[Code of Federal Regulations]
[Title 26, Volume 4]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.368-2]

[Page 340-348]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.368-2  Definition of terms.

    (a) The application of the term reorganization is to be strictly 
limited to the specific transactions set forth in section 368(a). The 
term does not embrace the mere purchase by one corporation of the 
properties of another corporation. The preceding sentence applies to 
transactions occurring after January 28, 1998, except that it does not 
apply to any transaction occurring pursuant to a written agreement which 
is binding on January 28, 1998, and at all times thereafter. If the 
properties are transferred for cash and deferred payment obligations of 
the transferee evidenced by short-term notes, the transaction is a sale 
and not an exchange in which gain or loss is not recognized.
    (b)(1) For rules regarding statutory mergers or consolidations on or 
after January 24, 2003, see Sec. 1.368-2T(b)(1). For rules regarding 
statutory mergers or consolidations before January 24, 2003, see Sec. 
1.368-2(b)(1) as in effect before January 24, 2003 (see 26 CFR part 1, 
revised April 1, 2002).
    (2) In order for the transaction to qualify under section 
368(a)(1)(A) by reason of the application of section 368(a)(2)(D), one 
corporation (the acquiring corporation) must acquire substantially all 
of the properties of another corporation (the acquired corporation) 
partly or entirely in exchange for stock of a corporation which is in 
control of the acquiring corporation (the controlling corporation), 
provided that (i) the transaction would have qualified under section 
368(a)(1)(A) if the merger had been into the controlling corporation, 
and (ii) no stock of the acquiring corporation is used in the 
transaction. The foregoing test of whether the transaction would have 
qualified under section

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368(a)(1)(A) if the merger had been into the controlling corporation 
means that the general requirements of a reorganization under section 
368(a)(1)(A) (such as a business purpose, continuity of business 
enterprise, and continuity of interest) must be met in addition to the 
special requirements of section 368(a)(2)(D). Under this test, it is not 
relevant whether the merger into the controlling corporation could have 
been effected pursuant to State or Federal corporation law. The term 
substantially all has the same meaning as it has in section 
368(a)(1)(C). Although no stock of the acquiring corporation can be used 
in the transaction, there is no prohibition (other than the continuity 
of interest requirement) against using other property, such as cash or 
securities, of either the acquiring corporation or the parent or both. 
In addition, the controlling corporation may assume liabilities of the 
acquired corporation without disqualifying the transaction under section 
368(a)(2(D), and for purposes of section 357(a) the controlling 
corporation is considered a party to the exchange. For example, if the 
controlling corporation agrees to substitute its stock for stock of the 
acquired corporation under an outstanding employee stock option 
agreement, this assumption of liability will not prevent the transaction 
from qualifying as a reorganization under section 368(a)(2)(D) and the 
assumption of liability is not treated as money or other property for 
purposes of section 361(b). Section 368(a)(2)(D) applies whether or not 
the controlling corporation (or the acquiring corporation) is formed 
immediately before the merger, in anticipation of the merger, or after 
preliminary steps have been taken to merge directly into the controlling 
corporation. Section 368(a)(2)(D) applies only to statutory mergers 
occurring after October 22, 1968.
    (3) For regulations under section 368(a)(2)(E), see paragraph (j) of 
this section.
    (c) In order to qualify as a ``reorganization'' under section 
368(a)(1)(B), the acquisition by the acquiring corporation of stock of 
another corporation must be in exchange solely for all or a part of the 
voting stock of the acquiring corporation (or, in the case of 
transactions occurring after December 31, 1963, solely for all or a part 
of the voting stock of a corporation which is in control of the 
acquiring corporation), and the acquiring corporation must be in control 
of the other corporation immediately after the transaction. If, for 
example, Corporation X in one transaction exchanges nonvoting preferred 
stock or bonds in addition to all or a part of its voting stock in the 
acquisition of stock of Corporation Y, the transaction is not a 
reorganization under section 368(a)(1)(B). Nor is a transaction a 
reorganization described in section 368(a)(1)(B) if stock is acquired in 
exchange for voting stock both of the acquiring corporation and of a 
corporation which is in control of the acquiring corporation. The 
acquisition of stock of another corporation by the acquiring corporation 
solely for its voting stock (or solely for voting stock of a corporation 
which is in control of the acquiring corporation) is permitted tax-free 
even though the acquiring corporation already owns some of the stock of 
the other corporation. Such an acquisition is permitted tax-free in a 
single transaction or in a series of transactions taking place over a 
relatively short period of time such as 12 months. For example, 
Corporation A purchased 30 percent of the common stock of Corporation W 
(the only class of stock outstanding) for cash in 1939. On March 1, 
1955, Corporation A offers to exchange its own voting stock for all the 
stock of Corporation W tendered within 6 months from the date of the 
offer. Within the 6-months' period Corporation A acquires an additional 
60 percent of stock of Corporation W solely for its own voting stock, so 
that it owns 90 percent of the stock of Corporation W. No gain or loss 
is recognized with respect to the exchanges of stock of Corporation A 
for stock of Corporation W. For this purpose, it is immaterial whether 
such exchanges occurred before Corporation A acquired control (80 
percent) of Corporation W or after such control was acquired. If 
Corporation A had acquired 80 percent of the stock of Corporation W for 
cash in 1939, it could likewise acquire some or all of the remainder of 
such stock solely in exchange for its own voting

