F Reorganizations: A Win-Win Strategy for Buyers and Sellers?

Mergers and acquisitions have seen a notable rise in activity in recent years, evolving beyond traditional stock or asset sales into more complicated structures.

Whether your company is seeking to acquire another business or is fielding offers from potential buyers, one strategic option worth considering is a reorganization under Internal Revenue Code Section 368(a)(1)(F), commonly known as an “F reorganization.” This type of restructuring can be a valuable pairing to a sale transaction, offering significant tax and structural advantages.

What Is an F Reorganization?

An F reorganization, simply put, is a pre-transaction reorganization of the target company that involves a mere change in identity, form or place of organization of the corporation. Although the Internal Revenue Code presents this definition in straightforward terms, successfully achieving treatment under an F reorganization requires meeting several specific criteria.

Treasury Regulation §1.368-2(m), “Qualifications as a reorganization under Section 368(a)(1)(F),” outlines six key requirements:

1. Resulting Corporation Stock Distributed in Exchange for Transferor Corporation Stock

Immediately after the F reorganization, all the stock of the resulting corporation, including any stock of the resulting corporation issued before the F reorganization, must have been distributed (or deemed distributed) in exchange for stock of the transferor corporation. The resulting corporation is a newly formed S corporation by the selling corporation’s shareholder(s). The transferor corporation is the original S corporation that is the target of an acquisition.

2. Identity of Stock Ownership

The same person or persons must own 100% of the stock of the transferor corporation, determined immediately before the F reorganization, and of the resulting corporation, determined immediately after the F reorganization, in identical proportions.

3. Prior Assets or Attributes of Resulting Corporation

The resulting corporation may not hold any property or have any tax attributes immediately before the F reorganization. However, 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 F reorganization.

4. Liquidation of Transferor Corporation

The transferor corporation must completely liquidate for federal income tax purposes in an F reorganization. However, the transferor corporation is not required to file for dissolution under applicable law and may retain a de minimis amount of assets for the sole purpose of preserving its legal existence.

5. Resulting Corporation Is the Only Acquiring Corporation

Immediately after the F reorganization, no corporation other than the resulting corporation may hold property that was held by the transferor corporation immediately before the F reorganization nor succeed to the transferor’s tax attributes.

6. Transferor Corporation Is the Only Acquired Corporation

Immediately after the potential F reorganization, the resulting corporation may not hold property acquired from a corporation other than the transferor corporation nor succeed to any tax attributes of a corporation other than the transferor corporation.

These requirements are designed to ensure that, after the reorganization: (1) all assets held by the resulting corporation originate from the transferor, aside from any de minimis assets permitted under Requirement 3; (2) the transferor fully liquidates by transferring all of its assets to the resulting corporation; and (3) the transaction involves only the transferor and the resulting corporation, preventing the inclusion of multiple parties that could complicate the structure.

What Are the Benefits?

Transactions structured with an F reorganization provide substantial tax benefits to both the buyer and seller.

Benefits For the Buyer:

1. Allows for a step-up in the tax basis of the acquired assets.
2. Unlike a Section 338(h)(10) election, there’s no requirement to purchase at least 80% of the target company’s stock.
3. The resulting corporation can retain the target’s Employer Identification Number (EIN), simplifying administrative transitions.
4. The structure accommodates seller rollover equity, allowing prior owners to remain involved and aligned with the company’s future growth.

Benefits For the Seller:

1. The favorable tax structure can make the business more attractive to potential buyers and may lead to a higher purchase price.
2. Sellers can potentially defer taxes through a rollover investment into the resulting corporation.
3. The structure allows flexibility in how proceeds are received—whether as cash, note receivable, rollover equity, or a combination.
4. Retaining an ownership interest provides the opportunity to participate in the company’s future appreciation.

In an increasingly competitive merger and acquisition environment, structuring a transaction as an F reorganization can offer significant advantages for both buyers and sellers. From tax advantages to post-sale administrative simplicity, this often-overlooked strategy can be a powerful tool in the right circumstances. As always, companies considering an F reorganization should work closely with trusted and experienced tax and legal advisors to ensure compliance with the applicable requirements, fully realize the benefits, and avoid potential pitfalls and improper steps that could lead to significant tax and legal consequences. With proper planning, an F reorganization can serve as a win-win structure that supports both immediate goals and long-term growth.

Contributing author: Anthony P. Pokrentowski, CPA, is a tax senior manager at the firm. He specializes in manufacturing, construction and the professional service industries, as well as multi-state entities and high-net-worth individuals. For more information on this topic, you may contact apokrentowski@dmcpas.com or (315) 472-9127.