What Are the Steps for an F-Reorganization?

An F reorganization is a specific type of corporate restructuring that allows a single corporation to change its identity, form, or state of incorporation without triggering immediate tax consequences. This process is often used to move a business to a state with more favorable laws or to create a new holding company structure. The transaction is considered a “mere change,” meaning the business operations and ownership must remain intact.

Because the Internal Revenue Service (IRS) views it as a continuation of the original entity in a new form, the reorganization does not result in the recognition of gain or loss for the corporation or its shareholders. This tax-neutral treatment is valuable for companies adapting their structure without the significant tax costs of other transactions.

Core Requirements for a Valid Reorganization

For a transaction to qualify as an F reorganization, it must satisfy several strict requirements outlined in the tax code. The foundational concept is the “mere change” doctrine, which dictates that the reorganization cannot alter the core enterprise in any meaningful way. This means the business operations, assets, and liabilities of the new corporation must be substantially the same as those of the old corporation.

The continuity of business enterprise requirement runs parallel to this rule. It mandates that the new corporation must either continue the old corporation’s historical business or use a significant portion of the old corporation’s historical business assets in a new business. This prevents companies from using the F reorganization framework to simply liquidate a business’s assets under the guise of a corporate restructuring.

The regulations require that the same person or persons own 100% of the stock of both the original and the new corporation in identical proportions. Finally, the transaction must adhere to the single corporation requirement. Although multiple entities may be formed and utilized temporarily to facilitate the steps of the reorganization, the end result must be a single operating company that is the successor to the original.

Pre-Reorganization Planning and Documentation

Thorough preparation begins with creating a formal Plan of Reorganization, which serves as the blueprint for the entire transaction. This document is required to demonstrate the intended tax-free nature of the restructuring to the IRS. It must explicitly state that the transaction is intended to qualify as a reorganization under Internal Revenue Code Section 368.

The Plan of Reorganization needs to be comprehensive and should include:

• All parties involved, including the original corporation (OldCo), the new corporation (NewCo), and all shareholders.
• A complete description of the assets and liabilities that will be transferred from OldCo to NewCo.
• The specific terms of the exchange, such as how shares in OldCo will be swapped for shares in NewCo.
• A clear statement of the business purpose for the reorganization, such as changing the state of incorporation.

Alongside drafting the plan, the company must gather internal information. This includes compiling a definitive list of all shareholders and their respective ownership percentages to prove the ownership requirements are met. Corporate records, such as the minute book and articles of incorporation for the original entity, must be collected and reviewed to ensure all corporate actions are properly authorized.

During this planning stage, management must also make key decisions. If the reorganization involves a change of incorporation, the new state must be selected. The exact legal mechanics of the transaction, whether it will be structured as a statutory merger or a conversion, must also be decided.

Execution of the Reorganization Steps

Once the Plan of Reorganization is complete and documented, the company can proceed with the legal actions to execute the change. The first action is the formation of the new corporation, often called “NewCo,” in the chosen state of incorporation. This involves filing articles of incorporation with that state’s secretary of state.

Following the formation of NewCo, the board of directors of the original corporation, or “OldCo,” must formally adopt the Plan of Reorganization. Shareholder approval is also required, typically accomplished through a formal vote. This step is a legal prerequisite and demonstrates that the corporation and its owners are committed to the transaction.

The next step is the legal transfer of the business from OldCo to NewCo, which can be accomplished in a few ways. In a statutory merger, OldCo merges into NewCo by filing articles of merger with the secretary of state in both jurisdictions. In a statutory conversion, OldCo files a certificate of conversion, which legally transforms it into a corporation governed by the new state’s laws.

As part of this transfer, the shareholders of OldCo exchange their stock certificates for new certificates representing ownership in NewCo. If the transaction was a merger, the final act is the formal dissolution of OldCo. In a conversion, OldCo automatically ceases to exist upon the filing, making a separate dissolution unnecessary.

Post-Reorganization Tax Compliance and Reporting

After the legal execution of the reorganization is complete, the focus shifts to fulfilling the necessary tax reporting obligations with the IRS. Because the new corporation is treated as a continuation of the old one, the original corporation’s taxable year does not end on the date of the reorganization. The new corporation files a single tax return for the entire taxable year, covering the periods both before and after the reorganization.

The tax return must include a specific statement detailing the reorganization, as mandated by Treasury Regulation Section 1.368. This statement provides the IRS with the essential facts of the transaction and must include:

• The names and Employer Identification Numbers (EINs) of both corporations.
• The date of the reorganization.
• A copy of the Plan of Reorganization.
• The cost basis of all assets and liabilities transferred.

The handling of the EIN depends on the reorganization’s structure. In a simple reincorporation where the old corporation merges into the new one, the new corporation continues to use the EIN of the old corporation. If the reorganization creates a new holding company structure, the new parent company must obtain a new EIN, while the original corporation retains its original EIN as a subsidiary.