Take It Back: IRS Rules on Rescinding a Merger

Take It Back: IRS Rules on Rescinding a Merger - 8/3/2009

Home

Index of Filings

News and Press Releases

Filings

Decisions

Settlements

Litigation Activity Indices

Top Ten List

Annual/Quarterly Updates

Clearinghouse Research

Articles & Papers

Search

Related Sites

About Us

Local Rules

Sponsors

Register

_______________
Copyright © 2001
Stanford Law School

2009 News and Press Releases

SEARCH

News	News 2009
HEADLINES \| SETTLEMENTS AND DISMISSALS \| COURT FILINGS LINKS TO OTHER NEWS \| NEWS ARCHIVE	HEADLINES ARCHIVED SETTLEMENTS AND DISMISSALS ARCHIVED

HEADLINE NEWS:

Take It Back: IRS Rules on Rescinding a Merger
Robert Willens

CFO.com. August 3, 2009
_________________________________________________________________________

EXCERPT: In what looks like an explanation for a corporate "do-over," the Internal Revenue Service issued guidance in December to take companies through the steps of backing out of a merger. The private letter ruling, dated Dec. 12, 2008, lays out the situation, and its resolution, in the following way: Prior to April 1, Tau Corporation had two classes of stock outstanding — convertible preferred stock and common stock. During April 1 and May 1, Alpha Corporation made a cash purchase of all of Tau's convertible preferred stock. On June 1, Alpha, Tau, and certain Tau shareholders executed an agreement and plan of merger. Specifically, Tau would merge with and into Alpha in exchange for a combination of Alpha stock, notes, and cash. On July 1, the Tau shareholders approved the union and the merger was effected by filing with the appropriate authorities certificates of merger. Accordingly, on July 1, Alpha acquired all of Tau's assets subject to its liabilities, and Tau's separate legal existence ceased. Continuity of Interest Later, Alpha discovered that the merger could yield "adverse tax consequences" that could be "devastating" to the continued viability of the company as a going concern. Although the ruling does not specify what the adverse tax consequences might be, it seems clear that Alpha discovered that the merger of Tau did not qualify as a tax-free reorganization within the meaning of the tax code, specifically Section 368(a)(1)(A). The failure to qualify was probably due to the transaction's inability to meet the continuity of interest (COI) requirement. A merger cannot qualify as a reorganization unless it exhibits COI.1 In turn, COI requires that no less than a "substantial part" of the value of the proprietary interests in the target be "preserved" in the potential reorganization.

Back to News page | Back to Archived News 2009 page | Back to Top

