Mutual fund reorganization qualifies as tax-free under Section 368 even though sanctioned foreign stock transfers later
Plain-English summary
Two mutual funds organized as separate series of the same investment company want to merge, with the Target Fund folding into the Acquiring Fund. Both are regulated investment companies (RICs) with nearly identical portfolios. The complication: both hold stock in a foreign bank that U.S. sanctions currently block them from transferring. So the plan splits into steps. First, the Target Fund transfers everything except the sanctioned stock to the Acquiring Fund for Acquiring Fund shares and assumption of liabilities, then distributes those shares to its own shareholders and redeems their old shares. Later, when possible, it transfers the sanctioned stock (or sells it and hands over the proceeds) for no extra consideration and liquidates. The Target Fund keeps a shell existence under state law solely to hold the sanctioned stock until it can move. The IRS ruled the whole thing qualifies as a tax-free reorganization under § 368(a)(1): no gain or loss to either fund or the shareholders, carryover basis and holding periods, and the Acquiring Fund succeeds to the Target Fund's tax attributes under § 381. The Target Fund is treated as liquidated for tax purposes even while its shell holds the sanctioned assets, and the Acquiring Fund (not the Target Fund) recognizes any gain or loss when those assets are eventually sold. The IRS expressed no opinion on the sanctions themselves.
Ruling snapshot
- Question: Does a RIC-to-RIC fund merger qualify as a tax-free reorganization when sanctioned foreign stock cannot be transferred until later?
- Outcome: Approved (qualifies as a § 368(a)(1) reorganization; 13 favorable rulings issued).
- Key authorities: IRC § 368(a)(1) and (b); §§ 354, 357, 358, 361, 362, 381, 1032, 1223; Treas. Reg. §§ 1.368-1 and 1.368-2.
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 202607001 Third Party Communication: None
Release Date: 2/13/2026 Date of Communication: Not Applicable
Index Number: 368.00-00
Person To Contact:
[Redacted] [Redacted], ID No. [Redacted]
[Redacted] Telephone Number:
[Redacted] [Redacted]
[Redacted] Refer Reply To:
[Redacted] CC:CORP:B5
PLR-107150-25
Date:
November 20, 2025
LEGEND
Company = [Redacted]
Acquiring Fund = [Redacted]
Target Fund = [Redacted]
Investment Advisor = [Redacted]
Foreign Bank = [Redacted]
Country X = [Redacted]
Date 1 = [Redacted]
State A = [Redacted]
Dear [Redacted]:
This letter responds to your representative's letter dated March 31, 2025 on behalf of
Target Fund, as supplemented by subsequent information and documentation,
requesting rulings under section 368(a)(1) of the Internal Revenue Code of 1986, as
amended (the "Code") with respect to certain federal income tax consequences of a
series of transactions (the Proposed Transaction, as defined below). The material
information submitted in that request and in subsequent correspondence is summarized
below.
This letter is issued pursuant to Rev. Proc. 2025-1, 2025-1 I.R.B. 1. Except as expressly
provided herein, no opinion is expressed or implied concerning the tax consequences of
any aspect of any transaction or item discussed or referenced in this letter.
The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted in
support of the request for rulings, it is subject to verification on examination. Verification
of the information, representations, and other data may be required as part of the audit
process.
FACTS
Company is a corporation registered under the Investment Company Act of 1940 (the
"1940 Act") as an open-end management investment company. Acquiring Fund and
Target Fund are each organized as a series of Company, and each is treated as a
corporation and a regulated investment company ("RIC") for U.S. federal income tax
purposes.
Target Fund and Acquiring Fund (collectively, the "Funds") have substantially similar
investment portfolios, each of which includes stock in Foreign Bank. According to the
Funds, there are sanctions that limit the ability to transfer stock of and distributions from
Foreign Bank, a Country X corporation. The Target Fund's assets whose transfer is
limited by sanctions are referred to as the "Sanctioned Assets."
The board of directors for the Funds adopted on behalf of each Fund an Agreement and
Plan of Reorganization (the "Plan") on Date 1 that generally includes the Proposed
Transaction (as defined below).
PROPOSED TRANSACTION
Pursuant to the Plan, the Funds propose to undertake the following steps (together, the
"Proposed Transaction"):
Step 1: Target Fund will transfer all of its assets and liabilities, except for the
Sanctioned Assets, to Acquiring Fund in exchange for voting stock
of Acquiring Fund and the assumption by Acquiring Fund of all of
Target Fund's liabilities.
