Opinion ID: 415638
Heading Depth: 2
Heading Rank: 1

Heading: Requirements of F Reorganizations

Text: 38 The Code defines an F reorganization as a mere change in identity, form, or place of organization, however effected. I.R.C. Sec. 368(a)(1)(F). This provision of the Code is not further amplified by the regulations and until recently received little judicial or administrative attention. See B. Bittker & J. Eustice, Federal Income Taxation of Corporations & Shareholders p 14.18 (1979). Apparently F reorganization treatment originally was intended to apply only to a narrow category of formalistic changes in the structure of a single corporation. See Metzer, An Effective Use of Plain English--The Evolution and Impact of Section 368(a)(1)(F), 32 Tax Law. 703, 704-08 (1979). This form of corporate restructuring has been expanded greatly through the case law, however; today the scope of F reorganizations includes mergers of a subsidiary into its parent, see Movielab, Inc. v. United States, 494 F.2d 693 (Ct.Cl.1974), fusions of multiple affiliated operating companies, see Estate of Stauffer v. Commissioner, 403 F.2d 611 (9th Cir.1968), and consolidations of multiple subsidiaries into a single subsidiary, see Home Construction Corp. v. United States, 439 F.2d 1165 (5th Cir.1971). 9 39 In Davant v. Commissioner, 366 F.2d 874 (5th Cir.1966), cert. denied, 386 U.S. 1022, 87 S.Ct. 1370, 18 L.Ed.2d 460 (1967), and Home Construction Corp. of America v. United States, 439 F.2d 1165 (5th Cir.1971), the Fifth Circuit established several criteria for F reorganization treatment. A combination of two or more corporations qualifies as a mere change in identity, form, or place of organization if there is an identity of shareholders and their proprietary interests, unimpaired continuity of the essential business enterprise and a new form which is the alter ego of the old. Home Construction, 439 F.2d at 1170. Furthermore, there must be a legitimate business purpose independent of and in addition to the tax consequences of the merger. Id. at 1172. 10 Thus a corporation may be born again by the grace of section 368(a)(1)(F), provided there are no distortions in the corporation's ownership, business, or purposes. 40 The controversy in this case focuses upon the requirement of an identity of shareholders and their proprietary interests. This continuity of interest doctrine developed as a judicial embellishment of the Codal reorganization provisions 11 and is now codified in the applicable regulations, which provide that [t]he term [reorganization] does not embrace the mere purchase by one corporation of the properties of another corporation, for it imports a continuity of interest on the part of the transferor or its shareholders in the properties transferred. Treas.Reg. Sec. 1.368-2(a). Thus, in order for a corporate combination to warrant tax-free reorganization treatment, the former owners of the acquired corporation must maintain a continuing proprietary interest in the acquiring corporation. This circuit has emphasized the importance of continuity of shareholder interest in the context of F reorganizations, noting that a substantial shift in the proprietary interest in a corporation accompanying a reorganization can hardly be characterized as a mere change in identity or form. Davant, 366 F.2d at 883 (citing Helvering v. Southwest Consolidated Corp., 315 U.S. 194, 62 S.Ct. 546, 86 L.Ed. 789 (1942)). 41 The continuity of interest issue here is basically one of timing: at what stage in these transactions should the shareholders' proprietary interests be measured? The district court, adopting Security's position, viewed OIC's initial purchases of the Southern and Standard stock as transactions separate and distinct from the later liquidations of the two corporations and their mergers into Security. The district court accordingly limited its evaluation of continuity of shareholder interest to the proprietary interests in Southern, Standard, and Security as they stood following the time of OIC's original stock purchases. At that point, Southern, Standard, and Security exhibited complete identity of shareholder interests; OIC, the Ourso family holding company, owned all the stock in all three insurance companies. Viewing the transactions through this narrow time window, the district court held that the continuity of interest requirement for F reorganizations was satisfied. 42 The government advocates the use of a wider time window for measuring the continuity of proprietary interests in this case. The government asserts that the stock purchases, asset transfers, reinsurance agreements, and liquidations were all merely intermediate steps in Security's plans to acquire the assets of Southern and Standard for cash. Concomitantly, the government urges that, in testing these corporate combinations for continuity of shareholder interest, the proprietary interests in Southern and Standard as they existed prior to OIC's purchases of stock must be compared to the proprietary interests in Security after Southern and Standard were dissolved. Of course, Southern's and Standard's original shareholders had no post-acquisition proprietary interest in Security; all the original shareholders of Southern and Standard were cashed out. Accordingly, the government claims, the continuity of interest requirement was not satisfied, and Security is not entitled to favorable F reorganization treatment. 43 The linchpin of the government's argument is the application of the step transaction doctrine. Unquestionably, if these transactions are amalgamated and viewed in their entirety, the continuity of interest requirement is not satisfied. In order to evaluate properly the government's argument, we therefore turn to an exposition of the step transaction doctrine.