Reorganizations Under Section 368(a)(1)(F); Section 367(a) and Certain Reorganizations Under Section 368(a)(1)(F), 56904-56915 [2015-23603]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 80, Number 182 (Monday, September 21, 2015)]
[Rules and Regulations]
[Pages 56904-56915]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-23603]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9739]
RIN 1545-BF51; 1545-BM78


Reorganizations Under Section 368(a)(1)(F); Section 367(a) and 
Certain Reorganizations Under Section 368(a)(1)(F)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations that provide guidance 
regarding the qualification of a transaction as a corporate 
reorganization under section 368(a)(1)(F) by virtue of being a mere 
change of identity, form, or place of organization of one corporation 
(F reorganization). This document also contains final regulations 
relating to F reorganizations in which the transferor corporation is a 
domestic corporation and the acquiring corporation is a foreign 
corporation (an outbound F reorganization). These regulations will 
affect corporations engaging in transactions that could qualify as F 
reorganizations (including outbound F reorganizations) and their 
shareholders.

[[Page 56905]]


DATES: Effective date: These final regulations are effective on 
September 21, 2015.
    Applicability date: For dates of applicability, see Sec. Sec.  
1.367(a)-1(g)(4) and 1.368-2(m)(5).

FOR FURTHER INFORMATION CONTACT: Douglas C. Bates, (202) 317-6065 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

1. Introduction

    This Treasury decision contains final regulations (the Final 
Regulations) that amend 26 CFR part 1 under sections 367 and 368 of the 
Internal Revenue Code (Code). These Final Regulations provide guidance 
relating to the qualification of transactions as F reorganizations and 
the treatment of outbound F reorganizations.
    In general, upon the exchange of property, gain or loss must be 
recognized if the new property differs materially, in kind or extent, 
from the old property. See Sec.  1.1001-1(a); Sec.  1.368-1(b). The 
purpose of the reorganization provisions of the Code is to except from 
the general rule of section 1001 certain specifically described 
exchanges that are required by business exigencies and effect only a 
readjustment of continuing interests in property under modified 
corporate forms. See Sec.  1.368-1(b). These exchanges, described in 
sections 354, 356, and 361, must be made in pursuance of a plan of 
reorganization. See Sec.  1.368-1(c).
    Section 368(a)(1) describes several types of transactions that 
constitute reorganizations. One of these, described in section 
368(a)(1)(F), is ``a mere change in identity, form, or place of 
organization of one corporation, however effected'' (a Mere Change). 
One court has described the F reorganization as follows:

    [The F reorganization] encompass[es] only the simplest and least 
significant of corporate changes. The (F)-type reorganization 
presumes that the surviving corporation is the same corporation as 
the predecessor in every respect, except for minor or technical 
differences. For instance, the (F) reorganization typically has been 
understood to comprehend only such insignificant modifications as 
the reincorporation of the same corporate business with the same 
assets and the same stockholders surviving under a new charter 
either in the same or in a different State, the renewal of a 
corporate charter having a limited life, or the conversion of a 
U.S.-chartered savings and loan association to a State-chartered 
institution.

Berghash v. Commissioner, 43 T.C. 743, 752 (1965) (citation and 
footnotes omitted), aff'd, 361 F.2d 257 (2d Cir. 1966).
    Although the statutory description of an F reorganization is short, 
and courts have described F reorganizations as simple, questions have 
arisen regarding the requirements of F reorganizations. In particular, 
when a corporation changes its identity, form, or place of 
incorporation, questions have arisen as to what other changes (if any) 
may occur, either before, during, or after the Mere Change, without 
affecting the status of the Mere Change (that is, what other changes 
are compatible with the Mere Change). These questions can become more 
pronounced if the transaction intended to qualify as an F 
reorganization is composed of a series of steps occurring over a period 
of days or weeks. Moreover, changes in identity, form, or place of 
organization are often undertaken to facilitate other changes that are 
difficult to effect in the corporation's current form or place of 
organization.

2. Related Regulations

    On January 16, 1990, the Treasury Department and the IRS published 
temporary regulations (TD 8280) in the Federal Register (55 FR 1406) 
under sections 367(a), (b), and (e). A notice of proposed rulemaking 
(INTL-704-87) cross-referencing these temporary regulations was 
published the same day under RIN 1545-AL35 in the Federal Register (55 
FR 1472) (1990 Proposed Regulations). No public hearing was requested 
or held. Prior to the publication of the 1990 Proposed Regulations, the 
Treasury Department and the IRS had issued two notices and a revenue 
ruling providing that, in an outbound F reorganization, the transferor 
corporation's taxable year closes, and clarifying that, in such F 
reorganizations, there is an actual or constructive transfer of assets 
and an exchange of stock. See Notice 88-50, 1988-1 CB 535; Notice 87-
29, 1987-1 CB 474; Rev. Rul. 87-27, 1987-1 CB 134. The 1990 Proposed 
Regulations, in relevant part, proposed the rules described in Notice 
88-50, Notice 87-29, and Rev. Rul. 87-27. No comments were received on 
this aspect of the 1990 Proposed Regulations. While this aspect of the 
1990 Proposed Regulations has not yet been finalized, final regulations 
(TD 8834) regarding the primary subject of the 1990 Proposed 
Regulations--guidance under sections 367(e)(1) and 367(e)(2) regarding 
outbound distributions under sections 355 and 332--have since been 
issued. See, for example, TD 8834, 64 FR 43072 (Aug. 9, 1999). A new 
RIN (RIN 1545-BM78, REG-117141-15) has been issued under which the 
portion of the 1990 Proposed Regulations relating to outbound F 
reorganizations will be finalized.
    On August 12, 2004, the Treasury Department and the IRS published a 
notice of proposed rulemaking (REG-106889-04) (2004 Proposed 
Regulations) in the Federal Register (69 FR 49836) regarding the 
requirements for F reorganizations. The 2004 Proposed Regulations are 
discussed in more detail in section 3. of this Background section of 
this preamble. In the preamble to the 2004 Proposed Regulations, the 
Treasury Department and the IRS requested comments from the public. One 
written comment was received with respect to the 2004 Proposed 
Regulations. No public hearing was requested or held.
    On February 25, 2005, the Treasury Department and the IRS published 
final regulations (TD 9182) (2005 Regulations) in the Federal Register 
(70 FR 9219) adopting a portion of the 2004 Proposed Regulations. The 
2005 Regulations provide that the continuity of interest and continuity 
of business enterprise requirements applicable to reorganizations in 
general do not apply to reorganizations under section 368(a)(1)(E) or 
section 368(a)(1)(F). The preamble to the 2005 Regulations stated that 
the Treasury Department and the IRS would continue to study the other 
issues addressed in the 2004 Proposed Regulations and would welcome 
further comments from the public. One written comment was received with 
regard to the 2005 Regulations.

3. The 2004 Proposed Regulations

    A corporation that continues to inhabit its corporate shell can 
change in many respects. Although these changes may have federal income 
tax consequences, they do not result in the corporation being treated 
for federal income tax purposes as a new corporation or as transferring 
its assets. Nor do these changes cause the corporation's taxable year 
to close. Unlike a partnership that might terminate for federal income 
tax purposes upon the transfer of a given percentage of the partnership 
interests, a corporation that continues to inhabit a single corporate 
shell continues to exist for federal tax purposes, independent of the 
identity of its shareholders or the composition of its assets.
    The underlying premise of the 2004 Proposed Regulations was that, 
if a corporate enterprise changes its corporate shell while adhering to 
four proposed requirements for a Mere Change, the resulting corporation

