An F-reorganization is a type of typically tax-free reorganizational structure that often involves a target company taxed as an S-corporation. The F-reorganization is so named because it involves a change in “form” of the target, while not changing the substance of the target for tax purposes.
What qualifies as an F reorganization?
The IRS issued final regulations in 2015 (Regs. Sec. 1. 368 - 2 (m)) in which it identified six requirements that must be satisfied for a transaction that involves an actual or deemed transfer of property by a transferor corporation to a resulting corporation to be a mere change that qualifies as an F reorganization.
What is an S corporation F reorganization?
Under Section 368 (a) (1) (F), an F reorganization is defined as “a mere change in identity, form, or place of organization of one corporation, however effected.” Rev. Rul. 2008-18 outlines the steps and timing an S corporation must adhere to in order to achieve an F reorganization while maintaining its S corporation election.
Are the transaction steps an F reorganization?
The transaction steps above are similar to those outlined in Situation 1 of Rev. Rul. 2008 - 18. The IRS does not specifically conclude in that ruling that the transaction steps qualify as an F reorganization, but it does recognize that they may represent an F reorganization.
How does the F reorganization affect target's tax return?
Pursuant to the F reorganization, Target Holding will file a full - year, uninterrupted return, inasmuch as the F reorganization does not break Target's tax year and Target Holding is deemed a continuation of Target. That full - year federal income tax return is filed in the name and federal EIN of Target Holding.
What does F reorg mean?
An “F” reorganization is a type of tax-free reorganization under Internal Revenue Code Section 368(a)(1)(F), which includes a mere change in identity or form of one corporation. F reorganizations are typically used to effectuate a tax-free shift of a single operating company.
Is a name change an F reorg?
As indicated in Sec. 368, an F reorganization may be effected by changing the identity, form, or place of organization of a corporation. Thus, a change in the name of a corporation could qualify as an F reorganization.
What is a type reorganization?
A type A Reorganization is a tax-free merger or consolidation. Generally, in a merger, one corporation (the acquiring corporation) acquires the assets and assumes the liabilities of another corporation (the target corporation) in exchange for its stock.
Do you need a new EIN for F reorg?
The previously assigned EIN should be used by the surviving corporation in a statutory merger and in a reincorporation qualifying as an F reorganization. A new EIN should be requested by the new corporation in a consolidation and in any reincorporation transaction not qualifying as an F reorganization.
What is the benefit of an F reorganization?
Buyer Benefits of F Reorganization Remove the risk associated with the validity of the Seller's S-Corporation election that could otherwise potentially taint a step-up in the basis of Target's assets under an IRC Section 338(h)(10) election or an IRC Section 336(e) election.
What happens in an F reorg?
An F Reorganization is an identity, form, or place of organization change, according to the IRS Sec. 368(a)(1)(F). It happens when a company transfers or is classified as transferring all of its assets to another company.
What is the difference between a liquidation and a reorganization?
If the plan is rejected or is approved but does not succeed, the company is forced into liquidation. Its assets will be sold and distributed to its creditors. A reorganization requires a restatement of the company's assets and liabilities as well as negotiations with major creditors to set schedules for repayment.
What is a triangular C reorganization?
A triangular C reorganization is an acquisition by S of substantially all of T's assets in exchange for P stock in a transaction that qualifies as a reorganization under section 368(a)(1)(C).
What is the difference between reorganization and restructuring?
Reorganization and restructuring generally mean the same thing. Neither term has a definition that is universally agreed upon, and many people use them to mean the same thing. At the same time, however, many people don't have a clear definition of either one.
Is an F reorg tax-free?
The F Reorganization enables restructuring to be done on a tax-free basis and it can be very valuable in pre-transaction planning. For any questions regarding F Reorganizations and other tax restructuring transactions, any attorney with Frost Brown Todd's Tax Practice. [1] I.R.C.
Can two businesses have the same tax ID?
