Statutory Mergers: A Reorganizations
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Internal Revenue Code § 368(a)(1)(A)In an A reorganization, the target corporation ("Target") merges into the acquiring corporation ("Acquiring") with the former Target shareholders receiving the merger consideration in exchange for their Target stock.
A Reorganization Diagram
To qualify as a reorganization, a merger must constitute a "statutory merger or consolidation." The IRS had long interpreted this language as requiring the merger to be effected under the laws of the United States, a state or territory or the District of Columbia. Under this view, foreign mergers, amalgamations or consolidations were not A reorganizations. However, in regulations adopted in 2006, the IRS reversed course and now permits transactions effected pursuant to statutes of foreign jurisdictions or United States possessions to qualify as long as the statute operates in a manner comparable to a domestic merger statute (i.e., by operation of law the separate legal existence of a merged entity ceases and all its assets and liabilities become assets and liabilities of the surviving entity).
Under temporary regulations adopted in 2003, and later incorporated in the final 2006 regulations, a merger with and into a disregarded entity (e.g., a single-member LLC) can qualify as an A reorganization as long as the owner of the disregarded entity is classified as a corporation for U.S. federal tax purposes.
Because of the continuity of interest requirement, a significant portion (i.e., 40%) of the consideration received by the former Target shareholders must be Acquiring stock.
Acquiring can transfer the former Target assets acquired in the merger to an Acquiring subsidiary as long as Acquiring is in control of that subsidiary.