The following article is adapted and reprinted from the M&A Tax Report, Vol. 10, No. 1, August 2001, Panel Publishers, New York, NY.


By Robert W. Wood

Revenue Ruling 2001-25, Tax Analysts Doc. No. 2001-12975, 2001 TNT 89-9, considers a target company which sells assets to an unrelated corporation after a triangular merger. The question in the ruling is whether the sale by the target company following its acquisition in a reverse triangular merger causes the transaction to fail as a tax-free merger under Section 368(a)(1)(A).

The parent corporation formed a subsidiary that merged into the target under state law. The acquiring parent and the target were both manufacturing companies. The target's shareholders exchanged their target voting stock for the parent's voting stock. Thereafter, and as part of the merger plan, the target sold 50% of its operating assets for cash to an unrelated company. The target retained the cash. In Revenue Ruling 2001-25, the Service notes that Section 368(a)(2)(E) requires that the surviving corporation held substantially all of its properties after a reverse triangular merger. The question was what "substantially all" means. Under the regulations, this phrase has the same meaning for purposes of a reverse triangular merger as it does for a C reorganization.

Revenue Ruling 88-48, 1988-1 C.B. 117, had allowed a target company to sell 50% of its historic assets to unrelated parties for cash immediately before it was acquired in a C reorganization. Since the recapitalization provision (I.R.C. §368(a)(2)(E)), does not impose any additional requirements on the surviving company before and after the merger that would not have applied if a corporation were acquired in a C reorganization or a forward triangular merger, there was no reason not to permit the sale of 50% of the historic target assets following the reverse triangular merger.

Tax-Free Merger Unaffected by Later Asset Sale, Vol. 10, No. 1, The M&A Tax Report (August 2001), p. 7.