You cannot use the same EIN for multiple businesses, even if they are owned by the same person. EINs are not limited, so you may apply for as many as you need. You are dividing your business into separate entities.
Can an S corp do a tax-free reorganization?
In a tax-free reorganization, an S-corporation can be the target corporation or acquiring corporation, or both. The S-corporation status of a surviving target in a tax-free reorganization generally terminates because the surviving target has a disqualified stockholder (a corporation).
Do I have to notify the IRS of a name change?
Taxpayers should notify the Social Security Administration of a name change ASAP. When a taxpayer files their taxes, the IRS checks SSA records to ensure names and social security numbers on the forms match. Failing to report a name change.
Can I file taxes if my last name changed?
The good news is yes, you can file your taxes with your maiden name. The tax form provides separate lines for each spouse's name and Social Security number. You should file using the name that the Social Security Administration (SSA) has on file for you. What if you're planning a name change or it's in progress?
How do I notify the IRS of a name change?
Write to us at the address where you filed your return, informing the Internal Revenue Service (IRS) of the name change. Note: The notification must be signed by the business owner or authorized representative.
What is an amendment for name change?
Name Amendment Overview A name amendment is a form filed with the state in which your business is located to officially change the name with the state's records.
What is the F reorganization structure?
The “F” Reorganization structure involves the formation of a new S Corporation (the resultant corporation or “NewCo”), followed by a contribution of the stock of the Target into NewCo in exchange for NewCo stock . Following the contribution, a Qualified Subchapter S Subsidiary (QSub) election is made to treat the Target as a disregarded entity for income tax purposes. This strategy follows the model established by Revenue Ruling (Rev. Rul.) 2008-18, [1] and is often the strategy of choice where the parties wish to avoid potential tax or structural inefficiencies.
What is the interplay of the F reorganization with S corporations and Qsubs?
The interplay of the “F” Reorganization with S Corporations and QSubs provides valuable planning opportunities, but also introduces complexities.
How does Target become a wholly owned subsidiary of Newco?
Step 1: The shareholders of Target contribute all of their shares to NewCo, in exchange for all of the shares of NewCo, thus causing Target to become a wholly-owned subsidiary of NewCo. Step 2: Effective on the same date as the contribution in Step 1, NewCo files Form 8869 to treat Target as a QSub.
What is mere change in a corporation?
Treasury Regulations elaborate that a mere change occurs if, as a result of a transaction or series of transactions: (1) All the stock of the resulting corporation, including stock issued before the transfer, is issued in respect of the transferring corporation’s stock; (2) There is no change in the corporation’s ownership in the transaction, except a change that has no effect other than that of a redemption of less than all of the corporation’s shares; (3) The resulting corporation does not hold any property or have any tax attributes immediately before the transfer; (4) The transferring corporation completely liquidates in the transaction; (5) The resulting corporation is the only acquiring corporation; and (6) The transferor corporation is the only acquired corporation. [5] To meet the fourth requirement, the transferring corporation is not required to legally dissolve. [6]
What is the purpose of pre-transaction restructuring?
Pre-transaction restructuring for S Corporations using the “F” Reorganization has become a very commonly used technique, especially for Private Equity (PE) firms that wish to acquire a closely-held corporation (the transferee corporation or “Target”) in transactions that require tax-free rollover equity.
Is a QSub a disregarded entity?
The conversion of one disregarded entity into another disregarded entity has no federal income tax consequences.
Is a transferring corporation required to legally dissolve?
To meet the fourth requirement, the transferring corporation is not required to legally dissolve. [6] An “F” Reorganization is, by its statutory definition, limited to a transaction involving a single entity which is treated as a corporation for federal tax purposes. [7] .
How to complete an F reorganization?
One common way of completing an F Reorganization is through the creation of a new corporation, which initially becomes the parent holding company of a new entity that will operate the existing business. The parent holding company then sells part or all of its interest in the new entity. Structuring an F Reorganization in that manner will be the focus of the remainder of this article.
