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The Check-and-Merge: A Viable Answer to Cross-entity Merger?

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Illustration of attorneys looking at yield sign From a very early time, the Internal Revenue Code1 h as permitted taxpayers to form partnerships and corporations tax-free and has allowed mergers of these entities without causing taxation. However, the Code has not and currently does not specifically permit an entity taxed as a partnership to merge with an entity taxed as a corporation, or vice versa, tax-free.2 F or years, taxpayers have tried to achieve what the Code does not expressly permit by engaging in multiple steps, each of which would be accorded nonrecognition, in an attempt to achieve a tax-free cross-entity merger. Taxpayers had very limited success in their multi-step approaches due to the “step transaction” doctrine, which courts used to collapse all the steps in a transaction and view the transaction as a whole (which usually resulted in unwanted tax consequences to the taxpayer, such as recognizing gain immediately instead of deferring it). Does this mean that taxpayers of differently classified federal entities have no choice but to recognize gain in order to merge?3 I t is submitted that under the proposed method and analysis below, the answer to the above mentioned questions is “no,” at least not for the time being.

Proposed Method

A limited liability company (LLC) taxed as a partnership cannot merge directly into a corporation tax-free. However, nonrecognition4 t reatment may be possible with a two-step process: 1) The LLC taxed as a partnership makes an elective change in its entity classification from a partnership to a corporation;5 a nd 2) the LLC, now taxed as a corporation,6 m erges with the other corporate entity. Taxpayers engaging in this two-step process will receive nonrecognition, provided the form is respected.7 T he LLC, in changing its classification in step one, is deemed to have contributed all of its “partnership” assets to the new “association” in exchange for stock of the association, followed by a deemed liquidation of the LLC, distributing the stock of the new corporation to the members of the LLC.8 T his deemed transaction under step one qualifies for nonrecognition treatment under §351.9 I n step two, when the LLC taxed as a corporation merges with another corporation, the transaction will also be eligible for nonrecognition treatment as a §368 reorganization.10


Each of the two steps in the proposed method, when viewed independently, provides nonrecognition treatment to the taxpayer. However, §351 transactions and §368 corporate reorganizations are subject to the step transaction doctrine.11 T here is no prescribed rule as to when or which of the alternate step transaction tests a court will use.12

The question remains, though: How close to the line can taxpayers get before being snagged by the step transaction doctrine? Can taxpayers on the heels of entity reclassification negotiate a merger? How about prior to the reclassification? Can taxpayers go so far as to enter into an agreement before engaging in the proposed method? Under the old rules the answer was clear, taxpayers were never safe from the step transaction doctrine. However, under the current rules, it appears that application of the step transaction doctrine to the proposed method is no longer appropriate, and that this position is supported by case law, §338 and the policy behind the enactment of §§351 and 368.

Case Law and its Current Evolution

In the past, taxpayers have tried to use a two-step transaction as proposed in the introductory paragraph with mixed luck. While some courts have applied the step transaction doctrine to cause taxation,13 o thers have found the doctrine inapplicable, providing nonrecognition treatment to the multi-step transaction.14 T he courts that found the doctrine inapplicable have found so because of the time interval between transactions, the independent business purpose of a step, and/or the lack of a binding commitment between the parties.15 A fter the enactment of the “check-the-box” (CTB) regulations,16 i t appears that the taxpayers’ luck has changed, and for the better.