[[Page 56906]]

should be treated as the functional equivalent of the transferor 
corporation.
A. Mere Change
    As noted in section 1. of this Background, questions have arisen as 
to whether other changes are compatible with a Mere Change. In 
addressing these questions, the 2004 Proposed Regulations embraced the 
principles derived from the language of section 368(a)(1)(F), the 
historic practice of the IRS and courts in applying that statutory 
definition, and functional differences between F reorganizations and 
other types of reorganizations.
    Like other types of reorganizations, an F reorganization generally 
involves, in form, two corporations, one (a Transferor Corporation) 
that transfers (or is deemed to transfer) assets to the other (a 
Resulting Corporation). However, the statute describes an F 
reorganization as being with respect to ``one corporation'' and 
provides for treatment that differs from that accorded other types of 
reorganizations in which assets are transferred from one corporation to 
another (Asset Reorganizations). As noted in the preamble to the 2004 
Proposed Regulations, ``an F reorganization is treated for most 
purposes of the Code as if the reorganized corporation were the same 
entity as the corporation in existence before the reorganization.'' 
Thus, the tax treatment accorded an F reorganization is more consistent 
with that of a single continuing corporation in that (1) the taxable 
year of the Transferor Corporation does not close and includes the 
operations of the Resulting Corporation for the remainder of the year, 
and (2) the Resulting Corporation's losses may be carried back to 
taxable years of the Transferor Corporation.
    Because an F reorganization must involve ``one corporation,'' and 
continuation of the taxable year and loss carrybacks from the Resulting 
Corporation to the Transferor Corporation are allowed, the statute 
cannot accommodate transactions in which the Resulting Corporation has 
preexisting activities or tax attributes. See H. Rep. Conf. Rep't. 97-
760, 97th Cong., 2d Sess., at pp. 540-41 (1982). Accordingly, the 2004 
Proposed Regulations did not allow for more than de minimis activities 
or very limited assets or tax attributes in the Resulting Corporation 
from sources other than the Transferor Corporation. This is one of the 
principal distinctions between F reorganizations and Asset 
Reorganizations. The proposed rule was consistent with the historical 
interpretation of the statute in this regard.
    Similarly, the requirement that there be ``one corporation'' means 
that the status of the Resulting Corporation as the successor to the 
Transferor Corporation must be unambiguous. Accordingly, and consistent 
with the historical interpretation of the statute, the 2004 Proposed 
Regulations required that, for a transaction to qualify as a Mere 
Change, the Transferor Corporation be liquidated for tax purposes.
    In Helvering v. Southwest Consolidated Corp., 315 U.S. 194 (1942), 
the Supreme Court noted 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 incorporation' within the meaning of 
[the F reorganization provision].'' The 2004 Proposed Regulations also 
adopted this principle by providing that an F reorganization could not 
be used as a vehicle to introduce new owners into the corporate 
enterprise.
    Based on these principles, the 2004 Proposed Regulations would have 
imposed four requirements for an F reorganization, with limited 
exceptions. First, all the stock of the Resulting Corporation, 
including stock issued before the transfer, would have had to be issued 
in respect of stock of the Transferor Corporation. Second, a change in 
the ownership of the corporation in the transaction would not have been 
allowed, except a change that had no effect other than that of a 
redemption of less than all the shares of the corporation. Third, the 
Transferor Corporation would have had to completely liquidate in the 
transaction. Fourth, the Resulting Corporation would not have been 
allowed to hold any property or possess any tax attributes (including 
those specified in section 381(c)) immediately before the transfer.
    As discussed in the preamble to the 2004 Proposed Regulations, the 
first two requirements reflected the Supreme Court's holding in 
Helvering v. Southwest Consolidated Corp., supra, that a transaction 
cannot be a Mere Change if it shifts the ownership of the proprietary 
interests in a corporation. These requirements would have prevented a 
transaction involving the introduction of a new shareholder or new 
equity capital into the corporation from qualifying as an F 
reorganization. Notwithstanding these requirements, the first 
requirement would have allowed the Resulting Corporation to issue a 
nominal amount of stock not in respect of stock of the Transferor 
Corporation to facilitate the organization of the Resulting 
Corporation.
    Under the second requirement (no change in ownership), redemptions 
of less than all the shares of the corporation would have been allowed. 
The law was not completely clear as to the effect of redemptions on the 
qualification of a transaction as an F reorganization. Some authorities 
supported the proposition that changes in ownership resulting from 
redemptions were compatible with an F reorganization. See Reef Corp. v. 
U.S., 368 F.2d 125 (5th Cir. 1966) (holding that a redemption of 48 
percent of the stock of a corporation that occurred during a change in 
place of incorporation did not cause the transaction to fail to qualify 
as an F reorganization, because the redemption was functionally 
separate from the F reorganization even if coincident in time); Sec.  
1.301-1(l) (relating in part to the treatment of a distribution with 
respect to stock that is in substance separate from a reincorporation); 
Rev. Rul. 66-284, 1966-2 CB 115 (concluding that a transaction could 
qualify as an F reorganization even though there was less than a one 
percent change in a corporation's shareholders as a result of stock 
held by dissenting shareholders being redeemed in the transaction); cf. 
Casco Products Corp. v. Commissioner, 49 T.C. 32 (1967) (reaching a 
comparable result without finding an F reorganization where a nine 
percent shareholder was redeemed in the transaction).
    The third requirement and the fourth requirement implemented the 
statutory requirement that an F reorganization involve only one 
corporation. Although the third requirement was that the Transferor 
Corporation completely liquidate in the transaction, a legal 
dissolution was not required. This accommodation allowed the value of 
the Transferor Corporation's charter to be preserved. Further, the 
Proposed Regulations would have allowed the Transferor Corporation to 
retain a nominal amount of assets to preserve its legal existence.
    The fourth requirement would have precluded the Resulting 
Corporation from holding any property or having any tax attributes 
immediately before the transfer. Nevertheless, the Proposed Regulations 
would have allowed the Resulting Corporation to hold or to have held a 
nominal amount of assets to facilitate its organization or preserve its 
existence, and to have tax attributes related to these assets. In 
addition, the Proposed Regulations provided that the fourth requirement 
would not be violated if, before the transfer, the

[[Page 56907]]

Resulting Corporation held the proceeds of borrowings undertaken in 
connection with the transaction.
B. Related Transactions
i. Series of Transactions Constituting a Mere Change
    The Treasury Department and the IRS concluded that the words 
``however effected'' in the statutory definition of F reorganization 
reflect a Congressional intent to treat as an F reorganization a series 
of transactions that together result in a Mere Change. The 2004 
Proposed Regulations reflected this view by providing that a series of 
related transactions that together result in a Mere Change may qualify 
as an F reorganization. This view is consistent with the IRS's 
historical interpretation of the statute.
ii. Mere Change Within in a Larger Transaction
    The Treasury Department and the IRS also recognized that an F 
reorganization may be a step in a larger transaction that effects more 
than a Mere Change. For example, in Situation 1 of Rev. Rul. 96-29, 
1996-1 CB 50, the IRS ruled that a reincorporation qualified as an F 
reorganization even though it was a step in a transaction in which the 
reincorporated entity issued common stock in a public offering and 
redeemed preferred stock having a value of 40 percent of the aggregate 
value of its outstanding stock immediately prior to the offering. In 
Situation 2 of the same ruling, the IRS ruled that a reincorporation of 
a corporation in another state qualified as an F reorganization even 
though it was a step in a transaction in which the reincorporated 
entity acquired the business of another entity.
    Consistent with Rev. Rul. 96-29, the 2004 Proposed Regulations 
provided that events occurring before or after a transaction or series 
of transactions that otherwise constitutes a Mere Change and related 
thereto would not cause the Mere Change to fail to qualify as an F 
reorganization (the Related Events Rule). The 2004 Proposed Regulations 
further provided that the qualification of the Mere Change as an F 
reorganization would not alter the treatment of the other events.
    The Related Events Rule would have operated in tandem with the 
proposal, which was made a final rule in the 2005 Regulations, that the 
continuity of interest and continuity of business enterprise 
requirements of Sec.  1.368-1(d) and (e) that are generally applicable 
to reorganizations under section 368 do not apply to F reorganizations. 
These rules, together, would have focused the F reorganization analysis 
on the discrete step or series of steps (to use the words of many 
observers, those steps occurring ``in a bubble'') that may satisfy the 
four requirements for a Mere Change, even if these steps constitute 
part of a larger series of steps. In other words, these rules rejected 
the application of step transaction principles to integrate all the 
steps of the overall plan or agreement to accomplish the larger 
transaction and thereby potentially prevent the transaction from 
qualifying as an F reorganization. See Rev. Rul. 75-456, 1975-2 CB 128 
(F reorganization of the acquiring corporation in a stock 
reorganization under section 368(a)(1)(B) did not prevent that 
provision's ``solely for voting stock'' requirement from being 
satisfied); see also Rev. Rul. 79-250, 1979-2 CB 156 (F reorganization 
of issuing corporation immediately after forward triangular merger did 
not prevent the transaction from satisfying requirements of section 
368(a)(2)(D)).
C. Net Effect of the Proposed Regulations
    Overall, the 2004 Proposed Regulations would have found certain 
changes occurring in connection with a change in identity, form, or 
place of organization to be compatible with the Mere Change 
requirement. Some changes could have been effected simultaneously with 
the transaction or series of transactions otherwise qualifying as an F 
reorganization because these changes would not have violated any of the 
four proposed requirements for a Mere Change. Thus, for example, a 
corporation could have bought, sold, or exchanged property, borrowed 
money, or repaid debt because the 2004 Proposed Regulations would not 
have required an identity of assets between the Transferor Corporation 
and the Resulting Corporation. Other changes could not have been 
effected simultaneously with the potential F reorganization, but could 
have occurred before or after the F reorganization ``in a bubble,'' for 
example, the issuance of new equity capital or the transfer of shares 
to new shareholders.
D. Distributions
    Prior to the issuance of the 2004 Proposed Regulations, much 
commentary had focused on whether distributions of money or other 
property in F reorganizations were distributions to which section 356 
applied, or whether sections 301 and 302, and related provisions, 
governed the treatment of these distributions. The Treasury Department 
and the IRS believed it appropriate to treat these distributions as 
transactions separate from the F reorganization, even if they occurred 
immediately before or immediately after the F reorganization, after 
some of the transactions making up the F reorganization and before 
other transactions making up the F reorganization, or as part of the 
same plan as the F reorganization. See, for example, Sec.  1.301-1(l). 
Accordingly, the 2004 Proposed Regulations provided that, if a 
shareholder received money or other property (including in exchange for 
its shares) from the Transferor Corporation or the Resulting 
Corporation in a transaction that constituted an F reorganization, the 
money or other property would be treated as distributed by the 
Transferor Corporation immediately before the transaction, and that 
section 356 would not apply.