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stock without recognition of gain or loss.
    (d) In order to qualify as a reorganization under section 
368(a)(1)(C), the transaction must be one described in subparagraph (1) 
or (2) of this paragraph:
    (1) One corporation must acquire substantially all the properties of 
another corporation solely in exchange for all or a part of its own 
voting stock, or solely in exchange for all or a part of the voting 
stock of a corporation which is in control of the acquiring corporation. 
For example, Corporation P owns all the stock of Corporation A. All the 
properties of Corporation W are transferred to Corporation A either 
solely in exchange for voting stock of Corporation P or solely in 
exchange for less than 80 percent of the voting stock of Corporation A. 
Either of such transactions constitutes a reorganization under section 
368(a)(1)(C). However, if the properties of Corporation W are acquired 
in exchange for voting stock of both Corporation P and Corporation A, 
the transaction will not constitute a reorganization under section 
368(a)(1)(C). In determining whether the exchange meets the requirement 
of ``solely for voting stock'', the assumption by the acquiring 
corporation of liabilities of the transferor corporation, or the fact 
that property acquired from the transferor corporation is subject to a 
liability, shall be disregarded. Though such an assumption does not 
prevent an exchange from being solely for voting stock for the purposes 
of the definition of a reorganization contained in section 368(a)(1)(C), 
it may in some cases, however, so alter the character of the transaction 
as to place the transaction outside the purposes and assumptions of the 
reorganization provisions. Section 368(a)(1)(C) does not prevent 
consideration of the effect of an assumption of liabilities on the 
general character of the transaction but merely provides that the 
requirement that the exchange be solely for voting stock is satisfied if 
the only additional consideration is an assumption of liabilities.
    (2) One corporation:
    (i) Must acquire substantially all of the properties of another 
corporation in such manner that the acquisition would qualify under (1) 
above, but for the fact that the acquiring corporation exchanges money, 
or other property in addition to such voting stock, and
    (ii) Must acquire solely for voting stock (either of the acquiring 
corporation or of a corporation which is in control of the acquiring 
corporation) properties of the other corporation having a fair market 
value which is at least 80 percent of the fair market value of all the 
properties of the other corporation.
    (3) For the purposes of subparagraph (2)(ii) only, a liability 
assumed or to which the properties are subject is considered money paid 
for the properties. For example, Corporation A has properties with a 
fair market value of $100,000 and liabilities of $10,000. In exchange 
for these properties, Corporation Y transfers its own voting stock, 
assumes the $10,000 liabilities, and pays $8,000 in cash. The 
transaction is a reorganization even though a part of the properties of 
Corporation A is acquired for cash. On the other hand, if the properties 
of Corporation A worth $100,000, were subject to $50,000 in liabilities, 
an acquisition of all the properties, subject to the liabilities, for 
any consideration other than solely voting stock would not qualify as a 
reorganization under this section since the liabilities alone are in 
excess of 20 percent of the fair market value of the properties. If the 
transaction would qualify under either subparagraph (1) or (2) of this 
paragraph and also under section 368(a)(1)(D), such transaction shall 
not be treated as a reorganization under section 368 (a)(1)(C).
    (4)(i) For purposes of paragraphs (d)(1) and (2)(ii) of this 
section, prior ownership of stock of the target corporation by an 
acquiring corporation will not by itself prevent the solely for voting 
stock requirement of such paragraphs from being satisfied. In a 
transaction in which the acquiring corporation has prior ownership of 
stock of the target corporation, the requirement of paragraph (d)(2)(ii) 
of this section is satisfied only if the sum of the money or other 
property that is distributed in pursuance of the plan of reorganization 
to the shareholders of the target corporation other than the acquiring 
corporation and to the creditors of the

