IRS Issues Significant Private Letter Ruling Approving Tax-Free Merger

This ruling reflects the IRS's increasing willingness to respect taxpayers' form.

The Internal Revenue Service (IRS) just released a significant private letter ruling (PLR 200928001) approving a tax-free reorganization in a situation that arises often in practice and poses difficult technical challenges. The ruling reflects the IRS's increasing willingness to respect taxpayers' form.

Background

The application of the "step transaction" and "substance over form" doctrines to tax-free reorganizations is often unpredictable. Although in most cases the steps of a transaction cannot be reordered by the IRS into an equal number of different steps, in the reorganization context certain sequences of steps are routinely collapsed. For example, numerous revenue rulings hold that when the stock of a target corporation (T) is transferred to another corporation (S), and then T liquidates or merges into S, the first-step stock transfer will be disregarded (as transitory) and