Step 2: Target Fund will immediately thereafter distribute all the stock of
Acquiring Fund to its shareholders pro rata. All of Target Fund
shareholders' stock in Target Fund will be redeemed in Step 2 and
returned to the status of authorized but unissued stock of Target
Fund, and no Target Fund shareholder will have any further rights
with respect to Target Fund after the completion of Step 2.
Step 3: As soon as reasonably practicable, Target Fund (1) will transfer the
Sanctioned Assets to Acquiring Fund for no additional consideration,
or (2) if a transfer of the Sanctioned Assets in-kind is impossible,
impractical, unduly burdensome, or unduly costly, Target Fund will
sell or otherwise dispose of the Sanctioned Assets (such sales or
other dispositions, "Permitted Dispositions") and promptly transfer
the net proceeds thereof, along with any remaining Sanctioned
Assets not sold or disposed of, to Acquiring Fund for no additional
consideration.
Immediately following Step 3, the liquidation of Target Fund will be completed under state
law. It is possible that, at some point following Step 2 of the Proposed Transaction, one
or both of Acquiring Fund and Target Fund may be renamed.
REPRESENTATIONS
- The Proposed Transaction will be undertaken pursuant to a plan of reorganization, as
described in Treas. Regs. §§ 1.368-1(c) and 1.368-2(g), that was adopted by each of
Target Fund and Acquiring Fund before the Proposed Transaction. - All exchanges effectuating the Proposed Transaction will be on a value-for-value basis
under arm's-length terms. In the Proposed Transaction, Acquiring Fund will issue no
consideration to the Target Fund shareholders other than the Acquiring Fund stock
(including fractional shares of stock, if any) provided in exchange for their Target Fund
stock. - Target Fund will distribute the Acquiring Fund stock it receives in the Proposed
Transaction to its shareholders in pursuance of the plan of reorganization. - Target Fund will distribute, for federal income tax purposes, any other property it
receives in the Proposed Transaction to its shareholders and/or creditors, in
pursuance of the plan of reorganization. - Target Fund will distribute, for U.S. federal income tax purposes, any properties not
transferred to Acquiring Fund with respect to its stock or liabilities. - As of [Redacted], Target Fund has a fair market value that exceeds the fair
market value of Acquiring Fund. - There is no plan or intention by Acquiring Fund (or a person bearing a relationship to
Acquiring Fund specified in sections 267(b) or 707(b)(1)) to issue additional shares of
stock, or dispose of shares of Acquiring Fund stock, that will affect the Target Fund
shareholders' retention of control of Acquiring Fund within the meaning of section
368(a)(2)(H)(i). - Acquiring Fund (or a person bearing a relationship to Acquiring Fund specified in
sections 267(b) or 707(b)(1)) has no outstanding warrants, options, convertible
securities, or any other type of right pursuant to which any person could acquire any
stock in Acquiring Fund (or such related person(s)) that could affect the Target Fund
shareholders' retention of control of Acquiring Fund within the meaning of section
368(a)(2)(H)(i). - There is no plan or intention by Acquiring Fund (or any related person, as defined in
Treas. Reg. § 1.368-1(e)(4)) to acquire any of the Acquiring Fund stock received by
Target Fund shareholders in exchange for their Target Fund stock in connection with
the Proposed Transaction that will reduce the former Target Fund shareholders'
ownership of Acquiring Fund stock to a number of shares having a value, of less than
40 percent of the fair market value, as of the relevant testing date, of the total
consideration received by such Target Fund shareholders in exchange for their Target
Fund stock in connection with the Proposed Transaction. For purposes of this
representation cash or other property furnished by Acquiring Fund (or any related
person, as defined in Treas. Reg. § 1.368-1(e)(4)) for redemptions of Target Fund
stock (including Target Fund stock surrendered by dissenters or exchanged for cash
in lieu of fractional shares), is treated as nonstock consideration received by such
Target Fund shareholders, and is taken into account in determining the total
consideration received by such Target Fund shareholders in exchange for their Target
Fund stock. - Except for stock acquired in the Proposed Transaction, neither Acquiring Fund nor
any related person of Acquiring Fund as defined in Treas. Reg. § 1.368-1(e)(4) has
acquired or will acquire any stock of Target Fund in connection with the Proposed
Transaction. - Following receipt of Target Fund's assets and liabilities in Step 1, Acquiring Fund will
continue the business and activities conducted by Target Fund. - Following the distribution of Acquiring Fund stock in Step 2, all of the Target Fund
shareholders' stock in Target Fund will be redeemed and returned to the status of
authorized but unissued stock of Target Fund, and no Target Fund shareholder will