When performing an F reorganization, should businesses create a new entity?
Based on this rule, when performing an F Reorganization, businesses should create a new entity to ensure that there is no history of unwanted assets or tax attributes.
What is the first step in forming an old corporation?
Individual shareholders own all of the issued and outstanding equity of the existing corporation (“OldCo”). Step 1: Formation of new corporation (“NewCo”). Step 2: All OldCo shareholders contribute all of their shares of OldCo to NewCo in exchange for all of the issued and outstanding shares of NewCo stock.
How to change S corporation to C corporation?
To change what was once an S corporation into a C corporation interest that can issue QSBS, a company might consider undergoing an F Reorganization followed by the contribution of the single member LLC interest to a C corporation in a tax-free 351 transaction. When the dust settles, there would be a three-tiered structure of the S corporation (parent) owning shares of a C corporation (sub) owning a single member LLC interest. The S corporation would be the shareholder of the QSBS. [17] See our article on S corporations and Section 1202 for a detailed discussion on this topic and other Section 1202 topics.
How many requirements are there for a tax free reorganization?
The Treasury regulations set forth six requirements for a reorganization to qualify as a tax-free reorganization.
What are the different types of business entities?
Here in the United States, the common business entity types include corporations (whether taxed as “C” or “S” corporations), LLCs, and partnerships. These different entity types bring different state law governance rules, which might make one entity type more advantageous than the other for state law purposes.
What is the choice of entity decision?
The choice of entity decision is a critical step in every company’s life cycle. At its onset, a business’s owners must decide where the business is going to be formed and what type of business entity it will be.
What is F reorganization?
The “F reorganization” has become the tax planning structuring technique of choice in today’s middle market M&A world. So, what does it mean to you as a seller?
What are the drawbacks of the F reorganization?
Now, the major drawback of the F reorganization with respect to a partial tax deferral transaction as described above, is the elimination of the 12 months favorable liquidation rule provisions in the context of installment sale obligation scenario. Stay tuned for the next M&A shop talk when we will cover this important topic. In the meantime, please feel to schedule a free consultation with Jorge Rodriguez, CPA. Jorge is a Tax Director and part of Aronson’s Financial Advisory Services Group. Jorge can be reached by email at [email protected] or (301) 222-8220.
How long does it take to convert a S corporation to a Qsub?
Step 4: Effective the same date as Step 2, convert the S corporation to a Qualified Subchapter S corporation (QSub) by filing IRS Form 8869 within 75 days. Entity will retain old EIN.
How to convert a S corporation to a Holdco?
Step 2: All the S corporation shareholders (with no exception) will contribute 100% of its ownership to HoldCo.
Can you roll over equity on a tax deferral basis?
Permits partial equity rolled-over on a tax deferral basis that cannot be achieved under an asset sale tax election reporting structure transaction under Sec 338 (h) (10), and/or Sec 336 (e) with no permitted tax deferral rolled-over flexibility. Please note that under certain unique sets of facts and circumstances, there is an alternative planning opportunity to achieve somewhat comparable tax results to both the seller and buyer parties using Sec 351. We will cover this alternate structure in a future blog.
How does an F reorganization work?
The buyer can receive a step-up in basis either by making a Section 338 (h) (10) election or by acquiring a single member LLC interest in the case where the Transferor Corporation has become a limited liability company (“LLC”) through a state law conversion. Acquiring an interest in the single member LLC can be particularly attractive, since the buyer does not need to worry about the limitations associated with owning S corporation stock. Purchasing the entire equity interest of the Transferor Corporation outright may also eliminate the need for certain third-party consents in connection with transferring assets, licenses, etc. Converting the S corporation to a single member LLC under state law also creates the opportunity for new equity investments from investors who would otherwise not qualify as S corporation shareholders, such as foreign persons.
Why use F reorganization?
There are also other benefits to using an F reorganization in an acquisition. For example, rollover transactions are a popular method for keeping the selling shareholders invested in the future success of a business following an acquisition.