Pre-check-the-box Regulations — The step transaction doctrine was used by the courts to collapse the transactions and find that a valid reorganization had not occurred when taxpayers were trying to avoid taxes,17 o r that a valid reorganization had occurred when taxpayers were trying to recognize losses or disguise dividends.18 F or example, in West Coast Marketing v. Commissioner, 46 T.C. 32 (1966), the taxpayer and his wholly owned corporation contributed property owned by each to a new corporation, Manatee, in exchange for Manatee stock.19 A ccording to a pre-arranged agreement (drafted two weeks before Manatee’s incorporation), the shareholders of Manatee exchanged their Manatee stock for stock in an unrelated corporation, Universal, thus qualifying for a reorganization under §368.20 T wo months after the transfer, Manatee liquidated, thus distributing its property to Universal and ceasing to exist as an entity.21 T he court in West Coast Marketing held that “Manatee was incorporated for the purpose of being used as a conduit” and that “[a]ll of the steps taken by [the taxpayer and his wholly owned corporation] were but component parts of a single transaction the substance of which was a taxable disposition by them of their property interest to Universal.”22 T he taxpayer in West Coast Marketing engaged in a transaction similar to the proposed method of this article, but the court applied the step transaction doctrine to cause the taxpayer to recognize gain.

American Manufacturing Company, Inc v. Commissioner, 55 T.C. 204 (1970), provides an example of courts’ collapsing transactions to find a valid reorganization exists.23 T he parent corporation had two wholly owned subsidiaries.24 O ne subsidiary “transferred its operating assets to [the other] for cash, and subsequently liquidated distributing cash and receivables to [the] parent corporation.”25 T he subsidiary receiving assets continued to operate the business of the transferor subsidiary.26 T he taxpayer argued that the liquidation to the parent was tax-free under §332.27 H owever, the court held that the transaction was actually a type (D) reorganization, and the liquidation to the parent corporation was actually “boot” under §356(a)(2), and thus taxable.28 I n so holding, the court found that a liquidation can be “merely a step” in a larger transaction, and “the situation must be considered as it existed at the beginning and end of a series of steps.”29

Post-check-the-box Regulations — While the enactment of the check-the-box regulations and its subsequent amendments made entity classification simpler for taxpayers, it also affected subsequent tax treatment of an entity with regard to changing classification. The first notably important change is that the regulations specifically permit an “eligible” entity to “elect its classification for federal tax purposes.”30 T he second notably important change is that such an entity can change its classification by making an election, and despite the form used to actually accomplish the change, the regulations have prescribed a transaction that is “deemed” to have occurred with tax consequences based upon the deemed transaction.31

The impact of the check-the-box regulations can be illustrated in the seminal case of Dover Corporation & Subsidiaries v. Commissioner, 122 T.C. 324 (2004) . Dover involved a wholly owned, controlled foreign corporation (CFC) whose parent corporation, after agreeing to sell the CFC’s assets, made a retroactive “elective change in classification” to change the CFC from an association to a disregarded entity.32 T he CFC was deemed to have liquidated into the parent upon the date specified in the retroactive election. The issue in Dover was whether the parent should be treated as having conducted the trade or business of the CFC. If the parent was not treated as such, the parent would be subject to foreign personal holding company income tax under Subpart F of the Code. The IRS argued that the parent corporation should not be treated as having conducted the business of the CFC and relied principally on four cases.33 T he court rejected the IRS’s “intent” rationale, explaining that three of the cases dealt with whether an asset was used in a trade or business (intent based arguments), and not the issue of “whose” trade or business the assets were used in.34

The court did find that the IRS’s remaining case was on point and stood for the proposition that the CFC’s assets should not be treated as having been used in the parent corporation’s trade or business.35 T he taxpayer principally relied on Rev. Rul. 75-223, 1975-1 C.B. 109, which held that in a §332 liquidation, the parent corporation inherits the business history of a subsidiary and, therefore, is treated as if it conducted the business of the subsidiary.36 T he court realized that conflicting authority existed (between the IRS case and the revenue ruling case), and rather than decide which was correct, relied on Rauenhorst v. Commissioner, 119 T.C. 157 (2002), to hold that the IRS could not argue positions that were contrary to current revenue rulings.37 T herefore, the effect of the change in entity classification was to treat the CFC as though it liquidated into its parent under §332, after which the parent was treated as having conducted the business of the liquidated CFC and not liable for Subpart F income when it sold the CFC’s assets.38

Effect of the Check-the-box Regulations — As a result of the check-the-box regulations, when an LLC changes its classification from a partnership to a corporation, the new classification will be respected, and it will be a corporation for purposes of reorganization.