have any further rights with respect to Target Fund. While no stock of Target Fund will
be outstanding, Target Fund will continue to exist under state law for the sole purpose
of holding the Sanctioned Assets. - Following Step 2 of the Proposed Transaction, Target Fund and Acquiring Fund will
treat Acquiring Fund as the owner of the Sanctioned Assets for U.S. federal income
tax purposes, and Acquiring Fund will recognize any items of income, gain, loss, or
deduction arising from a Permitted Disposition, or otherwise in respect of, the
Sanctioned Assets. - Following Step 2 of the Proposed Transaction, Target Fund will continue to conduct
no business other than the steps necessary to transfer the Sanctioned Assets or the
proceeds thereof to Acquiring Fund. - There will be no plan or intention by Acquiring Fund (or a person bearing a relationship
to Acquiring Fund specified in sections 267(b), 707(b)(1) or Treas. Reg. § 1.368-
1(e)(4)) to acquire any of the Acquiring Fund stock received by Target Fund
shareholders in exchange for their Target Fund stock in connection with the Proposed
Transaction other than redemptions that Acquiring Fund will make as an open-end
investment company pursuant to section 22(e) of the 1940 Act. - During the five years ending on the date of the Proposed Transaction, neither Target
Fund nor any person related to Target Fund (as defined in Treas. Reg. § 1.368-1(e)(4)
without regard to Treas. Reg. § 1.368-1(e)(4)(i)(A)) will have (i) acquired Target Fund
stock with consideration other than stock of Acquiring Fund or Target Fund, except in
the ordinary course of the Target Fund's business as an open-end investment
company pursuant to section 22(e) of the 1940 Act, or (ii) made distributions with
respect to Target Fund stock except for (a) normal, regular, dividend distributions
made pursuant to the historical dividend paying practice of Target Fund, and (b)
distributions and dividends declared and paid in order to ensure Target Fund's
continuing qualification as a RIC and to avoid the imposition of fund-level tax. - Except for stock acquired in the Proposed Transaction, neither Acquiring Fund nor
any person bearing a relationship to Acquiring Fund specified in sections 267(b),
707(b)(1) or Treas. Reg. § 1.368-1(e)(4) has acquired or will acquire any stock of
Target Fund in connection with the Proposed Transaction other than the redemptions
by Target Fund as an open-end investment company pursuant to section 22(e) of the
1940 Act. - Acquiring Fund, or a person bearing a relationship to Acquiring Fund specified in
sections 267(b), 707(b)(1) or Treas. Reg. § 1.368-1(e)(4), neither owns, directly or
indirectly, nor has owned during the past two years, directly or indirectly, any stock of
Target Fund. - Acquiring Fund will acquire assets of Target Fund solely in exchange for Acquiring
Fund voting stock and the assumption (within the meaning of section 357(d)) of Target
Fund's liabilities, if any. For purposes of this representation, Target Fund stock
redeemed for cash or other property furnished by Acquiring Fund (or a person bearing
a relationship to Acquiring Fund specified in sections 267(b) or 707(b)(1)) will be
considered as acquired by Acquiring Fund. - Acquiring Fund will acquire from Target Fund assets with a fair market value of at least
90 percent of the fair market value of the net assets and at least 70 percent of the fair
market value of the gross assets held by Target Fund immediately prior to the
Proposed Transaction. For purposes of this representation, amounts paid by Target
Fund to dissenters, amounts used by Target Fund to pay its reorganization expenses,
amounts used by Target Fund to pay liabilities or other obligations (other than
operating liabilities incurred in the ordinary course of business), amounts paid by
Target Fund to shareholders who receive cash or other property, and all redemptions
and distributions made by Target Fund immediately preceding the transfer (except for
(i) redemptions of stock pursuant to section 22(e) of the 1940 Act and (ii) distributions
and dividends declared and paid in order to ensure the Target Fund's continuing
qualification as a RIC and to avoid the imposition of fund-level tax) will be included as
assets of Target Fund held immediately prior to the Transaction. For purposes of this
representation: (i) the 70 percent test is based on the fair market value of the gross
assets Target Fund transfers to Acquiring Fund over the fair market value of Target
Fund's gross assets immediately prior to the Proposed Transaction; and (ii) the 90
percent test is based on the fair market value of the net assets Target Fund transfers
to Acquiring Fund over the fair market value of Target Fund's net assets immediately
prior to the Proposed Transaction. Also, for purposes of this representation, the
Sanctioned Assets are treated as acquired by Acquiring Fund in the Proposed
Transaction. - Acquiring Fund will continue the historic business of Target Fund or use a significant
