganization characterization applies. This is a safe harbor that gives F treatment priority. (Treas. Reg. § 1.368-2(m)(3)(iv)(B))
  • Limited to A, C, and D overlaps. Prong B applies only when the overlap is with § 368(a)(1)(A), (C), or (D). Overlaps with B, E, or G reorganizations are not covered by Prong B and must be analyzed under general principles. (Treas. Reg. § 1.368-2(m)(3)(iv)(B))
• The "before or after" exception. The critical condition for Prong B is that the F reorganization must occur before or after the other reorganization, not simultaneously with it. If the same corporation is the controlling corporation of the resulting corporation in the F reorganization and is a controlled corporation in the other reorganization, and the two reorganizations are sequential rather than simultaneous, the F reorganization is not disqualified. This is the sequential transfer exception. (Treas. Reg. § 1.368-2(m)(3)(iv)(B))
  • Temporal sequencing requirement. The F reorganization and the other reorganization must be sequential in time. One must occur before the other. Simultaneous execution of steps from both reorganizations risks Prong A application. (Treas. Reg. § 1.368-2(m)(3)(iv)(B))
  • Structural independence. The sequential nature of the transactions must be genuine, not merely formal. Separate board resolutions, separate business purposes, and meaningful time gaps between the transactions support the sequential characterization. (Treas. Reg. § 1.368-2(m)(4), Examples 1-14)
• Example 5 revisited. In Example 5 (see Step 8), the contribution of S1 stock to S3 and the merger of S1 into S2 together constitute a mere change of S1. Without regard to its F qualification, the transaction would also qualify as both an A reorganization (statutory merger) and a D reorganization. Under Prong B, because no corporation in control of the resulting corporation is a party to a separate reorganization, the transaction qualifies only as an F reorganization. (Treas. Reg. § 1.368-2(m)(4), Example 5)
  • Analysis of Prong A inapplicability. In Example 5, P controls S3 (the resulting corporation). P is NOT a party to a separate A or D reorganization involving S3. The A reorganization (S1 into S2) and D reorganization (deemed transfer) both involve S3 as the resulting corporation, not a separate reorganization to which P is a party. Prong A is not triggered. (Treas. Reg. § 1.368-2(m)(4), Example 5)
  • Prong B priority applied. Because Prong A does not apply and the transaction could qualify as F, A, and D, Prong B gives F treatment exclusive priority. The transaction is treated as an F reorganization for all federal income tax purposes. (Treas. Reg. § 1.368-2(m)(3)(iv)(B))
• Avoidance of independently qualifying reorganization steps. The safest approach is to structure the transaction so that no individual step independently qualifies as an A, C, or D reorganization to which a corporation in control of the resulting corporation is a party. If each step is either purely internal to the F reorganization or falls outside § 368(a)(1) entirely, Prong A cannot apply. (Treas. Reg. § 1.368-2(m)(3)(iv)(A))

Step 10C. Example 13 and the Step-Transaction Boundary

"A potential F reorganization consisting of a series of related transactions that together result in a mere change of one corporation may qualify as a reorganization under section 368(a)(1)(F), whether or not certain steps in the series, viewed in isolation, could be subject to other Code provisions." (Treas. Reg. § 1.368-2(m)(3)(i))

• Example 13 facts. P forms S. T merges into S, with the T shareholders receiving $50 of cash and $50 of P voting stock. Immediately thereafter, P sells all of the S stock to A, an unrelated person, for cash. Viewed in isolation, the merger of T into S appears to constitute a mere change of T. (Treas. Reg. § 1.368-2(m)(4), Example 13)
  • The consideration mix. The T shareholders received 50% cash and 50% P voting stock. This boot in the merger consideration is a hallmark of an acquisitive transaction, not a mere change. In a pure F reorganization, shareholders typically exchange stock for stock without boot. (Treas. Reg. § 1.368-2(m)(4), Example 13)
  • P's role and momentary ownership. P formed S, caused T to merge into S, and then immediately sold S to an unrelated buyer. P never intended to hold T as a long-term operating subsidiary. P's ownership of T (through S) was momentary and served only as a transactional bridge. (Treas. Reg. § 1.368-2(m)(4), Example 13)
• Step-transaction application. The step-transaction doctrine is applied to characterize the overall transaction. P's momentary ownership of T stock is disregarded. The overall transaction is treated as a statutory merger of T into S for $50 of cash and $50 of P voting stock. This is an acquisitive reorganization (A reorganization with boot), not a mere change of one corporation. (Treas. Reg. § 1.368-2(m)(4), Example 13)
  • Disregard of momentary ownership. P's brief ownership of T (through S) is disregarded because it lacks substance. P was merely an intermediary used to effect the acquisition. The step-transaction doctrine collapses P's insertion and looks to the substance. T's assets were acquired by S (a subsidiary of P) in exchange for cash and P stock. (Treas. Reg. § 1.368-2(m)(4), Example 13)
  • Acquisitive characterization. The overall transaction is treated as an A reorganization of T into S (a forward triangular merger) with boot. Because P is a party to this A reorganization (as the controlling corporation of S), the transaction must satisfy all A reorganization requirements, including continuity of interest. (Treas. Reg. § 1.368-2(m)(4), Example 13)
• Overlap rule denial of F treatment. Under Prong A, P is a corporation in control of S (the resulting corporation) and is a party to the A reorganization (as the corporation controlling the corporation to which T's assets are transferred). Therefore, the potential F reorganization does not qualify under § 368(a)(1)(F). The overlap rule applies to deny F treatment. (Treas. Reg. § 1.368-2(m)(4), Example 13)
  • Prong A elements satisfied. (1) The merger of T into S qualifies as an A reorganization. (2) P is in control of S (the resulting corporation) and is a party to the A reorganization under § 368(b). Both Prong A conditions are met. F treatment is denied. (Treas. Reg. § 1.368-2(m)(3)(iv)(A) and Example 13)
  • Reorganization recharacterized. The transaction is treated as an A reorganization, not an F reorganization. The tax consequences flow from A reorganization treatment, including nonrecognition under § 361(a), § 354(a), and boot treatment under § 356. (Treas. Reg. § 1.368-2(m)(4), Example 13)
• Boundary between protected F and disguised acquisition. Example 13 illustrates the critical boundary. The step-transaction doctrine CAN apply when the F reorganization is actually a disguised acquisitive transaction. Where momentary ownership structures are created solely to achieve F reorganization form, the steps may be collapsed and the overall transaction recharacterized. The "F in a bubble" principle (Step 9) protects the F reorganization from being tainted by unrelated preceding or following events, but it does not protect a transaction that is in substance an acquisition dressed in F reorganization clothing. (Treas. Reg. § 1.368-2(m)(3)(ii) and (iv)(A))
  • Substance-over-form application. The courts and IRS will look through formal F reorganization steps to the substance of the transaction. If the economic reality is an acquisition (new owners, boot consideration, momentary ownership by an acquirer), the transaction will be recharacterized. (Treas. Reg. § 1.368-2(m)(4), Example 13)
  • Distinguishing factors. Key factors that signal a disguised acquisition include. (a) boot in the merger consideration, (b) momentary ownership by an acquirer or its affiliate, (c) immediate sale or redemption following the merger, and (d) lack of continuity of ownership by historic shareholders. (Treas. Reg. § 1.368-2(m)(4), Examples 6 and 13)
• Comparison with Example 6. Example 6 (merger into New T followed by sale of New T stock to unrelated buyer) reaches a different result because P owned all of T both before and after, there was no boot in the merger, and the subsequent sale was clearly a separate, unrelated transaction. In Example 13, P's momentary ownership of T and the inclusion of boot in the merger consideration signal an acquisition structure, not a mere change. (Treas. Reg. § 1.368-2(m)(4), Examples 6 and 13)
  • Critical distinction table. Example 6. P owned T before and after, no boot, sale was separate. Example 13. P did NOT own T before, 50% boot, sale was part of same plan. The presence of these factors determines whether the "F in a bubble" protection applies or the step-transaction doctrine overrides it. (Treas. Reg. § 1.368-2(m)(4), Examples 6 and 13)

Step 10D. Planning Around the Overlap Rule

"If the potential F reorganization or a step thereof qualifies as a reorganization or part of a reorganization under another provision of section 368(a)(1), and if a corporation in control of the resulting corporation is a party to such other reorganization, the potential F reorganization will not qualify." (Treas. Reg. § 1.368-2(m)(3)(iv)(A))

• Avoidance of independently qualifying reorganization steps. The safest approach is to structure the transaction so that no individual step independently qualifies as an A, C, or D reorganization to which a corporation in control of the resulting corporation is a party. If each step is either purely internal to the F reorganization or falls outside § 368(a)(1) entirely, Prong A cannot apply. (Treas. Reg. § 1.368-2(m)(3)(iv)(A))
  • Structural purity test. For each step, ask. Does this step, viewed in isolation, satisfy the technical requirements of an A, C, or D reorganization. If yes, ask. Is a controlling corporation of the resulting corporation a party to that reorganization. If both answers are yes, Prong A applies. Redesign the step. (Treas. Reg. § 1.368-2(m)(3)(iv)(A))
  • Alternative transaction forms. Consider using transaction forms that do not independently qualify as reorganizations. For example, a direct § 351 transfer of stock may not independently qualify as an A, C, or D reorganization. (Treas. Reg. § 1.368-2(m)(3)(iv))
• Momentary ownership structure risks. Transactions that create momentary ownership of target stock by an acquiring corporation or its parent, followed by a merger into a subsidiary, risk step-transaction collapse under the Example 13 analysis. P's momentary ownership of T in Example 13 was the fatal fact. Avoid structures where an unrelated corporation briefly holds target stock before a downstream merger. (Treas. Reg. § 1.368-2(m)(4), Example 13)
  • Direct acquisition alternative. Instead of having an acquirer form a subsidiary and merge the target into it, consider having the target's shareholders contribute their stock to a new holding company and then merge the target downstream. This structure may avoid the momentary ownership problem. (Treas. Reg. § 1.368-2(m)(4), Examples 5 and 13)
  • Warning signs. Red flags for momentary ownership traps include. the acquirer has no pre-existing relationship with the target, the merger occurs within days of the acquirer obtaining target stock, the merger is followed immediately by a sale or distribution, and the only purpose of the intermediate ownership is to create F reorganization form. (Treas. Reg. § 1.368-2(m)(4), Example 13)
• Sequential transfer structuring under Prong B. When the F reorganization and another reorganization are genuinely sequential (one occurs before or after the other), and the same corporation is the controlling corporation of the resulting corporation and a controlled corporation of the other reorganization, Prong B preserves F treatment. Document the sequential nature of the transactions with separate board resolutions and independent business purposes. (Treas. Reg. § 1.368-2(m)(3)(iv)(B))
  • Temporal gap evidence. Maintain evidence of the sequential nature, including dated board resolutions, separate agreements, separate closings, and independent business justifications for each phase. A meaningful time gap between the F reorganization and the subsequent transaction strengthens the argument. (Treas. Reg. § 1.368-2(m)(3)(iv)(B))
  • Prong B checklist. (1) The F reorganization occurs before or after the other reorganization, not simultaneously. (2) No corporation in control of the resulting corporation is a party to the other reorganization in a manner that triggers Prong A. (3) The transaction could qualify as both F and A/C/D. If all three conditions are met, Prong B gives F treatment priority. (Treas. Reg. § 1.368-2(m)(3)(iv)(B))
• Business purpose documentation. Although the final regulations eliminated an explicit business purpose requirement, every regulatory example states that "each transaction is entered into for a valid business purpose." Contemporaneous documentation of business purposes strengthens the argument that each step has independent significance and should not be collapsed. (T.D. 9739 preamble, Treas. Reg. § 1.368-2(m)(4), Examples 1-14)
  • Documentation contents. Board resolutions should identify the specific business purpose for each step (e.g., changing state of incorporation for favorable corporate law, combining subsidiaries for operational efficiency, simplifying corporate structure). The business purpose should be genuine and documented at the time of the transaction, not created retroactively. (Treas. Reg. § 1.368-2(m)(4), Examples 1-14)
  • Independent significance argument. Business purpose documentation supports the argument that each step in a multi-step transaction has independent significance and should not be collapsed under the step-transaction doctrine. This is especially important when the F reorganization is part of a larger plan. (Treas. Reg. § 1.368-2(m)(3)(i) and (ii))
• CAUTION. Example 12 trap. P forms X and contributes the stock of T to X. Immediately thereafter, T merges into Y (an unrelated corporation), with the T shareholders receiving P voting stock. P then causes X to merge into Y. Under the overlap rule, the merger of T into Y is a C reorganization (or A reorganization), and P is a corporation in control of the resulting corporation (Y) that is a party to the C reorganization. The potential F reorganization involving T does not qualify under § 368(a)(1)(F). (Treas. Reg. § 1.368-2(m)(4), Example 12)
  • Why Example 12 fails. P controls Y (the resulting corporation after T merges into Y). P is also a party to the C reorganization (as the corporation controlling Y, the corporation to which T's assets are transferred). Both Prong A conditions are satisfied. The potential F reorganization of T is denied. (Treas. Reg. § 1.368-2(m)(3)(iv)(A) and Example 12)
  • Preventing the trap. To avoid the Example 12 result, ensure that the corporation that will control the resulting corporation is NOT a party to another reorganization that overlaps with the F reorganization steps. Consider restructuring so that the contribution and merger steps do not create an independent A or C reorganization. (Treas. Reg. § 1.368-2(m)(4), Example 12)

Step 11. Tax Consequences at the Corporate and Shareholder Levels

"No gain or loss shall be recognized to a corporation if such corporation is a party to a reorganization and exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization." (IRC § 361(a))

"No gain or loss shall be recognized to a corporation on the receipt of money or other property in exchange for its stock." (IRC § 1032(a))

"No gain or loss shall be recognized if stock or securities in a corporation which is a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization." (IRC § 354(a)(1))

• Both corporations are "parties to the reorganization". In an F reorganization, both the transferor corporation and the resulting corporation are "parties to the reorganization" within the meaning of § 368(b). § 368(b)(2) includes a corporation resulting from the reorganization and the corporation controlling the corporation to which acquired assets are transferred. Rev. Rul. 2008-18 confirmed that both the transferor S corporation and the newly formed parent S corporation are parties to a reorganization under § 368(a)(1)(F). (IRC § 368(b), Rev. Rul. 2008-18)
  • Transferor as party. The transferor corporation is a party to the reorganization because it is the corporation from which assets are transferred. It qualifies for nonrecognition under § 361(a) on the exchange of its assets for stock of the resulting corporation. (IRC § 361(a) and § 368(b))
  • Resulting corporation as party. The resulting corporation is a party to the reorganization as the corporation resulting from the reorganization. It qualifies for nonrecognition under § 1032(a) on the issuance of its stock. (IRC § 1032(a) and § 368(b))

Step 11A. Corporate-Level Nonrecognition

"No gain or loss shall be recognized to a corporation if such corporation is a party to a reorganization and exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization." (IRC § 361(a))