Explanation of Revisions

1. Overview

    After consideration of the comments received with respect to the 
2004 Proposed Regulations and the 2005 Regulations, the Treasury 
Department and the IRS are publishing, in this Treasury decision, 
additional Final Regulations regarding F reorganizations. The Final 
Regulations generally adopt the provisions of the 2004 Proposed 
Regulations not previously adopted in the 2005 Regulations, with 
changes discussed in the remainder of this preamble, and several 
clarifying, non-substantive changes. The Final Regulations also include 
rules regarding outbound F reorganizations by adopting, without 
substantive change, the provisions of the 1990 Proposed Regulations 
relating to section 367(a) and making conforming revisions to other 
regulations.
    Like the 2004 Proposed Regulations, the Final Regulations are based 
on the premise that it is appropriate to treat the Resulting 
Corporation in an F reorganization as the functional equivalent of the 
Transferor Corporation and to give its corporate enterprise roughly the 
same freedom of action as would be accorded a corporation that remains 
within its original corporate shell. The Final Regulations provide that 
a transaction that involves an actual or deemed transfer of property by 
a Transferor Corporation to a Resulting Corporation is a Mere Change 
that qualifies as an F reorganization if six requirements are satisfied 
(with certain exceptions). The Final Regulations provide that a 
transaction or a series of related transactions to be tested against 
the six requirements (a Potential F

[[Page 56908]]

Reorganization) begins when the Transferor Corporation begins 
transferring (or is deemed to begin transferring) its assets to the 
Resulting Corporation, and ends when the Transferor Corporation has 
distributed (or is deemed to have distributed) the consideration it 
receives from the Resulting Corporation to its shareholders and has 
completely liquidated for federal income tax purposes. The concept of a 
Potential F Reorganization was added to the Final Regulations to aid in 
determining which steps in a multi-step transaction should be 
considered when applying the six requirements to a potential mere 
change (that is, which steps are ``in the bubble'').
    In the context of determining whether a Potential F Reorganization 
qualifies as a Mere Change, deemed asset transfers include, but are not 
limited to, those transfers treated as occurring as a result of an 
entity classification election under paragraph Sec.  301.7701-
3(c)(1)(i), as well as transfers resulting from the application of step 
transaction principles. One example of such a transfer would be the 
deemed asset transfer by the Transferor Corporation to the Resulting 
Corporation resulting from a so-called ``liquidation-reincorporation'' 
transaction. See, for example, Davant v. Commissioner, 366 F.2d 874 
(5th Cir. 1966); Sec.  1.331-1(c) (liquidation-reincorporation may be a 
tax-free reorganization). Another example of such a deemed asset 
transfer would include the deemed transfer of the Transferor 
Corporation's assets to the Resulting Corporation in a so-called 
``drop-and-check'' transaction in which a newly formed Resulting 
Corporation acquires the stock of a Transferor Corporation from its 
shareholders and, as part of the plan, the Transferor Corporation 
liquidates into the Resulting Corporation. See, for example, steps (d) 
and (c) of Rev. Rul. 2015-10, 2015-21 IRB 973; Rev. Rul. 2004-83, 2004-
2 CB 157; Rev. Rul. 67-274, 1967-2 CB 141.
    Four of the six requirements are generally adopted from the 2004 
Proposed Regulations, and the fifth and sixth requirements address 
comments received with respect to the Proposed Regulations regarding 
``overlap transactions'' (for example, transactions involving the 
Transferor Corporation's transfer of its assets to a potential 
successor corporation other than the Resulting Corporation in a 
transaction that could also qualify for nonrecognition treatment under 
a different provision of the Code). 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. An F reorganization also does not include a transaction 
that leads to multiple potential acquiring corporations having 
competing claims to the Transferor Corporation's tax attributes under 
section 381.
    Certain exceptions, similar to those of the 2004 Proposed 
Regulations, apply to these six requirements. Three of these exceptions 
allow de minimis departures from the six requirements for purposes 
unrelated to federal income taxation.

2. F Reorganization Requirements and Certain Exceptions

A. Resulting Corporation Stock Issuances and Identity of Stock 
Ownership
    As in the 2004 Proposed Regulations, the first and the second 
requirements of the Final Regulations reflect the Supreme Court's 
holding in Helvering v. Southwest Consolidated Corp, supra, that a 
transaction that shifts the ownership of the proprietary interests in a 
corporation cannot qualify as a Mere Change. Thus, the Final 
Regulations provide that a transaction that involves the introduction 
of a new shareholder or new equity capital into the corporation ``in 
the bubble'' does not qualify as an F reorganization.
    Consistent with the 2004 Proposed Regulations, the first 
requirement in the Final Regulations is that immediately after the 
Potential F Reorganization, all the stock of the Resulting Corporation 
must have been distributed (or deemed distributed) in exchange for 
stock of the Transferor Corporation in the Potential F Reorganization. 
The 2004 Proposed Regulations focused on the issuance of the stock of 
the Resulting Corporation in respect of stock of the Transferor 
Corporation. The Treasury and the IRS believe, however, that a focus on 
the distribution of the stock of the Resulting Corporation better 
matches the transactions that occur (or are deemed to occur) in 
reorganizations.
    Also consistent with the 2004 Proposed Regulations, the second 
requirement is that, subject to certain exceptions, the same person or 
persons own all the stock of the Transferor Corporation at the 
beginning of the Potential F Reorganization and all of the stock of the 
Resulting Corporation at the end of the Potential F Reorganization, in 
identical proportions.
    Notwithstanding these requirements and also consistent with the 
Proposed Regulations, the Final Regulations allow the Resulting 
Corporation to issue a de minimis amount of stock not in respect of 
stock of the Transferor Corporation, to facilitate the organization or 
maintenance of the Resulting Corporation. This rule is designed to 
allow, for example, reincorporation in a jurisdiction that requires 
minimum capitalization, two or more shareholders, or ownership of 
shares by directors. It is also intended to allow a transfer of assets 
to certain pre-existing entities, for reasons explained further in 
section 2.B. of this Explanation of Revisions.
    In addition, the Final Regulations allow changes of ownership that 
result from either (i) a holder of stock in the Transferor Corporation 
exchanging that stock for stock of equivalent value in the Resulting 
Corporation having terms different from those of the stock in the 
Transferor Corporation or (ii) receiving a distribution of money or 
other property from either the Transferor Corporation or the Resulting 
Corporation, whether or not in redemption of stock of the Transferor 
Corporation or the Resulting Corporation. In other words, the 
corporation involved in a Mere Change may also recapitalize, redeem its 
stock, or make distributions to its shareholders, without causing the 
Potential F Reorganization to fail to qualify as an F reorganization. 
These exceptions reflect the determination of the Treasury Department 
and the IRS that allowing certain transactions to occur 
contemporaneously with an F reorganization is appropriate so long as 
one corporation could effect the transaction without undergoing an F 
reorganization. These exceptions also reflect the case law, discussed 
in section 3.A. of the Background, holding that certain transactions 
qualify as F reorganizations even if some shares are redeemed in the 
transaction, and rulings by the IRS that a recapitalization may happen 
at the same time as an F reorganization. See, for example, Rev. Rul. 
2003-19, 2003-1 CB 468, and Rev. Rul. 2003-48, 2003-1 CB 863 (both 
providing that certain demutualization transactions may involve both E 
reorganizations and F reorganizations).

