IRS approves a downstream merger as a Type A reorganization
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This page covers one taxpayer's ruling from 2026, which can't be cited as precedent. Ezel answers your situation under the current Code and IRS guidance, with citations.
Plain-English summary
An S corporation proposed to merge downstream into a corporation whose stock
was its primary asset, leaving the lower-tier corporation as the survivor. The
S corporation's shareholders would receive newly issued stock in the survivor,
cash consideration, and cash instead of fractional shares. The IRS ruled that
the merger will qualify as a statutory Type A reorganization under Section
368(a)(1)(A). Shareholders generally will not recognize gain on the stock they
receive, but they will recognize gain to the extent of the cash boot, and the
ruling provides basis and holding-period rules for the new shares. It also
addresses the treatment of fractional-share cash, the corporations' nonrecognition
and carryover-basis consequences, and the survivor's succession to the disappearing
corporation's tax attributes. The conclusions depend on the detailed facts and
29 representations supplied by the taxpayer.
Ruling snapshot
- Question: Will the downstream statutory merger qualify as a Type A reorganization, and what tax consequences follow for the corporations and shareholders?
- Outcome: Approved. The merger qualifies under Section 368(a)(1)(A), with gain recognized by shareholders to the extent of cash boot.
- Key authorities: IRC §§ 302, 356, 357, 358, 361, 362, 368, 381, 1001, 1032, and 1223
Full text (IRS public release)
Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 202611002
Release Date: 3/13/2026
Index Number: 368.00-00, 368.01-00
Third Party Communication: None
Date of Communication: Not Applicable
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Person To Contact:
----------------------, ID No. -----------------
Telephone Number:
Refer Reply To:
CC:CORP:4
PLR-111416-25
Date:
December 16, 2025
Legend
Acquiring = -----------------
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Target = ---------------------------
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State A = ------------
State B = -------------
State C = --------
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Date 1 = ----------------------------
Date 2 = ---------------------
Date 3 = ----------------------
Class A Stock = -------------------------------------------------------------------
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Class B Stock = -------------------------------------------------------------------
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Cash Boot = -------------------------------------------------------------------
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Cash Distribution Amount = -------------------------------------------------------------------
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Company A = ----------------------
Stock Repurchase Program = -------------------------------------------------------------------
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b = ---
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Dear -------------:
This letter responds to your letter dated May 16, 2025, as supplemented by subsequent
information and documentation, submitted on behalf of Target and its subsidiary,
Acquiring, requesting rulings under section 368(a)(1)(A) and related provisions of the
Internal Revenue Code of 1986, as amended (the “Code”), and related regulations with
respect to the proposed merger of Target with and into Acquiring, with Acquiring
surviving and Target ceasing to exist (the “Merger”). The material information provided
in that request and subsequent correspondence is summarized below.
The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalties of perjury statement
executed by an appropriate party. This office has not verified any of the material
submitted in support of the request for rulings. Verification of the information,
representations, and other data may be required as part of the audit process.
This letter is issued pursuant to Rev. Proc. 2025-1, 2025-1 I.R.B. 1 and Rev. Proc.
2025-3, 2025-1 I.R.B. 142. This Office expresses no opinion as to any issue not
specifically addressed by the rulings below.
Summary of Facts
Target, a State A corporation, made an S election effective Date 1. Target has two
classes of stock outstanding—voting common stock and non-voting common stock.
Persons A, B, and C (the “Primary Shareholders”) collectively own approximately a% of
the voting stock of Target. The Primary Shareholders are also officers and directors of
Target. The outstanding non-voting common stock is held by approximately b
shareholders.
On Date 2, Acquiring was a State B corporation. It has two classes of common stock
outstanding—Class A Stock and Class B Stock. Shares of Class A Stock and Class B
Stock generally have identical voting and economic rights, except that the holders of the
Class A Stock elect c of the members of the Acquiring board of directors, and the
holders of the Class B Stock elect d of the members of the Acquiring board of directors.
As of Date 2, Target’s assets included approximately $e cash, shares of Company A
stock worth approximately $f, and common stock in Acquiring worth approximately $g,
the latter of which constitutes Target’s primary asset. Target owns h% of the
outstanding shares of Class A Stock and i% of the outstanding shares of Class B Stock.