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target corporation pursuant to section 361(b)(3), and all of the 
liabilities of the target corporation assumed by the acquiring 
corporation (including liabilities to which the properties of the target 
corporation are subject), does not exceed 20 percent of the value of all 
of the properties of the target corporation. If, in connection with a 
potential acquisition by an acquiring corporation of substantially all 
of a target corporation's properties, the acquiring corporation acquires 
the target corporation's stock for consideration other than the 
acquiring corporation's own voting stock (or voting stock of a 
corporation in control of the acquiring corporation if such stock is 
used in the acquisition of the target corporation's properties), whether 
from a shareholder of the target corporation or the target corporation 
itself, such consideration is treated, for purposes of paragraphs (d)(1) 
and (2) of this section, as money or other property exchanged by the 
acquiring corporation for the target corporation's properties. 
Accordingly, the transaction will not qualify under section 368(a)(1)(C) 
unless, treating such consideration as money or other property, the 
requirements of section 368(a)(2)(B) and paragraph (d)(2)(ii) of this 
section are met. The determination of whether there has been an 
acquisition in connection with a potential reorganization under section 
368(a)(1)(C) of a target corporation's stock for consideration other 
than an acquiring corporation's own voting stock (or voting stock of a 
corporation in control of the acquiring corporation if such stock is 
used in the acquisition of the target corporation's properties) will be 
made on the basis of all of the facts and circumstances.
    (ii) The following examples illustrate the principles of this 
paragraph (d)(4):

    Example 1. Corporation P (P) holds 60 percent of the Corporation T 
(T) stock that P purchased several years ago in an unrelated 
transaction. T has 100 shares of stock outstanding. The other 40 percent 
of the T stock is owned by Corporation X (X), an unrelated corporation. 
T has properties with a fair market value of $110 and liabilities of 
$10. T transfers all of its properties to P. In exchange, P assumes the 
$10 of liabilities, and transfers to T $30 of P voting stock and $10 of 
cash. T distributes the P voting stock and $10 of cash to X and 
liquidates. The transaction satisfies the solely for voting stock 
requirement of paragraph (d)(2)(ii) of this section because the sum of 
$10 of cash paid to X and the assumption by P of $10 of liabilities does 
not exceed 20% of the value of the properties of T.
    Example 2. The facts are the same as in Example 1 except that P 
purchased the 60 shares of T for $60 in cash in connection with the 
acquisition of T's assets. The transaction does not satisfy the solely 
for voting stock requirement of paragraph (d)(2)(ii) of this section 
because P is treated as having acquired all of the T assets for 
consideration consisting of $70 of cash, $10 of liability assumption and 
$30 of P voting stock, and the sum of $70 of cash and the assumption by 
P of $10 of liabilities exceeds 20% of the value of the properties of T.