[[Page 56909]]

B. Resulting Corporation's Assets or Attributes and Liquidation of 
Transferor Corporation
    As in the 2004 Proposed Regulations, the third requirement 
(limiting the assets and attributes of the Resulting Corporation 
immediately before the transaction) and the fourth requirement 
(requiring the liquidation of the Transferor Corporation) under the 
Final Regulations reflect the statutory mandate that an F 
reorganization involve only one corporation. Although the Final 
Regulations generally require the Resulting Corporation not to hold any 
property or have any tax attributes immediately before the Potential F 
Reorganization, as in the 2004 Proposed Regulations, the Resulting 
Corporation is allowed to hold a de minimis amount of assets to 
facilitate its organization or preserve its existence (and to have tax 
attributes related to these assets), and the Resulting Corporation is 
allowed to hold proceeds of borrowings undertaken in connection with 
the Potential F Reorganization.
    A commenter responding to the 2004 Proposed Regulations stated that 
the Final Regulations should allow the Resulting Corporation to hold, 
in addition to the proceeds of borrowings, cash proceeds of stock 
issuances before the Mere Change. The Treasury Department and the IRS 
do not believe that the Resulting Corporation should be allowed to 
issue more than a de minimis amount of stock before a transaction 
constituting a Mere Change because that would allow a substantial 
investment of new capital and/or new shareholders, or an acquisition of 
assets from more than one corporation. This rule does not, however, 
preclude the Transferor Corporation from issuing new stock before a 
Potential F Reorganization constituting an F reorganization. Nor does 
it preclude the Resulting Corporation from issuing new stock after the 
Potential F Reorganization.
    Under the fourth requirement in the Final Regulations, the 
Transferor Corporation must completely liquidate in the Potential F 
Reorganization for federal income tax purposes. Nevertheless, as in the 
2004 Proposed Regulations, the Transferor Corporation is not required 
to legally dissolve and is allowed to retain a de minimis amount of 
assets for the sole purpose of preserving its legal existence.
C. One Section 381(a) Acquiring Corporation, One Section 381(a) 
Transferor Corporation
    The fifth requirement under the Final Regulations is that 
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). Thus, a transaction that divides the 
property or tax attributes of a Transferor Corporation between or among 
acquiring corporations, or that leads to potential competing claims to 
such tax attributes, will not qualify as a Mere Change.
    The sixth requirement under the Final Regulations is that 
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). Thus, a transaction that 
involves simultaneous acquisitions of property and tax attributes from 
multiple transferor corporations (such as the transaction described in 
Rev. Rul. 58-422, 1958-2 CB 145) will not qualify as a Mere Change.
    These requirements address a comment received with respect to the 
second requirement of the 2004 Proposed Regulations that there not be a 
change in the ownership of the corporation in the transaction, except a 
change that has no effect other than a redemption of less than all the 
shares of the corporation. The comment stated that allowing a 
corporation to distribute property in redemption of less than all of 
its shares could result in satisfying both the requirements for an F 
reorganization with respect to one transferee corporation and the 
requirements of another nonrecognition provision with respect to a 
different transferee corporation. The result would be uncertainty as to 
which corporation should succeed to the Transferor Corporation's tax 
attributes.
    For example, assume that corporation P owns all of the stock of 
corporation T, and T operates two separate businesses, Business 1 
(worth $297) and Business 2 (worth $3). Further assume that T merges 
into newly formed corporation R, and that, pursuant to the merger 
agreement, P receives Business 1 and all of R's stock in exchange for 
surrendering all of the T stock, and R receives Business 2. Under the 
2004 Proposed Regulations, the transaction could have qualified as an F 
reorganization, with T as the Transferor Corporation and R as the 
Resulting Corporation, because the only change in ownership is a 
redemption of less than all of the T shares. However, because T 
transfers 99 percent of its historic business assets (Business 1) to P 
in exchange for all of T's stock, the transaction might also qualify as 
a complete liquidation under sections 332 and 337 or an upstream 
reorganization under section 368(a)(1)(C) of T into P. This overlap--
with two potential acquiring corporations--would present unintended 
complexities. For example, as discussed above, there would be 
uncertainty as to which corporation should succeed to T's tax 
attributes.
    Accordingly, notwithstanding the overall flexibility provided with 
respect to transactions occurring contemporaneously with a Mere Change, 
the Final Regulations provide that a Mere Change cannot accommodate 
transactions that occur at the same time as the Potential F 
Reorganization if those other transactions could result in a 
corporation other than the Resulting Corporation acquiring the tax 
attributes of the Transferor Corporation.
    The same commenter requested clarification of the treatment of 
combinations of several corporations into a single, newly-created 
corporation. Consistent with the statutory language of section 
368(a)(1)(F), the Treasury Department and the IRS believe that a Mere 
Change involves only one Transferor Corporation and one Resulting 
Corporation. Thus, the Final Regulations provide that only one 
Transferor Corporation can transfer property to the Resulting 
Corporation in the Potential F Reorganization. If more than one 
corporation transfers assets to the Resulting Corporation in a 
Potential F Reorganization, none of the transfers would constitute an F 
reorganization.
3. Series of Transactions
    In some cases, business or legal considerations may require extra 
steps to complete a transaction that is intended to qualify as a Mere 
Change. As discussed in section 3.B.i. of the Background, the Treasury 
Department and the IRS concluded that the words ``however effected'' in 
the statutory definition of F reorganization reflect a Congressional 
intent to treat a series of transactions that together result in a Mere 
Change as an F reorganization, even if the transfer (or deemed 
transfer) of property from the Transferor Corporation to the Resulting 
Corporation occurs indirectly. The Final Regulations confirm this 
conclusion by providing that a Potential F Reorganization consisting of 
a series of related transactions that together result in a Mere Change 
may qualify as an F

[[Page 56910]]

reorganization, whether or not certain steps in the series, viewed in 
isolation, might, for example, be treated as a redemption under section 
304(a), as a complete liquidation under section 331 or section 332, or 
as a transfer of property under section 351. For example, the first 
step in an F reorganization of a corporation owned by individual 
shareholders could be a dissolution of the Transferor Corporation, so 
long as this step is followed by a transfer of all the assets of the 
Transferor Corporation to a Resulting Corporation. However, see Sec.  
1.368-2(k) for completed reorganizations that will not be 
recharacterized as a Mere Change as a result of one or more subsequent 
transfers of assets or stock, such as where a Transferor Corporation 
transfers all of its assets to its parent corporation in liquidation, 
followed by the parent corporation's retransfer of those assets to a 
new corporation. See also Rev. Rul. 69-617, 1969-2 CB 57 (an upstream 
merger followed by a contribution of all the target assets to a new 
subsidiary corporation is a reorganization under sections 368(a)(1)(A) 
and 368(a)(2)(C)).

4. Mere Change Within Larger Transaction

    As discussed in section 3.B.ii. of the Background, the Treasury 
Department and the IRS recognized that an F reorganization may be a 
step, or a series of steps, before, within, or after other transactions 
that effect more than a Mere Change, even if the Resulting Corporation 
has only a transitory existence following the Mere Change. In some 
cases an F reorganization sets the stage for later transactions by 
alleviating non-tax impediments to a transfer of assets. In other 
cases, prior transactions may tailor the assets and shareholders of the 
Transferor Corporation before the commencement of the F reorganization. 
Although an F reorganization may facilitate another transaction that is 
part of the same plan, the Treasury Department and the IRS have 
concluded that step transaction principles generally should not 
recharacterize F reorganizations because F reorganizations involve only 
one corporation and do not resemble sales of assets. From a federal 
income tax perspective, F reorganizations are generally neutral, 
involving no change in ownership or assets, no end to the taxable year, 
and inheritance of the tax attributes described in section 381(c) 
without a limitation on the carryback of losses. See, for example, Rev. 
Rul. 96-29 (discussed in section 3.B.ii. of the Background); Sec.  
1.381(b)-1(a)(2).
    The Final Regulations adopt the Related Events Rule of the 2004 
Proposed Regulations, which provided that related events preceding or 
following the Potential F Reorganization that constitutes a Mere Change 
generally would not cause that Potential F Reorganization to fail to 
qualify as an F reorganization. Notwithstanding the Related Events 
Rule, in the cross-border context, related events preceding or 
following an F reorganization may be relevant to the tax consequences 
under certain international provisions that apply to F reorganizations. 
For example, such events may be relevant for purposes of applying 
certain rules under section 7874 and for purposes of determining 
whether stock of the Resulting Corporation should be treated as stock 
of a controlled foreign corporation for purposes of section 367(b). 
See, for example, section 2.03(b)(iv), Example 2 in Notice 2014-52, 
2014-52 IRB 712; Rev. Rul. 83-23, 1983-1 CB 82.
    The Final Regulations also adopt the provision of the 2004 Proposed 
Regulations that the qualification of a Potential F Reorganization as 
an F reorganization would not alter the treatment of other related 
transactions. For example, if an F reorganization is part of a plan 
that includes a subsequent merger involving the Resulting Corporation, 
the qualification of a Potential F Reorganization as an F 
reorganization will not alter the tax consequences of the subsequent 
merger.