In total, Target owns approximately j% of the value and k% of the voting power (as
measured by ability to elect Acquiring’s board of directors) of the outstanding Acquiring
stock. As of Date 2, Target had no liabilities, and its gross income, which is from
Acquiring dividends, is routinely distributed pro rata to its shareholders.
In addition, the Primary Shareholders are also officers and directors of Acquiring.
Proposed Transaction
To accomplish a number of business objectives that can be achieved by eliminating
Target, such as simplified organizational governance, reduced operational and
compliance costs and other administrative burdens, Target proposes to merge
downstream into Acquiring, pursuant to the applicable state merger statute (i.e., the
Merger).
On Date 3, and prior to the Merger, Acquiring reincorporated from State B to State C
through legal filings in both State B and State C. Such reincorporation (the
“Reincorporation”) is intended to qualify as a reorganization under section 368(a)(1)(F).
Prior to the Merger, Target will distribute the Cash Distribution Amount to its
shareholders pursuant to its regular and ordinary distribution procedures (the “Pre-
Merger Distribution”).
Following the Pre-Merger Distribution, and pursuant to the applicable merger statutes
and an agreement of merger between Target and Acquiring (the “Plan of Merger”),
Target will merge with and into Acquiring, with Acquiring surviving and Target ceasing to
exist. At the effective time of the Merger, all of the assets of Target (subject to any
liabilities) will be transferred to and assumed by Acquiring by operation of law. Target
will cease to exist and each Target shareholder will receive its pro rata share of newly
issued shares of Acquiring Class A Stock and Class B Stock (together, the “New
Acquiring Stock”) in the same number as the number of such shares held by Target,
less any fractional shares to which the Target shareholders would be entitled to receive
and for which cash will be received instead (separate from the Cash Boot described
below).
In the Merger, Acquiring will, in addition to issuing the New Acquiring Stock, pay the
Cash Boot. The Cash Boot will be distributed pro rata to shareholders of Target as
Merger consideration in cancellation of Target stock.
Representations
With respect to the Proposed Transaction, Target makes the following representations:
1. The Reincorporation is a reorganization described in section 368(a)(1)(F).
2. The Pre-Merger Distribution will occur at the same time and in the same amount
irrespective of whether the Merger occurs.
3. The Merger will be effected pursuant to applicable state laws and will qualify as a
statutory merger under applicable state laws.
4. All other transactions undertaken contemporaneously with, in anticipation of, in
conjunction with, or in any way related to the Merger for which the letter ruling is
requested have been fully disclosed.
5. All exchanges effectuating the Merger will be on a value-for-value basis under
arm’s length terms.
6. The fair market value of all property transferred in any exchange effectuating the
Merger will exceed all liabilities (if any) assumed under section 357(d) at the time
of such exchange.
7. Each party to the Merger will be solvent, for Federal income tax purposes,
immediately before and immediately after the Merger.
8. No party to the Merger is an organization exempt from Federal income tax within
the meaning of section 501.
9. No party to the Merger will be a “personal service corporation” within the
meaning of section 269A.
10. None of the Merger or any other transaction described herein will be undertaken
contemporaneously with, in anticipation of, in conjunction with, or in any way
related to a transaction designated as a “listed transaction” for purposes of
§§1.6011-4T(b)(2) and 301.6111-2T.
11. Target and Acquiring will adopt the Plan of Merger, and the Merger will be
effected pursuant to the statute or statutes necessary to effect the Merger or
consolidation under section 368(a)(1)(A) and §1.368-2(b)(1).
12. The Merger will be undertaken pursuant to a plan of reorganization, as described
in §§1.368-1(c) and 1.368-2(g), that was adopted by the taxpayer and each of its
affiliates as necessary, before the Merger.
13. The aggregate fair market value of Acquiring stock provided to Target
shareholders will be at least 40 percent of the fair market value, as of the
relevant testing date, of the total consideration received by such Target
shareholders in exchange for their Target stock in connection with the Merger
(even if such total consideration included the Pre-Merger Distribution). For
purposes of this representation, cash or other property furnished by Acquiring (or
any related person, as defined in §1.368-1(e)(4)) for redemptions of Target stock
(including Target stock surrendered by dissenters or exchanged for cash in lieu
of fractional shares), is treated as nonstock consideration received by such
Target shareholders, and is taken into account in determining the total
consideration received by such Target shareholders in exchange for their Target
stock.
