New Rules for Qualifying a Transaction as a Statutory Merger or Consolidation Under Section 368(a)(1)(A) of the Internal Revenue Code

Section 368(a)(1)(A) of the Internal Revenue Code says that a merger or consolidation between two companies can be considered a reorganization for tax purposes. A merger is when one company takes over another, while a consolidation is when two or more companies come together to form a new one. If a merger or consolidation meets certain conditions, no gain or loss is recognized for tax purposes.

The regulations under Section 368 provide guidance on what qualifies as a statutory merger or consolidation. Recent temporary regulations clarify that a merger or consolidation can also happen between a target company and a disregarded entity of the acquiring company. This means that the acquiring company can get the tax benefits of the merger, while the disregarded entity takes on the liabilities of the target company. This makes it easier for companies to engage in these types of reorganizations. The first rule for statutory mergers and consolidations looks at whether a company transfers its assets and liabilities to another company. It also applies to a consolidation. A corporation is defined by law, and a disregarded entity is a company that is not considered separate from its owner for tax purposes. An example of a disregarded entity is a limited liability company owned by a corporation. A qualified real estate investment trust subsidiary (QRS) is a corporation that is fully owned by a real estate investment trust (REIT). All of its assets and money stuff are treated as belonging to the REIT.
A qualified subchapter S subsidiary (QSub) is a corporation fully owned by a subchapter S corporation. All of its money stuff is treated as belonging to the subchapter S corporation. The general rule for statutory mergers or consolidations has four requirements. The first is the “law requirement,” which means the merger or consolidation must be done according to the laws of a state or the U.S. The second requirement is the “all assets/liability test,” which means the target corporation must transfer all its assets and liabilities to the new company. There is an exception to this if the target company distributes assets to its shareholders before the merger. This exception is illustrated in an example where a company sells one of its businesses before merging with another company. When two companies from the same state merge, the company being bought out (X) no longer exists, and its assets and debts become part of the buying company (Y). Shareholders of the bought-out company get stock in the buying company. Both companies have to be organized under the laws of the same state or the US. The company X and the company Y are merging according to the laws of Florida. All of X’s assets and liabilities will become Y’s. After the merger, X will no longer exist as a separate entity. Since both X and Y are based in Florida, the merger qualifies as a reorganization. Another rule applies when a disregarded entity (owned by the acquiring corporation) is involved in the merger, which also has requirements for domestic entities. In certain business mergers, if one company owns another company that doesn’t have its own separate legal status, all of the assets and liabilities of the first company have to be transferred to the second company as part of the merger. This is to make sure everything is handled properly. For example, if Company X merges with Company Z, all of X’s stuff becomes Z’s stuff and X no longer exists as a separate company. This rule applies as long as all the companies involved are based in the same country. The regulations from 2001 didn’t address whether a QSub is considered part of the merging company or if its assets and liabilities are transferred to the new company. This is important because a QSub is treated as a new corporation when its status ends, which can affect the requirements for a merger. The government added an example to the regulations to clarify that a QSub is considered part of the merging company and its assets and liabilities are transferred to the new company. This means that a merger involving a QSub can qualify as a statutory merger under the tax law. Overall, these regulations help taxpayers structure their transactions to minimize taxes. This article talks about tax laws for corporations and shareholders. It refers to specific sections of the Internal Revenue Code and Treasury Regulations. It discusses regulations for different types of corporations and their qualifications for tax purposes. It also mentions specific state laws related to corporations. This article is written by a lawyer who works for the IRS. His opinions are his own and don’t necessarily represent the IRS or Treasury. It’s part of the Tax Section and is approved by the Florida Bar.

Source: https://www.floridabar.org/the-florida-bar-journal/new-rules-for-qualifying-a-transaction-as-a-statutory-merger-or-consolidation-under-section-368a1a-of-the-internal-revenue-code/