The regulations make clear that when an entity makes an elective change in classification, one of four specific sets of transactions are deemed to occur despite how the entity actually goes about the change.39 T raditionally, if taxpayers sought to incorporate, they would contribute assets to a corporation in exchange for stock, and it would be tax-free under §351, provided the requirements of §351 were satisfied, including having a business purpose. Under the check-the-box regulations, when an entity taxed as a partnership elects to be treated as a corporation and a deemed §351 transaction occurs, no business purpose is required.40 T his is because the regulations specifically hold that such elections are authorized “for federal tax purposes.”41 T hus, provided an LLC follows the regulations to change its classification from a partnership to a corporation, the IRS and courts should respect its new classification as a corporation.

When an LLC changes its classification from a partnership to a corporation, courts cannot apply the step transaction doctrine to collapse the reorganization between an LLC and a corporation; this is because the court must respect the LLC’s classification as a corporation stemming from the regulations’ “federal tax purposes” language. As discussed earlier, the court in West Coast Marketing Corp. used the step transaction doctrine to invalidate this type of reorganization, but it is submitted that this is no longer appropriate because of the check-the-box regulations, as demonstrated by Dover. In Dover, a parent corporation sold its CFC, but the court refused to collapse the transaction, and instead gave each of the steps independent significance. The Dover court rejected the IRS’s intent-based argument even in the face of an agreement that existed before the “elective entity classification change” was filed. The court in Dover, despite recognizing a “perceived abuse,” understood it “must apply the regulation[s] as written,” which meant it could not apply the step transaction doctrine.42 T here is a good argument, then, that when an LLC taxed as a partnership makes an elective change to be taxed as a corporation and thereafter merges with another corporation, the transaction will be accorded nonrecognition as each step will have had independent significance.

There are two arguments against the above conclusion for nonrecognition treatment: 1) The treasury regulations specifically authorize the use of the step transaction doctrine when changing entity classification; and 2) the only reason the court in Dover did not apply the step transaction doctrine was because it was dealing with a §332 liquidation situation; however, these arguments are without merit. Treasury Regulation §301.7701-3(g)(2)(i) says that a change in entity classification is “determined under all relevant provisions of the [Code] and general principles of tax law, including the step transaction doctrine.” The provision “including the step transaction doctrine,” however, was intended only to control the tax consequences of the “deemed transactions”43 ( under the elective change in classification regulations) no matter the actual form used by the taxpayer to effect the change.44 C ourts have held that a liquidation can be a “mere step” in a larger transaction, and have applied the step transaction doctrine in situations that involve §332 liquidations.45 T he court in Dover, therefore, was not prevented from applying the step transaction doctrine merely because a §332 liquidation was involved.

Effect of §338 on Application of the Step Transaction Doctrine

Although the proposed method does not incorporate §338, the section’s enactment has affected the applicability of the step transaction doctrine to corporate reorganizations. As a result, the step transaction doctrine, when testing any multi-step transaction, is subject to the limitations and restrictions created by §338.46


In 1950, the court, in Kimbell-Diamond Milling Company v. Commissioner, 14 T.C. 74 (1950), applied the step transaction doctrine to treat a stock purchase by a corporation followed by a §332 liquidation as an asset purchase. This decision was codified by Congress in 1954 under §334(b)(2), which provided that any stock purchase followed by a liquidation within two years would be treated as an asset sale.47 S ection 338 was enacted in 198248 t o replace §334(b)(2).49

Section 338 and Related Revenue Rulings

Section 338 provides that an acquiring corporation, after making a “qualified stock purchase,”50 c an make an election to treat the target corporation as having sold its assets to itself (a hypothetical new corporation) in a taxable transaction.51 W ith the §338 election, the acquiring corporation takes a cost basis in the target corporation’s assets,52 w hereas if no election is made, the acquiring corporation takes a carryover basis.53 T he purpose of §338, in addition to replacing §334(b)(2), was “to replace any nonstatutory treatment of a stock purchase as an asset purchase under the Kimbell-Diamond doctrine.”54

