The following article is adapted and reprinted from the M&A Tax Report, Vol. 8, No. 12, July 2000, Panel Publishers, New York, NY.


By Robert W. Wood

These days, reversals of long standing IRS positions do not happen too often. But occasionally change does happen. Last year we saw the reversal of the IRS position regarding the Bausch & Lomb doctrine. (For details see Wood, "Whither Bausch & Lomb?", Vol. 8, No. 1, The M&A Tax Report (August 1999), p. 6). This year, it seems the development concerns relaxation of boot.

Indeed, relatively hot off the press are the IRS final regulations on the solely for voting stock requirement of Section 368(A)(1)(C). See T.D. 8885. In these regulations, the IRS reverses its long-standing position that the acquisition of a partially controlled subsidiary's assets does not qualify as a tax-free C reorganization. Stated the other way around, the Service now formally indicates that a partially controlled subsidiary's assets can be acquired in a tax-free C deal.

Of course, we had some notice of this change back in June of 1999, when proposed regs on this point were issued. See REG-115086-98, published June 14, 1999. Under the now finalized regulations, an acquiring corporation's preexisting ownership of a portion of a target corporation's stock generally will not prevent the solely for voting stock requirement from being satisfied in a C reorganization. Mechanically, it is the boot relaxation rule which allows this result to apply. Under Section 368(a)(2)(B), the sum of money or other property distributed to the shareholders of the target other than the acquiring corporation and the target's creditors, plus the target's liabilities that are assumed by the acquiring corporation, may not exceed 20% of the value of all of the targets' assets. This is called "boot relaxation rule" of Section 368(a)(2)(B).

Note, though, that if the acquiring corporation acquires the target's stock for consideration other than its own voting stock (or that of a corporation that it controls), that consideration will be treated as money or other property exchanged by the acquiring corporation for the target's assets, if it is in connection with a potential C reorganization. As a result of all this, the requirements of the C reorganization provision will not be satisfied unless the "boot relaxation" rule has been met.

Effective Date

This final regulation is effective May 19, 2000, but generally applies to transactions occurring after December 31, 1999. Moreover, taxpayers can reach back further than this. The IRS will continue to consider ruling requests (on this point, see Notice 2000-1) to apply these regulations to transactions that occur after June 10, 1999.

Final Regulations on Solely for Voting Stock Reverse Service Position, Vol. 8, No. 12, The M&A Tax Report (July 2000), p. 6.