• § 361(a) nonrecognition for transferor. No gain or loss is recognized to the transferor corporation when it exchanges property pursuant to the plan of reorganization solely for stock or securities of another corporation that is a party to the reorganization. In an F reorganization, the transferor corporation transfers all of its assets to the resulting corporation in exchange for stock of the resulting corporation, qualifying for complete nonrecognition under § 361(a). (IRC § 361(a))
  • Solely for stock requirement. The "solely for stock or securities" language means that if the transferor receives only stock of the resulting corporation, no gain or loss is recognized. If boot is received, § 361(b) governs. (IRC § 361(a))
  • Plan of reorganization. The exchange must be "in pursuance of the plan of reorganization." A written plan is not statutorily required for F reorganizations, but documenting the plan strengthens the nonrecognition position. (IRC § 361(a))
• § 361(b) boot received by transferor. If the transferor receives property other than stock or securities (boot) in addition to qualifying consideration, no gain is recognized if the boot is distributed in pursuance of the plan of reorganization. If the boot is not distributed, gain is recognized in an amount not exceeding the sum of money and fair market value of other property received. (IRC § 361(b)(1))
  • Distribution requirement. To avoid gain recognition, the transferor must distribute the boot to its shareholders in pursuance of the plan of reorganization. If the corporation retains boot, it recognizes gain up to the amount of boot received. (IRC § 361(b)(1))
  • Character of recognized gain. Any gain recognized by the transferor under § 361(b) is treated as gain from the sale or exchange of the assets transferred. The character (capital or ordinary) depends on the nature of the assets. (IRC § 361(b)(1))
• § 361(c) nonrecognition on distributions. No gain or loss is recognized to the transferor corporation on the distribution to its shareholders of property in pursuance of the plan of reorganization, unless the corporation distributes appreciated property other than qualified property. (IRC § 361(c)(1))
  • § 361(c)(2) limitation on appreciated property. If the transferor distributes property with a fair market value in excess of its adjusted basis, gain is recognized unless the property qualifies under § 361(c)(2). This prevents the corporation from shifting built-in gain to shareholders tax-free. (IRC § 361(c)(2))
  • Qualified property exception. Property is "qualified property" if it consists of stock or securities of a party to the reorganization, or property that the corporation was obligated to distribute (such as under a binding agreement). (IRC § 361(c)(2))
• § 1032(a) nonrecognition for resulting corporation. No gain or loss is recognized to the resulting corporation on the receipt of money or other property in exchange for its stock. When the resulting corporation issues its shares to the transferor corporation or its shareholders in the F reorganization, it does not recognize gain or loss on the issuance. (IRC § 1032(a))
  • Issuance of stock. § 1032(a) applies to the issuance of stock by the resulting corporation in exchange for the transferor's assets. The resulting corporation recognizes no gain or loss regardless of the value of the stock issued. (IRC § 1032(a))
  • Receipt of boot by resulting corporation. If the resulting corporation receives boot from the transferor (which is unusual in an F reorganization), § 1032 still applies because the resulting corporation is receiving property in exchange for its stock. (IRC § 1032(a))
• Distributions as separate transactions. If a shareholder receives money or other property (including in exchange for shares) from the transferor corporation or the resulting corporation in a qualifying F reorganization, the receipt is treated as an unrelated, separate transaction from the reorganization. This rule applies at both the corporate and shareholder levels. (Treas. Reg. § 1.368-2(m)(3)(iii))
  • Shareholder-level treatment. The shareholder's receipt of cash or other property is tested under § 302 (redemption) or § 301 (distribution), not as part of the reorganization. (Treas. Reg. § 1.368-2(m)(3)(iii))
  • No corporate-level impact. The distribution does not affect the F reorganization qualification or the corporate-level nonrecognition under §§ 361(a) and 1032(a). (Treas. Reg. § 1.368-2(m)(3)(iii))

Step 11B. Shareholder-Level Nonrecognition

"No gain or loss shall be recognized if stock or securities in a corporation which is a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization." (IRC § 354(a)(1))

• § 354(a)(1) nonrecognition for shareholders. No gain or loss is recognized if stock in a corporation that is a party to a reorganization is exchanged solely for stock in such corporation or in another corporation that is a party to the reorganization. In a typical F reorganization, shareholders of the transferor exchange their stock solely for stock of the resulting corporation and qualify for complete nonrecognition. (IRC § 354(a)(1))
  • Solely for stock requirement. The "solely for stock" requirement means that if the shareholder receives ONLY stock of the resulting corporation in exchange for transferor stock, no gain or loss is recognized. If boot is received, § 356 applies. (IRC § 354(a)(1))
  • Basis carryover. Under § 358(a)(1), the shareholder takes a substituted basis in the resulting corporation stock equal to the basis of the transferor stock surrendered. See Step 12A for detailed basis rules. (IRC § 354(a)(1) and § 358(a)(1))
• § 354(b) nonapplicability to F reorganizations. § 354(b) imposes additional requirements for D reorganizations, including that the transferor transfer substantially all of its assets and distribute all remaining properties. These additional requirements do not apply to F reorganizations. An F reorganization qualifies for § 354 nonrecognition without satisfying § 354(b). (IRC § 354(b), Treas. Reg. § 1.354-1(a))
  • D reorganization additional hurdles. For a D reorganization, § 354(b) requires. (1) substantially all of the transferor's assets must be transferred, and (2) the transferor must distribute all remaining properties. F reorganizations are not subject to these additional constraints. (IRC § 354(b))
  • Simpler shareholder treatment. Because § 354(b) does not apply, F reorganization shareholders need only satisfy § 354(a)(1) (the exchange of stock solely for stock) to achieve nonrecognition. The complete liquidation of the transferor under Requirement 4 of Treas. Reg. § 1.368-2(m)(1) serves a similar function but is tested at the corporate level, not the shareholder level. (IRC § 354(a)(1) and § 368(a)(1)(F))
• § 356(a)(1) boot recognition. If § 354 would apply to an exchange but for the fact that the property received includes money or other property (boot), then gain (if any) is recognized to the extent of the sum of money received and the fair market value of other property received. The recognized gain is the lesser of the boot received or the gain realized. (IRC § 356(a)(1))
  • Gain limitation formula. Recognized gain equals the LESSER of. (a) the sum of money received plus the fair market value of other property received, or (b) the shareholder's realized gain (amount realized minus adjusted basis). Loss is never recognized under § 356. (IRC § 356(a)(1) and (c))
  • EXAMPLE. Boot recognition calculation. Shareholder A has a basis of $100 in Target stock. In an F reorganization, A exchanges Target stock for ResultingCo stock worth $150 plus $30 cash. A's realized gain is $80 ($150 + $30 - $100). A's recognized gain is $30 (lesser of $30 boot or $80 realized gain). A takes a substituted basis of $100 in the ResultingCo stock under § 358(a)(1). (IRC § 356(a)(1) and § 358(a)(1))
• § 356(a)(2) dividend treatment of boot. If the exchange has "the effect of the distribution of a dividend," the gain recognized under § 356(a)(1) is treated as dividend income to the extent of earnings and profits. The determination of whether boot has "dividend effect" generally follows the redemption rules of § 302. (IRC § 356(a)(2))
  • The Clark post-reorganization redemption framework. Commissioner v. Clark, 489 U.S. 726 (1989). The Supreme Court held that boot received in a reorganization should be tested as a post-reorganization redemption by the acquiring corporation for purposes of the § 356(a)(2) dividend equivalency analysis. The Court rejected the pre-reorganization approach that treated boot as a distribution by the target corporation. Under Clark, the boot is tested under § 302 as if the acquiring corporation had redeemed the shareholder's stock after the reorganization. (Commissioner v. Clark, 489 U.S. 726 (1989), holding that boot in a reorganization is a post-reorganization redemption distribution by the acquiring corporation)
    • Post-reorganization testing. Under Clark, after the reorganization is complete, the shareholder is treated as if they received the boot in a redemption of their stock in the acquiring (resulting) corporation. The § 302 tests (not essentially equivalent to a dividend, substantially disproportionate, complete termination, or liquidating distribution) are applied to this deemed redemption. (Commissioner v. Clark, 489 U.S. 726 (1989))
    • Impact on dividend characterization. If the deemed redemption would be treated as a dividend under § 302(b)(1) (not essentially equivalent to a dividend, tested under United States v. Davis), or if it fails the § 302(b)(2) safe harbor, the boot is dividend income to the extent of the corporation's earnings and profits. (Commissioner v. Clark, 489 U.S. 726 (1989))
  • The pre-Clark pre-reorganization distribution approach. Rev. Rul. 75-83, 1975-1 C.B. 112. Before Clark, the IRS had ruled that boot given in a reorganization is treated as a pre-reorganization distribution by the acquired corporation in redemption of its stock and is tested for dividend equivalency under § 302. This approach was superseded by Clark for most purposes. Practitioners should apply the post-reorganization Clark framework unless specific facts warrant a different analysis. (Rev. Rul. 75-83, 1975-1 C.B. 112, superseded in holding by Commissioner v. Clark, 489 U.S. 726 (1989))
    • Historical context. Rev. Rul. 75-83 treated the boot as if the acquired corporation had redeemed the shareholder's stock BEFORE the reorganization. The shareholder was treated as having received a distribution from the target corporation, tested under § 302 against the target's E&P. (Rev. Rul. 75-83, 1975-1 C.B. 112)
    • When pre-Clark analysis might still apply. The Clark framework is the general rule for reorganization boot. In unusual factual patterns where the post-reorganization approach produces anomalous results, practitioners may need to analyze whether pre-Clark reasoning has any residual application. The default position should always be Clark. (Commissioner v. Clark, 489 U.S. 726 (1989))
• § 356(c) loss nonrecognition. Loss is NEVER recognized on an exchange to which § 354 would apply but for the receipt of boot. Even if the shareholder realizes a loss on the exchange, no loss is recognized. (IRC § 356(c))
  • Asymmetry of § 356. Gain is recognized to the extent of boot received (subject to the realized gain limitation), but loss is never recognized. This asymmetry is a deliberate feature of the reorganization nonrecognition framework. (IRC § 356(a)(1) and (c))
  • EXAMPLE. Loss nonrecognition. Shareholder B has a basis of $200 in Target stock. In an F reorganization, B exchanges Target stock for ResultingCo stock worth $150 plus $10 cash. B's realized loss is $40 ($150 + $10 - $200). B recognizes NO loss. B takes a substituted basis of $190 in the ResultingCo stock ($200 basis minus $10 boot received). (IRC § 356(c) and § 358(a)(1))

Step 12. Basis, Holding Period, and Attribute Carryover

"If property was acquired by a corporation in connection with a reorganization to which this part applies, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain recognized to the transferor on such transfer." (IRC § 362(b))

"The acquiring corporation shall be treated (for purposes of section 381) just as the transferor corporation would have been treated if there had been no reorganization." (Treas. Reg. § 1.381(b)-1(a)(2))

Step 12A. Basis Rules

"If property was acquired by a corporation in connection with a reorganization to which this part applies, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain recognized to the transferor on such transfer." (IRC § 362(b))

• § 358(a)(1) substituted basis for shareholders. In an exchange to which § 354 applies, the basis of property permitted to be received without recognition of gain or loss is the same as the basis of the property exchanged, decreased by the amount of any money received and the fair market value of any other property received, and increased by the amount of gain recognized. Shareholders in an F reorganization take a substituted basis in the resulting corporation stock equal to their basis in the transferor corporation stock. (IRC § 358(a)(1))
  • Substituted basis formula. Basis of stock received equals. (a) basis of stock surrendered, minus (b) sum of money received and fair market value of other property received, plus (c) amount of gain recognized on the exchange. (IRC § 358(a)(1))
  • EXAMPLE. Pure stock-for-stock exchange. Shareholder A has a basis of $100 in Target stock. In an F reorganization, A exchanges Target stock solely for ResultingCo stock. A takes a substituted basis of $100 in the ResultingCo stock. No gain or loss is recognized. (IRC § 358(a)(1))
• § 362(b) carryover basis for assets. The resulting corporation takes a basis in the assets received equal to the same basis as the assets had in the hands of the transferor, increased by the amount of gain recognized to the transferor on the transfer. In a typical F reorganization where no gain is recognized under § 361(a), the resulting corporation takes a pure carryover basis. (IRC § 362(b))
  • Carryover basis formula. Basis of assets in resulting corporation equals. (a) adjusted basis of the assets in the transferor's hands, plus (b) gain recognized to the transferor on the transfer. In a typical F reorganization, (b) is zero and the basis is a pure carryover. (IRC § 362(b))
  • Impact of § 361(b) gain. If the transferor recognizes gain under § 361(b) on receipt of boot, the resulting corporation's basis in the transferred assets is increased by that gain amount. (IRC § 362(b))
• § 362(e)(2) built-in loss limitation. If the aggregate adjusted bases of property transferred exceed their aggregate fair market value, the resulting corporation's basis in each property is limited (reduced proportionately) to the aggregate fair market value, unless the transferor and transferee jointly elect otherwise. If the election is made, the transferor's stock basis is reduced instead. This provision prevents duplication of built-in losses. (IRC § 362(e)(2))
  • Proportionate reduction method. Absent election, the aggregate built-in loss is allocated proportionately among the transferred assets based on their respective built-in losses. Each asset's basis is reduced by its allocable share. (IRC § 362(e)(2)(A))
  • Joint election alternative. The transferor and transferee may jointly elect under § 362(e)(2)(C) to reduce the transferor's stock basis (or the basis of property distributed to shareholders) instead of reducing the asset bases in the transferee's hands. This election requires a statement attached to both parties' timely filed returns. (IRC § 362(e)(2)(C))
• Tracing method for basis allocation. Final regulations under § 358 adopted a tracing method for allocating basis in reorganization exchanges. Where shareholders exchange stock with different bases for stock of the resulting corporation, the basis of each share received is determined by tracing from the specific shares surrendered. The IRS adopted tracing because averaging of bases was not justified under the substituted-basis rule of § 358. (Treas. Reg. § 1.358-2, REG-116564-03 (May 3, 2004), adopted in T.D. 9313)
  • Share-by-share tracing. If a shareholder surrenders multiple blocks of stock with different bases, the basis of each share received is traced from the specific share surrendered. The shareholder must maintain records identifying which shares were surrendered and which shares were received. (Treas. Reg. § 1.358-2(a)(2))
  • Allocation among multiple classes. If the shareholder receives stock of more than one class, basis is allocated among the classes based on relative fair market values. Within each class, tracing applies. (Treas. Reg. § 1.358-2(a)(2))
• EXAMPLE. Shareholder basis with boot. Shareholder A has a basis of $100 in Target stock. In an F reorganization, A exchanges Target stock for ResultingCo stock worth $150 plus $20 cash. A's realized gain is $70 ($150 + $20 - $100). A's recognized gain is $20 (lesser of $20 boot or $70 realized gain). A's basis in ResultingCo stock is $100 ($100 basis minus $20 boot plus $20 gain recognized). (IRC § 358(a)(1) and § 356(a)(1))
  • Component analysis. Starting basis is $100. minus cash received of -$20. plus gain recognized of +$20. ending basis of $100. The boot reduces basis dollar for dollar, but the recognized gain adds back the same amount, producing the same basis as the original stock when the boot is less than or equal to realized gain. (IRC § 358(a)(1))
  • When gain is less than boot. If realized gain were only $15 (basis of $155, stock worth $150 plus $20 cash), recognized gain would be $15 (limited to realized gain), and the resulting basis would be $95 ($155 - $20 + $15). (IRC § 356(a)(1) and § 358(a)(1))

Step 12B. Holding Period

"In determining the period for which the taxpayer has held stock or securities... there shall be included the period for which the taxpayer held the stock or securities exchanged." (IRC § 1223(1))