portion of Target Fund's historic business assets in a business within the meaning of
Treas. Reg. § 1.368-1(d). - Following Step 2 of the Proposed Transaction, Target Fund will conduct no activities
other than (i) holding, transferring, and/or disposing of the Sanctioned Assets as
described in the ruling request (and actions incident thereto), and (ii) taking such
actions as may be necessary to maintain its corporate existence under state law and
subsequently to liquidate under state law following its transfer of the Sanctioned
Assets or the proceeds thereof (as applicable) to Acquiring Fund. - There is no plan or intention to sell or otherwise dispose of any of Target Fund assets
acquired in the Proposed Transaction, except for (i) dispositions made in the ordinary
course of business or transfers allowed under section 368(a)(2)(C) and Treas. Reg. §
1.368-2(k), or (ii) dispositions of shares in certain country or region-specific exchange
traded funds acquired by Target Fund in anticipation of the Proposed Transaction in
order to remain consistent with its investment objectives using investments that would
not be subject to foreign law restrictions on being transferred to Acquiring Fund, or (iii)
as pertaining to the Sanctioned Assets, transfers and dispositions that constitute
Permitted Dispositions. - The liabilities of Target Fund that will be assumed by Acquiring Fund, within the
meaning of section 357(d), were incurred by Target Fund in the ordinary course of
business and are associated with the assets transferred. - There will be no intercorporate indebtedness existing between Target Fund and
Acquiring Fund that will be issued, acquired, or settled at a discount. - The fair market value of all property transferred in any exchange effectuating the
Proposed Transaction will exceed all liabilities assumed under section 357(d) at the
time of such exchange. - Target Fund, Acquiring Fund, and Target Fund shareholders will each pay their own
expenses incurred in connection with the Proposed Transaction, except that certain
expenses incurred in connection with the Proposed Transaction may be assumed
or paid directly by Investment Adviser, the investment adviser to both Funds. Any
expenses borne by Investment Advisor will be solely and directly related to the
Proposed Transaction in accordance with the guidelines established in Rev. Rul.
73-54, 1973-1 C.B. 1987. - The Proposed Transaction is motivated, in whole or substantial part, by one or more
bona fide non-federal income tax purposes as described in the ruling request. - No party to the Proposed Transaction is under the jurisdiction of a court in a title 11 or
similar case (within the meaning of section 368(a)(3)(A)). - Target Fund and Acquiring Fund have elected to be taxed as RICs under section 851,
and for all of their taxable periods, have qualified or intended to qualify for the special
tax treatment afforded to RICs under the Code. After Step 2 of the Proposed
Transaction, Acquiring Fund intends to continue to so qualify. - None of the stock to be transferred is section 306 stock (within the meaning of section
306(c)). - No payment of cash in lieu of fractional shares will be made in the Proposed
Transaction. - Target Fund will be solvent, for U.S. federal income tax purposes, immediately before
the Proposed Transaction. - Acquiring Fund will be solvent, for U.S. federal income tax purposes, immediately
before and immediately after Step 2 of the Proposed Transaction. - Neither Target Fund nor Acquiring Fund will be a U.S. real property holding
corporation (as defined in section 897(c)(2)) at any time during the five-year period
preceding the Proposed Transaction, and no party to the Proposed Transaction will
be a U.S. real property holding corporation immediately after the Proposed
Transaction. - The Proposed Transaction is not part of a plan (or series of related transactions)
resulting in an acquisition described in section 7874(a)(2)(B)(i). - Neither Target Fund nor Acquiring Fund will be a controlled foreign corporation (within
the meaning of section 957(a)) immediately before or after the Proposed Transaction. - Target Fund will not transfer as part of the Proposed Transaction stock in any
corporation with respect to which Target Fund has in effect any unexpired "gain
recognition agreement" within the meaning of Treas. Regs. §§ 1.367(a)-3 and
1.367(a)-8. - Acquiring Fund will recognize any items of income, gain, loss, or deduction arising
from a Permitted Disposition, or otherwise in respect of, the Sanctioned Assets. - Target Fund will treat itself as being liquidated for U.S. federal income tax purposes
even though it will remain in existence under State A law to hold the Sanctioned
Assets. - All other transactions undertaken contemporaneously with, in anticipation of, in
conjunction with, or in any way related to the Proposed Transaction for which the letter
ruling is requested have been fully disclosed.RULINGS
Based solely on the information submitted and the representations set forth above, we
hold as set forth below.
