IRS issues letter ruling on internal reorganization

Tax Hot Topics newsletterThe IRS ruled in a private letter ruling (PLR 201918015) that the continuity of business enterprise (COBE) requirement was satisfied for the purposes of determining whether a transaction qualified as a tax-free reorganization described in Section 368(a)(1)(A).

In the ruling, a corporation (HoldCo) directly owned stock of another corporation (OpCo). The steps of the proposed transaction in the ruling included that OpCo would form a new corporation (Merger Sub) and a limited liability company (LLC). LLC would be treated as a disregarded entity to OpCo. Merger Sub would merge with and into HoldCo, with HoldCo surviving. As a result of the first merger, OpCo directly owned the stock of HoldCo and HoldCo’s shareholder received OpCo shares in exchange for its HoldCo shares.  Subsequently, HoldCo would merge with and into LLC, at which time the separate existence of HoldCo would cease.

Under Treas. Reg. Sec. 1.368-1(d), COBE is satisfied when the acquiring corporation either continues the target corporation’s historic business or uses a significant portion of the target’s historic business assets in a business. In Rev. Rul. 85-197, the IRS ruled that the COBE requirement was satisfied when a holding company merged with and into its wholly-owned operating subsidiary because the historic business of the holding company was the business of its operating subsidiary.

In PLR 201918015, the IRS ruled that the COBE requirement was satisfied for purposes of determining whether the proposed transaction was a reorganization under Section 368(a)(1)(A) citing Rev. Rul. 85-197. Notwithstanding that HoldCo did not formally merge into OpCo, the IRS ruled that the form of the proposed transaction will be disregarded, and that the proposed transaction will be treated as a merger of HoldCo into OpCo provided that the proposed transaction would otherwise qualify as a reorganization under Section 368(a)(1)(A).

Jeff Borghino
Washington National Tax Office
T +1 202 521 1532

Evan Adams
Washington National Tax Office
T +1 202 521 1591

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