What happens to stock after F reorganization?
Immediately after the F reorganization, all of the issued and outstanding stock of the Resulting Corporation must be distributed to the shareholders of the Transferor Corporation. The IRS will disregard a de minimis amount of the stock in the Resulting Corporation being owned by someone other than the shareholders of the Transferor Corporation if necessary to facilitate the F reorganization. “ De minimis ” is not defined, but Treas. Reg. § 1.368-2 (m) (4), Example 3, suggests that 1% would be acceptable.
What happens to a transferor corporation in an F reorganization?
One such matter concerns how to notify the state and local tax authorities that the Resulting Corporation has stepped into the shoes of the Transferor Corporation with the result that the Transferor Corporation is no longer required to file state and local tax returns. The Resulting Corporation may also need to register with the state or local tax authorities. The Transferor Corporation, on its part, may have overpayments or credit carry forwards requiring an application for a refund.
What is a resulting corporation?
The Resulting Corporation elects to be treated as an S corporation .
Who owns the transferor corporation?
This makes the Transferor Corporation a wholly owned subsidiary of the Resulting Corporation which itself ends up being owned by the original shareholders of the Transferor Corporation.
Is an S corporation a F reorganization?
In practice, F reorganizations typically involve S corporations. However, while the pass-through tax treatment of an S corporations is attractive, the limits on who can be a shareholder, and the single class of stock requirement, can pose challenges to retaining pass-through tax treatment after an acquisition.
What is an F Reorganization?
An F reorganization, tax-free under IRC Section 368 (a) (1) (F), is typically defined as a mere change in identity, form or place of organization. An F reorganization is very useful when the Target selling corporation has a business or tax reason to implement a disregarded entity, but there are impediments to forming a SMLLC.
What is the F reorganization structure?
The F reorganization structure places the seller in a position where they can have flexibility to do the following:
What is a drop down in a DRE?
The usual manner to implement a DRE is commonly called a “drop-down,” where the Target transfers assets and liabilities into a SMLLC. The F reorganization can effectively achieve the same result as a drop-down while avoiding some of the negative consequences listed above.
Who contributes shares of the selling S-Corporation to the new Holding Company?
The shareholders contribute shares of the selling S-Corporation to the new Holding Company.
Does the F reorganization structure reduce the risk of historic C corporation income tax liabilities?
Note: While the F reorganization structure protects the buyer’s basis step-up, many practitioners believe that the F reorganization structure does not reduce the risk of historic C Corporation income tax liabilities if Target did not historically have a valid S-election.
What is the F reorganization strategy?
As mentioned earlier, the F reorganization strategy has gained popularity within private - equity transactions involving S corporations. The overall transaction plan generally requires the seller (s) of an S corporation target to engage in some pre - transaction restructuring. Generally, those steps are: (1) the shareholder (s) of a target S corporation (Target) form a new corporation (Target Holding) via contributing the shares of Target to Target Holding in exchange for all of Target Holding's shares; and (2) Target elects to be a qualified Subchapter S subsidiary (QSub), which effects a deemed tax - free liquidation of Target into Target Holding (and extends S corporation status to Target Holding per Rev. Ruls. 2008 - 18 and 64 - 250 ).
When did S corporations become a federal entity?
Congress created S corporation status in 1958. While S corporation status provides tax benefits such as corporate income and gains being taxed only once, at the individual level, it is subject to several limitations. Perhaps the most important is a limit on the number of shareholders; however, that restriction has been relaxed over time. The number of shareholders was originally capped at 10, but that limit has since been increased a number of times, most recently to 100 in 2004. As restrictions were eased, S corporations became the most common type of entity filing a corporate federal income tax return as of 1997. S corporations continue to be the predominant type of corporation for closely held businesses. As a result, many of the closely held businesses that private - equity firms wish to acquire these days are S corporations.
What is a resulting corporation?
