Mere Change?—“F” Reorganization Qualifies in Spite of Change in Plan

Freeman Law

Freeman Law

Former British Prime Minister Winston Churchill once said, “Plans are of little importance, but planning is essential.” Perhaps that quote is a tad strong to apply generally to corporate reorganizations under Section 368 of the Internal Revenue Code. Plans, after all, are very important—if not essential—in the context of corporate reorganizations. However, based on a recent Private Letter Ruling, the Internal Revenue Service (“IRS”) noted that the “plan of reorganization” requirement for an “F” reorganization was not undermined by a subsequent change to the plan midstream. Effectively, in this instance, a change to the plan was “of little importance.”

Corporate Reorganizations, Generally

Generally, corporate reorganizations are defined under Section 368(a)(1)(A)-(G) and may take many different forms.[1]An “A” reorganization, for example, is defined as a plain statutory merger or consolidation. An “E” reorganization is defined as a recapitalization. These corporate reorganizations must generally meet certain requirements to potentially qualify for tax-free treatment:

  • Continuity of Interest (“COI”) requirement—Continuity of interest requires that in substance a substantial part of the value of the proprietary interests in the target corporation be preserved in the reorganization.[2]
  • Continuity of Business Enterprise (“COBE”) requirement—Continuity of business enterprise requires that the issuing corporation either continue the target corporation’s historic business or use a significant portion of the target corporation’s historic business assets in a business.[3]
  • Valid Business Purpose requirement—Valid business purpose stipulates that the purpose of the reorganization must be required by business exigencies, an ordinary and necessary incident of the conduct of the enterprise, and not a device or scheme to avoid tax.[4]
  • Plan of Reorganization requirement—Plan of reorganization requires that the reorganization be made pursuant to a plan. Such plan must contemplate the bona fide execution of one of the transactions specifically described in Section 368(a) and also contemplate the bona fide execution of each of the requisite acts under which nonrecognition of gain is claimed.[5] [6]

“F” Reorganization, Specifically

Perhaps one of the most frequently executed corporate reorganizations is the “F” reorganization. Section 368(a)(1)(F) defines an “F” reorganization as a mere change in identity, form, or place of organization of one corporation, however effected. The U.S. Tax Court previously defined “F” reorganizations as follows:

Although the exact function and scope of the (F) reorganization in the scheme of tax-deferred transactions described in section 368(a)(1) have never been clearly defined, it is apparent from the language of subparagraph (F) that it is distinguishable from the five preceding types of reorganizations as encompassing only the simplest and least significant of corporate changes. The (F)-type reorganization presumes that the surviving corporation is the same corporation as the predecessor in every respect, except for minor or technical differences. For instance, the (F) reorganization typically has been understood to comprehend only such insignificant modifications as the reincorporation of the same corporate business with the same assets and the same stockholders surviving under a new charter either in the same or in a different State, the renewal of a corporate charter having a limited life, or the conversion of a U.S.-chartered savings and loan association to a State-chartered institution.[7]

Further, unlike other reorganizations under Section 368(a)(1), an “F” reorganization is exempt from the COI and COBE requirements.[8] However, “F” reorganizations must still have a valid business purpose and be made pursuant to a plan of reorganization.[9]

Private Letter Ruling 202031002

On July 31, 2020, the IRS issued a Private Letter Ruling (“PLR”) related to a taxpayer’s request for a ruling, in part, under Section 368(a)(1)(F).[10] The main facts presented are as follows:

Taxpayer was incorporated in State A on Date 1. Taxpayer filed Articles of Domestication in State B on Date 2. Taxpayer was dissolved in State A on the State A Dissolution Date.

On Date 3, Taxpayer discovered that the domestication in State B was invalid because, unbeknownst to Taxpayer, State A law did not permit State A corporations to domesticate to another State. As a result, Taxpayer was inadvertently not incorporated in either State A or in State B as of the State A Dissolution Date. On Date 4, to partially remedy this issue, Taxpayer incorporated in State C.[11]

Based on the limited facts presented, the IRS held, in part, as follows:

The State A Dissolution of Taxpayer on the State A Dissolution Date, together with the entity classification election effective as of the State A Dissolution Date, will not preclude either (i) the transition of Taxpayer’s legal form of organization from a State A statutory corporation to an unincorporated association, or (ii) the subsequent reincorporation of the Taxpayer as a State C corporation from qualifying as a reorganization under section 368(a)(1)(F) of the Internal Revenue Code.[12]


Notably, the Internal Revenue Service stated that the transaction did, in fact, qualify as an “F” reorganization. Reading between the lines, the IRS implicitly held that both the valid business purpose and plan of reorganization requirements were satisfied. This is interesting given the fact that the Taxpayer enacted a plan of reorganization with one state in mind and then changed the state of incorporation pursuant to the plan while the transaction was underway.

Perhaps the Internal Revenue Service held that the transaction still qualified as an “F” reorganization because such reorganizations “comprehend only such insignificant modifications.” Or, perhaps the transaction did not frustrate the requirements of Section 368(a)(1)(F) because the original purpose and overall plan was still consummated in a general sense—the actual state of incorporation was of little consequence. Regardless, this ruling is notable that taxpayers’ plans for reorganization may change after executing said plan yet still qualify under Section 368(a)—at least if such reorganization is a “mere change.”

[1] I.R.C. § 368(a)(1)(A)-(G).

[2] Treas. Reg. § 1.368-1(e)(1)(i).

[3] Treas. Reg. § 1.368-1(d)(1).

[4] Treas. Reg. § 1.368-1(b), (c).

[5] Treas. Reg. § 1.368-1(c).

[6] It should also be noted that corporate reorganizations should also be evaluated under certain relevant provisions of law, such as the step transaction doctrine.

[7] Berghash v. Comm’r, 43 T.C. 743, 752 (1965) (internal citations and footnotes omitted), aff’d, 361 F.2d 257 (2d Cir. 1966).

[8] See Treas. Reg. § 1.368-2(m)(2).

[9] The additional parameters required for “F” reorganizations are succinctly outlined in Treas. Reg. § 1.368-2(m)(1)(i)-(vi).

[10] I.R.S. Priv. Ltr. Rul. 202031002 (July 31, 2020).

[11] Id. Additionally, the Taxpayer made certain other representations that are not reproduced here.

[12] Id.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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