USA – NEW YORK Trends and Developments Contributed by: Matthew Rappaport, Matthew Foreman, Michelle Kabel and Elysse Anderson, Falcon Rappaport & Berkman LLP
practice group. Post-graduation, Elysse continues to work with the corporate and securities team, while also assisting the real estate and taxation practice groups.
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Using F Reorganisations to Restructure Businesses Prior to a Sale Introduction
for legal purposes (preserving operational continuity, employer identification numbers, contracts, licenses, and employee relationships) while simultaneously being treated as an asset acquisition for US federal income tax purposes. In the cross-border context, it may be necessary to reorganise a business to ensure a stepped-up basis upon acquisition or to optimise its structure for tax purposes. As such, a single-entity, tax-free reorgani - sation, such as an F Reorganisation, is a useful tool in any M&A or tax practitioner’s toolkit. Understanding how and when to use F Reorganisations is imperative when advising clients, particularly after the introduc - tion of Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII) in 2018. What is an F Reorganisation? An F Reorganisation is a type of corporate restructur - ing governed by Section 368 (a)(1)(F) of the Internal Revenue Code (the “Code”). To qualify as a reorgani - sation under Section 368 (a)(1)(F) of the Code, a trans - action must result in a mere change in identity, form, or place of organisation of one corporation, however effected. A “mere change” can involve an actual or deemed transfer of property from one corporation to another but is only considered a “mere change” (and, therefore, a qualifying F Reorganisation) if the follow - ing six specific requirements are met.
M&A transactions involving the acquisition of an S corporation requires strategic pre-transaction struc - turing to ensure tax-efficiency. Often, this involves a reorganisation under Section 368 (a)(1)(F) (an “F Reor - ganisation”) of the Internal Revenue Code of 1986, as amended (the “Code”). An F Reorganisation, when executed correctly, changes a company’s legal struc - ture (for example, from a corporation taxed as an S corporation to a limited liability company (LLC), there - by enabling a buyer to obtain a stepped-up basis) in a tax-free manner and with little to no disruption to business activities. This article provides an overview of what an F Reorganisation is, the steps to implement an F Reorganisation, and explains why or when an F Reorganisation may be necessary. In an M&A landscape, the F Reorganisation is a vital restructuring tool. For example, buyers typically prefer to acquire assets (through an asset purchase agree - ment), for the resulting step-up in tax basis which generates increased depreciation and amortisation deductions in future years. Sellers, on the other hand, generally prefer a stock sale to avoid the complexity of transferring individual assets and benefit from capital gains treatment on the entire purchase price. An F Reorganisation resolves this tension by allowing the transaction to be structured as an equity purchase
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