Resulting corporation is the only acquiring corporation: No corporation other than the resulting corporation may hold property that was held by the transferor corporation immediately before the potential F reorganization, if such other corporation would succeed to and take into account the transferor's tax attributes under Sec. 381 as a result of the reorganization.
What happens to assets when targets are appreciated?
Assuming Target's assets are appreciated, the cash paid plus liabilities/debt deemed assumed would generally result in a basis step - up in Target's assets. To the extent the step - up might predominantly be allocable to Target's self - created intangible asset base, perhaps the sellers would be amicable to the transaction structure, inasmuch as they are not harmed by a higher income tax rate (e.g., on depreciation recapture). The remaining Target equity not sold could be rolled over, as discussed above, in exchange for buyer equity that would remain held by Target Holding. That rollover would be expected to be tax - deferred, and Target Holding would retain a carryover basis in the buyer's equity equal to the basis Target Holding had in the property so contributed.
What happens after a pre-transaction restructuring?
After a pre - transaction restructuring for an S corporation target via an F reorganization, there are multiple options for a buyer to effect the acquisition. Target Holding can contribute some of its Target equity into the buyer's acquisition structure, with the remaining Target equity being acquired by the buyer. This will be treated as a partial rollover and a partial taxable sale of an undivided interest in each of Target's assets for an amount of consideration equal to the cash paid plus the assumption of an associated share of Target's liabilities for federal income tax purposes, in a transaction consistent with Situation 1 of Rev. Rul. 99 - 5.
Is a S corporation a passthrough entity?
S corporations continue to be the predominant type of corporation for closely held businesses. As a result, many of the closely held businesses that private - equity firms wish to acquire these days are S corporations. Inasmuch as S corporations are passthrough entities, they are generally not directly liable for federal income taxes.
Does a corporation have to have prior assets before a potential F reorganization?
Prior assets or attributes of resulting corporation: The resulting corporation may not hold any property or have any tax attributes immediately before the potential F reorganization. This requirement is not violated if the resulting corporation holds or has held a de minimis amount of assets to facilitate its organization or maintain its legal existence, and has tax attributes related to holding those assets, or holds the proceeds of borrowings undertaken in connection with the potential F reorganization.
How many requirements are there for an F reorganization?
Under the final rules, an F reorganization has occurred if the transactions meet six requirements. Four of the requirements were in the 2004 proposed regulations, and the last two were added in response to comments.
What is the final rule for a reorganization?
The final rules apply a concept called a potential F reorganization, allowing the many steps of a corporate reorganization to be examined together to see if the transaction qualifies to be an F reorganization. The IRS believes that, because the statute contains the phrase “however effected,” the rules should permit a series ...
Can a transaction that divides the property or tax attributes of an old corporation between or among acquiring corporations qualify?
Thus, a transaction that divides the property or tax attributes of the old corporation between or among acquiring corporations, or that leads to potential competing claims to those tax attributes, will not qualify.
Is a transaction that introduces a new shareholder or new equity capital into the corporation an F reorganiz?
Thus, a transaction that introduces a new shareholder or new equity capital into the corporation does not qualify as an F reorganization.
Can a new corporation hold assets before a reorganization?
And the old corporation is not required to legally dissolve and may maintain a de minimi samount of assets to remain in existence.
Is a transferor corporation a foreign corporation?
The final regulations also finalize proposed rules under Sec. 367 on F reorganizations in which the old, transferor corporation is a domestic U.S. corporation and the new, acquiring corporation is a foreign corporation. In those cases, most of the nonrecognition provisions do not apply.
at A Glance
- Main Takeaway California businesses can change their entity type for various reasons, including ownership changes, growth plans, and exit strategies. As part of the restructuring process, companies and tax practitioners can apply for an F Reorganization. This type of reorganization can be helpful as a tax-efficient way to plan and restructure the company into a new distinct enti…
Why Business Entity Type Matters
- Every company in California needs to carefully choose its entity type since this will affect the amount of taxes the entity and the owner(s) pay on an aggregate basis. The business entity type is also important because it impacts the ability to protect yourself from personal liability in the event of litigation. For example, a sole proprietorship does not protect the owner’s personal asse…
What Is An F Reorganization?
