PLR 200109037: Two mergers may be characterized as a direct asset acquisition

Plain-English summary

A public company used a subsidiary to acquire a target through a completed reverse merger, then proposed to merge the target into itself. The IRS ruled on a narrow issue: if the two mergers are steps in one integrated plan and both qualify as statutory mergers under state law, they will be treated for federal tax purposes as a direct acquisition of the target's assets for the acquirer's stock and assumption of liabilities. The IRS expressly did not decide whether the mergers form an integrated plan or whether the transaction qualifies as a section 368(a)(1)(A) reorganization. The letter therefore resolves the transaction's characterization only under its stated conditions.

Ruling snapshot

• Question: How would the reverse subsidiary merger and proposed upstream merger be characterized if treated as one plan?
• Outcome: Approved on the conditional characterization; reorganization qualification was not decided.
• Key authorities: IRC §§ 332 and 368(a)(1)(A); Rev. Ruls. 67-274 and 72-405.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200109037
Washington, DC 20224
Release Date: 3/2/2001
Index Number: 0368.01-00
Person to Contact:

Telephone Number:

Refer Reply To:
CC:CORP:1 PLR-117857-00
Date:
December 4, 2000

Acquiring =

Acquiring Sub =

Target
=

State X
=

Business A =

Business B =

Date 1
=

Date 2
=

a
=

b
=

c
=

Dear:

We respond to your letter dated September 1, 2000, in which you requested rulings on the federal income tax consequences of a completed transaction and a proposed transaction under section 368(a)(1)(A). Pursuant to section 3.01(23) of Rev. Proc. 2000-3, 2000-1 I.R.B. 103,105, the Internal Revenue Service will not rule as to whether a proposed transaction qualifies under section 368(a)(1)(A). However, the

Service has discretion to rule on significant subissues that must be resolved to determine whether a transaction qualifies under section 368(a)(1)(A). The information submitted for our review is summarized as follows.

Acquiring, a State X corporation, is the publicly traded parent of a consolidated group of corporations. Acquiring is engaged in Business A. Acquiring uses the accrual method of accounting and its tax year ends on March 31.

Target, a State X corporation, is engaged in Business B. Target uses the accrual method of accounting and its tax year ends on March 31.

Acquiring’s Board of Directors came to believe that an acquisition of Target’s business would enhance Acquiring’s operations and opportunities for future growth and thereby increase revenues. Accordingly, on Date 1, Acquiring formed Acquiring Sub. On Date 2, Acquiring Sub was merged with and into Target in a reverse subsidiary merger (the “Acquisition Merger”). As such, Target shareholders received $a worth of Acquiring stock and $b of cash in the transaction. Target option holders received Acquiring options in exchange for options to purchase c shares of Target Stock.

Acquiring now proposes to merge Target with and into itself (the ”Upstream Merger”). Acquiring has made the following representations in connection with the completed and proposed transaction:

(1) The Acquisition Merger, viewed independently of the proposed Upstream Merger, qualified as a reorganization under section 368(a)(1)(A) by reason of section 368(a)(2)(E).

(2) The proposed Upstream Merger will qualify as a statutory merger under State X law and, viewed independently of the Acquisition Merger, would qualify under section 332.

(3) If the Acquisition Merger had not occurred, and Target had merged directly into Acquiring the merger would have qualified as a reorganization under section 368(a)(1)(A).

(4) All other transactions undertaken contemporaneously with or in any way related to the proposed Upstream Merger have been fully disclosed.

Based solely on the information submitted and the representations made, and provided that (i) the Acquisition Merger and Upstream Merger are treated as steps in an integrated plan pursuant to the step transaction doctrine, and (ii) the Acquisition Merger and the Upstream Merger qualify as statutory mergers under applicable state law, we hold as follows:

For federal income tax purposes, the Acquisition Merger and the Upstream Merger will be treated as if Acquiring directly acquired the Target assets in exchange for Acquiring stock and the assumption of Target liabilities through a statutory merger as that term is used in section 368(a)(1)(A). See Rev. Rul. 67- 274, 1967-2 C.B. 141 and Rev. Rul. 72-405, 1972-2 C.B. 217.

We express no opinion regarding whether the Acquisition Merger and the Upstream Merger are steps in an integrated plan or whether the Acquisition Merger and Upstream Merger qualify as a reorganization under section 368(a)(1)(A). Additionally, we express no opinion about the tax treatment of the proposed transaction under other provisions of the Code and regulations or about the tax treatment of any conditions existing at the time of, or effects resulting from, the proposed transaction that are not specifically covered by the above rulings.

This ruling is directed only to the taxpayer(s) requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

Each affected taxpayer should attach a copy of this letter to its federal income tax return for the taxable year in which the transaction covered by this ruling letter is consummated.

Sincerely yours,

Associate Chief Counsel (Corporate)

By____
Mark S. Jennings
Chief, CC:CORP:1