    (iii) This paragraph (d)(4) applies to transactions occurring after 
December 31, 1999, unless the transaction occurs pursuant to a written 
agreement that is (subject to customary conditions) binding on that date 
and at all times thereafter.
    (e) A ``recapitalization'', and therefore a reorganization, takes 
place if, for example:
    (1) A corporation with $200,000 par value of bonds outstanding, 
instead of paying them off in cash, discharges them by issuing preferred 
shares to the bondholders;
    (2) There is surrendered to a corporation for cancellation 25 
percent of its preferred stock in exchange for no par value common 
stock;
    (3) A corporation issues preferred stock, previously authorized but 
unissued, for outstanding common stock;
    (4) An exchange is made of a corporation's outstanding preferred 
stock, having certain priorities with reference to the amount and time 
of payment of dividends and the distribution of the corporate assets 
upon liquidation, for a new issue of such corporation's common stock 
having no such rights;
    (5) An exchange is made of an amount of a corporation's outstanding 
preferred stock with dividends in arrears for other stock of the 
corporation. However, if pursuant to such an exchange there is an 
increase in the proportionate interest of the preferred shareholders in 
the assets or earnings and profits of the corporation, then under Sec. 
1.305-7(c)(2), an amount equal to the lesser of (i) the amount by which

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the fair market value or liquidation preference, whichever is greater, 
of the stock received in the exchange (determined immediately following 
the recapitalization) exceeds the issue price of the preferred stock 
surrendered, or (ii) the amount of the dividends in arrears, shall be 
treated under section 305(c) as a deemed distribution to which sections 
305(b)(4) and 301 apply.
    (f) The term a party to a reorganization includes a corporation 
resulting from a reorganization, and both corporations, in a transaction 
qualifying as a reorganization where one corporation acquires stock or 
properties of another corporation. If a transaction otherwise qualifies 
as a reorganization, a corporation remains a party to the reorganization 
even though stock or assets acquired in the reorganization are 
transferred in a transaction described in paragraph (k) of this section. 
If a transaction otherwise qualifies as a reorganization, a corporation 
shall not cease to be a party to the reorganization solely by reason of 
the fact that part or all of the assets acquired in the reorganization 
are transferred to a partnership in which the transferor is a partner if 
the continuity of business enterprise requirement is satisfied. See 
Sec. 1.368-1(d). The preceding three sentences apply to transactions 
occurring after January 28, 1998, except that they do not apply to any 
transaction occurring pursuant to a written agreement which is binding 
on January 28, 1998, and at all times thereafter. A corporation 
controlling an acquiring corporation is a party to the reorganization 
when the stock of such controlling corporation is used in the 
acquisition of properties. Both corporations are parties to the 
reorganization if, under statutory authority, Corporation A is merged 
into Corporation B. All three of the corporations are parties to the 
reorganization if, pursuant to statutory authority, Corporation C and 
Corporation D are consolidated into Corporation E. Both corporations are 
parties to the reorganization if Corporation F transfers substantially 
all its assets to Corporation G in exchange for all or a part of the 
voting stock of Corporation G. All three corporations are parties to the 
reorganization if Corporation H transfers substantially all its assets 
to Corporation K in exchange for all or a part of the voting stock of 
Corporation L, which is in control of Corporation K. Both corporations 
are parties to the reorganization if Corporation M transfers all or part 
of its assets to Corporation N in exchange for all or a part of the 
stock and securities of Corporation N, but only if (1) immediately after 
such transfer, Corporation M, or one or more of its shareholders 
(including persons who were shareholders immediately before such 
transfer), or any combination thereof, is in control of Corporation N, 
and (2) in pursuance of the plan, the stock and securities of 
Corporation N are transferred or distributed by Corporation M in a 
transaction in which gain or loss is not recognized under section 354 or 
355, or is recognized only to the extent provided in section 356. Both 
Corporation O and Corporation P, but not Corporation S, are parties to 
the reorganization if Corporation O acquires stock of Corporation P from 
Corporation S in exchange solely for a part of the voting stock of 
Corporation O, if (1) the stock of Corporation P does not constitute 
substantially all of the assets of Corporation S, (2) Corporation S is 
not in control of Corporation O immediately after the acquisition, and 
(3) Corporation O is in control of Corporation P immediately after the 
acquisition.
    (g) The term plan of reorganization has reference to a consummated 
transaction specifically defined as a reorganization under section 
368(a). The term is not to be construed as broadening the definition of 
reorganization as set forth in section 368(a), but is to be taken as 
limiting the nonrecognition of gain or loss to such exchanges or 
distributions as are directly a part of the transaction specifically 
described as a reorganization in section 368(a). Moreover, the 
transaction, or series of transactions, embraced in a plan of 
reorganization must not only come within the specific language of 
section 368(a), but the readjustments involved in the exchanges or 
distributions effected in the consummation thereof