In Revenue Ruling 90-95, the IRS addressed two issues: 1) Whether the parent corporation would be treated as making a qualified stock purchase when using a subsidiary; and (2) whether the subsequent liquidation of the subsidiary would result in asset purchase treatment.55 T he IRS answered the first question in the affirmative, and in addressing the second question held “[s]ection 338 of the Code replaced the Kimbell-Diamond doctrine and governs whether a corporation’s acquisition of stock is treated as an asset purchase.”56 T his revenue ruling was incorporated into the regulations, and in a regulation example, a transaction was not permitted to be “stepped together” because it would have changed the acquiring corporation’s basis from a carryover basis to a cost basis.57

In Revenue Ruling 2001-46, the IRS addressed whether the step transaction doctrine could be applied when a newly formed wholly owned subsidiary of an acquiring corporation merges into a target corporation (the “acquisition merger”), followed by the merger of the target corporation into the acquiring corporation (the “upstream merger”).58 T he ruling, in upholding the principles of Revenue Ruling 90-95 and regulation §1.338-3(d), held that §338 is not violated when, after application of the step transaction doctrine, the acquiring corporation still has a carryover basis in the assets of the target corporation and not a cost basis.59

In Revenue Ruling 2008-25, the IRS addressed a situation similar to that in Revenue Ruling 2001-46, except that instead of the acquisition merger being followed by the upstream merger, the acquisition merger was followed by the target corporation’s liquidation into the acquiring corporation (the liquidation).60 I n this situation, when the steps were viewed independently, the first step qualified as a reorganization and the second step as a §332 liquidation; however, when the two steps were viewed as one, the transaction did not qualify as a reorganization, and instead would result in a purchase of the target corporation’s assets by the acquiring corporation.61 T herefore, when the two steps were viewed independently, the acquiring corporation had a carryover basis in the target corporation’s assets, but when viewed as a whole, the acquiring corporation took a cost basis.

The IRS, in confirming the analysis in Rev. Rul. 2001-46, held that the step transaction doctrine could not apply because it would result in the acquiring corporation with a cost basis in the target’s assets violating the policy underlying §338.62 T he revenue ruling did not provide tax-free treatment to the transaction. Instead, it recharacterized the two-step transaction by treating the first step (the acquisition merger) as a qualified stock purchase and the second step (the liquidation) as a §332 complete liquidation of a controlled subsidiary without any §338 election.63 H owever, it should be noted that case law does not permit the fictitious creations of steps when applying the step transaction doctrine; therefore, the IRS’s recharacterization would likely not be supported by the courts.64

Applicability of the Step Transaction Doctrine to the Proposed Method

Under the method proposed in this article, the acquiring corporation will have a carryover basis in the LLC’s assets. The carryover basis results from the LLC changing its classification to a corporation, which is a deemed §351 transaction, followed by a §368 reorganization between the LLC taxed as a corporation and the acquiring corporation. Section 358 provides a carryover basis to the LLC upon its conversion, and §362(b) provides a carryover basis to the acquiring corporation for the assets received in the reorganization.65 H owever, if the step transaction doctrine were applied to the proposed method, causing the two steps to be viewed as one integrated transaction, the transaction would be treated as a sale of the LLC’s assets to the acquiring corporation.66 T he acquiring corporation would take a cost basis in the LLC’s assets if the step transaction doctrine were applied to collapse the steps.67

The step transaction doctrine cannot be applied to the proposed method because it results in the acquiring corporation having a cost basis in the LLC’s assets that it actually acquired through a stock acquisition. As explained in the history and relevant revenue rulings, §338 is the only method for a stock acquisition to result in an asset sale, and the step transaction doctrine can only be applied when it will not result in the assets’ having a cost basis in the hands of the acquiring corporation.68 T herefore, each step in the proposed method should be accorded independent significance, thereby providing nonrecognition treatment to the transaction.

