[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: 26CFR1.368-2T]

[Page 348-351]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.368-2T  Definition of terms (temporary).

    (a) [Reserved]. For further guidance, see Sec. 1.368-2(a).
    (b)(1)(i) Definitions. For purposes of this paragraph (b)(1), the 
following terms shall have the following meanings:
    (A) Disregarded entity. A disregarded entity is a business entity 
(as defined in Sec. 301.7701-2(a) of this chapter) that is disregarded 
as an entity separate from its owner for Federal tax purposes. Examples 
of disregarded entities include a domestic single member limited 
liability company that does not elect to be classified as a corporation 
for Federal tax purposes, a corporation (as defined in Sec. 301.7701-
2(b) of this chapter) that is a qualified REIT subsidiary (within the 
meaning of section 856(i)(2)), and a corporation that is a qualified 
subchapter S subsidiary (within the meaning of section 1361(b)(3)(B)).
    (B) Combining entity. A combining entity is a business entity that 
is a corporation (as defined in Sec. 301.7701-2(b) of this chapter) 
that is not a disregarded entity.
    (C) Combining unit. A combining unit is composed solely of a 
combining entity and all disregarded entities, if any, the assets of 
which are treated as owned by such combining entity for Federal tax 
purposes.
    (ii) Statutory merger or consolidation generally. For purposes of 
section 368(a)(1)(A), a statutory merger or consolidation is a 
transaction effected pursuant to the laws of the United States or a 
State or the District of Columbia, in which, as a result of the 
operation of such laws, the following events occur simultaneously at the 
effective time of the transaction--
    (A) All of the assets (other than those distributed in the 
transaction) and liabilities (except to the extent satisfied or 
discharged in the transaction) of each member of one or more combining 
units (each a transferor unit) become the assets and liabilities of one 
or more members of one other combining unit (the transferee unit); and
    (B) The combining entity of each transferor unit ceases its separate 
legal existence for all purposes; provided, however, that this 
requirement will be satisfied even if, pursuant to the laws of the 
United States or a State or the District of Columbia, after the 
effective time of the transaction, the combining entity of the 
transferor unit (or

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its officers, directors, or agents) may act or be acted against, or a 
member of the transferee unit (or its officers, directors, or agents) 
may act or be acted against in the name of the combining entity of the 
transferor unit, provided that such actions relate to assets or 
obligations of the combining entity of the transferor unit that arose, 
or relate to activities engaged in by such entity, prior to the 
effective time of the transaction, and such actions are not inconsistent 
with the requirements of paragraph (b)(1)(ii)(A) of this section.
    (iii) Statutory merger or consolidation involving disregarded 
entities. A transaction effected pursuant to the laws of the United 
States or a State or the District of Columbia in which any of the assets 
and liabilities of a combining entity of a transferor unit become assets 
and liabilities of one or more disregarded entities of the transferee 
unit is not a statutory merger or consolidation within the meaning of 
section 368(a)(1)(A) and paragraph (b)(1)(ii) of this section unless 
such combining entity, the combining entity of the transferee unit, such 
disregarded entities other than entities that were disregarded entities 
of the transferor unit immediately prior to the transaction, and each 
business entity through which the combining entity of the transferee 
unit holds its interests in such disregarded entities is organized under 
the laws of the United States or a State or the District of Columbia.
    (iv) Examples. The following examples illustrate the rules of 
paragraph (b)(1) of this section. In each of the examples, except as 
otherwise provided, each of V, Y, and Z is a domestic C corporation. X 
is a domestic limited liability company. Except as otherwise provided, X 
is wholly owned by Y and is disregarded as an entity separate from Y for 
Federal tax purposes. The examples are as follows:

    Example 1. Divisive transaction pursuant to a merger statute. (i) 
Under State W law, Z transfers some of its assets and liabilities to Y, 
retains the remainder of its assets and liabilities, and remains in 
existence following the transaction. The transaction qualifies as a 
merger under State W corporate law. Prior to the transaction, Y is not 
treated as owning any assets of an entity that is disregarded as an 
entity separate from its owner for Federal tax purposes.
    (ii) The transaction does not satisfy the requirements of paragraph 
(b)(1)(ii)(A) of this section because all of the assets and liabilities 
of Z, the combining entity of the transferor unit, do not become the 
assets and liabilities of Y, the combining entity and sole member of the 
transferee unit. In addition, the transaction does not satisfy the 
requirements of paragraph (b)(1)(ii)(B) of this section because the 
separate legal existence of Z does not cease for all purposes. 
Accordingly, the transaction does not qualify as a statutory merger or 
consolidation under section 368(a)(1)(A).
    Example 2. Merger of a target corporation into a disregarded entity 
in exchange for stock of the owner. (i) Under State W law, Z merges into 
X. Pursuant to such law, the following events occur simultaneously at 
the effective time of the transaction: all of the assets and liabilities 
of Z become the assets and liabilities of X and Z's separate legal 
existence ceases for all purposes. In the merger, the Z shareholders 
exchange their stock of Z for stock of Y. Prior to the transaction, Z is 
not treated as owning any assets of an entity that is disregarded as an 
entity separate from its owner for Federal tax purposes.
    (ii) The transaction satisfies the requirements of paragraph 
(b)(1)(ii) of this section because the transaction is effected pursuant 
to State W law and the following events occur simultaneously at the 
effective time of the transaction: all of the assets and liabilities of 
Z, the combining entity and sole member of the transferor unit, become 
the assets and liabilities of one or more members of the transferee unit 
that is comprised of Y, the combining entity of the transferee unit, and 
X, a disregarded entity the assets of which Y is treated as owning for 
Federal tax purposes, and Z ceases its separate legal existence for all 
purposes. Paragraph (b)(1)(iii) of this section does not apply to 
prevent the transaction from qualifying as a statutory merger or 
consolidation for purposes of section 368(a)(1)(A) because each of Z, Y, 
and X is a domestic entity. Accordingly, the transaction qualifies as a 
statutory merger or consolidation for purposes of section 368(a)(1)(A). 
The result would be the same if Z were treated as owning assets of an 
entity that is disregarded as an entity separate from Z, regardless of 
whether such disregarded entity became an entity disregarded as an 
entity separate from Y as a result of the transaction, or merged into X 
or a domestic entity disregarded as an entity separate from Y.
    Example 3. Merger of a target S corporation that owns a QSub into a 
disregarded entity. (i) The facts are the same as in Example 2, except 
that Z is an S corporation and owns all of the stock of U, a QSub.
    (ii) The deemed formation by Z of U pursuant to Sec. 1.1361-5(b)(1) 
(as a consequence of the

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termination of U's QSub election) is disregarded for Federal income tax 
purposes. The transaction is treated as a transfer of the assets of U to 
X, followed by X's transfer of these assets to U in exchange for stock 
of U. See Sec. 1.1361-5(b)(3), Example 9. The transaction will, 
therefore, satisfy the requirements of paragraph (b)(1)(ii) of this 
section because the transaction is effected pursuant to State W law and 
the following events occur simultaneously at the effective time of the 
transaction: all of the assets and liabilities of Z and U, the sole 
members of the transferor unit, become the assets and liabilities of one 
or more members of the transferee unit that is comprised of Y, the 
combining entity of the transferee unit, and X, a disregarded entity the 
assets of which Y is treated as owning for Federal tax purposes, and Z 
ceases its separate legal existence for all purposes. Paragraph 
(b)(1)(iii) of this section does not apply to prevent the transaction 
from qualifying as a statutory merger or consolidation for purposes of 
section 368(a)(1)(A) because each of Z, Y, and X is a domestic entity. 
Moreover, the deemed transfer of the assets of U in exchange for U stock 
does not cause the transaction to fail to qualify as a statutory merger 
or consolidation. See Sec. 368(a)(2)(C). Accordingly, the transaction 
qualifies as a statutory merger or consolidation for purposes of section 
368(a)(1)(A).
    Example 4. Triangular merger of a target corporation into a 
disregarded entity. (i) The facts are the same as in Example 2, except 
that V owns 100 percent of the outstanding stock of Y and, in the merger 
of Z into X, the Z shareholders exchange their stock of Z for stock of 
V. In the transaction, Z transfers substantially all of its properties 
to X.
    (ii) The transaction is not prevented from qualifying as a statutory 
merger or consolidation under section 368(a)(1)(A), provided the 
requirements of section 368(a)(2)(D) are satisfied. Because the assets 
of X are treated for Federal tax purposes as the assets of Y, Y will be 
treated as acquiring substantially all of the properties of Z in the 
merger for purposes of determining whether the merger satisfies the 
requirements of section 368(a)(2)(D). As a result, the Z shareholders 
that receive stock of V will be treated as receiving stock of a 
corporation that is in control of Y, the combining entity of the 
transferee unit that is the acquiring corporation for purposes of 
section 368(a)(2)(D). Accordingly, the merger will satisfy the 
requirements of section 368(a)(2)(D).
    Example 5. Merger of a target corporation into a disregarded entity 
owned by a partnership. (i) The facts are the same as in Example 2, 
except that Y is organized as a partnership under the laws of State W 
and is classified as a partnership for Federal tax purposes.
    (ii) The transaction does not satisfy the requirements of paragraph 
(b)(1)(ii)(A) of this section. All of the assets and liabilities of Z, 
the combining entity and sole member of the transferor unit, do not 
become the assets and liabilities of one or more members of a transferee 
unit because neither X nor Y qualifies as a combining entity. 
Accordingly, the transaction cannot qualify as a statutory merger or 
consolidation for purposes of section 368(a)(1)(A).
    Example 6. Merger of a disregarded entity into a corporation. (i) 
Under State W law, X merges into Z. Pursuant to such law, the following 
events occur simultaneously at the effective time of the transaction: 
all of the assets and liabilities of X (but not the assets and 
liabilities of Y other than those of X) become the assets and 
liabilities of Z and X's separate legal existence ceases for all 
purposes.
    (ii) The transaction does not satisfy the requirements of paragraph 
(b)(1)(ii)(A) of this section because all of the assets and liabilities 
of a transferor unit do not become the assets and liabilities of one or 
more members of the transferee unit. The transaction also does not 
satisfy the requirements of paragraph (b)(1)(ii)(B) of this section 
because X does not qualify as a combining entity. Accordingly, the 
transaction cannot qualify as a statutory merger or consolidation for 
purposes of section 368(a)(1)(A).
    Example 7. Merger of a corporation into a disregarded entity in 
exchange for interests in the disregarded entity. (i) Under State W law, 
Z merges into X. Pursuant to such law, the following events occur 
simultaneously at the effective time of the transaction: all of the 
assets and liabilities of Z become the assets and liabilities of X and 
Z's separate legal existence ceases for all purposes. In the merger of Z 
into X, the Z shareholders exchange their stock of Z for interests in X 
so that, immediately after the merger, X is not disregarded as an entity 
separate from Y for Federal tax purposes. Following the merger, pursuant 
to Sec. 301.7701-3(b)(1)(i) of this chapter, X is classified as a 
partnership for Federal tax purposes.
    (ii) The transaction does not satisfy the requirements of paragraph 
(b)(1)(ii)(A) of this section because immediately after the merger X is 
not disregarded as an entity separate from Y and, consequently, all of 
the assets and liabilities of Z, the combining entity of the transferor 
unit, do not become the assets and liabilities of one or more members of 
a transferee unit. Accordingly, the transaction cannot qualify as a 
statutory merger or consolidation for purposes of section 368(a)(1)(A).
    Example 8. Merger transaction preceded by distribution. (i) Z 
operates two unrelated businesses, Business P and Business Q, each of 
which represents 50 percent of the value of the assets of Z. Y desires 
to acquire and continue operating Business P, but does not want to 
acquire Business Q. Pursuant to a