• § 1223(1) holding period tacking for shareholders. In determining the period for which a taxpayer has held stock received in an exchange, there is included the period for which the taxpayer held the stock exchanged, if the stock received has the same basis in whole or in part as the stock exchanged. Shareholders in an F reorganization automatically tack their holding period in the transferor corporation stock to their holding period in the resulting corporation stock. (IRC § 1223(1))
  • Tacking requirement. Tacking under § 1223(1) applies because the resulting corporation stock has the same basis (in whole or in part) as the transferor stock surrendered under the substituted basis rule of § 358(a)(1). (IRC § 1223(1) and § 358(a)(1))
  • Significance for long-term capital gains. Tacking preserves the shareholder's ability to claim long-term capital gain treatment on a subsequent sale of the resulting corporation stock. If the shareholder had held the transferor stock for more than one year, the resulting corporation stock is also treated as held for more than one year immediately after the reorganization. (IRC § 1223(1) and § 1222)
• § 1223(2) holding period tacking for assets. When property has a basis determined by reference to the basis in the hands of a prior owner (such as under § 362(b)), the holding period includes the period the property was held by the prior owner. The resulting corporation's holding period in the assets received includes the transferor corporation's holding period. (IRC § 1223(2))
  • Carryover basis trigger. § 1223(2) applies because the resulting corporation's basis in the transferred assets is determined by reference to the transferor's basis under § 362(b). The holding period tacks automatically. (IRC § 1223(2) and § 362(b))
  • Impact on depreciation recapture. Tacking of the holding period means that the resulting corporation inherits the transferor's depreciation history. Assets held for less than the relevant recapture period remain subject to depreciation recapture on a subsequent sale. (IRC § 1223(2) and § 1245)
• Tacking applies automatically. Holding period tacking under §§ 1223(1) and 1223(2) is automatic and requires no election. Both the shareholders and the resulting corporation benefit from the transferor's holding periods. (IRC § 1223(1) and (2))
  • No filing requirement. Neither the shareholders nor the resulting corporation need to file any election or statement to obtain the benefit of holding period tacking. The tacking is automatic by operation of law. (IRC § 1223(1) and (2))
  • Recordkeeping. Despite the automatic nature of tacking, shareholders and the resulting corporation should maintain records of the transferor's original acquisition dates and the reorganization date. These records will be needed to prove holding periods on future transactions. (IRC § 1223(1) and (2))

Step 12C. Attribute Carryover

"The acquiring corporation shall be treated (for purposes of section 381) just as the transferor corporation would have been treated if there had been no reorganization." (Treas. Reg. § 1.381(b)-1(a)(2))

• § 381(a)(2) attribute succession. The provisions of § 381 apply to a corporation that acquires the assets of another corporation in an F reorganization. The resulting corporation succeeds to and takes into account the tax attributes of the transferor corporation described in § 381(c). (IRC § 381(a)(2))
  • F reorganization as § 381 transaction. An F reorganization is one of the types of transactions to which § 381 applies. The resulting corporation is the "acquiring corporation" for § 381 purposes. (IRC § 381(a)(2))
  • Scope of succession. The resulting corporation succeeds to ALL of the transferor's § 381(c) attributes, not merely selected ones. There is no pick-and-choose option. (IRC § 381(c))
• § 381(b) special rule for F reorganizations. In the case of an F reorganization, the acquiring (resulting) corporation is treated for purposes of § 381 just as the transferor corporation would have been treated if there had been no reorganization. The taxable year of the transferor does not end on the date of transfer. This unique rule means that the resulting corporation steps into the shoes of the transferor for purposes of taxable year continuity, estimated tax liability, and NOL carryback privileges. (Treas. Reg. § 1.381(b)-1(a)(2))
  • NOL carryback privilege. A critical advantage of F reorganizations over other reorganization types is that an NOL of the acquiring corporation for any taxable year ending after the date of transfer may be carried back to a taxable year of the transferor corporation ending before the date of transfer. This carryback privilege is unique to F reorganizations and flows directly from the § 381(b) rule treating the resulting corporation as the transferor. (CPA Journal, "Type F Reorganizations and the Impact of the Jobco Manufacturing Decision")
  • Taxable year continuity. Under Treas. Reg. § 1.381(b)-1(a)(2), if the transfer occurs on the last day of the transferor's taxable year, there is no short taxable year. If the transfer occurs on any other day, the transferor's taxable year generally ends on the date of transfer, producing a short taxable year. (Treas. Reg. § 1.381(b)-1(a)(2))
  • Estimated tax liability. The resulting corporation assumes the transferor's estimated tax payment schedule and any underpayment penalties that may apply. The EIN of the transferor remains attached to the resulting corporation for employment tax and certain other purposes. (Treas. Reg. § 1.381(b)-1(a)(2))
• § 381(c) attributes that carry over. § 381(c) enumerates the specific tax attributes that succeed to the resulting corporation. (IRC § 381(c))
  • Net operating loss carryovers (§ 381(c)(1)). The resulting corporation inherits the transferor's NOL carryovers, including any NOLs arising in the taxable year of the transfer. The carryover period is determined as if the resulting corporation were the transferor. (IRC § 381(c)(1))
  • Earnings and profits (§ 381(c)(2)). The resulting corporation succeeds to the transferor's earnings and profits (or deficit in earnings and profits) as of the close of the date of transfer. Treas. Reg. § 1.381(c)(2)-1(a)(1) provides that the acquiring corporation succeeds to and takes into account the E and P of the transferor corporation. For F reorganizations, the § 381(b) rule ensures seamless E and P continuity. (IRC § 381(c)(2), Treas. Reg. § 1.381(c)(2)-1(a)(1))
  • Capital loss carryovers (§ 381(c)(3)). The resulting corporation inherits the transferor's capital loss carryovers, subject to the same carryover period limitations that would have applied to the transferor. (IRC § 381(c)(3))
  • Method of accounting (§ 381(c)(4)). The resulting corporation must use the transferor's method of accounting (cash, accrual, etc.) unless the IRS consents to a change. This includes any accounting method elections previously made by the transferor. (IRC § 381(c)(4))
  • Inventories (§ 381(c)(5)). The resulting corporation takes over the transferor's inventory accounting method and inventory basis. This is particularly important for LIFO inventories, where the LIFO layers and elections carry over. (IRC § 381(c)(5))
  • Depreciation method and basis recovery (§ 381(c)(6)). The resulting corporation continues the transferor's depreciation method (including any accelerated or bonus depreciation elections) and recovery period for each asset. The remaining depreciable basis carries over. (IRC § 381(c)(6))
  • Installment method obligations (§ 381(c)(8)). The resulting corporation succeeds to the transferor's installment obligations and must continue reporting installment gain on the same schedule as the transferor would have. (IRC § 381(c)(8))
  • Foreign tax credit carryovers (§ 381(c)(15)). The resulting corporation inherits the transferor's foreign tax credit carryovers, subject to the same carryover period and limitation rules. (IRC § 381(c)(15))
  • General business credit carryovers (§ 381(c)(16)). The resulting corporation succeeds to the transferor's general business credits (including research credits, low-income housing credits, etc.), subject to the same carryforward limitations. (IRC § 381(c)(16))
  • Minimum tax credits (§ 381(c)(17)). The resulting corporation inherits the transferor's minimum tax credit carryovers. (IRC § 381(c)(17))
  • Specified liability losses under § 172(f) (§ 381(c)(25)). The resulting corporation succeeds to the transferor's specified liability loss carryovers, which are treated as NOLs for carryback and carryover purposes. (IRC § 381(c)(25))
• E and P carryover under §§ 312 and 381(c)(2). The resulting corporation succeeds to the transferor's earnings and profits (or deficit in earnings and profits) as of the close of the date of transfer. This succession is automatic and comprehensive. The E&P history carries over for purposes of determining whether future distributions are dividends under § 301(c)(1). (IRC § 381(c)(2), Treas. Reg. § 1.381(c)(2)-1(a)(1))
  • Deficit E&P succession. If the transferor has a deficit in E&P, the resulting corporation inherits that deficit. This may reduce or eliminate the resulting corporation's ability to treat post-reorganization distributions as dividends. (IRC § 381(c)(2))
  • Post-reorganization E&P pool. After the reorganization, all subsequent E&P of the resulting corporation is added to the inherited E&P pool. There is no fresh start or reset of E&P in an F reorganization. (IRC § 381(c)(2))
• Rev. Rul. 2008-18 EIN rules. In an F reorganization under Rev. Rul. 2008-18, the new parent S corporation (NewCo) must obtain a new EIN. The former S corporation (Target), which becomes a QSub, retains its historic EIN for non-income-tax purposes (such as employment taxes and excise taxes) even though it is disregarded as an entity separate from its parent for federal income tax purposes. (Rev. Rul. 2008-18, 2008-1 C.B. 674, Treas. Reg. § 301.6109-1(h) and (i))
  • EIN allocation. NewCo (the resulting corporation) must apply for a new EIN. Target retains its historic EIN for employment taxes, excise taxes, and certain information returns. This allocation is specific to the Rev. Rul. 2008-18 structure and may differ in other F reorganization fact patterns. (Rev. Rul. 2008-18, 2008-1 C.B. 674)
  • NewCo EIN. NewCo (HoldCo) must obtain a new EIN on Form SS-4 because it is a newly formed corporation.
  • Target EIN retention. Target retains its historic EIN for payroll and regulatory purposes despite becoming a QSub and then an LLC.
  • Employment tax continuity. Because Target retains its historic EIN for employment tax purposes, there is no interruption in payroll tax reporting, withholding, or deposit obligations. The F reorganization is transparent for employment tax administration. (Rev. Rul. 2008-18, 2008-1 C.B. 674)

Step 12D. Limitations on Attributes

"If for any taxable year beginning in the recognition period an S corporation has a net recognized built-in gain, there is hereby imposed a tax (computed under subsection (b)) on the income of such corporation for such taxable year." (IRC § 1374(a))

• § 382 ownership change limitation. § 382 limits the use of NOL carryforwards and certain other tax attributes following an "ownership change," defined as a greater than 50 percentage point increase in ownership by one or more 5-percent shareholders over a three-year testing period. The annual limitation equals the value of the old loss corporation multiplied by the federal long-term tax-exempt rate. An F reorganization generally does NOT trigger a § 382 ownership change because the identical ownership requirement of Treas. Reg. § 1.368-2(m)(1)(ii) ensures that the same shareholders own the resulting corporation in the same proportions. (IRC § 382, Treas. Reg. § 1.368-2(m)(1)(ii))
  • No ownership change in pure F reorganization. Because Requirement 2 of Treas. Reg. § 1.368-2(m)(1) requires identical ownership before and after the reorganization, there is no shift in ownership of 5-percent shareholders. § 382(g) defines an ownership change as a greater than 50 percentage point increase over a three-year testing period. A pure F reorganization produces a zero percentage point change. (IRC § 382(g) and Treas. Reg. § 1.368-2(m)(1)(ii))
  • Value of the loss corporation. In the event that a § 382 limitation does apply (because the F reorganization is part of a larger ownership change), the limitation is computed by multiplying the value of the old loss corporation by the federal long-term tax-exempt rate published monthly by the IRS. (IRC § 382(b))
• CAUTION. Ownership change in larger transactions. If the F reorganization is part of a larger transaction that results in a greater than 50 percentage point shift in ownership of 5-percent shareholders over a three-year period, § 382 may apply to the overall transaction. The F reorganization itself does not cause the ownership change, but subsequent or simultaneous steps may. Practitioners must analyze the entire transaction sequence for § 382 implications. (IRC § 382(g))
  • Three-year testing period. The § 382 testing period is the three-year period ending on the date of the ownership change. Any shifts in ownership during this period are aggregated. A stock sale immediately following an F reorganization may, when combined with other recent shifts, trigger the § 382 limitation. (IRC § 382(g)(1))
  • Planning around § 382. If a post-reorganization stock sale would trigger a § 382 ownership change, consider spreading the sale over time to keep the cumulative shift below 50 percentage points, or structure the sale to avoid creating new 5-percent shareholders. (IRC § 382(g))
• § 384 limitation on built-in losses. § 384 limits the use of pre-acquisition losses of a corporation (including NOL carryovers and net capital loss carryovers) against the recognized built-in gains of another corporation acquired in a tax-free transaction, unless the two corporations were under common control before the acquisition. This provision is designed to prevent "trafficking" in tax attributes. § 384 generally does not apply to a pure F reorganization because there is only one continuing corporation and no acquisition of another corporation's built-in gains. (IRC § 384)
  • Anti-trafficking purpose. § 384 prevents corporations from acquiring loss corporations solely to offset those losses against the acquirer's built-in gains.
  • Common control exception. The limitation does not apply if the loss corporation and the gain corporation were under 80% common control before the acquisition.
  • Single corporation exception. Because an F reorganization involves only one continuing corporation, there is no "acquisition" of another corporation for § 384 purposes. The resulting corporation's pre-reorganization losses and the transferor's losses are all losses of the same continuing entity. (IRC § 384)
  • Potential application in larger transactions. If the F reorganization is followed by an acquisition of another corporation, § 384 may apply to limit the use of the combined entity's pre-acquisition losses against the built-in gains of the acquired corporation. (IRC § 384)
• § 1374(d)(8) built-in gains tax for S corporations. § 1374 imposes a corporate-level tax on an S corporation's net recognized built-in gain during the recognition period (currently five years under the PATH Act) in the case of a C corporation's conversion to S status. § 1374(d)(8) extends this tax to assets acquired by an S corporation in a transaction in which the S corporation's basis in the acquired assets is determined by reference to the basis of such assets in the hands of a C corporation. In an F reorganization involving a former C corporation that is now an S corporation, the built-in gains tax continues to apply to the assets in the hands of the resulting corporation on the same basis as before. (IRC § 1374(d)(8), IRS Letter Ruling 0835002 (Aug. 29, 2008))
  • Continuity of built-in gains tax. The built-in gains tax recognition period is not reset by an F reorganization. If the transferor had three years remaining in its recognition period before the reorganization, the resulting corporation has three years remaining after. (IRC § 1374(d)(8))
  • Carryover of net unrealized built-in gain. The resulting corporation inherits the transferor's net unrealized built-in gain (NUBIG) or net unrealized built-in loss (NUBIL). The amount of built-in gain recognized during the recognition period is computed as if the resulting corporation were the transferor. (IRC § 1374(d)(8))
• § 383 credit limitation. § 383 limits the use of pre-change tax credits (general business credits, minimum tax credits, and foreign tax credits) following an ownership change, coordinating with the § 382 limitation. Like § 382, § 383 generally does not apply to a pure F reorganization because there is no ownership change. (IRC § 383)
  • Coordination with § 382. § 383 applies the same ownership change framework to limit the use of pre-change credits.
  • Standalone F reorganization scope. A pure F reorganization does not trigger § 383 because no ownership change occurs.
  • Coordination with § 382. § 383 operates in parallel with § 382. If an ownership change occurs, both the NOL usage limitation (§ 382) and the credit usage limitation (§ 383) apply. The credit limitation is computed based on the § 382 limitation amount. (IRC § 383)
  • General business credits. Pre-change general business credits (including research credits, low-income housing credits, etc.) are subject to the § 383 limitation. Credits that cannot be used due to the limitation carry forward to subsequent years. (IRC § 383)
• TRAP. State tax attribute limitations. Most states with corporate income taxes conform to federal treatment of F reorganizations, but some states (including California and Pennsylvania) do not fully conform. State-level limitations on attribute carryover, NOL usage, and credit availability may differ from federal rules. Always analyze state-specific attribute carryover rules independently from federal analysis. (California FTB Waters' Edge Manual, practitioner guidance)
  • Non-conforming states. California, Pennsylvania, and other states that do not fully conform to federal reorganization treatment may impose their own limitations. Some states treat F reorganizations as taxable events at the state level, or deny certain attribute carryovers. (California FTB Waters' Edge Manual)
  • State-specific checklist. For each state in which the transferor or resulting corporation is subject to tax, verify. (a) whether the state conforms to federal F reorganization treatment, (b) whether state NOL carryover is permitted, (c) whether state credits carry over, and (d) whether any state-level filing or election is required. (State tax practitioner guidance)

Step 13. S Corporation F Reorganizations and the QSub Structure

"a mere change in identity, form, or place of organization of one corporation, however effected" (IRC § 368(a)(1)(F))

• The modern S corporation F reorganization. This step addresses the most common contemporary F reorganization structure, the five-step Rev. Rul. 2008-18 model that converts an S corporation into a disregarded LLC subsidiary through a QSub election. Master this step before proceeding to Steps 14 (attribute limitations), 16 (business purpose), or 17 (state conformity).
  • Dominant structure. The Rev. Rul. 2008-18 QSub model is the most common F reorganization in practice today.
  • Cross-references. See Step 13B for QSub mechanics, Step 13C for S election continuity, Step 13D for traps, and Step 13E for PE structures.
• Step 13A covers the canonical five-step Rev. Rul. 2008-18 structure.
• Step 13B addresses QSub election mechanics and eligibility.
• Step 13C explains S election continuity through the reorganization.
• Step 13D identifies S corporation-specific traps.
• Step 13E discusses private equity transaction structures using F reorganizations.