Although there is an argument under Revenue Ruling 2008-25 that the transaction should be restructured to permit carryover basis but not nonrecognition treatment, this argument is unpersuasive because the courts will not create fictitious steps when applying the step transaction doctrine.69


The nonrecognition treatment of the proposed method, as suggested in this article, is supported by the policy behind the enactments of §351, §368, and the check-the-box regulations. Section 351 was intended to exempt from taxation transactions where the taxpayer remained invested and there was merely a change in form.70 S imilarly, §368 was enacted to provide nonrecognition treatment to mergers because taxpayers remained invested in the “corporate solution” and there was only a change in form.71 T he CTB regulations were adopted to simplify entity classification, but the simplification was necessitated by the fact that LLCs, while possessing partnership taxation, were almost indistinguishable from a corporation.72

Under the proposed method, taxpayers remain invested in the LLC when it converts to corporate taxation treatment, and when the LLC merges with a corporation under §368, the members of the LLC and the corporation remain invested in the corporation resulting from the merger. The IRS admits that the differences between LLCs and corporations are very narrow,73 b ut it seeks to tax a merger between an LLC taxed as a partnership and a corporation. States have started to understand the true substance of a cross-entity merger, and many now allow for the tax-free treatment of those transactions.74 D uring both steps of the proposed method, the taxpayer remains invested and there is only a mere change in form — the substance of the transaction falls squarely within the policy behind §§351 and 368.


The Code may not specifically permit cross-entity mergers; however, the Code’s failure to provide for such a transaction will not prohibit taxpayers from being able to achieve nonrecognition treatment through an entity reclassification and reorganization. The CTB regulations require that changes in entity classification be respected for federal tax purposes, as demonstrated in Dover where the court refused to apply the step transaction doctrine to a prearranged sale followed by an LLC reclassification that permitted the taxpayer to avoid taxes. Moreover, the enactment of §338 prevents application of the step transaction doctrine to a transaction such as that of the proposed method where application would cause the acquiring corporation to take a cost basis in the acquired assets. Finally, the proposed method falls within the policy behind the nonrecognition provisions. Thus, the author submits that, despite a prearranged agreement, an LLC, after changing its classification to that of a corporation, can engage in a merger with an acquiring corporation, and both the deemed §351 transaction and the §368 reorganization will be accorded independent significance resulting in nonrecognition treatment.

1 A ll references to the Code in this article are to the Internal Revenue Code of 1986, as amended, unless otherwise indicated. All references and citations to sections in this article are to sections of the Internal Revenue Code of 1986, as amended, unless otherwise indicated. All references and citations to regulations are to Treasury Regulations under the Internal Revenue Code of 1986, as amended, unless otherwise indicated.

2 I. R.C. §708 allows for “partnerships” to merge with each other without recognition, and I.R.C. §368 allows for “corporations” to merge with each other without recognition, but neither section allows for a nonrecognition merger between a partnership and a corporation.

3 R ecognition of loss may also be a possibility. It is unlikely, however, that entities would want to defer loss recognition, whereas they would like to defer taxable gain.

4 G enerally, I.R.C. §1001 requires gain or loss to be recognized on any “disposition of property”; however, nonrecognition treatment is an exception to this general rule and will prevent gain or loss from being recognized provided the transaction falls within the exception. See generally I.R.C. §351.

5 T reas. Reg. §301.7701-3(g).

6 A n LLC that elects to be an association is considered a corporation under §301.7701-2(b)(2), therefore, falling within the definition of “a party to a reorganization” under I.R.C. §368(b).

7 H owever, if the form is not respected and the step transaction doctrine collapses the transaction, the taxpayer will not be accorded nonrecognition and will likely have to recognize gain on the transaction as if he or she had sold the partnership interest to the corporation. See also note 13 and accompanying text.

8 T reas. Reg. §301.7701-3(g)(1)(i).

9 I. R.C. §351 (“No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control[] of the corporation”).

10 U nder I.R.C. §354, no gain or loss is generally recognized provided the transaction qualifies as a “reorganization” as defined by §368.