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must be undertaken for reasons germane to the continuance of the 
business of a corporation a party to the reorganization. Section 368(a) 
contemplates genuine corporate reorganizations which are designed to 
effect a readjustment of continuing interests under modified corporate 
forms.
    (h) As used in section 368, as well as in other provisions of the 
Internal Revenue Code, if the context so requires, the conjunction 
``or'' denotes both the conjunctive and the disjunctive, and the 
singular includes the plural. For example, the provisions of the statute 
are complied with if ``stock and securities'' are received in exchange 
as well as if ``stock or securities'' are received.
    (i) [Reserved]
    (j)(1) This paragraph (j) prescribes rules relating to the 
application of section 368 (a)(2)(E).
    (2) Section 368(a)(2)(E) does not apply to a consolidation.
    (3) A transaction otherwise qualifying under section 368(a)(1)(A) is 
not disqualified by reason of the fact that stock of a corporation (the 
controlling corporation) which before the merger was in control of the 
merged corporation is used in the transaction, if the conditions of 
section 368(a)(2)(E) are satisfied. Those conditions are as follows:
    (i) In the transaction, shareholders of the surviving corporation 
must surrender stock in exchange for voting stock of the controlling 
corporation. Further, the stock so surrendered must constitute control 
of the surviving corporation. Control is defined in section 368(c). The 
amount of stock constituting control is measured immediately before the 
transaction. For purposes of this subdivision (i), stock in the 
surviving corporation which is surrendered in the transaction (by any 
shareholder except the controlling corporation) in exchange for 
consideration furnished by the surviving corporation (and not by the 
controlling corporation of the merged corporation) is considered not to 
be outstanding immediately before the transaction. For effect on 
``substantially all'' test of consideration furnished by the surviving 
corporation, see paragraph (j)(3)(iii) of this section.
    (ii) Except as provided in paragraph (k)(2) of this section, the 
controlling corporation must control the surviving corporation 
immediately after the transaction.
    (iii) After the transaction, except as provided in paragraph (k)(2) 
of this section, the surviving corporation must hold substantially all 
of its own properties and substantially all of the properties of the 
merged corporation (other than stock of the controlling corporation 
distributed in the transaction). The term substantially all has the same 
meaning as in section 368(a)(1)(C). The ``substantially all'' test 
applies separately to the merged corporation and to the surviving 
corporation. In applying the ``substantially all'' test to the surviving 
corporation, consideration furnished in the transaction by the surviving 
corporation in exchange for its stock is property of the surviving 
corporation which it does not hold after the transaction. In applying 
the ``substantially all'' test to the merged corporation, assets 
transferred from the controlling corporation to the merged corporation 
in pursuance of the plan of reorganization are not taken into account. 
Thus, for example, money transferred from the controlling corporation to 
the merged corporation to be used for the following purposes is not 
taken into account for purposes of the ``substantially all'' test:
    (A) To pay additional consideration to shareholders of the surviving 
corporation;
    (B) To pay dissenting shareholders of the surviving corporation;
    (C) To pay creditors of the surviving corporation;
    (D) To pay reorganization expenses; or
    (E) To enable the merged corporation to satisfy state minimum 
capitalization requirements (where the money is returned to the 
controlling corporation as part of the transaction).
    (iv) Paragraphs (j)(3)(ii) and (iii) of this section apply to 
transactions occurring after January 28, 1998, except that they do not 
apply to any transaction occurring pursuant to a written agreement which 
is binding on January 28, 1998, and at all times thereafter.

