I. Introduction

F reorganizations, much like the game of Othello, can take a minute to learn but a lifetime to master. They are often a critical part of structuring the purchase and sale of S corporations. As part of an F reorganization, a target S corporation will file an IRS election to be treated as a qualified subchapter S subsidiary, or a QSub. While making a QSub election has become standard practice in F reorganizations involving S corporations, few practitioners have stopped to ask whether it is required in order to have an effective F reorganization. We explain why a QSub election isn’t necessary to have a valid F reorganization.

II. Background on F Reorganizations

F reorganizations have become a commonly used structure in the market when buyers, especially private equity buyers, wish to acquire a closely held corporation in transactions involving tax-free rollover equity. The code defines an F reorganization as a tax-deferred reorganization that consists of a mere change in identity, form, or place of organization of one corporation, however effected. Although the language is short and sweet, its vague words provide plenty of ambiguities.

Originally published in Tax Notes Federal on October 17, 2022.