Step 13A. The Rev. Rul. 2008-18 Canonical Structure

"a mere change in identity, form, or place of organization of one corporation, however effected" (IRC § 368(a)(1)(F))

• Five sequential steps. The S corporation F reorganization proceeds as follows (Rev. Rul. 2008-18, 2008-1 C.B. 674).
• Step 1. The shareholders of existing S corporation Target form a new corporation (NewCo/HoldCo) and file a protective S election on Form 2553.
• Step 2. The shareholders contribute 100% of their Target stock to NewCo in exchange for 100% of NewCo stock. Ownership proportions must remain identical before and after. Treas. Reg. § 1.368-2(m)(1)(ii) (same persons own all stock in identical proportions).
• Step 3. NewCo elects QSub status for Target by filing Form 8869, checking "Yes" in Box 14 to indicate the election is part of an F reorganization described in Rev. Rul. 2008-18 (IRS Instructions for Form 8869 (Dec. 2020)).
• Step 4. The QSub election triggers a deemed tax-free liquidation of Target into NewCo under §§ 332 and 337. Target becomes a disregarded entity for federal income tax purposes. Treas. Reg. § 1.1361-4(a)(1) (QSub treated as entity that liquidated into parent under §§ 332 and 337).
• Step 5. At least one day after the QSub election effective date, Target converts from a corporation to a single-member LLC under state law. This converts one disregarded entity into another with no federal income tax consequences.
• Rationale for private equity transactions. An F reorganization combined with LLC conversion has become the dominant pre-closing structure for PE transactions involving S corporation targets (The Tax Adviser, "Private equity and F reorganizations involving S corporations," Sept. 2020). The structure produces a stepped-up basis in the Target LLC interests for the buyer without requiring 80% acquisition (unlike § 338(h)(10)) and enables tax-deferred rollover equity.
  • Basis step-up without 80% threshold. The structure gives buyers asset-purchase basis step-up without requiring 80% stock acquisition.
  • Tax-deferred rollover. Sellers can contribute equity to the buyer entity without recognizing gain.
• Buyer's basis step-up. The buyer achieves an asset-purchase basis step-up by acquiring membership interests in a disregarded LLC, treated as a purchase of underlying assets for federal tax purposes.
• No 80% threshold. Unlike § 338(h)(10), the F reorganization structure works for any buyer acquisition percentage.
• Tax-deferred rollover. Sellers can roll over equity into the buyer entity on a tax-deferred basis.

Step 13B. QSub Election Mechanics

"The term qualified subchapter S subsidiary means a domestic corporation which is a subsidiary of an S corporation and which the S corporation elects to treat as a qualified subchapter S subsidiary." (IRC § 1361(b)(3)(B))

• Statutory definition. § 1361(b)(3) defines a "qualified subchapter S subsidiary" (QSub) as a domestic corporation that (A) is not an ineligible corporation under § 1361(b)(2), (B) is 100% owned by an S corporation parent, and (C) is for which the parent elects QSub treatment. Upon election, the QSub is not treated as a corporation separate from its parent.
  • Three statutory requirements. The QSub definition requires (A) domestic corporation status, (B) 100% S corporation parent ownership, and (C) an affirmative election.
  • Federal tax disregard. Upon a valid QSub election, the subsidiary is not treated as a corporation separate from its parent for federal income tax purposes.
• Domestic corporation requirement. The subsidiary must be a corporation organized under U.S. federal or state law. Foreign corporations are ineligible (§ 1361(b)(2)(B)).
• 100% ownership requirement. The S corporation parent must own 100% of the subsidiary's stock. Even 99% ownership disqualifies the subsidiary from QSub treatment.
• Election requirement. The parent must make an affirmative election on Form 8869. The election is not automatic.
• Treas. Reg. § 1.1361-4(a). The regulation provides that a QSub election is treated as a deemed liquidation of the subsidiary into the parent under §§ 332 and 337. The subsidiary's assets, liabilities, and tax attributes are absorbed into the parent. The subsidiary's stock is disregarded for all federal tax purposes except for determining S corporation eligibility under § 1361(b)(1).
• Asset absorption. The parent corporation inherits all of the QSub's assets and liabilities at their adjusted bases under § 362(b).
• Attribute carryover. The parent succeeds to all of the QSub's tax attributes including E&P, accounting methods, and tax accounting periods.
• Stock disregard. The QSub's stock is ignored for federal tax purposes. Only the parent's ownership matters for S corporation eligibility.
• Form 8869 filing mechanics.
• File Form 8869 (Qualified Subchapter S Subsidiary Election) within 2 months and 15 days of the beginning of the tax year for immediate effectiveness (Treas. Reg. § 1.1361-3(a)).
  • Filing deadline and form. File Form 8869 (Qualified Subchapter S Subsidiary Election) within 2 months and 15 days of the beginning of the tax year for immediate effectiveness (Treas. Reg. § 1.1361-3(a)).
  • Box 14 notification. Check Box 14 "Yes" to notify the IRS that the election is part of an F reorganization under Rev. Rul. 2008-18. This signals that no new S election is required for NewCo (IRS Instructions for Form 8869 (Dec. 2020)).
  • CAUTION. Mailbox rule inapplicable. Form 8869 must actually be received by the IRS. The mailbox rule does not apply. PLR 201724013 (granting § 1362(f) relief where QSub election filed "timely, but too late" after Target had converted to LLC).
• Ineligible corporations for QSub status. A corporation is ineligible for QSub treatment if it is (§ 1361(b)(2)).
  • Foreign corporations excluded. Only domestic corporations qualify for QSub treatment. A foreign subsidiary cannot be a QSub.
  • Special entities excluded. REMICs, RICs, REITs, and LLCs are ineligible for QSub treatment.
• A corporation that is not a domestic corporation (foreign corporations are ineligible).
  • Foreign corporation exclusion. A corporation that is not a domestic corporation is ineligible (foreign corporations are ineligible).
  • Specialized entity exclusion. A REMIC, a RIC, or a REIT is ineligible for QSub treatment.
  • LLC exclusion. An LLC is not a corporation for QSub purposes and is ineligible.
  • Less than 100% ownership exclusion. A corporation in which the parent owns less than 100% is ineligible (even 99% disqualifies).
• Termination of QSub election. § 1362(d)(3) and Treas. Reg. § 1.1361-5 provide that a QSub election terminates if (A) the S corporation parent ceases to qualify as an S corporation, (B) the subsidiary ceases to be wholly owned, (C) the subsidiary becomes an ineligible corporation, or (D) the election is revoked. Upon termination, the former QSub is treated as a new corporation acquiring all of its assets from the parent in exchange for stock of the new corporation (§ 1361(b)(3)(C)) (Treas. Reg. § 1.1361-5(b)(1)).
  • Four termination triggers. The election terminates if (A) the S parent ceases to qualify, (B) the subsidiary ceases to be wholly owned, (C) the subsidiary becomes ineligible, or (D) the election is revoked.
  • Deemed incorporation on termination. Treas. Reg. § 1.1361-5(b)(1) treats the former QSub as a new corporation acquiring all assets from the parent.
• Five-year waiting period. A corporation whose QSub election terminates generally cannot make an S election or have a QSub election made for it for five taxable years unless an exception applies.
• Immediate re-election exception. Treas. Reg. § 1.1361-5(c)(2) provides that if immediately following termination the corporation is otherwise eligible and the relevant election is made effective immediately, the five-year waiting period does not apply (Rev. Rul. 2004-85, 2004-2 C.B. 189).
• Five-year waiting period exception. § 1361(b)(3)(D) provides that a corporation whose QSub election terminates generally may not make an S election or have a QSub election made for it for five taxable years. However, Treas. Reg. § 1.1361-5(c)(2) provides an exception. If immediately following termination the corporation is otherwise eligible to make an S election and the relevant election is made effective immediately following the termination, the five-year waiting period does not apply (Rev. Rul. 2004-85, 2004-2 C.B. 189).
  • Immediate eligibility required. The corporation must meet all S corporation eligibility requirements at the moment of QSub termination.
  • Same-day election permitted. If the new election is effective immediately following termination, the five-year waiting period does not apply.
• Automatic applicability. The exception operates automatically if the conditions are met. No IRS ruling is required.

Step 13C. S Election Continuity

"An election under subsection (a) shall be effective for the taxable year of the corporation for which it is made and for all succeeding taxable years of such corporation until terminated." (IRC § 1362(a))

• No new S election required. Rev. Rul. 64-250, 1964-2 C.B. 333, established that an S election continues through an F reorganization without requiring a new election. Rev. Rul. 2008-18, 2008-1 C.B. 674, confirmed this principle for the canonical QSub structure. Form 8869, Box 14 notifies the IRS that the transaction is an F reorganization, and no new Form 2553 is required for NewCo (IRS Instructions for Form 8869 (Dec. 2020) ("No Form 2553... is required to be filed by the parent")).
  • Rev. Rul. 64-250 principle. The original S election continues uninterrupted through the F reorganization without a new filing.
  • Box 14 notification. Checking Box 14 Yes on Form 8869 alerts the IRS Service Center that the QSub election is part of an F reorganization.
• EIN allocation. Under Rev. Rul. 2008-18, Situation 1, NewCo must obtain a new EIN. Target (the QSub) must retain its historic EIN even after the QSub election. The historic EIN retention is critical for business continuity. It preserves existing payroll accounts, vendor relationships, contracts, licenses, and regulatory filings (Treas. Reg. § 301.6109-1(h) and (i)).
  • NewCo EIN. NewCo (HoldCo) must obtain a new EIN on Form SS-4 because it is a newly formed corporation.
  • Target EIN retention. Target retains its historic EIN for payroll and regulatory purposes despite becoming a QSub and then an LLC.
• Straddle year filing. NewCo (HoldCo) becomes the filing entity for the full tax year. No short-period returns are required. NewCo reports all of Target's income and activities that occurred prior to the reorganization, reflecting the continuity of the S election (CRI Advisory, "F Reorganizations in M&A," Jan. 2026).
  • Full-year filing entity. NewCo files Form 1120S for the entire tax year, reporting both pre-reorganization and post-reorganization activity.
  • No short-period return. Target does not file a short-period return because the S election continues without interruption.

Step 13D. S Corporation-Specific Traps

"If an S corporation acquires assets of a C corporation in a transaction to which section 381(a) applies, the S corporation shall be treated for purposes of this section as having been a C corporation for any period for which the C corporation was in existence." (IRC § 1374(d)(8))

• Inadvertent termination. The S corporation parent must maintain valid S status throughout the F reorganization. An S election terminates through (A) acquisition of an ineligible shareholder (nonresident alien, corporation, partnership, or non-qualifying trust), (B) exceeding 100 shareholders, (C) creating a second class of stock, or (D) three consecutive years of excess passive investment income with C corporation AE&P (§ 1362(d)(3)). Upon termination, the corporation generally cannot re-elect for five years under § 1362(g) unless the IRS grants inadvertent termination relief under § 1362(f).
  • Common termination triggers. Acquisition of an ineligible shareholder, exceeding 100 shareholders, creating a second class of stock, or three years of excess passive income with C corporation AE and P.
  • § 1362(f) relief available. The IRS may grant inadvertent termination relief if the event was unintended and corrected within a reasonable period.
• Ineligible shareholder acquisition. A single nonresident alien, corporation, or partnership acquiring S corporation stock terminates the election immediately.
• Second class of stock. Disproportionate distributions or varying liquidation rights can inadvertently create a second class of stock. Treas. Reg. § 1.1361-1(l)(1) and (4) require identical rights to liquidation and distribution proceeds for all shares.
• § 1362(f) relief. The IRS may grant inadvertent termination relief if the terminating event was unintended, the corporation corrects the defect within a reasonable period, and all parties agree to make adjustments consistent with S status.
• Built-in gains tax (§ 1374). § 1374 imposes entity-level tax at 21% on net recognized built-in gain during the five-year recognition period after a C corporation converts to S status. The F reorganization preserves all built-in gain because § 362(b) provides carryover basis. TRAP. The five-year built-in gains recognition period does NOT restart upon an F reorganization. The clock continues running from the original C-to-S conversion date. If an invalidly-elected S corporation is contributed to a new S corporation as a QSub, the transaction effectively liquidates a C corporation into an S corporation, and the S corporation inherits all built-in gains exposure under § 1374(d)(8) (Rev. Rul. 2001-50) (Journal of Accountancy Podcast, July 2023).
  • Carryover basis preserves gain. § 362(b) provides carryover basis in an F reorganization, so all built-in gain inherent in the assets survives intact.
  • No recognition period restart. The five-year built-in gains clock continues from the original C-to-S conversion date without extension.
• Carryover basis preservation. § 362(b) provides carryover basis in an F reorganization, so all built-in gain inherent in the assets survives intact.
• No recognition period restart. The five-year built-in gains clock continues from the original C-to-S conversion date. The F reorganization neither eliminates nor extends the recognition period.
• § 1374(d)(8) exposure. Contributing a corporation with an invalid S election as a QSub effectively liquidates a C corporation into an S corporation, causing the parent to inherit all built-in gains exposure.
• Excess passive investment income (§ 1375). § 1375 imposes tax at the highest corporate rate (21%) on excess net passive income of an S corporation that has C corporation AE&P and passive investment income exceeding 25% of gross receipts. The QSub's passive income counts toward the parent S corporation's limit because the QSub's income is reported on the parent's return.
  • Three-year threshold. The tax applies only if passive investment income exceeds 25% of gross receipts for three consecutive tax years.
  • QSub income aggregation. Because a QSub's income is reported on the parent's return, the QSub's passive income counts toward the parent's limit.
• 25% gross receipts threshold. The tax applies only if passive investment income exceeds 25% of gross receipts for three consecutive tax years.
• C corporation AE&P requirement. The tax applies only if the S corporation has accumulated earnings and profits from a prior C corporation period.
• QSub income aggregation. Because a QSub's income is reported on the parent's return, the QSub's passive income contributes to the parent's gross receipts and passive income calculations.
• State law conversion timing. The QSub election must be filed and effective BEFORE Target converts to an LLC, because at the time of the election the subsidiary must be a corporation. TRAP. PLR 201724013 highlights the danger. A QSub election filed after Target converted to an LLC was ineffective. Best practice is a minimum one-day gap between QSub election effective date and LLC conversion (Michigan Bar Journal, "How an F reorganization can benefit the sale of an S corporation").
  • Corporation status required. The subsidiary must be a corporation at the time the QSub election is effective. An LLC cannot be a QSub.
  • PLR 201724013 warning. Filing a QSub election after the subsidiary converted to an LLC is ineffective and requires relief.
• Corporation status required at election. The subsidiary must be a corporation at the time the QSub election is effective. An LLC cannot be a QSub.
• Minimum one-day gap. Best practice is to allow at least one full day between the QSub election effective date and the LLC conversion date.
• PLR 201724013 warning. The PLR demonstrates that filing a QSub election after the subsidiary has already converted to an LLC is ineffective and requires § 1362(f) relief.
• Second class of stock. Treas. Reg. § 1.1361-1(l)(1) and (4) require that all outstanding shares of an S corporation confer identical rights to liquidation and distribution proceeds. Disproportionate distributions or varying liquidation rights can inadvertently create a second class of stock and terminate S status (The Tax Adviser, "Inadvertent terminations of S and QSub elections," Nov. 2022).
• Identical liquidation rights. Every share must have the same right to receive liquidation proceeds. Any variation in liquidation rights creates a second class of stock.
• Identical distribution rights. Every share must have the same right to receive distributions. Disproportionate distributions can create a second class of stock even without a formal agreement.
• Safe harbor. Treas. Reg. § 1.1361-1(l)(2)(iii) provides that disproportionate distributions do not create a second class of stock if they are made inadvertently or due to reasonable commercial accounting discrepancies and are corrected within a reasonable time.