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    (4) The controlling corporation may assume liabilities of the 
surviving corporation without disqualifying the transaction under 
section 368(a)(2)(E). An assumption of liabilities of the surviving 
corporation by the controlling corporation is a contribution to capital 
by the controlling corporation to the surviving corporation. If, in 
pursuance of the plan of reorganization, securities of the surviving 
corporation are exchanged for securities of the controlling corporation, 
or for other securities of the surviving corporation, see sections 354 
and 356.
    (5) In applying section 368(a)(2)(E), it makes no difference if the 
merged corporation is an existing corporation, or is formed immediately 
before the merger, in anticipation of the merger, or after preliminary 
steps have been taken to otherwise acquire control of the surviving 
corporation.
    (6) The following examples illustrate the application of this 
paragraph (j). In each of the examples, Corporation P owns all of the 
stock of Corporation S and, except as otherwise stated, Corporation T 
has outstanding 1,000 shares of common stock and no shares of any other 
class. In each of the examples, it is also assumed that the transaction 
qualifies under section 368(a)(1)(A) if the conditions of section 
368(a)(2)(E) are satisfied.

    Example 1. P owns no T stock. On January 1, 1981, S merges into T. 
In the merger, T's shareholders surrender 950 shares of common stock in 
exchange for P voting stock. The holders of the other 50 shares (who 
dissent from the merger) are paid in cash with funds supplied by P. 
After the transaction, T holds all of its own assets and all of S's 
assets. Based on these facts, the transaction qualifies under section 
368(a)(1)(A) by reason of the application of section 368(a)(2)(E). In 
the transaction, former shareholders of T surrender, in exchange for P 
voting stock, an amount of T stock (950/1,000 shares or 95 percent) 
which constitutes control of T.
    Example 2. The facts are the same as in Example (1) except that 
holders of 100 shares in corporation T, who dissented from the merger, 
are paid in cash with funds supplied by T (and not by P or S) and in the 
merger, T's remaining shareholders surrender 720 shares of common stock 
in exchange for P voting stock and 180 shares of common stock for cash 
supplied by P. The requirements of section 368(a)(2)(E)(ii) are 
satisfied since, in the transaction, former shareholders of T surrender, 
in exchange for P voting stock, an amount of T stock (720/900 shares or 
80 percent) which constitutes control of T. The T stock surrendered in 
exchange for consideration furnished by T is not considered outstanding 
for purposes of determining whether the amount of T stock surrendered by 
T shareholders for P stock constitutes control of T.
    Example 3. T has outstanding 1,000 shares of common stock, 100 
shares of nonvoting preferred stock, and no shares of any other class. 
On January 1, 1981, S merges into T. Prior to the merger, as part of the 
transaction, T distributes its own cash in redemption of the 100 shares 
of preferred stock. In the transaction, T's remaining shareholders 
surrender their 1,000 shares of common stock in exchange for P voting 
stock. The requirements of section 368(a)(2)(E)(ii) are satisfied since, 
in the transaction, former shareholders of T surrender, in exchange for 
P voting stock, an amount of T stock (1,000/1,000 shares or 100 percent) 
which constitutes control of T. The preferred stock surrendered in 
exchange for consideration furnished by T is not considered outstanding 
for purposes of determining whether the amount of T stock surrendered by 
T shareholders for P stock constitutes control of T. However, the 
consideration furnished by T for its stock is property of T which T does 
not hold after the transaction for purposes of the substantially all 
test in paragraph (j)(3)(iii) of this section.
    Example 4. On January 1, 1971, P purchased 201 shares of T's stock. 
On January 1, 1981, S merges into T. In the merger, T's shareholders 
(other than P) surrender 799 shares of T stock in exchange for P voting 
stock. Based on these facts, in the transaction, former shareholders of 
T do not surrender, in exchange for P voting stock, an amount of T stock 
which constitutes control of T (799/1,000 shares being less than 80 
percent). Therefore, the transaction does not qualify under section 
368(a)(1)(A). However, if S is a transitory corporation, formed solely 
for purposes of effectuating the transaction, the transaction may 
qualify as a reorganization described in section 368(a)(1)(B) provided 
all of the applicable requirements are satisfied.
    Example 5. On January 1, 1971, P purchased 200 shares of T's stock. 
On January 1, 1981, S merges into T. Prior to the merger, as part of the 
transaction, T distributes its own cash in redemption of 1 share of T 
stock from a T shareholder other than P. In the merger, T's remaining 
shareholders (other than P) surrender 799 shares of T stock in exchange 
for P voting stock. Based on these facts, in the transaction, former 
shareholders of T do not surrender, in exchange for P voting stock, an 
amount of T stock which constitutes control of T (799/999 shares being 
less than 80 percent). Therefore, the transaction does not qualify under 
section 368(a)(1)(A). However, if S is a transitory corporation, formed 
for purposes of effectuating the transaction, the

