CORPORATE ACQUISITIONS will be a little easier to structure as “tax-free reorganizations.”

CORPORATE ACQUISITIONS will be a little easier to structure as “tax-free reorganizations.”

June 01, 2001
CORPORATE ACQUISITIONS will be a little easier to structure as “tax-free reorganizations.”

The IRS issued two revenue rulings at the end of May that relax technical rules on how mergers must be structured in order to qualify as tax-free reorganizations.

One of the rulings — Revenue Ruling 2001-24 — dealt with “reverse subsidiary mergers” where a parent corporation sets up a subsidiary to merge into the target company. The US tax code had been viewed in the past as requiring that the merged subsidiary remain a first-tier subsidiary of the parent after the merger. However, the IRS said in the ruling that the parent could drop the merged subsidiary into another subsidiary — making it a second-tier subsidiary — and the original merger would still qualify as tax free.

The other ruling — Revenue Ruling 2001-26 — dealt with so-called two-step mergers where a parent or subsidiary uses voting stock of the parent first to buy shares of the target company in the market. Then once it owns a majority of the stock, it arranges the merger of its subsidiary into the target. The IRS said it would treat both steps as part of a single tax-free reorganization.

Keith Martin