Step 13E. Private Equity Transaction Structures

"a mere change in identity, form, or place of organization of one corporation, however effected" (IRC § 368(a)(1)(F))

• Private equity buyer preferences. The F reorganization has become the dominant pre-closing structure for PE transactions involving S corporation targets because it provides the same basis step-up as § 338(h)(10) without the eligibility restrictions (The Tax Adviser, "Private equity and F reorganizations involving S corporations," Sept. 2020).
  • No corporate buyer restriction. Unlike § 338(h)(10), the F reorganization structure permits any buyer entity type including LLCs and partnerships.
  • No minimum acquisition threshold. The buyer can acquire any percentage of the target and still achieve a partial basis step-up.
• No corporate buyer requirement. Unlike § 338(h)(10), the F reorganization structure permits any buyer entity type including LLCs and partnerships.
• No minimum acquisition threshold. The buyer can acquire any percentage of the target and still achieve a basis step-up for the purchased portion.
• Tax-deferred rollover. Sellers can roll over equity into the buyer entity on a tax-deferred basis, which is generally unavailable in § 338(h)(10) transactions.
• Buyer's stepped-up basis in assets. Because the Target LLC is a disregarded entity (either as a QSub or SMLLC), when the buyer purchases membership interests in the LLC, the transaction is treated as a purchase of the underlying assets for federal income tax purposes. The buyer receives a stepped-up basis in Target's assets equal to the cash purchase price, while taking a carryover (often nominal) basis for the portion acquired with rollover equity (M. Baker Tax Law, "S Corp F Reorg QSub Drop," Oct. 2025).
  • Asset purchase treatment. A purchase of membership interests in a disregarded LLC is treated as a direct purchase of underlying assets.
  • Mixed basis result. Assets receive a step-up for the cash portion and carryover basis for the rollover equity portion.
• Asset purchase treatment. A purchase of membership interests in a disregarded LLC is treated as a direct purchase of the LLC's underlying assets.
• Stepped-up basis for cash portion. Assets receive a basis step-up equal to the cash purchase price allocated under § 1060.
• Carryover basis for rollover portion. The portion of assets attributable to rollover equity takes a carryover basis, creating a mixed basis structure.
• Comparison to § 338(h)(10). The F reorganization structure differs from a § 338(h)(10) election in several critical respects for PE transactions.
  • Buyer flexibility. A § 338(h)(10) transaction requires a corporate buyer acquiring at least 80%. An F reorganization has no such restrictions.
  • S election risk elimination. A § 338(h)(10) step-up depends on valid S election status. An F reorganization protects the buyer regardless of S election validity.
• Buyer entity type. A § 338(h)(10) transaction requires the buyer to be a corporation. An F reorganization permits any buyer entity type including an LLC, partnership, or private equity fund.
• Minimum acquisition threshold. § 338(h)(10) requires the buyer to acquire at least 80% of target stock. An F reorganization has no minimum acquisition threshold.
• Tax-deferred rollover availability. § 338(h)(10) generally does not permit tax-deferred rollover equity. An F reorganization structure accommodates tax-deferred rollover equity.
• S election validity risk. A § 338(h)(10) step-up depends on a valid S election, creating high risk if the election was defective. An F reorganization protects the buyer's step-up regardless of S election validity.
• Business continuity. A § 338(h)(10) transaction produces moderate business continuity disruption. An F reorganization produces excellent continuity because the target retains its historic EIN, contracts, licenses, and vendor relationships.

(Cordasco & Company, "§ 338(h)(10) vs. the F Reorganization," Apr. 2026) (Mintz, "F-Reorgs," Oct. 2024).

• Rollover equity structures.
• If rollover equity is partnership equity, gain is deferred under § 721 but later recognized under § 704(c) built-in gain rules when the equity is sold.
• If rollover equity is C corporation stock, deferral may be available under § 351, subject to limitations under § 351(b).
• The F reorganization has no minimum threshold. A buyer acquiring 51%, 60%, or 70% can still achieve a partial step-up (Mintz, "F-Reorgs," Oct. 2024).
• Avoiding transfer taxes and consent requirements. An F reorganization allows the target to avoid (A) obtaining legal consent from third parties for contract assignments, (B) obtaining landlord consent for lease assignments, (C) incurring transfer taxes and retitling assets, and (D) transferring administrative items such as payroll, 401(k) plans, and benefits (Plante Moran, "Maximizing tax efficiency," Nov. 2025).
  • Contract and lease continuity. Because the target retains its legal identity as an LLC with the same EIN, existing contracts and leases remain in force.
  • No retitling required. The F reorganization does not involve an asset sale, so state and local transfer taxes do not apply to the reorganization.
• Contract continuity. Because the target retains its legal identity as an LLC with the same EIN, existing contracts generally remain in force without assignment.
• Lease continuity. Existing leases remain in place because the same legal entity continues, avoiding the need for landlord consent.
• No transfer taxes. The F reorganization does not involve a sale or transfer of assets, so state and local transfer taxes do not apply to the reorganization itself.
• State PTET election benefits. The F reorganization positions the entity to take advantage of state pass-through entity tax (PTET) elections. An F reorganization prior to sale allows the transaction to be structured as a sale at the entity level (treated as an asset sale) rather than a sale of equity. PTET elections allow S corporations to pay state tax at the entity level, creating a federal deduction not subject to the $10,000 SALT cap (Cohen & Company, "Pass-Through Entity Tax and F Reorganization," Mar. 2024). See Step 17 for state-specific PTET analysis.
  • Entity-level sale treatment. The F reorganization structure treats the transaction as an asset sale at the entity level, enabling PTET application.
  • SALT cap bypass. PTET elections create a federal deduction for state taxes paid at the entity level, bypassing the individual $10,000 limitation.
• Entity-level sale treatment. The F reorganization structure treats the transaction as an asset sale at the entity level, enabling PTET election benefits.
• Federal deduction for state tax. PTET elections create a federal deduction for state taxes paid at the entity level, bypassing the individual $10,000 SALT deduction cap.
• Buyer-seller bridge. The PTET election combined with an F reorganization can bridge the gap between buyer and seller tax objectives, potentially eliminating gross-up payments.
• TRAP. Invalid S election risk. The F reorganization protects the buyer's basis step-up even if Target had an invalid S election, because the step-up comes from purchasing a disregarded entity rather than relying on S election validity. CAUTION. The F reorganization does NOT cure a bad S election or eliminate historic C corporation tax liabilities, which could still be inherited under state successor liability rules (Journal of Accountancy Podcast, July 2023).
• Basis step-up protection. The buyer's stepped-up basis derives from purchasing a disregarded entity, not from S election validity. An invalid S election does not impair the basis step-up.
• No cure for bad S election. The F reorganization does not retroactively validate an improperly made S election. The IRS could still assert tax liabilities for prior years.
• State successor liability. State successor liability rules may cause the resulting entity to inherit unpaid state tax liabilities of the predecessor corporation.
• § 197 anti-churning risk. If sellers retain more than 20% of the buyer entity (directly or through attribution) in an F reorganization drop-down, the § 197 anti-churning rules may deny amortization of goodwill and other intangibles. A common solution is to distribute a nominal interest (e.g., 1%) to convert the entity to a partnership and allow time to pass before the sale, or to structure the transaction so the seller owns 20% or less of the buyer (CPA Journal, "Professional Practice Transitions, § 197, and the Anti-Churning Rules," Spring 2016).
  • 20% ownership threshold. § 197(f)(9) denies amortization of goodwill if the seller retains more than 20% of the buyer entity.
  • Partnership conversion workaround. Distributing a nominal interest to convert to a partnership can break the anti-churning taint.
• 20% threshold. § 197(f)(9) denies amortization of goodwill and other § 197 intangibles if the seller retains more than 20% of the buyer entity directly or through attribution.
• Partnership conversion solution. Distributing a nominal interest (e.g., 1%) to a new partner converts the entity to a partnership, breaking the S corporation structure and allowing time to pass before sale.
• Structure for 20% or less ownership. Planning the transaction so sellers own 20% or less of the post-transaction buyer avoids anti-churning denial entirely.

Step 14. Built-In Gains, NOLs, and Attribute Limitations

"If for any taxable year beginning in the recognition period an S corporation has a net recognized built-in gain, there is hereby imposed a tax (computed under subsection (b)) on the income of such corporation for such taxable year." (IRC § 1374(a))

• Built-in gains tax survival through F reorganization. § 362(b) provides carryover basis in an F reorganization. Because the resulting corporation takes the transferor's basis in all assets, any built-in gain inherent in those assets survives the reorganization intact. § 1374 imposes tax at 21% on net recognized built-in gain during the five-year recognition period (permanently reduced from 10 years by the PATH Act, effective for tax years beginning on or after Jan. 1, 2015). TRAP. The F reorganization does NOT eliminate, reduce, or restart the built-in gains clock. The full built-in gain remains in the corporation's assets, and the recognition period continues from the original C-to-S conversion date. IRS Letter Ruling 0835002 (Aug. 29, 2008) ("To the extent that the assets of Oldco are presently subject to the built-in gain provisions of § 1374, they will continue to be subject to the built-in gain provisions of § 1374 in the hands of NewCo on the same basis as they were subject to such provisions in the hands of OldCo").
  • Carryover basis under § 362(b). The resulting corporation takes the transferor's adjusted basis in all assets, preserving all built-in gain.
  • No recognition period restart. The five-year recognition period runs from the original C-to-S conversion date. The F reorganization neither extends nor restarts the clock.
• Carryover basis under § 362(b). The resulting corporation takes the transferor's adjusted basis in all assets, preserving all built-in gain or loss.
• No recognition period restart. The five-year recognition period runs from the original C-to-S conversion date. The F reorganization neither extends nor restarts the clock.
• IRS Letter Ruling 0835002 confirmation. The IRS has confirmed that assets subject to § 1374 before an F reorganization remain subject to § 1374 after the reorganization on the same basis.
• Built-in gain mechanics.
  • NUBIG and NRBIG framework. Net unrealized built-in gain is measured at the C-to-S conversion date. Net recognized built-in gain is the lesser of gain recognized in a year or remaining NUBIG.
  • Tax rate and cap. The § 1374 tax rate is 21% and cannot exceed the corporation's taxable income computed as if it were a C corporation.
• NUBIG (net unrealized built-in gain). FMV of assets minus adjusted basis, net of built-in losses, measured at the C-to-S conversion date.
• NRBIG (net recognized built-in gain). The lesser of (A) gain recognized in a taxable year, or (B) remaining NUBIG after subtracting previously recognized amounts.
• Tax rate. 21% (the highest corporate rate under § 11(b)).
• Taxable income cap. The § 1374 tax cannot exceed the corporation's taxable income computed as if the corporation were a C corporation.
• § 1374(d)(8) acquisitions. § 1374 applies not only to C-to-S conversions but also to tax-free acquisitions of C corporation assets by an S corporation. When a QSub election causes a deemed liquidation of a former C corporation into an S corporation parent, the parent inherits the built-in gains exposure of the subsidiary's assets under § 1374(d)(8). CAUTION. If Target had an invalid S election (was actually a C corporation), contributing it as a QSub effectively liquidates a C corporation into an S corporation, triggering full § 1374(d)(8) exposure.
  • Deemed acquisition of C corporation assets. A QSub election triggers a deemed liquidation under §§ 332 and 337, which constitutes a tax-free acquisition of C corporation assets by an S corporation.
  • Invalid S election trap. If Target's S election was invalid, contributing it as a QSub effectively liquidates a C corporation into an S corporation, triggering full § 1374(d)(8) exposure.
• Deemed acquisition of C corporation assets. A QSub election triggers a deemed liquidation under §§ 332 and 337, which constitutes a tax-free acquisition of C corporation assets by an S corporation.
• Inheritance of built-in gains. The S corporation parent inherits the NUBIG of the subsidiary's assets and becomes subject to § 1374 on any recognized built-in gain.
• Invalid S election trap. If Target's S election was invalid, it was actually a C corporation. Contributing it as a QSub triggers § 1374(d)(8) because the transaction effectively liquidates a C corporation into an S corporation.
• § 382 NOL limitation. § 382 limits the use of NOL carryforwards after an "ownership change," defined as a greater than 50 percentage point increase in ownership by one or more 5% shareholders over a three-year testing period. An F reorganization typically does NOT trigger a § 382 ownership change because identical ownership is maintained. However, if the F reorganization is part of a larger transaction (e.g., a subsequent sale to a PE buyer) that results in a greater than 50 percentage point ownership shift, § 382 may apply to the overall transaction (Plante Moran, "How § 382 Can Unexpectedly Impact NOL Carryforwards," June 2025).
  • No ownership change in standalone F reorganization. Because identical ownership is maintained, a pure F reorganization does not trigger a § 382 ownership change.
  • Larger transaction risk. If the F reorganization is followed by a sale to a PE buyer causing a greater than 50 percentage point shift, § 382 may limit NOL usage.
• No ownership change in standalone F reorganization. Because identical ownership is maintained, a pure F reorganization does not trigger a § 382 ownership change.
• Three-year testing period. Ownership changes are measured by comparing ownership at any testing date to the lowest percentage ownership in the prior three years.
• Larger transaction risk. If the F reorganization is followed by a sale to a PE buyer causing a greater than 50 percentage point shift, § 382 may limit NOL usage post-transaction.
• § 384 limitation on built-in losses. § 384 limits the use of pre-acquisition losses (NOL carryovers and net capital loss carryovers) of a corporation against the recognized built-in gains of another corporation acquired in a tax-free transaction, unless the corporations were under common control before the acquisition. This prevents "trafficking" in tax attributes. In a pure F reorganization involving only one continuing corporation, § 384 generally does not apply. It may become relevant if the F reorganization is followed by an acquisition of another loss corporation (Bloomberg Tax Portfolio, "Net Operating Losses and Other Tax Attributes," July 2024).
  • Anti-trafficking purpose. § 384 prevents corporations from acquiring loss corporations solely to offset those losses against the acquirer's built-in gains.
  • Common control exception. The limitation does not apply if the loss corporation and the gain corporation were under 80% common control before the acquisition.
• Anti-trafficking purpose. § 384 prevents corporations from acquiring loss corporations solely to offset those losses against the acquirer's built-in gains.
• Common control exception. The limitation does not apply if the loss corporation and the gain corporation were under common control (80% ownership) before the acquisition.
• Pure F reorganization scope. In a single-corporation F reorganization, § 384 generally has no application because there is no acquisition of another corporation.
• § 362(e)(2) built-in loss duplication rule. If in an F reorganization the aggregate adjusted bases of property transferred exceed their aggregate fair market value (i.e., the transferor has a built-in loss), § 362(e)(2) requires that the transferee's basis in each property be reduced proportionately to eliminate the duplicated loss, unless the transferor and transferee elect otherwise under § 362(e)(2)(C). If the election is made, the transferor reduces the basis of the stock received instead.
  • Built-in loss trigger. The rule applies only when the aggregate adjusted bases of transferred property exceed aggregate fair market value.
  • Election alternative. If the § 362(e)(2)(C) election is made, the transferor reduces the basis of stock received instead of the transferee reducing asset bases.
• Built-in loss trigger. The rule applies only when the aggregate adjusted bases of transferred property exceed aggregate FMV.
• Mandatory basis reduction. The transferee's basis in each property is reduced proportionately unless an election is made under § 362(e)(2)(C).
• Election alternative. If the § 362(e)(2)(C) election is made, the transferor reduces the basis of stock received instead of the transferee reducing asset bases.
• § 383 credit limitation. § 383 coordinates with § 382 to limit the use of pre-change tax credits (general business credits, minimum tax credits, and foreign tax credits) following an ownership change. Like § 382, § 383 generally does not apply to a standalone F reorganization but may apply to a larger transaction that effects an ownership change.
  • Coordination with § 382. § 383 applies the same ownership change framework to limit the use of pre-change credits.
  • Standalone F reorganization scope. A pure F reorganization does not trigger § 383 because no ownership change occurs.
• Coordination with § 382. § 383 applies the same ownership change framework to limit the use of pre-change credits.
• Credit categories covered. General business credits under § 38, minimum tax credits under § 53, and foreign tax credits under § 27 are all subject to § 383 limitation.
• Standalone F reorganization scope. A pure F reorganization does not trigger § 383 because no ownership change occurs.
• EXAMPLE. Built-in gain survival. Target Corp converted from C to S status on January 1, 2022. At conversion, it owned real estate with an adjusted basis of $500,000 and FMV of $1,500,000, creating $1,000,000 of NUBIG. On July 1, 2025, Target's shareholders execute an F reorganization under Rev. Rul. 2008-18. The resulting corporation takes a carryover basis of $500,000 in the real estate under § 362(b). If the real estate is sold in 2026 for $1,600,000, the recognized built-in gain of $1,000,000 (the remaining NUBIG) is subject to § 1374 tax at 21% ($210,000). The post-conversion appreciation of $100,000 is not subject to § 1374 because it is not built-in gain. The F reorganization neither restarted nor extended the five-year recognition period, which runs from January 1, 2022 through December 31, 2026.