5. Transactions Qualifying Under Other Provisions of Section 368(a)(1)

    A comment to the Proposed Regulations stated that, in some cases, 
an asset transfer that would constitute a step in an F reorganization 
is also a necessary step for characterizing a larger transaction as a 
nonrecognition transaction that would not constitute an F 
reorganization. For example, assume that corporation P acquires all of 
the stock of unrelated corporation T in exchange for consideration 
consisting of $50 cash and P voting stock with $50 value (without 
making an election under section 338), and, immediately thereafter and 
as part of the same plan, T is merged into corporation S, a newly-
formed corporation wholly owned by P. Viewed in isolation, the merger 
of T into S appears to constitute a Mere Change. Provided the 
requirements for Asset Reorganization treatment are otherwise 
satisfied, however, the step transaction doctrine is applied to 
integrate the steps and treat the transaction as a statutory merger of 
T into S in which S acquires T's assets in exchange for $50 cash, $50 
of P voting stock and assumption of T's liabilities, and T distributes 
the cash and P stock to its shareholders. This merger qualifies as a 
reorganization under section 368(a)(1)(A) by reason of section 
368(a)(2)(D), and P's momentary ownership of T stock is disregarded. 
See Situation 2 of Rev. Rul. 2001-46, 2001-2 CB 321 (same). The stock 
of S is not treated as issued for the assets of T; the historic 
shareholders of T are replaced by P as the shareholder of the resulting 
corporation (S); and the transaction is not a Mere Change.
    To clarify this and similar situations, the Treasury Department and 
the IRS have determined that, if the Potential F Reorganization or a 
step thereof involving a transfer of property from the Transferor 
Corporation to the Resulting Corporation is also a reorganization or 
part of a reorganization in which a corporation in control (within the 
meaning of section 368(c)) of the Resulting Corporation is a party to 
the reorganization (within the meaning of section 368(b)), the 
Potential F Reorganization is not a Mere Change and does not qualify as 
an F reorganization. This rule will apply to transactions qualifying as 
reorganizations (i) under section 368(a)(1)(C) by reason of the 
parenthetical language therein, (ii) under section 368(a)(1)(A) by 
reason of section 368(a)(2)(D), and (iii) under sections 368(a)(1)(A) 
or (C) by reason of section 368(a)(2)(C).
    The IRS has long taken the position that, if a Transferor 
Corporation's transfer of property qualifies as a step in both an F 
reorganization and another type of reorganization in which the 
Resulting Corporation is the acquiring corporation, the transaction 
qualifies for the benefits accorded to an F reorganization. See, for 
example, Rev. Rul. 57-276, 1957-1 CB 126 (section 381(b) applies such 
that the parts of the Transferor Corporation's taxable year before and 
after an F reorganization constitute a single taxable year of the 
Acquiring Corporation, notwithstanding that the transaction also 
qualifies as another type of reorganization under section 368(a)(1)); 
Rev. Rul. 79-289, 1979-2 CB 145 (section 357(c) does not apply to an F 
reorganization even if the transaction also qualifies as another type 
of reorganization to which section 357(c) applies); Sec.  1.381(b-
1(a)(2) (providing for rules applicable to F reorganizations, 
regardless of whether such reorganizations also qualify as another type 
of reorganization).
    To avoid confusion in the application of the reorganization 
provisions, the Treasury Department and the IRS have decided that, 
except as provided earlier in this section 5. of the Explanation of

[[Page 56911]]

Revisions, if a Potential F Reorganization qualifies as a 
reorganization under section 368(a)(1)(F) and would also qualify as a 
reorganization under section 368(a)(1)(A), 368(a)(1)(C), or 
368(a)(1)(D), then for all federal income tax purposes the Potential F 
Reorganization qualifies only as a reorganization under section 
368(a)(1)(F). This rule does not apply to a reorganization within the 
meaning of sections 368(a)(1)(E) (see Rev. Rul. 2003-19, 2003-1 CB 468, 
and Rev. Rul. 2003-48, 2003-1 CB 863 (providing that certain 
demutualization transactions may involve both E Reorganizations and F 
reorganizations)) or 368(a)(1)(G) (see section 368(a)(3)(C)).

6. Distributions

    As described in section 3.D. of the Background, the 2004 Proposed 
Regulations provided that, if a shareholder received money or other 
property (including in exchange for its shares) from the Transferor 
Corporation or the Resulting Corporation in a transaction that 
constituted an F reorganization, the money or other property would be 
treated as distributed by the Transferor Corporation immediately before 
the transaction, not as additional consideration under section 356(a). 
The preamble to the 2004 Proposed Regulations indicated that this 
treatment would also be appropriate for distributions of money or other 
property in E reorganizations.
    Although the Treasury Department and the IRS considered whether a 
distribution occurring during a Potential F Reorganization should 
prevent it from qualifying as an F reorganization, the Treasury 
Department and the IRS determined to allow flexibility for such 
distributions. Nevertheless, unlike other types of reorganizations, 
which generally involve substantial changes in economic position, F 
reorganizations are mere changes in form. Accordingly, the Treasury 
Department and the IRS have concluded that any concurrent distribution 
should be treated as a transaction separate from the F reorganization. 
See Sec.  1.301-1(l); see also Bazley v. Commissioner, 331 U.S. 737 
(1947) (distribution in the context of a purported E reorganization 
treated as a dividend).
    An F reorganization is a Mere Change involving only one continuing 
corporation and is neither an acquisitive transaction nor a divisive 
transaction. From a federal income tax perspective, F reorganizations 
generally are neutral, involving no change in ownership or assets, no 
end to the taxable year, and inheritance of the tax attributes 
described in section 381(c). A distribution that occurs at the same 
time as a Mere Change is, in substance, a distribution from one 
continuing corporation and is functionally separate from the Mere 
Change. The Treasury Department and the IRS believe that a distribution 
from one continuing corporation should not be treated the same as an 
exchange of money or other property for stock of a target corporation 
in an acquisitive reorganization. Instead, the distribution should be 
treated as a separate transaction occurring at the same time. Although 
the 2004 Proposed Regulations would have treated a distribution as 
occurring immediately before the transaction qualifying as an F 
reorganization, the Treasury Department and the IRS believe it is 
sufficient to treat the distribution as a separate transaction that 
occurs at the same time as the F reorganization.

7. Entities Treated as Corporations for Federal Tax Purposes

    As explained in this preamble, the first requirement of the Final 
Regulations is that all of the stock of the Resulting Corporation be 
distributed in exchange for stock of the Transferor Corporation. 
Certain entities may be treated as corporations for federal tax 
purposes even though they do not have owners that could be treated as 
shareholders for federal tax purposes to whom the profits of the 
corporation would inure (for example, some charitable organizations 
described in section 501(c)(3)). Nevertheless, these entities may be 
able to engage in corporate reorganizations. Thus, no inference should 
be drawn from the use of the terms ``stock'' or ``shareholders'' in 
these Final Regulations with respect to the ability of such entities to 
engage in reorganizations under section 368(a)(1)(F).

8. Employer Identification Numbers

    The Treasury Department and the IRS are studying how to assign (or 
reassign) employer identification numbers (EINs) to taxpayers following 
an F reorganization, including in cases in which the Transferor 
Corporation remains in existence as a disregarded entity, and comments 
on this issue are welcome.

Effective Date

    These final regulations are effective for transactions occurring on 
or after September 21, 2015.

Effect on Other Documents

    The following publications are obsolete as of September 21, 2015.
    Rev. Rul. 57-276, 1957-1 CB 126; Rev. Rul. 58-422, 1958-2 CB 145; 
Rev. Rul. 66-284, 1966-2 CB 115; Rev. Rul. 79-250, 1979-2 CB 156; Rev. 
Rul. 79-289, 1979-2 CB 145; and Rev. Rul. 96-29, 1996-1 CB 50; are 
obsoleted. Rev. Rul. 87-27, 1987-1 CB 134; and Rev. Rul. 88-25, 1988-1 
CB 116; are obsoleted in part (with respect to the determination of 
whether a transaction qualifies as a reorganization under section 
368(a)(1)(F)).

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required. It has also been determined that section 553(b) of the 
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to 
these regulations, and because these regulations do not impose a 
collection of information on small entities, the Regulatory Flexibility 
Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of 
the Code, the proposed regulations preceding these final regulations 
were submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small businesses, and no 
comments were received.

Drafting Information

    The principal author of these final regulations is Douglas C. Bates 
of the Office of Associate Chief Counsel (Corporate). However, other 
personnel from the Treasury Department and the IRS participated in 
their development.

