Type F Reorganizations and the Impact of the Jobco Manufacturing Company Decision

Article excerpt

Ccorporations are reorganized for many different reasons: as a means of preventing the impending extinction of a financially vulnerable business, an instrument in acquiring a target company, or a means of absorbing a subsidiary into a patent. A reorganization, if properly carried out, results in no taxable gain or loss at the time of reorganization and preserves favorable tax attributes of the old corporation. Consequently, it is important to view provisions of corporate reorganizations in conjunction with criteria allowing the carryover of tax attributes. The necessity for considering these provisions together is further underscored by a recent judicial decision disallowing the carryover of net operating losses in what was seemingly a reorganization transaction.

The requirements, attributes, and benefits of Type F corporate reorganizations can be analyzed and explained in a discussion of the recent Jobco Manufacturing Company case (951 F2d 1259-affg TC Memo 1990-385). Of particular interest is the carryover of net operating losses (NOLs) in F reorganizations.

DEFINITION OF TYPE F REORGANIZATIONS

Under IRC Sec. 368(a)(1)(F), a Type F reorganization is a "mere change in identity, form, or place of organization of one corporation, however effected." The Type F reorganization is not explained further either in the code or regulations. Most guidance regarding F reorganizations must be obtained through IRS revenue rulings and judicial holdings.

Typically, an F reorganization involves no more than reincorporation of the same corporate business with the same shareholders and assets under a new corporate charter either in the same or different state. The presumption is the surviving corporation is the same corporation as its predecessor in every respect except for minor technical differences.

In 1954, Congress failed in its attempt to repeal the F reorganization provisions. It felt F reorganizations were unnecessary because such reorganizations would often qualify as a Type A, C, or D reorganization. As late as 1965, the F reorganization was referred to "as encompassing only the simplest and least significant of corporate changes." Nonetheless, the F reorganization provisions were retained, and have played an important role primarily because of the enactment of Secs. 381 and 382 regarding carryover of tax attributes to an acquiring corporation.

As discussed later, Sec. 381(b) distinguishes between Types A-D reorganizations and Type F reorganizations for the purposes of allowing NOL carrybacks and closing the taxable year. In addition, the IRS ruled where there is an overlap between a Type F reorganization and other types of reorganizations, the transaction should be treated as a Type F reorganization. As a result, it became essential to determine whether a transaction met the conditions of an F reorganization, notwithstanding the fact the transaction qualified as some other type of transaction.

ADVANTAGES OF TYPE F REORGANIZATIONS

Sec. 381 outlines the primary advantages of an F reorganization over other types of reorganizations. In the case of a type F reorganization, the acquiring corporation is to be treated (for purposes of Sec. 381) just as the transferor corporation would have been treated if there had been no reorganization. Therefore, the taxable year of the transferor does not end on the date of transfer merely because of the transfer. Such is not the case for other types of reorganizations.

More importantly, a net operating loss of the acquiring corporation for any taxable year ending after the date of transfer may be carried back (in accordance with Sec. 172(b)) in computing the taxable income of the transferor corporation for a taxable year ending before the date of the transfer. Furthermore, the tax attributes of the transferor corporation enumerated in Sec. 381(c) are to be taken into account by the acquiring corporation as if no reorganization had occurred. …