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single plan, Z sells Business Q for cash to parties unrelated to Z and Y 
in a taxable transaction, and then distributes the proceeds of the sale 
pro rata to its shareholders. Then, pursuant to State W law, Z merges 
into Y. Pursuant to such law, the following events occur simultaneously 
at the effective time of the transaction: all of the assets and 
liabilities of Z related to Business P become the assets and liabilities 
of Y and Z's separate legal existence ceases for all purposes. In the 
merger, the Z shareholders exchange their Z stock for Y stock. Prior to 
the transaction, Z is not treated as owning any assets of an entity that 
is disregarded as an entity separate from its owner for Federal tax 
purposes.
    (ii) The transaction satisfies the requirements of paragraph 
(b)(1)(ii) of this section because the transaction is effected pursuant 
to State W law and the following events occur simultaneously at the 
effective time of the transaction: all of the assets and liabilities of 
Z, the combining entity and sole member of the transferor unit, become 
the assets and liabilities of Y, the combining entity and sole member of 
the transferee unit, and Z ceases its separate legal existence for all 
purposes. Paragraph (b)(1)(iii) of this section does not apply to 
prevent the transaction from qualifying as a statutory merger or 
consolidation for purposes of section 368(a)(1)(A) because each of Z and 
Y is a domestic entity. Accordingly, the transaction qualifies as a 
statutory merger or consolidation for purposes of section 368(a)(1)(A).

    (v) Effective dates. This paragraph (b)(1) applies to transactions 
occurring on or after January 24, 2003. Taxpayers, however, may apply 
these regulations in whole, but not in part, to transactions occurring 
before January 24, 2003, provided that, if the taxpayer is the acquiring 
corporation (or a shareholder of the acquiring corporation whose tax 
treatment of the transaction reflects the tax treatment by the acquiring 
corporation, such as a shareholder of an acquiring S corporation), the 
target corporation (and the shareholders of the target corporation whose 
tax treatment of the transaction reflects the tax treatment by the 
target corporation) also applies these regulations in whole, but not in 
part, to the transaction, and if the taxpayer is the target corporation 
(or a shareholder of the target corporation whose tax treatment of the 
transaction reflects the tax treatment by the target corporation), the 
acquiring corporation (and the shareholders of the acquiring corporation 
whose tax treatment of the transaction reflects the tax treatment by the 
acquiring corporation) also applies these regulations in whole, but not 
in part, to the transaction. For all other transactions, see Sec. 
1.368-2(b)(1) as in effect before January 24, 2003 (see 26 CFR part 1, 
revised April 1, 2002).
    (b)(2)-(k) [Reserved]. For further guidance, see Sec. 1.368-2(b)(2) 
through (k).

[T.D. 9038, 68 FR 3387, Jan. 24, 2003]