Availability of IRS Documents

    IRS revenue rulings, revenue procedures, and notices cited in this 
Treasury decision are made available by the Superintendent of 
Documents, U.S. Government Printing Office, Washington, DC 20402.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *

[[Page 56912]]

Sec.  1.269B-1  [Amended]


0
Par. 2. Section 1.269B-1 is amended by removing the language in 
paragraph (c) ``1.367(a)-1T(e), (f)'' and adding ``1.367(a)-1(e), (f)'' 
in its place.

0
Par. 3. Section 1.367(a)-1 is amended by:
0
1. Revising paragraph (d)(4) through (d)(5).
0
2. Adding paragraphs (e) and (f).
0
3. Revising paragraphs (g)(1) through (g)(3).
0
4. Adding two sentences at the end of paragraph (g)(4).
    The additions and revisions read as follows:


Sec.  1.367(a)-1  Transfers to foreign corporations subject to section 
367(a): In general.

* * * * *
    (d) * * *
    (4) through (5) [Reserved]. For further guidance, see Sec.  
1.367(a)-1T(d)(4) through (5).
    (e) Close of taxable year in certain section 368(a)(1)(F) 
reorganizations. If a domestic corporation is the transferor 
corporation in a reorganization described in section 368(a)(1)(F) after 
March 30, 1987, in which the acquiring corporation is a foreign 
corporation, then the taxable year of the transferor corporation shall 
end with the close of the date of the transfer and the taxable year of 
the acquiring corporation shall end with the close of the date on which 
the transferor's taxable year would have ended but for the occurrence 
of the transfer. With regard to the consequences of the closing of the 
taxable year, see section 381 and the regulations thereunder.
    (f) Exchanges under sections 354(a) and 361(a) in certain section 
368(a)(1)(F) reorganizations--(1) Rule. In every reorganization under 
section 368(a)(1)(F), where the transferor corporation is a domestic 
corporation, and the acquiring corporation is a foreign corporation, 
there is considered to exist--
    (i) A transfer of assets by the transferor corporation to the 
acquiring corporation under section 361(a) in exchange for stock (or 
stock and securities) of the acquiring corporation and the assumption 
by the acquiring corporation of the transferor corporation's 
liabilities;
    (ii) A distribution of the stock (or stock and securities) of the 
acquiring corporation by the transferor corporation to the shareholders 
(or shareholders and security holders) of the transferor corporation; 
and
    (iii) An exchange by the transferor corporation's shareholders (or 
shareholders and security holders) of their stock (or stock and 
securities) of the transferor corporation for stock (or stock and 
securities) of the acquiring corporation under section 354(a).
    (2) Rule applies regardless of whether a continuance under 
applicable law. For purposes of paragraph (f)(1) of this section, it 
shall be immaterial that the applicable foreign or domestic law treats 
the acquiring corporation as a continuance of the transferor 
corporation.
    (g)(1) through (3) [Reserved]. For further guidance, see Sec.  
1.367(a)-1T(g)(1) through (3).
    (4) * * * The rules in paragraph (e) of this section apply to 
transactions occurring on or after March 31, 1987. The rules in 
paragraph (f) of this section apply to transactions occurring on or 
after January 1, 1985.

0
Par. 4. Section 1.367(a)-1T is amended by revising paragraphs (e) and 
(f) to read as follows:


Sec.  1.367(a)-1T  Transfers to foreign corporations subject to section 
367(a): In general (temporary).

* * * * *
    (e) [Reserved]. For further guidance, see Sec.  1.367(a)-1(e).
    (f) [Reserved]. For further guidance, see Sec.  1.367(a)-1(f).
* * * * *

0
Par. 5. Section 1.368-2 is amended by adding paragraph (m) to read as 
follows:


Sec.  1.368-2  Definition of terms.

* * * * *
    (m) Qualification as a reorganization under section 368(a)(1)(F)--
(1) Mere change. To qualify as a reorganization under section 
368(a)(1)(F), a transaction must result in a mere change in identity, 
form, or place of organization of one corporation, however effected (a 
mere change). A mere change can consist of a transaction that involves 
an actual or deemed transfer of property from one corporation (a 
transferor corporation) to one other corporation (a resulting 
corporation). 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. For purposes of this paragraph (m), a transaction or a 
series of related transactions that can be tested against the 
requirements set forth in paragraphs (m)(1)(i) through (vi) of this 
section (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, and 
it ends when the transferor corporation has distributed (or is deemed 
to have distributed) to its shareholders the consideration it receives 
(or is deemed to receive) from the resulting corporation and has 
completely liquidated for federal income tax purposes. For purposes of 
this paragraph (m), deemed transfers include, for example, those 
provided in Sec.  301.7701-3(g)(1)(iv) of this chapter (when an entity 
disregarded as separate from its owner elects under paragraph Sec.  
301.7701-3(c)(1)(i) of this chapter to be classified as an association, 
the owner of the entity is deemed to transfer all of the assets and 
liabilities of the entity to the association in exchange for stock of 
the association). Deemed transfers also include those resulting from 
the application of step transaction principles. For example, step 
transaction principles may disregard a transitory holding of property 
by an individual after a liquidation of the transferor corporation and 
before a subsequent transfer of the transferor corporation's property 
to the resulting corporation. Step transaction principles may also 
treat a contribution of all the stock of the transferor corporation to 
the resulting corporation, followed by a liquidation (or deemed 
liquidation) of the transferor corporation, as a deemed transfer of the 
transferor corporation's property to the resulting corporation, 
followed by a distribution of stock of the resulting corporation in 
complete liquidation of the transferor corporation.
    (i) Resulting corporation stock distributed in exchange for 
transferor corporation 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. However, for purposes of this paragraph (m)(1)(i) and 
paragraph (m)(1)(ii) of this section, a de minimis amount of stock 
issued by the resulting corporation other than in respect of stock of 
the transferor corporation to facilitate the organization of the 
resulting corporation or maintain its legal existence is disregarded.
    (ii) 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. However, this requirement is 
not violated if one or more holders of stock in the transferor 
corporation exchange

[[Page 56913]]

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, or receive a distribution of money 
or other property from either the transferor corporation or the 
resulting corporation, whether or not in exchange for stock in the 
transferor corporation or the resulting corporation.
    (iii) Prior assets or attributes of resulting corporation. 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. However, this 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 assets, or 
holds the proceeds of borrowings undertaken in connection with the 
potential F reorganization.
    (iv) Liquidation of transferor corporation. The transferor 
corporation must completely liquidate, for federal income tax purposes, 
in the potential F reorganization. However, the transferor corporation 
is not required to dissolve under applicable law and may retain a de 
minimis amount of assets for the sole purpose of preserving its legal 
existence.
    (v) Resulting corporation is the only acquiring corporation. 
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).
    (vi) Transferor corporation is the only acquired corporation. 
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).
    (2) Non-application of continuity of interest and continuity of 
business enterprise requirements. A continuity of the business 
enterprise and a continuity of interest are not required for a 
potential F reorganization to qualify as a reorganization under section 
368(a)(1)(F). See Sec.  1.368-1(b).
    (3) Related transactions--(i) Series of transactions. 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. However, see 
paragraph (k) of this section for transactions that qualify as 
reorganizations under section 368(a) and will not be recharacterized as 
a mere change as a result of one or more subsequent transfers of assets 
or stock.
    (ii) Mere change within a larger transaction. A potential F 
reorganization that qualifies as a reorganization under section 
368(a)(1)(F) may occur before, within, or after other transactions that 
effect more than a mere change, even if the resulting corporation has 
only transitory existence. 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). 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).
    (iii) Distributions treated as separate transactions. As provided 
in paragraph (m)(1)(ii) of this section, a potential F reorganization 
may qualify as a mere change even though a holder of stock in the 
transferor corporation receives a distribution of money or other 
property from either the transferor corporation or the resulting 
corporation. If a shareholder receives money or other property 
(including in exchange for its shares) from the transferor corporation 
or the resulting corporation in a potential F reorganization that 
qualifies as a reorganization under section 368(a)(1)(F), then the 
receipt of money or other property (including any exchanged for shares) 
is treated as an unrelated, separate transaction from the 
reorganization, whether or not connected in a formal sense. See Sec.  
1.301-1(l).
    (iv) Transactions also qualifying under other provisions of section 
368(a)(1). In certain cases, a potential F reorganization would (but 
for this paragraph (m)(3)(iv)) qualify both as a reorganization under 
section 368(a)(1)(F) and as a reorganization or part of a 
reorganization under another provision of section 368(a)(1). The 
following rules determine which of these overlapping qualifications 
applies.
    (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 (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).
    (B) Except as provided in paragraph (m)(3)(iv)(A) of this section, 
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).
    (4) Examples. The following examples illustrate the application of 
this paragraph (m). Unless the facts otherwise indicate, A, B, and C 
are domestic individuals; P, S, T, X, Y, and Z (and similar 
designations) are domestic corporations; each transaction is entered 
into for a valid business purpose; all persons and transactions are 
unrelated; and all other relevant facts are set forth in the examples.

