F Reorganizations

Overview: F Reorganization: A Mere Change in Identity, Form or Place of Organization

Certain changes in corporate structure and place and form of incorporation can be effectuated tax free under Section 368 of the Internal Revenue Code. Section 368(a)(1)(F) allows for a tax free reorganization where there is “a mere change in identity, form or place of organization of one corporation, however effected.”

For example, for various reasons, a corporation organized in one state may want to be operate in another state and wants to transfer the corporate charter while retaining its corporate tax attributes, history and licenses.

Tax Requirements

Here are some of the tax requirements needed to effectuate this tax free reorganization.

All Stock of the Resulting Corporation is Issued In Exchange of The Stock of the Old Corporation

All the stock of the resulting corporation must be issued in exchange for and in respect of the stock of the transferring (old) corporation.

No Change In Ownership of the Corporation

There is no change in the ownership of the corporation in the transaction. So the shareholders who owned the old corporation must own the new corporation in the same proportions.

Transferring Corporation Liquidates

The transferring corporation must be completely liquidated to comply with the F reorganization rules. However, a legal dissolution of the transferring corporation is not required. This is a subtle legal distinction but allows the parties to comply here with only a liquidation. However, legal prudence would dictate in a complete dissolution in most cases.

Resulting Corporation Holds No Property or Tax Attributes Before the Transfer

The resulting corporation should not have any assets or engage in any activity before the F reorganization is undertaken.

F Reorganization Must Meet Other Valid Judicial Tests

As with any reorganizations under Section 368, the F reorganization must:

• Have a valid business purpose, and
• Meet the economic substance test.

Conclusion:

These and other reorganizations allow changes in corporate structure and place of incorporation on a tax-free basis if the proper steps and due diligence is taken to effectuate these transfers.

The usual warning is to not try this on your own, but have tax counsel assist you in these complicated and technical transactions that require compliance with both federal and state laws.

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