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transaction may qualify as a reorganization described in section 
368(a)(1)(B) provided all of the applicable requirements are satisfied.
    Example 6. The stock of S has a value of $25,000. The stock of T has 
a value of $75,000. On January 1, 1984, S merges into T. In the merger, 
T's shareholders surrender all of their T stock in exchange for P voting 
stock. After the transaction, T holds all of its own assets and all of 
S's assets. Based on these facts, the transaction qualifies under 
section 368(a)(1)(A) by reason of the application of section 
368(a)(2)(E). In the transaction, former shareholders of T surrender, in 
exchange for P voting stock, an amount of T stock (1,000/1,000 shares or 
100 percent) which constitutes control of T. The stock of T received by 
P in exchange for P's prior interest in S is not taken into account for 
purposes of section 368(a)(2)(E)(ii) since the amount of T stock 
constituting control of T is measured before the transaction.
    Example 7. The stock of T has a value of $75,000. On January 1, 
1984, S merges into T. In the merger, T's shareholders surrender all of 
their T stock in exchange for P voting stock. As part of the 
transaction, P contributes $25,000 to T in exchange for new shares of T 
stock. None of the cash received by T is distributed or otherwise paid 
out to former T shareholders. After the transaction, T holds all of its 
own assets and all of S's assets. Based on these facts, the transaction 
qualifies under section 368(a)(1)(A) by reason of the application of 
section 368(a)(2)(E). In the transaction, former shareholders of T 
surrender, in exchange for P voting stock, an amount of T stock (1,000/
1,000 shares or 100 percent) which constitutes control of T. The T stock 
received by P in exchange for its contribution to T is not taken into 
account for purposes of section 368(a)(2)(E)(ii) since the amount of T 
stock constituting control of T is measured before the transaction.
    Example 8. The facts are the same as in Example (7) except that, as 
part of the transaction, corporation R, instead of P, contributes 
$25,000 to T in exchange for T stock. Based on these facts, the 
transaction does not qualify under section 368(a)(1)(A) by reason of 
section 368(a)(2)(E) since P does not control T immediately after the 
transaction.
    Example 9. T stock has a value of $75,000. P owns 500 shares (\1/2\) 
of that stock with a value of $37,500. The stock of S has a value of 
$125,000. On January 1, 1984, S merges into T. In the merger, T's 
shareholders (other than P) surrender their T stock in exchange for P 
voting stock. Based on these facts, in the transaction, former 
shareholders of T do not surrender, in exchange for P voting stock, an 
amount of T stock which constitutes control of T (500/1,000 shares being 
less than 80 percent). Therefore, the transaction does not qualify under 
section 368(a)(1)(A). The stock of T received by P in exchange for P's 
prior interest in S does not contribute to satisfaction of the 
requirement of section 368(a)(2)(E)(ii).