Step 15. Key Case Law and Judicial Doctrines

"The second approach pressed by the Commissioner, that of the 'F' reorganization, is limited in scope. That section refers to 'a mere change in identity, form, or place of organization, however effected.' Its application is limited to cases where the corporate enterprise continues uninterrupted, except perhaps for a distribution of some of its liquid assets." (Pridemark, Inc. v. Commissioner, 345 F.2d 35 (4th Cir. 1965))

• Scope of this step. This step collects the judicial decisions and IRS rulings that define the boundaries of F reorganization treatment. Cross-reference Step 16 (business purpose and economic substance) and Step 13D (S corporation traps) for practical application of these doctrines.
  • Definitional cases in Step 15A. Cases that define what constitutes an F reorganization including Berghash, Helvering v. Southwest Consolidated, and Cortland.
  • Reincorporation cases in Step 15B. Cases involving reincorporation transactions and continuity requirements including Standard Realization and Yoc Heating.
• Definitional cases. Step 15A covers cases that define what constitutes an F reorganization.
• Reincorporation and control cases. Step 15B addresses cases involving reincorporation transactions and continuity of interest requirements.
• Redemptions, rulings, and the F-in-a-bubble doctrine. Step 15C covers post-2005 case law and IRS rulings that establish the modern F reorganization framework.

Step 15A. Definitional Cases

"The second approach pressed by the Commissioner, that of the F reorganization, is limited in scope. Its application is limited to cases where the corporate enterprise continues uninterrupted." (Pridemark, Inc. v. Commissioner, 345 F.2d 35 (4th Cir. 1965))

• Berghash v. Commissioner, 43 T.C. 743 (1965), aff'd, 361 F.2d 257 (2d Cir. 1966). The Tax Court defined an F reorganization as encompassing "only the simplest and least significant of corporate changes" in which "the surviving corporation is the same corporation as the predecessor in every respect, except for minor or technical differences." The Second Circuit affirmed. This remains the foundational definitional standard. The F reorganization presumes the surviving corporation is the same as the predecessor except for minor differences.
• Simplest corporate changes standard. The F reorganization is limited to the least significant changes in corporate form, identity, or place of organization.
• Same corporation test. The surviving corporation must be the same as the predecessor in every respect except for minor or technical differences.
• Foundational authority. Berghash remains the primary judicial definition of the scope of F reorganization treatment.
• Helvering v. Southwest Consolidated Corp., 315 U.S. 194 (1942). The Supreme Court held that "a transaction which shifts the ownership of the proprietary interest in a corporation is hardly a 'mere change in identity, form, or place of organization.'" A recapitalization that shifted proprietary interests to creditors was not a mere change. This case established that continuity of proprietary interest is fundamental to F reorganization analysis. Note that the continuity of interest requirement was eliminated for F reorganizations by the 2005 regulations (Treas. Reg. § 1.368-2(m)(2)), but the principle that an F reorganization must involve only one continuing corporation remains.
• No ownership shift. A transaction that shifts proprietary interests to new parties cannot qualify as an F reorganization.
• One continuing corporation. The F reorganization must involve only one continuing corporation. The introduction of new proprietary interests defeats F status.
• Regulatory evolution. The 2005 regulations eliminated the formal COI requirement for F reorganizations but preserved the single-continuing-corporation principle.
• Cortland Specialty Co. v. Commissioner, 60 F.2d 937 (2d Cir. 1932), cert. denied, 288 U.S. 599 (1933). The Second Circuit held that a transfer of substantially all assets for cash and short-term notes was a taxable sale, not a reorganization, because there was no continuity of proprietary interest. Short-term promissory notes functioned as near-cash and did not qualify as "securities" sufficient for continuity of interest. Post-transfer employment of a shareholder as general manager could not substitute for a continuing proprietary interest. This case is foundational for the continuity of interest doctrine in all reorganization jurisprudence. Deficiency assessed was $13,412.82 on a gain of $101,175.58.
• Near-cash is not continuity. Short-term promissory notes that function as near-cash do not provide the continuity of interest required for reorganization treatment.
• Employment is not proprietary interest. Post-transfer employment of a former shareholder cannot substitute for a continuing proprietary interest.
• Foundational COI doctrine. Cortland established the continuity of interest doctrine that applies across all reorganization types.

Step 15B. Reincorporation and Control Cases

"A corporation transferred all of its assets to a newly formed corporation in exchange for stock, distributed the stock to its shareholders, and then liquidated." (Standard Realization Co. v. Commissioner, 10 T.C. 708 (1948))

• Standard Realization Co. v. Commissioner, 10 T.C. 708 (1948), acq. 1948-2 C.B. 3. A corporation transferred all of its assets to a newly formed corporation in exchange for stock, distributed the stock to its shareholders, and then liquidated. The Tax Court denied reorganization treatment because the new corporation was organized solely to hold and dispose of the assets distributed in liquidation, with no continuity of business enterprise. The court held that the transaction was a taxable liquidation and reincorporation rather than a tax-free F reorganization. This case established that reincorporation transactions must demonstrate continuity of business enterprise to qualify for nonrecognition treatment.
• No continuity of business enterprise. The new corporation existed solely to hold liquidated assets, not to continue the operating business.
• Taxable liquidation. The court treated the transaction as a taxable liquidation followed by a reincorporation of previously distributed assets.
• COBE requirement. This case established that F reorganizations require continuity of business enterprise, not merely continuity of ownership.
• Yoc Heating Corp. v. Commissioner, 61 T.C. 168 (1973). Reliance Fuel Oil Corp. purchased approximately 85% of Old Nassau's stock for cash, formed a new subsidiary (New Nassau/YOC Heating Corp.), and Old Nassau transferred all assets to New Nassau. The Tax Court held that (1) YOC was entitled to stepped-up cost basis in the acquired assets, (2) the transaction was NOT an F reorganization because continuity of proprietary interest was not maintained (the minority interests were largely eliminated for cash), and (3) the transaction was NOT a D reorganization because the "control" requirement was not satisfied immediately after the transfer. The court applied step-transaction analysis to integrate the stock purchase and asset transfer. CAUTION. This case was decided under pre-2005 law when COI was required for F reorganizations. The IRS "rejected" the COI holding by issuing Treas. Reg. § 1.338-3(d), which treats COI as satisfied where the acquisition constitutes a qualified stock purchase under § 338. COI is no longer required for F reorganizations under current Treas. Reg. § 1.368-2(m)(2).
• Lack of continuity of interest. Minority shareholders were largely eliminated for cash, destroying the continuity of proprietary interest required under pre-2005 law.
• Step-transaction integration. The court integrated the stock purchase and asset transfer as steps in a single unified plan.
• Pre-2005 law limitation. This case was decided under prior law. COI is no longer required for F reorganizations under current regulations.
• Kass v. Commissioner, 60 T.C. 218 (1973), aff'd without published opinion, 491 F.2d 749 (3d Cir. 1974). A corporation purchased target stock and then caused the target to merge into the purchaser. The Tax Court held that the transaction did not satisfy the continuity of interest requirement because the stock purchase and merger were pursuant to an integrated transaction in which the majority target shareholder received solely cash. The court applied step-transaction analysis to deny reorganization treatment and § 354 nonrecognition. Kass is the leading case for the proposition that minority shareholders receiving stock in a merger following a cash stock purchase generally do not receive tax-free treatment because COI is lacking.
• Integrated cash purchase. The stock purchase and merger were treated as a single integrated transaction because they were pre-planned steps.
• Solely cash to majority shareholder. The majority shareholder received only cash, providing no continuity of interest.
• Minority shareholder treatment. Minority shareholders who received stock in the merger were also denied tax-free treatment because the overall transaction lacked COI.
• MacNeill v. United States, 91-2 USTC ¶ 50,447 (D.C. Cir. 1991), rev'd on other grounds, 975 F.2d 738 (D.C. Cir. 1992). This case addressed the application of the step-transaction doctrine to multi-step corporate reorganizations. The court analyzed whether formally separate steps should be treated as a single integrated transaction. MacNeill illustrates the willingness of courts to apply step-transaction principles to recharacterize corporate transactions when steps are part of a unified plan.
• Step-transaction doctrine application. Courts will integrate formally separate steps if they are part of a single unified plan with a common objective.
• Multi-step reorganization scrutiny. The case demonstrates that multi-step transactions receive heightened judicial scrutiny.
• Recharacterization risk. Step-transaction analysis can recharacterize a tax-free reorganization as a taxable sale if the steps are sufficiently integrated.
• Jobco Manufacturing Co., 951 F.2d 1259 (Fed. Cir. 1991). The court denied NOL carryover treatment because the transaction failed to qualify as an F reorganization. The key flaw was that the transferor corporation did not actually liquidate and transfer its assets (only its stock was acquired). There was no change in identity, form, or place of organization. This case underscores the critical importance of proper transactional form. The carryover of NOLs under § 381(c)(1) requires the acquisition of assets in a transfer to which § 361 applies.
• No actual liquidation. Only stock was acquired. The transferor corporation did not liquidate and transfer its assets to the acquiring corporation.
• No F reorganization. Because there was no change in identity, form, or place of organization, the transaction could not qualify as an F reorganization.
• Proper form requirement. The case underscores that the formal structure of the transaction must match the statutory requirements. Asset acquisition is required for § 381 attribute carryover.

Step 15C. Redemption, Rulings, and the F-in-a-Bubble Doctrine

"Related events that precede or follow the potential F reorganization generally will not cause that potential F reorganization to fail to qualify as a reorganization under section 368(a)(1)(F)." (Treas. Reg. § 1.368-2(m)(3)(ii))

• Reed Corp. v. Commissioner, 368 F.2d 125 (5th Cir. 1966). A 48% stock redemption that occurred simultaneously with a change in place of incorporation still permitted F reorganization treatment. The Fifth Circuit held that the redemption was functionally separate from the F reorganization even though concurrent in time. This case establishes that redemptions of less than all shares do not automatically destroy F reorganization qualification, provided the redemption is not part of the reorganization plan.
• Redemption not part of reorganization. The 48% redemption was functionally separate from the change of place of incorporation.
• Less than 100% redemption. A redemption of less than all outstanding shares does not automatically disqualify an F reorganization.
• Plan independence. The key factor is whether the redemption is part of the reorganization plan or a separate, independent transaction.
• Rev. Rul. 72-391, 1972-2 C.B. 136. The IRS held that reincorporation of a corporation in a different state qualifies as an F reorganization. This ruling confirmed that a change in place of organization, even when involving the creation of a new corporate entity, could qualify as a mere change provided the same shareholders continued their ownership and the same business continued uninterrupted.
• Change of domicile qualifies. A change in the state of incorporation can satisfy the F reorganization definition as a change in "place of organization."
• Same shareholders required. The same shareholders must continue their ownership in identical proportions.
• Same business continuation. The same business must continue uninterrupted after the reincorporation.
• Rev. Rul. 73-338, 1973-2 C.B. 29. The IRS held that an F reorganization followed by a sale of assets could still qualify as a valid F reorganization, provided the sale was not part of the reorganization plan and occurred as a separate subsequent transaction. Related events preceding or following the F reorganization generally do not cause the F reorganization to fail. This ruling was an early articulation of the "F in a bubble" concept later codified in Treas. Reg. § 1.368-2(m)(3)(ii).
• Subsequent sale permitted. An asset sale following an F reorganization does not invalidate the F reorganization if the sale is a separate, independent transaction.
• Not part of reorganization plan. The subsequent transaction must not be part of the plan of reorganization.
• Early F-in-a-bubble articulation. This ruling prefigured the regulatory codification of the "F in a bubble" doctrine by decades.
• Rev. Rul. 96-29, 1996-1 C.B. 50. An acquirer holding company reincorporated in a different state after an operating target merged into an acquirer operating subsidiary. The IRS held that the reincorporation was a separate and valid F reorganization, and the step-transaction doctrine would not integrate the reincorporation with the prior acquisition. This was the first IRS ruling to explicitly rationalize the unique "F in a bubble" treatment. The principle is now codified in Treas. Reg. § 1.368-2(m)(3)(ii) (related events preceding or following a potential F reorganization generally will not cause that potential F reorganization to fail to qualify).
• Separate F reorganization. The reincorporation was treated as a separate F reorganization, not integrated with the prior acquisition.
• Step-transaction inapplicable. The IRS declined to apply step-transaction doctrine to integrate the reincorporation with the preceding acquisition.
• Regulatory codification. The ruling's principle is now codified in Treas. Reg. § 1.368-2(m)(3)(ii) as the "related events" rule.