    Example 1. Cash contribution and redemption--no mere change. C 
owns all of the stock of X, a State A corporation. The net value of 
X's assets and liabilities is $1,000,000. Y, a State B corporation, 
seeks to acquire the assets of X for cash. To effect the 
acquisition, Y and X enter into an agreement under which Y will 
contribute $1,000,000 to Z, a newly formed corporation of which Y is 
the sole shareholder, in exchange for Z stock and X will merge into 
Z. In the merger, C surrenders all of the X stock and receives the 
$1,000,000 Y contributed to Z. C receives no Z stock in the 
transaction. After the merger, Y holds all of the Z stock, and Z 
holds all of the assets and liabilities previously held by X. Z 
stock is not distributed to the shareholders of X in exchange for 
their stock in X as required by paragraph (m)(1)(i) of this section, 
and the transaction results in a change in the ownership of X that 
does not result from an exchange or distribution described in 
paragraph (m)(1)(ii) of this section. Therefore, the merger of X 
into Z is not a mere change of X and does not qualify as a 
reorganization under section 368(a)(1)(F).
    Example 2. Cash redemption--mere change. A owns 75%, and B owns 
25%, of the stock of X, a State A corporation. The management of X 
determines that it would be in the best interest of X to reorganize 
under the laws of State B. Accordingly, X forms Y, a State B 
corporation, and X and Y enter into an agreement under which X will 
merge into Y. A does not wish to own stock in Y. In the

[[Page 56914]]

merger, 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 change in 
ownership caused by A's surrender of X stock results from a 
distribution and exchange described in paragraph (m)(1)(ii) of this 
section. Therefore, the merger of X into Y is a mere change of X and 
qualifies as a reorganization under section 368(a)(1)(F). Under 
paragraph (m)(3)(iii) of this section, A's surrender of X stock for 
cash is treated as a transaction, separate from the reorganization, 
to which section 302(a) applies.
    Example 3. Pre-transaction de minimis stock issuance--mere 
change--other provisions of section 368(a)(1). P owns all of the 
stock of S, a Country A corporation. The management of P determines 
that it would be in the best interest of S to change its place of 
incorporation to Country B. Under Country B law, a corporation must 
have at least two shareholders to enjoy limited liability. P is 
advised by its Country B advisors that the new corporation should 
issue 1% of its stock to a shareholder that is not P's nominee to 
assure satisfaction of the two-shareholder requirement. As part of 
an integrated plan, C, an officer of S, organizes Y, a Country B 
corporation with 1,000 shares of common stock authorized, and 
contributes cash to Y in exchange for ten of the common shares. S 
then merges into Y under the laws of Country A and Country B. 
Pursuant to the plan of merger, P surrenders its shares of S stock 
and receives 990 shares of Y common stock. 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 within the meaning of 
paragraph (m)(1)(i) of this section. Therefore, the issuance of this 
stock to a new shareholder does not prevent the merger of S into Y 
from qualifying as a mere change of S. Accordingly, the merger is a 
reorganization under section 368(a)(1)(F). Without regard to the 
merger's qualification under section 368(a)(1)(F), the merger would 
also qualify as a reorganization under both section 368(a)(1)(A) and 
section 368(a)(1)(D). Under paragraph (m)(3)(iv)(B) of this section, 
if a potential F reorganization qualifies as a reorganization under 
section 368(a)(1)(F), and would also qualify under one or more of 
sections 368(a)(1)(A) or 368(a)(1)(D), the potential F 
reorganization qualifies only as a reorganization under 
368(a)(1)(F), and neither section 368(a)(1)(A) nor section 
368(a)(1)(D) will apply.
    Example 4. Pre-transaction assets, attributes--no mere change. A 
owns all of the stock of P, and P owns all of the stock of S, which 
is engaged in a manufacturing business. P has owned the stock of S 
for many years. P owns no assets other than the stock of S. A 
decides to eliminate the holding company structure by merging P into 
S. Because it operates a manufacturing business, the potential 
resulting corporation, S, holds property and has tax attributes 
immediately before the potential F reorganization. Therefore, under 
paragraph (m)(1)(iii) of this section, the merger of P into S is not 
a mere change of P and does not qualify as a reorganization under 
section 368(a)(1)(F). The same result would occur under paragraph 
(m)(1)(iii) of this section if, instead of P merging into S, S 
merged into P, because P, the potential resulting corporation, holds 
property (the stock of S) and has tax attributes immediately before 
the potential F reorganization.
    Example 5. Series of related transactions--mere change. P owns 
all of the stock of S1, a State A corporation. The management of P 
determines that it would be in the best interest of S1 to change its 
place of incorporation to State B. Accordingly, under an integrated 
plan, P forms S2, a new State B corporation; P contributes the S1 
stock to S2; and S1 merges into S2 under the laws of State A and 
State B. Under paragraph (m)(3)(i) of this section, a series of 
transactions that together result in a mere change of one 
corporation may qualify as a reorganization under section 
368(a)(1)(F). The contribution of S1 stock to S2 and the merger of 
S1 into S2 together constitute a mere change of S1. Therefore, the 
potential F reorganization qualifies as a reorganization under 
section 368(a)(1)(F). Without regard to its qualification under 
section 368(a)(1)(F), the potential F reorganization would also 
qualify as a reorganization under both section 368(a)(1)(A) and 
section 368(a)(1)(D). Under paragraph (m)(3)(iv)(B) of this section, 
if a potential F reorganization qualifies as a reorganization under 
section 368(a)(1)(F) and would also qualify under one or more of 
sections 368(a)(1)(A) or 368(a)(1)(D), it qualifies only as a 
reorganization under 368(a)(1)(F), and neither section 368(a)(1)(A) 
nor section 368(a)(1)(D) will apply. The result would be the same 
with respect to qualification under section 368(a)(1)(F) if, instead 
of merging into S2, S1 completely liquidates.
    Example 6. Post-transaction stock sale--mere change. P owns all 
of the stock of S1, a State A corporation. The management of P 
determines that it would be in the best interest of S1 to change its 
place of incorporation to State B. Accordingly, P forms S2, a new 
State B corporation. S1 then merges into S2 under the laws of State 
A and State B. Immediately thereafter, and as part of the same plan, 
P sells all of its stock in S2 to an unrelated party. Without regard 
to P's sale of S2 stock, the merger of S1 into S2 is a potential F 
reorganization that qualifies as a mere change of S1 within the 
meaning of paragraph (m)(1) of this section. Under paragraph 
(m)(3)(ii) of this section, related events that occur before or 
after a potential F reorganization that qualifies as a mere change 
generally do not cause that potential F reorganization to fail to 
qualify as a reorganization under section 368(a)(1)(F). Therefore, 
P's sale of the S2 stock is disregarded in determining whether the 
merger of S1 into S2 is a mere change of S1. Accordingly, the merger 
of S1 into S2 qualifies as a reorganization under section 
368(a)(1)(F). The result would be the same if, instead of the S2 
stock being sold by P, S2 merges into a previously unrelated 
corporation and terminates its separate existence.
    Example 7. Post-transaction redemption--mere change. A owns all 
of the stock of T. P owns all of the stock of S. Each of T and S is 
a State A corporation engaged in a manufacturing business. The 
following transactions occur pursuant to a single plan. First, T 
merges into S with A receiving solely stock in P. Second, P changes 
its state of incorporation to State B by merging into newly 
incorporated New P under the laws of State A and State B. Third, New 
P redeems all the New P stock issued to A in respect of A's P stock 
(initially issued to A in respect of A's T stock) for cash. Without 
regard to the other steps, the merger of P into New P is a potential 
F reorganization that qualifies as a reorganization under section 
368(a)(1)(F). Under paragraph (m)(3)(ii) of this section, related 
events that occur before or after a potential F reorganization that 
qualifies as a mere change generally do not prevent that potential F 
reorganization from qualifying as a reorganization under section 
368(a)(1)(F). Therefore, the merger of P into New P qualifies as a 
reorganization under section 368(a)(1)(F). Under paragraph 
(m)(3)(ii) of this section, the qualification of the merger of P 
into New P as a reorganization under section 368(a)(1)(F) does not 
alter the tax treatment of the merger of T into S. Because the P 
shares received by A in respect of the T shares (exchanged for New P 
shares in the mere change of P into New P) are redeemed for cash 
pursuant to the plan, the merger of T into S does not satisfy the 
continuity of interest requirement of Sec.  1.368-1(e) and therefore 
does not qualify as a reorganization under section 368(a).
    Example 8. Series of related transactions--mere change. P owns 
all of the stock of S, a State A corporation. The management of P 
determines that it would be in the best interest of S to change its 
form from a State A corporation to a State A limited partnership but 
to continue to be treated as a corporation for federal tax purposes. 
Accordingly, P contributes 1% of the S stock to newly formed LLC, a 
limited liability company, in exchange for all of the membership 
interests in LLC. P is the sole member of LLC. Under Sec.  301.7701-
3 of this chapter, LLC is disregarded as an entity separate from its 
owner, P. Then, under a State A statute, S converts to a State A 
limited partnership. In the conversion, P's interest as a 99% 
shareholder of S is converted into a 99% limited partner interest, 
and LLC's interest as a 1% shareholder of S is converted into a 1% 
general partner interest. S also elects, under Sec.  301.7701-3(c) 
of this chapter, to be classified as a corporation for federal 
income tax purposes, effective on the same day as the conversion. 
Under paragraph (m)(3)(i) of this section, the conversion of S from 
a State A corporation to a State A limited partnership, together 
with the election to treat S as a corporation for federal tax 
purposes, results in a mere change of S and qualifies as a 
reorganization under section 368(a)(1)(F).
    Example 9. Other acquiring corporation--no mere change. P owns 
80%, and A owns 20%, of the stock of S. A and the management of P 
determine that it would be in the best interest of S to completely 
liquidate while A continues to operate part of the business of S in 
corporate form. Accordingly, S distributes 80% of its assets to P 
and 20% of its assets to A; S dissolves; and A contributes the 
assets it receives from S to newly incorporated New S in exchange