    (k) Transfer of assets or stock in section 368(a)(1)(A), (B), (C), 
or (G) reorganizations--(1) General rule for transfers to controlled 
corporations. Except as otherwise provided in this section, a 
transaction otherwise qualifying under section 368(a)(1)(A), (B), (C), 
or (G) (where the requirements of sections 354(b)(1)(A) and (B) are met) 
shall not be disqualified by reason of the fact that part or all of the 
acquired assets or stock acquired in the transaction are transferred or 
successively transferred to one or more corporations controlled in each 
transfer by the transferor corporation. Control is defined under section 
368(c).
    (2) Transfers following a reverse triangular merger. A transaction 
qualifying under section 368(a)(1)(A) by reason of the application of 
section 368(a)(2)(E) is not disqualified by reason of the fact that part 
or all of the stock of the surviving corporation is transferred or 
successively transferred to one or more corporations controlled in each 
transfer by the transferor corporation, or because part or all of the 
assets of the surviving corporation or the merged corporation are 
transferred or successively transferred to one or more corporations 
controlled in each transfer by the transferor corporation.
    (3) Examples. The following examples illustrate the application of 
this paragraph (k). P is the issuing corporation and T is the target 
corporation. P has only one class of stock outstanding. The examples are 
as follows:

    Example 1. Transfers of acquired assets to controlled corporations. 
(i) Facts. T operates a bakery which supplies delectable pastries and 
cookies to local retail stores. The acquiring corporate group produces a 
variety of baked goods for nationwide distribution. P owns 80 percent of 
the stock of S-1. Pursuant to a plan of reorganization, T transfers all 
of its assets to S-1 solely in exchange for P stock, which T distributes 
to its shareholders. S-1 owns 80 percent of the stock of S-2; S-2 owns 
80 percent of the stock of S-3, which also makes and supplies pastries 
and cookies. Pursuant to the plan of reorganization, S-1 transfers the T 
assets to S-2; S-2 transfers the T assets to S-3.
    (ii) Analysis. Under this paragraph (k), the transaction, otherwise 
qualifying as a reorganization under section 368(a)(1)(C), is not

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disqualified by reason of the fact of the successive transfers of all of 
the acquired assets from S-1 to S-2, and from S-2 to S-3 because in each 
transfer, the transferee corporation is controlled by the transferor 
corporation. Control is defined under section 368(c).
    Example 2. Transfers of acquired stock to controlled corporations. 
(i) Facts. The facts are the same as Example 1 except that S-1 acquires 
all of the T stock rather than the T assets, and as part of the plan of 
reorganization, S-1 transfers all of the T stock to S-2, and S-2 
transfers all of the T stock to S-3.
    (ii) Analysis. Under this paragraph (k), the transaction, otherwise 
qualifying as a reorganization under section 368(a)(1)(B), is not 
disqualified by reason of the fact of the successive transfers of all of 
the acquired stock from S-1 to S-2, and from S-2 to S-3 because in each 
transfer, the transferee corporation is controlled by the transferor 
corporation.
    Example 3. Transfers of acquired stock to partnerships. (i) Facts. 
The facts are the same as in Example 2. However, as part of the plan of 
reorganization, S-2 and S-3 form a new partnership, PRS. Immediately 
thereafter, S-3 transfers all of the T stock to PRS in exchange for an 
80 percent partnership interest, and S-2 transfers cash to PRS in 
exchange for a 20 percent partnership interest.
    (ii) Analysis. This paragraph (k) describes the successive transfer 
of the T stock to S-3, but does not describe S-3's transfer of the T 
stock to PRS. Therefore, the characterization of this transaction must 
be determined under the relevant provisions of law, including the step 
transaction doctrine. See Sec. 1.368-1(a). The transaction fails to 
meet the control requirement of a reorganization described in section 
368(a)(1)(B) because immediately after the acquisition of the T stock, 
the acquiring corporation does not have control of T.

    (4) This paragraph (k) applies to transactions occurring after 
January 28, 1998, except that it does not apply to any transaction 
occurring pursuant to a written agreement which is binding on January 
28, 1998, and at all times thereafter.

[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7281, 38 FR 
18540, July 12, 1973; T.D. 7422, 41 FR 26570, June 28, 1976; T.D. 8059, 
50 FR 42689, Oct. 22, 1985; 51 FR 6400, Feb. 24, 1986; T.D. 8760, 63 FR 
4182, Jan. 28, 1998; T.D. 8885, 65 FR 31806, May 19, 2000; T.D. 9038, 
Jan. 24, 2003]