USA – NEW YORK Trends and Developments Contributed by: Matthew Rappaport, Matthew Foreman, Michelle Kabel and Elysse Anderson, Falcon Rappaport & Berkman LLP
• Requirement 1: resulting corporation stock is distributed in exchange for transferor corporation stock. • Requirement 2: identity of stock ownership. • Requirement 3: resulting corporation must not hold any prior assets or tax attributes. • Requirement 4: transferor corporation must com - pletely liquidated for federal income tax purposes. • Requirement 5: resulting corporation is the only acquiring corporation. • Requirement 6: transferor corporation is the only acquired corporation. The first requirement ensures that the resulting corpo - ration’s stock is issued solely in respect to the trans - feror corporation’s stock, creating a direct exchange relationship between the old and new entities. In prac - tical terms, this means that the shareholders of the original corporation must receive stock in the resulting corporation in exchange for their shares in the trans - feror corporation. The second requirement mandates that the same per - son or persons must own all of the stock of the trans - feror corporation immediately before the reorganisa - tion and all of the stock of the resulting corporation immediately after the reorganisation, in identical pro - portions. This requirement is not violated if the stock is of different classes or has different terms, provided it is of equivalent value, nor is it violated if either cor - poration distributes cash or other property. The third requirement provides that the resulting cor - poration must not hold any property or have any tax attributes immediately before the transfer, subject to a narrow de minimis exception. The exception permits the resulting corporation to hold assets to facilitate its organisation, maintain its legal existence, or to hold proceeds of loans taken in connection with the F Reorganisation. The fourth requirement states that the transferor cor - poration must completely liquidate for federal income tax purposes as part of the transaction, although a dissolution of the transferor’s legal existence for state law purposes is not absolutely required; the transferor may even retain a de minimis amount of assets for
the purpose of preserving its legal existence (as dis - cussed above). The fifth and sixth requirements, which were added to the final regulations in 2015, further ensure that the resulting corporation is the functional equivalent of the transferor corporation. Specifically, the fifth require - ment provides that immediately after the reorganisa - tion, no corporation other than the resulting corpo - ration may hold any property previously held by the transferor if the other corporation would, as a result, succeed to any tax attributes of the transferor under Section 381 (c) of the Code. The sixth requirement provides that immediately after the reorganisation, the resulting corporation may not hold property acquired from a corporation other than the transferor if, as a result, the resulting corporation would inherit tax attributes of the other corporation under Section 381 (c) of the Code. Taken together, these requirements reinforce the statutory concept that an F Reorganisation involves a single operating entity undergoing a mere change in Revenue Ruling 2008-18 is the foundational guidance from the Internal Revenue Service (IRS) on F Reor - ganisations. It provides practitioners with a roadmap on how to effectuate an F Reorganisation while navi - gating complexities and maintaining compliance with the relevant rules and regulations. In accordance with Revenue Ruling 2008-18, the shareholder(s) of the target S corporation (the “Tar - get”) will execute the following steps to effectuate an F Reorganisation: • form a new corporation (the “Target Holding”) and apply for an Employer Identification Number (EIN), which will be used to file tax election forms and returns. • contribute the shares of Target to Target Holding in exchange for all of Target Holding’s shares; and • Target files IRS Form 8869, Qualified Subchapter S Subsidiary Election, to elect to be a qualified Subchapter S subsidiary (QSub), which effects a deemed tax-free liquidation of Target into Tar - identity, form, or place of organisation. Implementation of an F Reorganisation
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