14. There is no plan or intention by Acquiring (or any related person, as defined in
§1.368-1(e)(4)) to acquire any of the Acquiring stock received by Target
shareholders in exchange for their Target stock in connection with the Merger
that will reduce the former Target shareholders’ ownership of Acquiring 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
shareholders in exchange for their Target stock in connection with the Merger,
except for acquisitions of Acquiring stock in the open market pursuant to its
previously adopted Stock Repurchase Program meeting the requirements of
Rev. Rul. 99-58, 1999-2 C.B. 701. For purposes of this representation, cash or
other property furnished by Acquiring (or any related person, as defined in
§1.368-1(e)(4)) for redemptions of Target stock (including Target stock
surrendered by dissenters or exchanged for cash in lieu of fractional shares) is
treated as nonstock consideration received by such Target shareholders, and is
taken into account in determining the total consideration received by such Target
shareholders in exchange for their stock.
15. Except for stock acquired in the Merger, neither Acquiring nor any related person
of Acquiring, as defined in §1.368-1(e)(4), has acquired or will acquire any stock
of Target in connection with the Merger.
16. After the effective time of the Merger, Acquiring will continue its historic business.
17. Acquiring has no plan or intention to sell or otherwise dispose of any of the
assets of Target acquired in the Merger, except for dispositions made in the
ordinary course of business or transfers allowed under section 368(a)(2)(C) or
§1.368-2(k).
18. The liabilities of Target that will be assumed by Acquiring (if any), within the
meaning of section 357(d), were incurred by Target in the ordinary course of its
business and are associated with the assets transferred.
19. Acquiring, Target, and the Target shareholders will pay their respective
expenses, if any, incurred in connection with the Merger.
20. There is no intercorporate indebtedness existing between Target and Acquiring
that was issued, acquired, or will be settled at a discount.
21. Target has not made, and prior to or in connection with the Merger will not make,
any distributions with respect to its stock other than any regular, normal
distributions, and neither Target nor any related person of Target, as defined in
§1.368-1(e)(4) (determined without regard to §1.368-1(e)(4)(i)(A)), will acquire
any stock of Target, in each case, in connection with the Merger.
22. The aggregate fair market value of the assets of Target that will be held by
Acquiring immediately after the Merger will equal or exceed Acquiring’s
aggregate basis in such assets at that time.
23. The Merger is motivated, in whole or substantial part, by one or more bona fide
non-Federal income tax purposes as described in this request for ruling.
24. No party to the Merger is under the jurisdiction of a court in a title 11 or similar
case within the meaning of section 368(a)(3)(A).
25. Immediately before the Merger, no party to the Merger is an investment company
within the meaning of section 368(a)(2)(F).
26. None of the stock to be transferred is section 306 stock (within the meaning of
section 306(c)).
27. The payment of cash in lieu of fractional shares of New Acquiring Stock is solely
for the purpose of avoiding the expense and inconvenience of issuing fractional
shares and does not represent separately bargained-for consideration. The total
cash consideration that will be received in connection with the Merger in lieu of
fractional shares of New Acquiring Stock will not exceed one percent of the total
consideration that will be received by the Target shareholders in exchange for
their shares of Target stock. The fractional share interests of each Target
shareholder will be aggregated, and no Target Shareholder will receive cash in
an amount equal to or greater than the value of one full share of Acquiring stock,
with the possible exception of Target shareholders whose holdings are in multiple
accounts or with multiple brokers.
28. At the time of the Merger, none of the Primary Shareholders will have any plan or
intention to utilize the Stock Repurchase Program to have Acquiring redeem the
shares of Acquiring Class A Stock issued to them in the Merger (or received in
exchange for Acquiring Class B Stock issued to them in the Merger).
29. None of the compensation to be received by any shareholder-employees of
Target will be separate consideration for, or allocable to, any of their shares of
Target stock; none of the shares of Acquiring stock received by any shareholder-
employees will be separate consideration for, or allocable to, any employment
agreement; and the compensation paid to any shareholder-employees will be for
services actually rendered and will be commensurate with amounts paid to third
parties bargaining at arm's-length for similar services.