[[Page 56915]]

for all of the stock of New S. S's distribution of 80% of its 
property to P as part of the complete liquidation of S meets the 
requirements of section 332. Thus, section 381(a)(1) applies to P's 
acquisition of 80% of the property held by S immediately before the 
transaction. Under paragraph (m)(1)(v) of this section, the 
potential F reorganization in which 20% of the property held by S 
immediately before the transaction is transferred to New S cannot be 
a mere change of S, because section 381(a) applies to P's 
acquisition of property held by S immediately before the potential F 
reorganization. Accordingly, sections 331 and 336 apply to A's 
acquisition of property from S and S's distribution of property to 
A, and section 351 applies to A's contribution of that property to 
New S.
    Example 10. Other acquiring corporation--no mere change. P owns 
all of the stock of S1. The management of P determines that it would 
be in the best interest of S1 to merge S1 into P. Accordingly, 
pursuant to a state merger statute, S1 merges into P. Immediately 
afterward and as part of the same plan, P contributes 50% of the 
former assets of S1 to newly incorporated S2 in exchange for all of 
the stock of S2. The transaction does not qualify as a complete 
liquidation of S1 under section 332 (because of the reincorporation 
of some of S1's assets) but does qualify as a reorganization under 
section 368(a)(1)(A) by reason of section 368(a)(2)(C) and paragraph 
(k) of this section. Under paragraph (m)(1)(v) of this section, the 
potential F reorganization in which some of the former assets of S1 
are transferred (in form) first to P, and then to S2, is not a mere 
change of S1, because section 381(a) applies to P's acquisition of 
property held by S1 immediately before the potential F 
reorganization. Furthermore, under paragraph (m)(3)(iv)(A) of this 
section, P, the corporation in control of S2 within the meaning of 
section 368(c), is a party to the reorganization within the meaning 
of section 368(b). Thus, the indirect transfer of property from S1 
to S2 does not qualify under section 368(a)(1)(F).
    Example 11. Other acquiring corporation--mere change. P owns all 
of the stock of S1. S1's only asset is all of the equity interest in 
LLC2, a domestic limited liability company. Under Sec.  301.7701-3 
of this chapter, LLC2 is disregarded as an entity separate from its 
owner, S1. Pursuant to an integrated plan to undergo a 
reorganization under 368(a)(1)(F), S1 and LLC2 undergo the following 
two state law conversions. First, under state law LLC2 converts into 
S2, a corporation. Second, under state law S1 converts into LLC1, a 
domestic limited liability company. Under Sec.  301.7701-3 of this 
chapter, LLC1 is disregarded as an entity separate from its owner, 
P. As a result of the two conversions, S1 is deemed to transfer its 
assets to S2 in exchange for all of the stock in S2 and then 
distribute the S2 stock to P in complete liquidation of S1. The two 
conversions, viewed as a potential F reorganization, constitute a 
mere change of S1, and that potential F reorganization qualifies as 
a reorganization under section 368(a)(1)(F). The result would be the 
same if, instead of converting into S2 pursuant to state law, LLC2 
elected under Sec.  301.7701-3(c) to change its classification for 
federal tax purposes and be treated as an association taxable as a 
corporation, provided the effective date of the election (and its 
resulting deemed transactions) occurs before the conversion of S1.
    Example 12. Other acquiring corporation--no mere change. The 
facts are the same facts as in Example 11, except that S1 converts 
into LLC1 prior to the conversion of LLC2 into S2. As a result of 
these conversions, S1 is deemed to distribute all of its assets to P 
in exchange for all of P's S1 stock, and P is deemed to transfer all 
of those assets to S2 in exchange for all of the stock in S2. The 
transaction does not qualify as a complete liquidation of S1 under 
section 332 (because of the reincorporation of S1's assets), but 
does qualify as a reorganization under section 368(a)(1)(C) by 
reason of section 368(a)(2)(C) and paragraph (k) of this section. 
Under paragraph (m)(1)(v) of this section, the potential F 
reorganization in which the former assets of S1 are deemed 
transferred, first by S1 to P, and then by P to S2, is not a mere 
change of S1 because section 381(a) applies to P's acquisition of 
property held by S1 immediately before the potential F 
reorganization. Furthermore, the corporation in control of S2, 
within the meaning of section 368(c), is a party to the 
reorganization within the meaning of section 368(b). Thus, the 
indirect transfer of property from S1 to S2 does not qualify under 
section 368(a)(1)(F).
    Example 13. Series of related transactions--no mere change. X 
owns all of the stock of T. P acquires all of the stock of T in 
exchange for consideration consisting of $50 cash and P voting stock 
with $50 value. No election is made under section 338. Immediately 
thereafter and as part of the same plan, P forms S as a wholly-owned 
subsidiary, and T is merged into S. Viewed in isolation as a 
potential F reorganization, the merger of T into S appears to 
constitute a mere change of T. However, the acquisition of the T 
stock by P and the merger of T into S, viewed together, qualify as a 
reorganization under section 368(a)(1)(A) by reason of section 
368(a)(2)(D). The step transaction doctrine is applied treat the 
transaction as a statutory merger of T into S in exchange for $50 
cash and $50 of P's voting stock (and S's assumption of T's 
liabilities), P's momentary ownership of T stock is disregarded. 
Under paragraph (m)(3)(iv)(A) of this section, P, the corporation in 
control of S, is a party to the reorganization within the meaning of 
section 368(b). Thus, the transfer of property from T to S does not 
qualify under section 368(a)(1)(F).
    Example 14. Multiple transferor corporations--no mere change. P 
owns all the stock of S1 and S2. The management of P determines it 
would be in the best interest of S1 and S2 to operate as a single 
corporation. P forms S3 and, under applicable corporate law, S1 and 
S2 simultaneously merge into S3. Immediately after the merger, P 
owns all the stock of S3. Each of the mergers can be tested as a 
potential F reorganization. However, immediately after the 
simultaneous mergers, the resulting corporation, S3, holds property 
acquired from a corporation other than the transferor corporation, 
and section 381(a) would apply to the acquisition of such property. 
Therefore, under paragraph (m)(1)(vi) of this section, neither 
potential F reorganization is a mere change, and neither merger into 
S3 qualifies as a reorganization under section 386(a)(1)(F). The 
result would be different if the mergers were not simultaneous. If 
S1 completed its merger into S3 before S2 began its merger into S3, 
the merger of S1 into S3 would qualify as a reorganization under 
section 368(a)(1)(F), but the merger of S2 into S3 would not so 
qualify (although it would qualify as a reorganization under 
sections 368(a)(1)(A) and 368(a)(1)(D)).

    (5) Effective/Applicability Date. This paragraph (m) applies to 
transactions occurring on or after September 21, 2015.


Sec.  1.381(b)-1  [Amended]

0
Par. 6. Section 1.381(b)-1 is amended by removing the language in 
paragraph (a)(1) ``1.367(a)-1T(e)'' and adding ``1.367(a)-1(e)'' in its 
place.

John M. Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: September 9, 2015.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2015-23603 Filed 9-18-15; 8:45 am]
BILLING CODE 4830-01-P