Step 16. Business Purpose, Economic Substance, and Anti-Abuse

"The whole undertaking... was in reality an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else." (Gregory v. Helvering, 293 U.S. 465 (1935))

• Current regulatory status of the business purpose requirement. The 2004 proposed regulations (REG-106889-04, 69 Fed. Reg. 49,836) included an explicit business purpose requirement for F reorganizations, but the 2015 final regulations (T.D. 9739) dropped it. Business purpose is NOT an explicit regulatory requirement for F reorganization qualification under current law. However, every regulation example under Treas. Reg. § 1.368-2(m)(4) states "each transaction is entered into for a valid business purpose." The IRS reserves the right to assert business purpose as a common law requirement.
  • Proposed regulations included business purpose. The 2004 proposed regulations would have made business purpose an explicit requirement for F reorganization qualification.
  • Final regulations dropped the requirement. The 2015 final regulations (T.D. 9739) omitted the explicit business purpose requirement.
• Proposed regulations included business purpose. The 2004 proposed regulations would have made business purpose an explicit requirement for F reorganization qualification.
• Final regulations dropped the requirement. The 2015 final regulations (T.D. 9739) omitted the explicit business purpose requirement.
• Regulation examples all include business purpose. Every example in Treas. Reg. § 1.368-2(m)(4) includes a statement that the transaction was entered into for a valid business purpose, suggesting the IRS still views it as relevant.
• Gregory v. Helvering, 293 U.S. 465 (1935). The Supreme Court held that a transaction that technically complies with the literal language of the tax code may still be disregarded if it lacks business purpose and is solely designed to avoid taxes. The Court characterized the transaction as "an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else." Gregory established the business purpose doctrine, which remains applicable to all reorganization types including F reorganizations. The substance-over-form doctrine allows the IRS to recharacterize a transaction according to its economic substance rather than its formal structure.
• Literal compliance insufficient. Technical compliance with statutory language does not guarantee tax treatment if the transaction lacks business purpose.
• Business purpose doctrine. Gregory established that transactions solely designed to avoid taxes may be disregarded regardless of formal compliance.
• Substance-over-form authority. The IRS may recharacterize a transaction according to its economic substance rather than its legal form.
• Treas. Reg. § 1.368-1(b). The regulation provides that a reorganization must be "required by business exigencies" and "an ordinary and necessary incident of the conduct of the enterprise, and not a device or scheme to avoid tax." While this regulation applies to all reorganizations, its applicability to F reorganizations specifically was left ambiguous when the business purpose requirement was dropped from the final F reorganization regulations.
• Business exigencies requirement. A reorganization must be required by business exigencies of the corporate enterprise.
• Ordinary and necessary incident. The transaction must be an ordinary and necessary incident of conducting the business, not a tax avoidance device.
• Ambiguous F reorganization applicability. Whether this regulation specifically applies to F reorganizations remains ambiguous after the final regulations dropped the explicit business purpose requirement.
• § 7701(o) economic substance doctrine. § 7701(o), enacted as part of the Health Care and Education Reconciliation Act of 2010, codified the economic substance doctrine. It requires that a transaction must satisfy both an objective prong (meaningful change in economic position) and a subjective prong (non-tax business purpose), the conjunctive test. ACM Partnership v. Commissioner, 157 F.3d 231 (3d Cir. 1998) (landmark case establishing the two-prong economic substance analysis). However, the House Report for the 2010 Act and the Joint Committee on Taxation provided a list of transactions in which § 7701(o) was intended NOT to apply, including "the choice to reorganize a corporation." This suggests that F reorganizations themselves may generally be outside the scope of the codified economic substance doctrine. CAUTION. The economic substance doctrine may still be applied to challenge transactions that use F reorganizations as part of a larger plan lacking economic substance.
  • Two-prong conjunctive test. § 7701(o) requires both (1) a meaningful change in economic position and (2) a non-tax business purpose.
  • Corporate reorganization exclusion. The legislative history indicates that the choice to reorganize a corporation was intended to be outside the scope of § 7701(o).
• Two-prong conjunctive test. § 7701(o) requires both (1) a meaningful change in economic position and (2) a non-tax business purpose.
• Corporate reorganization exclusion. The legislative history indicates that "the choice to reorganize a corporation" was intended to be outside the scope of § 7701(o).
• Larger plan risk. While the F reorganization itself may be excluded, the doctrine may still apply to challenge a larger plan that uses an F reorganization as one step in a transaction lacking economic substance.
• § 269 acquisitions to evade or avoid tax. § 269(a) allows the Secretary to disallow any deduction, credit, or other allowance if (1) control of a corporation is acquired, or (2) property of another corporation is acquired, and the principal purpose is tax avoidance. "Control" means ownership of stock possessing at least 50% of the total combined voting power or total value. Rocco, Inc. v. Commissioner, 72 T.C. 140 (1979) (§ 269 did not apply to disallow deferral of tax "consciously granted" by Congress). CCA 202501008 (Jan. 3, 2025) (quoting Rocco for the principle that § 269 should not apply to benefits consciously granted by Congress).
  • Control or property acquisition trigger. § 269 applies when control (50% of voting power or value) is acquired or property of another corporation is acquired with a principal purpose of tax avoidance.
  • Consciously granted benefits exception. Rocco, Inc. v. Commissioner established that § 269 should not apply to tax benefits that Congress consciously granted.
• Control acquisition trigger. § 269 applies when control (50% of voting power or value) is acquired with a principal purpose of tax avoidance.
• Property acquisition trigger. § 269 also applies when property of another corporation is acquired with a principal purpose of tax avoidance.
• Consciously granted benefits exception. Rocco established that § 269 should not apply to disallow tax benefits that Congress consciously granted through statutory language.
• Step-transaction and the F reorganization bubble. Treas. Reg. § 1.368-2(m)(3)(i) provides that a series of transactions that together result in a mere change may qualify as an F reorganization, reflecting the "however effected" language. Treas. Reg. § 1.368-2(m)(3)(ii) (the "related events" rule) provides that related events preceding or following the potential F reorganization generally will not cause that F reorganization to fail, and qualification of a potential F reorganization will not alter the character of other transactions. This is the "F in a bubble" concept. Step-transaction principles may still be applied to related transactions without regard to whether certain steps qualify as an F reorganization. CAUTION. Treas. Reg. § 1.368-2(m)(3)(iv)(A) provides the overlap rule. If a potential F reorganization or a step thereof qualifies as a reorganization under another provision of § 368(a)(1), and a corporation in control of the resulting corporation is a party to such other reorganization, the potential F reorganization will NOT qualify.
  • However effected flexibility. A series of transactions may together qualify as an F reorganization even if no single step independently satisfies the definition.
  • Overlap rule trap. If a step of a potential F reorganization independently qualifies under another reorganization provision and a controlling corporation is a party, F qualification is denied.
• "However effected" language. A series of transactions may together qualify as an F reorganization even if no single step independently satisfies the definition.
• Related events rule. Treas. Reg. § 1.368-2(m)(3)(ii) provides that related events before or after an F reorganization generally do not cause it to fail.
• Overlap rule trap. If a step of a potential F reorganization independently qualifies under another reorganization provision (e.g., A, C, or D), and a controlling corporation is a party, the F reorganization qualification is denied.
• Best practices for documenting business purpose.
  • Contemporaneous documentation. Document business purpose through board resolutions, shareholder minutes, and written plans of reorganization at the time of the transaction.
  • Non-tax purposes required. Common valid business purposes include changing state of incorporation, creating a holding company structure, and facilitating succession planning.
• Document business purpose contemporaneously through board resolutions, shareholder minutes, and written plans of reorganization.
• Common valid business purposes include (A) changing state of incorporation for favorable corporate law, (B) creating a holding company structure for estate planning or raising capital, (C) facilitating succession planning, and (D) preparing for a future sale to a partnership-taxed buyer.
• TRAP. Do not rely solely on tax savings as the stated purpose. Document genuine non-tax business reasons. A plan of reorganization that states "to achieve tax-free treatment" as its sole purpose is vulnerable to challenge.
• In QSBS planning contexts using F reorganizations, practitioners emphasize establishing a valid business purpose for the restructuring other than just to qualify for QSBS (Galleros Robinson, Dec. 2025).

Step 17. State Tax Conformity and Non-Conformity

"Most states with corporate income taxes conform to federal tax treatment of reorganizations, including F reorganizations, either through rolling conformity or fixed-date conformity." (Tax Law Center, "Cross-border transactions for F reorganization")

• General state conformity. Most states with corporate income taxes conform to federal tax treatment of reorganizations, including F reorganizations, either through rolling conformity (automatically adopting the IRC as amended) or fixed-date conformity (adopting the IRC as of a specific date). However, some states do not fully conform, and the practitioner must verify state-specific treatment for every jurisdiction involved (Tax Law Center, "Cross-border transactions for F reorganization").
  • Rolling conformity states. These states automatically adopt the IRC as amended, including federal reorganization provisions.
  • Fixed-date conformity states. These states adopt the IRC as of a specific date. The practitioner must verify whether the conformity date includes the relevant provisions.
• Rolling conformity states. These states automatically adopt the IRC as amended, including federal reorganization provisions. Examples include Colorado, Illinois, and New Jersey (with limitations).
• Fixed-date conformity states. These states adopt the IRC as of a specific date. The practitioner must verify whether the conformity date includes the relevant reorganization provisions. Examples include California and Pennsylvania.
• Verification requirement. The practitioner must verify state-specific treatment for every jurisdiction in which the corporation operates, files returns, or has nexus.
• California. California does not fully conform to federal reorganization treatment. California's Waters' Edge Manual discusses the application of § 367 to transfers of property to foreign corporations, indicating that California follows its own rules for certain cross-border transactions. California imposes an annual LLC fee (based on total income) and minimum franchise tax that may apply differently after an F reorganization converts a corporation to an LLC. California requires specific documentation to transfer PTET payments after an F reorganization (Boutin Jones, "F Reorganizations and California PTET Elections," Dec. 2025). At the federal level, HoldCo files Form 1120S. In California, HoldCo files FTB Form 100S. Some states require separate S corporation and QSub elections.
• Non-conforming reorganization treatment. California does not automatically conform to federal F reorganization treatment, requiring separate state analysis.
• LLC fee and franchise tax. Converting from a corporation to an LLC may trigger different California fee structures including the annual LLC fee based on total income.
• Separate S corporation election. California requires a separate state S corporation election. The federal S election does not automatically apply for California tax purposes.
• PTET documentation. California requires specific documentation to transfer PTET payments after an F reorganization, which practitioners must prepare in advance.
• Pennsylvania. Pennsylvania does not have rolling conformity to the IRC and historically has required separate analysis for reorganization treatment. Corporate net income taxpayers in Pennsylvania must carefully analyze whether F reorganization treatment is recognized for Pennsylvania tax purposes.
• Fixed-date conformity. Pennsylvania follows the IRC as of a specific date, which may not include recent reorganization provisions.
• Separate reorganization analysis. Pennsylvania taxpayers must independently analyze whether an F reorganization qualifies for state tax purposes.
• Corporate net income tax impact. The reorganization may affect Pennsylvania corporate net income tax liability and apportionment factors.
• New York. New York generally conforms to federal reorganization treatment but imposes entity-level taxes. New York specifically provides that if an S corporation undergoes an F reorganization, the PTET election remains effective for the successor entity and the PTET return should be filed using the electing entity's EIN (NYSSCPA, "The New York Pass-Through Entity Tax (PTET) FAQ," Nov. 2023).
• General federal conformity. New York generally follows federal reorganization treatment, including F reorganization nonrecognition.
• PTET election continuity. The PTET election survives the F reorganization and remains effective for the successor entity.
• EIN requirement. The PTET return must be filed using the electing entity's historic EIN, not a new EIN.
• New Jersey. New Jersey permits PTET elections for S corporations and partnerships. Post-F reorganization, the pass-through structure may enable or affect the PTET election. Timing, credit amounts, and deductibility vary by state.
• PTET availability. New Jersey permits PTET elections for both S corporations and partnerships.
• Post-reorganization effect. The F reorganization may change the entity structure in a way that affects PTET eligibility or calculation.
• Variable timing and credits. The timing of the PTET election, credit amounts, and deductibility rules vary and must be analyzed post-reorganization.
• Texas. Texas imposes franchise tax based on margin. An F reorganization may affect the franchise tax calculation if it changes the entity structure or apportionment factors. Texas does not impose a traditional corporate income tax.
• Margin-based franchise tax. Texas taxes the taxable margin of entities doing business in the state, not traditional net income.
• Entity structure impact. Converting from a corporation to an LLC may affect the franchise tax calculation methodology.
• Apportionment factor changes. The reorganization may alter the apportionment factors used to calculate Texas franchise tax liability.
• Cross-border issues. When an F reorganization involves a change of state of incorporation, the old state may require final returns and the new state may require initial registrations. Some states impose exit taxes or transfer taxes on the change of domicile. The F reorganization itself is typically not taxable at the state level in conforming states, but franchise tax, annual report, and other state-level filing obligations may be triggered. CAUTION. Delaware's flexible corporate law makes it a preferred jurisdiction for NewCo formation, but Delaware imposes franchise taxes that may differ from the prior state of incorporation.
• Final returns in old state. The former state of incorporation may require final income tax returns, final franchise tax returns, and dissolution documents.
• Initial registrations in new state. The new state of incorporation will require initial registrations, corporate filings, and potentially new tax accounts.
• Exit tax risk. Some states impose exit taxes or franchise taxes on corporations changing their domicile out of the state.
• Delaware franchise tax. Delaware is a popular NewCo formation jurisdiction but imposes franchise taxes based on authorized shares or assumed par value capital, which may differ from the prior state's tax structure.
• PTET elections post-F reorganization. The F reorganization has become increasingly important for state pass-through entity tax elections. An F reorganization prior to sale allows the transaction to be structured as a sale at the entity level (treated as an asset sale) rather than a sale of equity. PTET elections allow S corporations to pay state tax at the entity level, creating a federal deduction not subject to the $10,000 SALT cap. An F reorganization combined with a PTET election can help bridge the gap between buyer and seller in S corporation transactions, potentially eliminating gross-up payments required to compensate sellers for asset-sale tax treatment (Cohen & Company, "Pass-Through Entity Tax and F Reorganization," Mar. 2024). See also Step 13E for PE transaction PTET analysis.
• Entity-level sale structuring. The F reorganization permits the transaction to be treated as an asset sale at the entity level, enabling PTET application.
• SALT cap bypass. PTET elections create a federal deduction for state taxes paid at the entity level, bypassing the individual $10,000 SALT deduction limitation.
• Gross-up elimination. The PTET deduction can reduce or eliminate the need for buyer gross-up payments to compensate sellers for asset-sale tax treatment.
• State tax rule variations. TRAP. Always check state-specific rules when the reorganization involves a change of state of incorporation. Even in rolling-conformity states, the details of state QSub treatment, combined/unitary return rules, apportionment, withholding, credits, and incentive programs may differ from federal treatment. State payroll registrations and unemployment insurance requirements must be separately evaluated. Some states do not follow the federal passthrough treatment of S corporations or the disregarded nature of QSubs.
• QSub treatment variations. Some states do not follow the federal disregarded entity treatment of QSubs and instead treat them as separate taxable corporations.
• Combined and unitary return rules. States with combined or unitary reporting requirements may include or exclude QSubs differently from federal consolidated return rules.
• Payroll and UI registrations. State payroll tax registrations and unemployment insurance accounts must be separately evaluated and potentially re-established post-reorganization.
• State S corporation conformity. Some states do not recognize S corporation status at all (e.g., New Hampshire's interest and dividends tax, Tennessee's franchise and excise tax).