1. The Proposed Transaction will qualify as a reorganization within the meaning of
section 368(a)(1). Acquiring Fund and Target Fund will each be "a party to a
reorganization" within the meaning of section 368(b).
2. The distribution requirement for reorganizations is waived, as applicable. See section
368(a)(2)(G)(ii).
3. No gain or loss will be recognized by Target Fund upon the transfer of its assets,
including interests in the Sanctioned Assets, to Acquiring Fund in exchange for stock
of Acquiring Fund and the assumption by Acquiring Fund of the liabilities of Target
Fund. Sections 357(a) and 361(a).
4. No gain or loss will be recognized by Target Fund upon the distribution of the stock of
Acquiring Fund to the shareholders of Target Fund. Section 361(c)(1).
5. No gain or loss will be recognized by Acquiring Fund on the receipt of the assets of
Target Fund, including interests in the Sanctioned Assets, in exchange for its stock
and the assumption by Acquiring Fund of the liabilities of Target Fund. Section
1032(a).
6. Acquiring Fund's basis in each asset received from Target Fund, including interests
in the Sanctioned Assets, will equal the basis of such assets in the hands of Target
Fund immediately before the Proposed Transaction. Section 362(b).
7. Acquiring Fund's holding period in each asset received from Target Fund, including
interests in the Sanctioned Assets, will include the period during which such asset was
held by Target Fund. Section 1223(2).
8. As provided by section 381(a), Acquiring Fund will succeed to the tax attributes of
Target Fund enumerated in section 381(c), subject to the conditions and limitations
specified in sections 381, 382, 383 and 384 and the regulations thereunder. Section
381(a) and Treas. Reg. § 1.381(a)-1.
9. No gain or loss will be recognized by the shareholders of Target Fund upon the
surrender of their stock of Target Fund in exchange for stock of Acquiring Fund.
Section 354(a)(1).
10. The basis of the Acquiring Fund stock in the hands of each shareholder of Target
Fund will be the same as the shareholder's basis in the Target Fund stock surrendered
in exchange therefor. Section 358(a)(1).
11. The Target Fund shareholders' holding period in the Acquiring Fund stock received
will include the holding period in their Target Fund stock surrendered in exchange
therefor, provided that such Target Fund stock is held as a capital asset on the date
of the exchange. Section 1223(1).
12. Following Step 2 of the Proposed Transaction, Target Fund will be treated as
liquidated for U.S. federal income tax purposes.
13. Acquiring Fund (and not Target Fund) will recognize gain or loss from any Permitted
Dispositions.
CAVEATS
Except as expressly provided herein, no opinion is expressed or implied concerning the
tax treatment of the proposed transaction under other provisions of the Code or
regulations, or the tax treatment of any conditions existing at the time of, or effects
resulting from, the Proposed Transaction that is not specifically covered by the above
rulings. No opinion is expressed or implied concerning the applicability or effects of
sanctions under U.S. law including whether any violation of such sanctions would occur
as a result of the Proposed Transaction.
PROCEDURAL STATEMENTS
This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.
A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, a taxpayer filing its return electronically may satisfy this requirement by
attaching a statement to its return that provides the date and control number (PLR-
107150-25) of the letter ruling.
In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.
Sincerely,
John Lovelace
Senior Technical Reviewer, Branch 5
Office of Associate Chief Counsel (Corporate)
cc: [Redacted]