The Six Requirements of an F Reorganization

The IRS first described these requirements informally in Rev. Rul. 2008-18. Treasury later finalized them as Treas. Reg. Section 1.368-2(m)(1), which is the operative authority today. All six have to be satisfied. There's no substantial-compliance standard here, which is exactly why the drafting and sequencing of the transaction documents matters as much as the business intent behind them.

1. Resulting corporation stock issued solely for transferor stock

All of the stock of the resulting (new) corporation must be issued in respect of the shareholders' stock in the transferor (old) corporation. In an F/S drop, this means Newco stock is issued only in exchange for the Oldco shares contributed, not for cash, services, or anything else, in the same transaction.

2. Identical ownership, before and after

The same person or persons must own all of the stock of the transferor and the resulting corporation, in identical proportions, immediately before and immediately after the transaction (a narrow, de minimis exception exists for pre-existing minority stock in the resulting corporation). If a new investor is supposed to come in as part of the same transaction, that has to happen as a separate, subsequent step, not folded into the F reorg itself.

3. Resulting corporation starts empty

Immediately before the transfer, the resulting corporation can't hold any property (beyond nominal formation assets) or carry any tax attributes. It has to be a clean shell. If Newco has already been doing business, holding assets, or accumulating its own history before the reorg, this requirement is the one that breaks.

4. Transferor corporation completely liquidates

The transferor corporation must completely liquidate for federal tax purposes as part of the transaction. In practice, this is usually satisfied by converting Oldco into a disregarded single-member LLC, which is treated as a liquidation into its sole owner for tax purposes, even though the entity itself keeps operating without interruption under state law.

5. No property ends up in the wrong place

Immediately after the transaction, no corporation other than the resulting corporation can hold property that belonged to the transferor immediately before, and no corporation other than the transferor can hold property that belonged to the resulting corporation immediately before. This requirement mainly polices multi-step transactions, making sure the F reorg isn't being used to quietly move assets to a third corporation in the same sequence.

6. Only one resulting corporation

There can only be one resulting corporation. An F reorganization restructures a single corporation into a single successor. A transaction that splits the business into two or more successor corporations isn't a mere change in form, it's a divisive transaction governed by different rules entirely.