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Thursday, February 02, 2006


Under the Internal Revenue Code, the reorganization provisions generally allow corporations to merge or combine without incurring income tax. The nontax treatment generally also applies to the shareholders of the corporations who may be exchanging stock of one corporation for another as part of the transaction. These provisions are an exception to the general tax rules that provide when a taxpayer exchanges property with other property, this is treated as if the property they are giving up has been sold for the value of what is received.

One type of "reorganization" that qualifies for this treatment is an "A" reorganization (named after Code Section 368(a)(1)(A), which generally provides for nonrecognition in regard to "statutory merger" transactions). In regulations issued this week, the Treasury Department has modernized the definition of what type of mergers qualify as an "A" reorganization.

Some important provisions of the new Regulations include:

-provisions that corporate combinations involving a "disregarded entity" under the Code (e.,g., single member LLCs which have not elected to be taxed as an association) will not qualify as an "A" reorganization.

-clarification that the acquisition of control of one corporation by another, and then an election of the acquired entity to be a disregarded entity, while in substance similar to an "A" reorganization since all of the assets of the target end up owned by the acquiring corporation for income tax purposes, does not qualify for "A" reorganization treatment because the target entity does not cease its separate legal existence under local law (although the IRS may revisit this issue in the future).

-a combination transaction between a corporation and a partnership may give rise to "A" reorganization treatment where the resulting entity ends up as a disregarded entity owned by another corporation.

-combinations or amalgamations of corporations into one "new" corporation can qualify for "A" reorganization treatment.

Treas.Regs. Section 1.368-2(b), as finalized.

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