F reorganizations add restructuring flexibility
Ruling addresses separation of operating businesses in corporate group
TAX ALERT |
An F reorganization is 'mere change in identity, form, or place of organization of one corporation' (Reg. section 368(a)(1)(F)). By itself, an F reorganization might not accomplish much from a tax perspective. Combined with other steps, however, F reorganizations can help corporations improve their restructuring results.
A recent private letter ruling, PLR 201611015, illustrates this type of combination. The ruling involved a publicly traded corporation, which we will call Old F. It was engaged in two business segments, Business A and Business B.
Old F’s restructuring separated the Business A and Business B assets. It combined an F reorganization and subsequent restructuring. The F reorganization involved a merger that essentially replaced the old parent corporation, Old F, with a new one that we will call New F. Old F became a subsidiary of the New F and then converted to a limited liability company (LLC).
This F reorganization is similar to an example in the regulations adopted in 2015 (Reg. section 1.368-2(m)(4), Ex. 5). Unlike the regulations’ example, however, PLR 201611015 involved reincorporating some of Old F’s assets (the Business B assets) in a second tier subsidiary. That second tier subsidiary was Old F, which was contributed to a first tier subsidiary of New F and then re-converted from an LLC to a corporation. The IRS held that this reincorporation of the Business B assets did not affect the F reorganization’s tax-free treatment.
At the end of the day, New F retained the Business A assets. The Business B assets, on the other hand, had moved to a new position in the corporate structure even though they were still held by the same legal entity as in the beginning (i.e., Old F, the former parent company).
Having continuous ownership of business assets in the same legal entity can be important. For example, asset transfers between entities may face obstacles such as license requirements and contractual restrictions. The ruling does not indicate whether Old F faced any of these obstacles. However, it does illustrate how F reorganizations can help corporations overcome legal restrictions when they arise.