Rulings
Based solely on the information submitted and the representations made, we rule as
follows with respect to the Proposed Transaction:
1. The Merger will constitute a reorganization within the meaning of section
368(a)(1)(A). Target and Acquiring will each be a “party to a reorganization”
within the meaning of section 368(b). In the Merger, Target will be treated for
federal income tax purposes as having transferred all of its assets, subject to
liabilities (if any), including the Acquiring stock held by it, to Acquiring in
exchange for the New Acquiring Stock and the Cash Boot (together, the “Merger
Consideration”). Thereafter, Target will be treated as distributing the New
Acquiring Stock and the Cash Boot received in the Merger to its shareholders in
exchange for their Target shares.
2. With respect to each Target shareholder, no gain or loss will be recognized on
the exchange of its shares of Target stock for shares of New Acquiring Stock, but
gain will be recognized to the extent of any Cash Boot received. Section
356(a)(1). For the treatment of gain, see also sections 356(a)(2) and 1368, as
applicable. No loss will be recognized by a Target shareholder pursuant to
section 356(c).
3. The basis of the New Acquiring Stock in the hands of the Target shareholders
immediately after the exchange will be the same as the aggregate basis of the
Target shares in the hands of the shareholders immediately prior to the
exchange (section 358(a)(1)), decreased by the amount of Cash Boot received
by such Target shareholders, and increased by the amount treated as a dividend
and the amount of gain (if any) recognized on such exchange (but not including
any portion of such gain which is treated as a dividend).
4. Each Target shareholder’s holding period in the shares of New Acquiring Stock
received (including any fractional share interest in New Acquiring Stock to which
a shareholder may be entitled) will include such shareholder’s holding period in
Target stock surrendered in exchange therefor, provided such Target stock was
held as a capital asset by such Target shareholder on the date of the Merger.
Section 1223(1).
5. A Target shareholder who receives cash in lieu of receiving a fractional share of
New Acquiring Stock will be viewed as (i) receiving the fractional share, and then
(ii) transferring the fractional share back to Acquiring in exchange for cash. The
cash payment will be treated as having been received as a distribution in
redemption of the fractional share, subject to the provisions and limitations of
section 302. Rev. Rul. 66-365, 1966-2 C.B. 116. Gain or loss will be recognized
by a Target shareholder on the difference between the Target shareholder’s
basis in such fractional share and the amount of cash received. Section 1001. If
the fractional share qualifies as a capital asset in the hands of the shareholder,
such gain or loss will be capital gain or loss subject to the provisions and
limitations of sections 1221 and 1222.
6. Target will recognize no gain or loss upon the transfer of its assets to Acquiring
(including the Acquiring stock held by Target immediately before the Merger)
solely in exchange for the Merger Consideration and the assumption of Target
liabilities, if any, by Acquiring. Sections 361 and 357(a).
7. Acquiring will recognize no gain or loss upon its receipt of Target’s assets in
exchange for the Merger Consideration. Section 1032(a).
8. Acquiring’s basis in each asset received from Target will be the same as the
basis of such property in the hands of Target immediately prior to the Merger.
Section 362(b).
9. Acquiring’s holding period in each asset received in the Merger will include the
period during which Target held such asset. Section 1223(2).
10. Pursuant to section 381(a) and §§ 1.381(a)-1, Acquiring will succeed to and take
into account the items of Target described in section 381(c) as of the close of the
day of the Merger. The items will be taken into account by Acquiring subject to
the conditions and limitations specified in sections 381, 382, 383, and 384 and
the regulations thereunder, as applicable.
Caveats
No opinion is expressed about the federal income tax treatment of the Proposed
Transaction under other provisions of the Code or regulations, or the federal income 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.
Procedural Statements
This letter is directed only to the taxpayer who requested it. Section 6110(k)(3) provides
that this letter 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, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of this
ruling letter.
Pursuant to the power of attorney on file in this matter, a copy of this letter is being sent
to your authorized representatives.
Sincerely,
Petya V. Kirilova
Assistant to the Branch Chief, Branch 4
Office of Chief Counsel (Corporate)
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