- An F Reorganization is an identity, form, or place of organization change, according to the IRS Sec. 368(a)(1)(F). It happens when a company transfers or is classified as transferring all of its assets to another company. Typically, an F Reorganization occurs as a company prepares for a merger or acquisition transaction. The strategy is also used t...
Requirements For F Reorganization
- According to IRS Rev. Rul. 2008-18, an S corporation must follow the processes and timelines to achieve an F Reorganization while keeping its S corporation election. The IRS published the final regulations under §1.368-2(m)in 2015 that outline six requirements to qualify as an F reorganization. The primary purpose of these regulations is to prevent acquisitions or divisive tr…
Transition Structure For Reorganization as An F Entity
- An F Reorganization structure takes many forms. They comprise merging related entities or reincorporating a company in a different state. A frequent method of an F Reorganization is the establishment of a new corporation to serve as the holding company of the new business. You must follow these steps to complete an F Reorganization: Step 1:The individual shareholders wh…
Tax Compliance Issues For Reorganizing
- If you use F Reorganizations with S corporations, consider the issues with tax compliance and how they may affect future tax filings. Significant considerations include employer identification numbers, S subsidiary elections, and income tax filings. Employer Identification Numbers The Resulting Corporation must receive an employer tax identification number (EIN) upon completin…
How F Reorganization Benefits Your Tax Strategy
- You can plan your company’s growth without incurring any taxes through an F Reorganization. New investors can obtain a vested interest in the company, while owners can explore ways to restructure the business. LLC Membership Interests LLC asset transfers do not require third-party consent. Buying an LLC membership interest does not have the same restrictions as an S corpor…
Working with A Business Entity Consultant
- If you want to restructure your business under an F Reorganization, work with a business structuring and tax planning firm to ensure a smooth transfer process.An experienced consulting firm with a background in handling multi-million-dollar corporate reorganizations can give you the professional expertise you need to make the right choice for your company. Windes is a busines…
Restructure with Windes
- Reorganizing a business entity is a complex undertaking, but it may be the most tax-effective solution for your business. F Reorganizations let buyers in M&A transactions gain an advantage on the tax basis of the corporation’s assets without relying on it to keep its S corporation status. They also make rollover transactions more efficient while letting investors invest in the compan…
F Reorganization Requirements
F Reorganization Transaction Structure
- The structure of an F Reorganization can take many shapes. A list of examples is set out in Treas. Reg. § 1.368–2(m)(4). Many of these structures involve mergers among related entities and/or the reincorporation of a business in a new state.In practice, F Reorganizations typically involve S corporations, either as a target entity in an acquisition or as the acquiring entity. The pass-throu…
Compliance Issues
- When performing the F Reorganization structure outlined above involving S corporations, one must be mindful of the tax compliance issues and impact on compliance filings moving forward. The Resulting Corporation (NewCo in the example above), must obtain its own taxpayer ID number (employer identification number (EIN)) by filing a Form SS-4. The Transferor Corporatio…
Using An F Reorganization to Accomplish Tax Planning Goals
- While there are certainly others, here are several examples of where F Reorganizations can be a useful planning technique. Performing an F Reorganization prior to the sale of a business owned by an S corporation can enable the seller to sell a subsidiary single member LLC interest, not the corporate stock directly. By purchasing a single member LLC interest, the buyer would receive a …
Conclusion
- As highlighted in this article, the F Reorganization can be a useful tool in the tax practitioner’s kit for effecting a change of entity. The F Reorganization enables restructuring to be done on a tax-free basis and it can be very valuable in pre-transaction planning. For any questions regarding F Reorganizations and other tax restructuring transactions, any attorney with Frost Brown Todd’s …