Step 18. Reporting, Disclosure, and Documentation

"Line 14. This box should be checked 'Yes' if this election is being made pursuant to a reorganization under section 368(a)(1)(F) and Rev. Rul. 2008-18." (IRS Instructions for Form 8869 (Dec. 2020))

• Scope of this step. This step covers the practical mechanics of filing elections, attaching disclosure statements, and retaining documentation. Execute these tasks contemporaneously with the transactions described in Steps 13A through 13E. Cross-reference Step 13B for QSub election mechanics and Step 13C for EIN rules.
  • Definitional cases in Step 15A. Cases that define what constitutes an F reorganization including Berghash, Helvering v. Southwest Consolidated, and Cortland.
  • Reincorporation cases in Step 15B. Cases involving reincorporation transactions and continuity requirements including Standard Realization and Yoc Heating.
• Contemporaneous execution. All elections and disclosures should be filed contemporaneously with the underlying transactions. Retroactive filings risk late-election penalties and potential challenges.
• Integration with Steps 13A-13E. The reporting and documentation tasks in this step directly implement the substantive transactions described in the Step 13 subsections.
• Cross-references. Step 13B covers QSub election timing and mechanics. Step 13C covers EIN allocation between NewCo and Target.

Step 18A. Forms and Elections

"Line 14. This box should be checked Yes if this election is being made pursuant to a reorganization under section 368(a)(1)(F) and Rev. Rul. 2008-18." (IRS Instructions for Form 8869 (Dec. 2020))

• Form 8869 (QSub election). File within 2 months and 15 days of the beginning of the tax year for immediate effectiveness (Treas. Reg. § 1.1361-3(a)). Check Box 14 "Yes" to indicate the election is part of an F reorganization described in Rev. Rul. 2008-18. When a QSub election is made pursuant to an F reorganization under Rev. Rul. 2008-18, no final return is required for the subsidiary (IRS Instructions for Form 8869 (Dec. 2020)). CAUTION. The election must be effective while the subsidiary is still a corporation. See Step 13D for the timing trap.
  • Filing deadline. Form 8869 must be filed within 2 months and 15 days after the beginning of the tax year for which the election is to be effective.
  • Box 14 requirement. Checking Box 14 Yes is essential to notify the IRS that the QSub election is part of an F reorganization and that no new S election is required.
• Filing deadline. Form 8869 must be filed within 2 months and 15 days after the beginning of the tax year for which the election is to be effective.
• Box 14 requirement. Checking Box 14 "Yes" is essential to notify the IRS that the QSub election is part of an F reorganization and that no new S election is required.
• No final return for subsidiary. When Box 14 is properly checked, the subsidiary does not need to file a final return because the S election continues uninterrupted.
• Subsidiary must be a corporation. The QSub election must be effective while the subsidiary is still a corporation. Filing after LLC conversion is ineffective.
• Rev. Proc. 2013-30 (late election relief). If a QSub election, S election, or entity classification election is filed late, Rev. Proc. 2013-30 provides simplified procedures for requesting relief. Relief can be granted when the entity failed to qualify solely because it failed to file the appropriate election timely and all returns reported income consistently as if the election were in effect. This revenue procedure is the exclusive simplified method for late QSub elections. PLR 201724013 granted § 1362(f) relief for a QSub election filed after the subsidiary had converted to an LLC (demonstrating that relief is available but should not be relied upon as a planning strategy).
  • Simplified relief procedures. Rev. Proc. 2013-30 provides a streamlined method for requesting late election relief without a private letter ruling.
  • Consistency requirement. All affected returns must have been filed consistently with the election being in effect. Inconsistent treatment disqualifies the entity.
• Simplified relief procedures. Rev. Proc. 2013-30 provides a streamlined method for requesting late election relief without a private letter ruling.
• Consistency requirement. All affected returns must have been filed consistently with the election being in effect. Inconsistent treatment disqualifies the entity from simplified relief.
• Exclusive method for QSub elections. Rev. Proc. 2013-30 is the exclusive simplified method for late QSub elections. More complex situations require a PLR.
• PLR 201724013 as cautionary example. The PLR granted relief for an election filed after LLC conversion, but practitioners should not rely on relief as a planning strategy.
• Form 8832 (entity classification election). If converting the QSub to an LLC after the QSub election, the entity may need to file Form 8832 to "uncheck the box" and elect disregarded entity classification. This is typically the final step in the F reorganization QSub drop structure (Plante Moran, "Maximizing tax efficiency," Nov. 2025). In some cases, state law conversion alone is sufficient and no Form 8832 is required if the entity is already disregarded as a QSub.
• When Form 8832 is required. If the entity was previously taxed as a corporation (other than as a QSub), Form 8832 is required to elect disregarded entity status.
• When Form 8832 is not required. If the entity is already disregarded as a QSub and state law conversion automatically changes its classification, Form 8832 may be unnecessary.
• Final step in QSub drop. Form 8832 typically represents the final step in the F reorganization after the QSub election has been made effective.
• Form 2553 (protective S election). File a protective S election for NewCo on Form 2553 if there is any risk of invalidity. If Box 14 on Form 8869 is properly checked, no new S election is required because Target's S election carries over to NewCo under Rev. Rul. 64-250 and Rev. Rul. 2008-18. However, practitioners often file a protective Form 2553 "just in case" the QSub election is challenged. The protective election should be filed within 2 months and 15 days of NewCo's formation.
  • When protective election is advisable. File a protective Form 2553 when there is any risk of QSub election challenge, defective formation, or timing uncertainty.
  • Redundant but safe. If Box 14 on Form 8869 is properly checked, the protective Form 2553 is technically redundant but provides a safety net.
• Redundant but safe. If Box 14 on Form 8869 is properly checked, the protective Form 2553 is technically redundant, but it provides a safety net if the QSub election is later challenged.
• Rev. Proc. 2018-40 (accounting method changes). Rev. Proc. 2018-40 modifies Rev. Proc. 2018-31 to provide additional automatic changes in method of accounting reflecting TCJA amendments to §§ 263A, 447, 448, 460, and 471. Under § 381(b)-1(a)(2), in an F reorganization the resultant corporation inherits the transferor's accounting methods and is treated as if there had been no reorganization for accounting method purposes. If the resulting corporation wishes to change its accounting method, it must file Form 3115 under the procedures of Rev. Proc. 2015-13 (as modified). Rev. Proc. 2018-40, § 3.03 provides that if a taxpayer has an existing § 481(a) adjustment from a prior related change, the taxpayer may choose to either account for the prior adjustment separately or combine/net it with new adjustments.
  • Accounting method inheritance. The resulting corporation inherits the transferor's accounting methods under § 381(b)-1(a)(2).
  • Form 3115 required for changes. If the resulting corporation wishes to change accounting methods, it must file Form 3115 under Rev. Proc. 2015-13.
• Accounting method inheritance. The resulting corporation inherits the transferor's accounting methods under § 381(b)-1(a)(2) and is treated as if no reorganization occurred.
• Form 3115 required for changes. If the resulting corporation wishes to change accounting methods, it must file Form 3115 under Rev. Proc. 2015-13 (as modified).
• § 481(a) adjustment options. Rev. Proc. 2018-40, § 3.03 permits taxpayers to either account for prior § 481(a) adjustments separately or combine them with new adjustments.

Step 18B. Statements and Return Disclosure

"No gain or loss shall be recognized if stock or securities in a corporation which is a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization." (IRC § 354(a)(1))

• Disclosure statement requirement. Attach a statement to the relevant tax return describing the F reorganization and citing § 368(a)(1)(F). The statement should document that all six requirements of Treas. Reg. § 1.368-2(m)(1) are satisfied (see Step 1 of this checklist for the six requirements). While there is no statutory penalty for failure to disclose, the statute of limitations remains open indefinitely if the return does not adequately disclose the F reorganization. CAUTION. Best practice is to attach a detailed disclosure statement that includes (A) a description of each step in the transaction, (B) the date each step was completed, (C) a representation that identical ownership was maintained, (D) a representation that the resulting corporation held no property or attributes before the reorganization (except de minimis), (E) a representation that the transferor completely liquidated for federal tax purposes, and (F) citations to all applicable authorities.
  • Six requirements documentation. The disclosure statement should explicitly address each of the six requirements in Treas. Reg. § 1.368-2(m)(1).
  • Statute of limitations protection. Adequate disclosure starts the statute of limitations running. Inadequate disclosure leaves the statute open indefinitely.
• Six requirements documentation. The disclosure statement should explicitly address each of the six requirements in Treas. Reg. § 1.368-2(m)(1).
• Statute of limitations protection. Adequate disclosure starts the statute of limitations running. Inadequate disclosure leaves the statute open indefinitely.
• Best practice contents. The statement should describe each step, state completion dates, confirm identical ownership, confirm no pre-reorganization property in NewCo, confirm complete liquidation, and cite all authorities.
• EIN notification. File Form SS-4 to obtain a new EIN for NewCo. Notify the IRS by letter that Target retains its historic EIN. Under Rev. Rul. 2008-18, NewCo must obtain a new EIN and Target must retain its historic EIN. Proper EIN documentation prevents IRS confusion and processing delays. See Step 13C for the EIN allocation rules.
  • Form SS-4 for NewCo. NewCo must obtain a new EIN by filing Form SS-4 for all NewCo/HoldCo federal tax filings.
  • Target EIN retention letter. Send a letter to the IRS notifying them that Target retains its historic EIN despite the reorganization.
• Form SS-4 for NewCo. NewCo must obtain a new EIN by filing Form SS-4. The new EIN is used for all NewCo/HoldCo federal tax filings.
• Target EIN retention letter. Send a letter to the IRS notifying them that Target retains its historic EIN despite the reorganization.
• Processing delay prevention. Proper EIN documentation at the outset prevents IRS confusion, duplicate entity creation, and processing delays for future filings.
• Plan of reorganization documentation. Treas. Reg. § 1.368-2(m) requires that a plan of reorganization exist for an F reorganization. While the plan need not be in writing, practitioners should document the plan through (A) board resolutions approving each step, (B) shareholder consents or minutes, (C) a written plan describing the steps and their business purpose, and (D) contemporaneous memoranda from tax advisors. The plan should reference § 368(a)(1)(F) and Rev. Rul. 2008-18 (where applicable) and state the intended federal income tax treatment of each step.
  • Board resolutions. Each step of the reorganization should be approved by separate board resolutions adopted contemporaneously with the step.
  • Written plan of reorganization. A written document describing each step, its intended tax treatment, and its business purpose should be prepared before the first step.
• Board resolutions. Each step of the reorganization should be approved by separate board resolutions adopted contemporaneously with the step.
• Shareholder consents. Shareholder consents or meeting minutes should reflect approval of the reorganization plan and each step.
• Written plan of reorganization. A written document describing each step, its intended tax treatment, and its business purpose should be prepared and adopted before the first step is implemented.
• Tax advisor memoranda. Contemporaneous memoranda from tax advisors documenting the tax analysis and business purpose provide critical evidence if the reorganization is later challenged.

Step 18C. Document Retention

"The acquiring corporation shall be treated (for purposes of section 381) just as the transferor corporation would have been treated if there had been no reorganization." (Treas. Reg. § 1.381(b)-1(a)(2))

• Retention period. Retain all F reorganization documents for at least 7 years (and indefinitely for corporate records that establish basis and tax attributes).
  • Minimum 7-year retention. All F reorganization documents should be retained for at least 7 years from the date of filing the relevant return.
  • Indefinite retention for basis records. Corporate records that establish asset basis, tax attributes, and accounting methods should be retained indefinitely.
• Minimum 7-year retention. All F reorganization documents should be retained for at least 7 years from the date of filing the relevant return.
• Indefinite retention for basis records. Corporate records that establish asset basis, tax attributes, and accounting methods should be retained indefinitely.
• Electronic backup. Maintain electronic backups of all documents in a format that preserves authenticity and readability.
• Key documents to retain.
  • Entity formation documents. Articles of incorporation, certificates of merger, conversion documents, and EIN documentation.
  • Election forms and tax records. Form 8869, Form 2553, Form 8832, tax returns, and all correspondence with the IRS regarding the transaction.
• Plan of reorganization (written description of steps, dates, and intended tax treatment).
• Board resolutions approving each step of the reorganization.
• Shareholder consents or minutes reflecting approval.
• Merger certificates and state filing receipts (articles of incorporation, certificates of merger, conversion documents).
• Form 8869 (QSub election) with Box 14 checked.
• Form 2553 (protective S election for NewCo, if filed).
• Form 8832 (entity classification election, if applicable).
• EIN documentation (Form SS-4 for NewCo, letter confirming Target's EIN retention).
• Borrowing agreements (if relying on the borrowing proceeds exception under Treas. Reg. § 1.368-2(m)(1)(iii) for de minimis assets).
• Business purpose memoranda (contemporaneous documentation of non-tax business reasons).
• Tax advisor engagement letters and opinion letters (if obtained).
• Valuation reports (if any assets were valued for basis or NUBIG purposes).
• All correspondence with the IRS regarding the transaction.
• Documentation of F reorganization independence. If the F reorganization is part of a larger transaction (e.g., a subsequent sale to a PE buyer), retain documentation showing the independence of the F reorganization steps. Under the "F in a bubble" doctrine (Treas. Reg. § 1.368-2(m)(3)(ii)), related events preceding or following the F reorganization do not cause it to fail. However, if the F reorganization steps are so closely integrated with the subsequent sale that the IRS could argue the entire transaction should be recast, documentation of independent business purpose for the F reorganization becomes critical. Maintain separate board resolutions, separate timing (where feasible), and separate business purpose memoranda for the F reorganization and the subsequent transaction.
  • Separate board resolutions. The F reorganization should have its own board resolutions separate from any subsequent transaction.
  • Separate timing and business purpose. Where feasible, allow time to pass between the F reorganization and any subsequent transaction. Document independent business purposes.
• Separate board resolutions. The F reorganization should have its own board resolutions separate from the subsequent transaction.
• Separate timing. Where feasible, allow time to pass between the completion of the F reorganization and the commencement of the subsequent transaction.
• Separate business purpose memoranda. Document independent, genuine business purposes for the F reorganization that are separate from the business purposes of the subsequent transaction.
• F in a bubble protection. Proper documentation of independence protects the F reorganization's validity under Treas. Reg. § 1.368-2(m)(3)(ii) even if the subsequent transaction is challenged.