IRS Revenue Ruling
2000-5

Code Sec. 368

<<FULL TEXT>>

26 CFR 1.368-1: Purpose and scope of exception of reorganization
exchanges.

Application of section 368(a)(1)(A) to divisive mergers. The ruling
holds that a state law merger will not qualify as a reorganization under
section 368(a)(1)(A) of the Code if the merger does not result in one
corporation acquiring the assets of a target corporation and the target
corporation ceasing to exist.


REV. RUL. 2000-5

ISSUES:

Whether a transaction in which (1) a target corporation "merges" under
state law with and into an acquiring corporation and the target
corporation does not go out of existence, or (2) a target corporation
"merges" under state law with and into two or more acquiring corporations
and the target corporation goes out of existence, qualifies as a
reorganization under section 368(a)(1)(A) of the Internal Revenue Code?


FACTS:

SITUATION (1). A target corporation transfers some of its assets and
liabilities to an acquiring corporation, retains the remainder of its
assets and liabilities, and remains in existence following the
transaction. The target corporation's shareholders receive stock in the
acquiring corporation in exchange for part of their target corporation
stock and they retain their remaining target corporation stock. The
transaction qualifies as a merger under state X corporate law.

SITUATION (2). A target corporation transfers some of its assets and
liabilities to each of two acquiring corporations. The target corporation
liquidates and the target corporation's shareholders receive stock in each
of the two acquiring corporations in exchange for their target corporation
stock. The transaction qualifies as a merger under state X corporate law.


DISCUSSION:

The purpose of the reorganization provisions of the Code is to provide
tax-free treatment to certain exchanges incident to readjustments of
corporate structures made in one of the specified ways described in the
Code. Section 1.368-1(b) of the Income Tax Regulations. In 1921, Congress
defined a reorganization as including ". . . a merger or consolidation
(including the acquisition by one corporation . . . of substantially all
the properties of another corporation)." In 1934, Congress separated this
rule into two distinct provisions. In the predecessor of current section
368(a)(1)(C), an "acquisition by one corporation . . . of substantially
all the properties of another corporation" continued to be a
reorganization where payment was effectuated with the acquiror's voting
stock. In the predecessor of current section 368(a)(1)(A), the terms
"merger or consolidation" were qualified by requiring that they be
"statutory" mergers and consolidations. The word "statutory" was added to
the definition of a reorganization so that the definition "will conform
more closely to the general requirements of [state] corporation law." See
H.R. Rep. No. 704, 73d Cong., 2d Sess. 14 (1934).

Historically, corporate law merger statutes have operated to ensure
that "[a] merger ordinarily is an absorption by one corporation of the
properties and franchises of another whose stock it has acquired. The
merged corporation ceases to exist, and the merging corporation alone
survives." Cortland Specialty Co. v. Commissioner, 60 F.2d 937, 939 (2d
Cir. 1932), cert. denied, 288 U.S. 599 (1933); for other cases that
describe mergers as requiring that the target corporation transfer its
assets and cease to exist, see, e.g., Vulcan Materials Company v. U.S.,
446 F.2d 690, 694 (5th Cir. 1971), cert. denied, 404 U.S. 942 (1971);
Fisher v. Commissioner, 108 F.2d 707, 709 (6th Cir. 1939), cert. denied,
310 U.S. 627 (1939). Thus, unlike section 368(a)(1)(C), in which Congress
included a "substantially all the properties" requirement, it was not
necessary for Congress to explicitly include a similar requirement in
section 368(a)(1)(A) because corporate law merger statutes contemplated an
acquisition of the target corporation's assets by the surviving
corporation by operation of law.

Compliance with a corporate law merger statute does not by itself
qualify a transaction as a reorganization. See, e.g., Southwest Natural
Gas Co. v. Commissioner, 189 F.2d 332 (5th Cir. 1951), cert. denied, 342
U.S. 860 (1951) (holding that a state law merger was not a reorganization
under section 368(a)(1)(A)); Roebling v. Commissioner, 143 F.2d 810 (3d
Cir. 1944), cert. denied, 323 U.S. 773 (1944) (same holding). In addition
to satisfying the requirements of business purpose, continuity of business
enterprise and continuity of interest, in order to qualify as a
reorganization under section 368(a)(1)(A), a transaction effectuated under
a corporate law merger statute must have the result that one corporation
acquires the assets of the target corporation by operation of the
corporate law merger statute and the target corporation ceases to exist.
The transactions described in Situations (1) and (2) do not have the
result that one corporation acquires the assets of the target corporation
by operation of the corporate law merger statute and the target
corporation ceases to exist. Therefore, these transactions do not qualify
as reorganizations under section 368(a)(1)(A).

In contrast with the operation of corporate law merger statutes, a
divisive transaction is one in which a corporation's assets are divided
among two or more corporations. Section 355 provides taxfree treatment for
certain divisive transactions, but only if a number of specific
requirements are satisfied. Congress intended that section 355 be the sole
means under which divisive transactions will be afforded tax-free status
and, thus, specifically required the liquidation of the acquired
corporation in reorganizations under both sections 368(a)(1)(C) and
368(a)(1)(D) in order to prevent these reorganizations from being used in
divisive transactions that did not satisfy section 355. See S. Rep. No.
1622, 83d Cong., 2d Sess. 274 (1954); S. Rep. No. 169, 98th Cong., 2d
Sess. 204 (1984). No specific liquidation requirement was necessary for
statutory mergers because corporate law merger statutes contemplated that
only one corporation survived a merger. The transaction described in
Situation (1) is divisive because, after the transaction, the target
corporation's assets and liabilities are held by both the target
corporation and acquiring corporation and the target corporation's
shareholders hold stock in both the target corporation and acquiring
corporation. The transaction described in Situation (2) is divisive
because, after the transaction, the target corporation's assets and
liabilities are held by each of the two acquiring corporations and the
target corporation's shareholders hold stock in each of the two acquiring
corporations.


HOLDING:

The transactions described in Situations (1) and (2) do not qualify as
reorganizations under section 368(a)(1)(A). However, the transactions
described in Situations (1) and (2) possibly may qualify for taxfree
treatment under other provisions of the Code.


DRAFTING INFORMATION:

The principal author of this revenue ruling is Reginald Mombrun of the
Office of the Assistant Chief Counsel (Corporate). For further information
regarding this revenue ruling, contact Reginald Mombrun on (202) 622-7750
(not a toll-free call).

<<END RULING>>
 

TO CONTACT
DON FITCH CPA

Phone Don Fitch CPA Toll Free at (877)CPA-Help or (877)272-4357 or on our Direct Line at (760)674-1722.