Final regulations: "F reorganizations" and outbound “F reorganizations”

"F reorganizations" final regulations

The Treasury Department and the IRS today released for publication in the Federal Register final regulations (T.D. 9739) as 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 reorganizations.” The final regulations also address F reorganizations in which the transferor corporation (the “Transferor Corporation”) is a domestic corporation and the acquiring corporation (the “Resulting Corporation”) is a foreign corporation—an “outbound F reorganization.”


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These final regulations [PDF 324 KB] adopt rules that were included in 2004 proposed regulations (the “2004 Proposed Regulations”) with certain changes.

According to the preamble, these regulations reflect the IRS and Treasury position that the statutory definition of F reorganization reflects a congressional intent to treat as an F reorganization a series of transactions that together result in a “mere change.” This treatment is consistent with the 2004 Proposed Regulations.


The Treasury Department and IRS have historically 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, 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% of the aggregate value of its outstanding stock immediately prior to the offering.  In Situation 2, 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 regulations issued in 2005 (the “2005 Final Regulations”), that the continuity of interest and continuity of business enterprise requirements of Reg. section 1.368-1(d) and (e) that are generally applicable to reorganizations under section 368 do not apply to F reorganizations.  Note that the 2005 Final Regulations did not otherwise adopt the 2004 Proposed Regulations.

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 four requirements for a “mere change” described in the 2004 Proposed Regulations—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 (including those occurring outside the “bubble”) and thereby potentially prevent the transaction from qualifying as an F reorganization.

Final regulations

The preamble state that today’s final regulations (“2015 Final Regulations”) generally adopt the provisions of the 2004 Proposed Regulations not previously adopted in 2005 Regulations, with certain specified changes (as well as several clarifying, non-substantive changes). The 2015 Final Regulations also include rules regarding outbound F reorganizations by adopting, without substantive change, the provisions of 1990 Proposed Regulations relating to section 367(a) and making conforming revisions to other regulations.

As described in the preamble to today’s release, similar to the 2004 Proposed Regulations, the 2015 Final Regulations treat the Resulting Corporation in an F reorganization as the functional equivalent of the Transferor Corporation. These 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).  

  • Four of the six requirements are generally adopted from the 2004 Proposed Regulations.
  • The fifth and sixth requirements address comments received with respect to the 2004 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)

These six requirements are consistent with the idea 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, 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. Today’s final regulations also provide guidance as to which steps are to be analyzed under the six requirement test.  Specifically, these 2015 Final Regulations provide that a transaction or a series of related transactions to be tested against the six requirements:

  • Begin when the Transferor Corporation begins transferring (or is deemed to begin transferring) its assets to the Resulting Corporation, and
  • End 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

In the context of determining whether a series of steps 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 Reg. section 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.  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.

Outbound F reorganizations

With respect to outbound F reorganizations, the 2015 Final Regulations provide that when an outbound F reorganization occurs, the tax year of the Transferor Corporation ends on the date of the transfer, and the tax year of the Resulting Corporation ends with the close of the date the Transferor Corporation’s year would have ended if the transfer had not occurred.

In addition, the 2015 Final Regulations confirm that (notwithstanding the single corporation concept for F reorganizations described above and notwithstanding whether foreign law treats the Resulting Corporation as a continuance of the Transferor Corporation) an outbound F reorganization results in a deemed transfer of assets by the Transferor Corporation to the Resulting Corporation for Resulting Corporation followed by a liquidating distribution of the Resulting Corporation stock by the Transfer Corporation to its shareholders.   

Effective date

The 2015 Final Regulations are effective for transactions occurring on or after Monday, September 21, 2015 (the date of their publication in the Federal Register).

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