11 T he step transaction doctrine is a judicially developed test that is used to determine whether the separate steps in a transaction should be given individual effect or collapsed together. See generally Penrod v. Commissioner, 88 T.C. 1415 (1987).

12 Penrod, 88 T.C. 1415, 1429 (1987).

13 See West Coast Marketing Corp. v. Commissioner, 46 T.C. 32 (1966). See also Rev. Rul. 70-140, 1970-1 C.B. 73.

14 See Weikel v. Commissioner, T.C. Memo 1986-58, 51 T.C.M. (CCH) 432 (1986); Culligan Water Conditioning of Tri-Cities, Inc. v. U.S., 567 F.2d 867 (9th Cir. 1978); Vest v. Commissioner, 57 T.C. 128 (1971), rev’d in part on other grounds, 481 F.2d 238 (5th Cir. 1973).

15 Id.

16 S implification of Entity Classification Rules, 1997-1 C.B. 215;
Treas. Reg. 301.7701-1 to -3.

17 See U.S. v. Cumberland Public Service Co., 338 U.S. 451 (1950); Commissioner v. Court Holding Co., 324 U.S. 331 (1945); West Coast Marketing Corp. v. Commissioner, 46 T.C. 32 (1966).

18 See Central Soya Company, Inc. v. U.S., 80-1 U.S. Tax Cas. (CCH) P9367 (1980); Kansas Sand and Concrete, Inc. v. Commissioner, 56 T.C. 522 (1971); Estate of John L. Bell, et al. v. Commissioner, 30 T.C.M. (CCH) 1221 (1971); American Manufacturing Company, Inc. v. Commissioner, 55 T.C. 204 (1970), superseded by statute, Tax Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1525, as recognized in Sherwood Properties, Inc. v. Commissioner, 89 T.C. 651 (1987).

19 West Coast Marketing Corp., 46 T.C. at 38.

20 Id. at 39.

21 Id.

22 Id. at 40.

23 American Manufacturing Company, Inc. v. Commissioner, 55 T.C. 204 (1970), superseded by statute, Tax Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1525, as recognized in Sherwood Properties, Inc. v. Commissioner, 89 T.C. 651 (1987).

24 Id. at 206.

25 Id. at 214.

26 Id.

27 Id.

28 Id. at 228.

29 Id. at 215.

30 T reas. Reg. §301.7701-3(a).

31 T reas. Reg. §301.7701-3(g).

32 Dover, 122 T.C. at 327-28.

33 Id. at 343-47 ( Reese v. Commissioner, 615 F.2d 226 (5th Cir. 1980), affg. T.C. Memo . 1976-275; Azar Nut Co. v. Commissioner, 94 T.C. 455 (1990), affd. , 931 F.2d 314 (5th Cir. 1991); Acro Manufacturing Co. v. Commissioner, 39 T.C. 377 (1962), affd. , 344 F.2d 40 (6th Cir. 1964); and Ouderkirk v. Commissioner, T.C. Memo. 1977-120)).

34 Id.

35 Id. at 346-47.

36 Id. at 339-41.

37 Id. at 350-53.

38 Id. at 349-50, 53.

39 T reas. Reg. §301.7701-3(g)(1)(i) – (iv) (An entity classified as a partnership that elects to be classified as an association is deemed to “contribute[] all of its assets and liabilities to the association in exchange for stock in the association, and immediately thereafter, the partnership liquidates by distributing the stock of the association to its partners.”).

40 Dover, 122 T.C. at 351, n.19 (“the check-the-box regulations [do not] require that the taxpayer have a business purpose for such an election or, indeed, for any election under those regulations.”).

41 T reas. Reg. §301.7701-3(a). See also Pierre v. Commissioner, 2009 U.S. Tax Ct. LEXIS 21 (held “that the phrase ‘for federal tax purposes’ was intended to cover the classification of an entity for Federal tax purposes,” but the check-the-box regulations do not “apply to disregard the LLC in determining how a donor must be taxed under the [f]ederal gift tax provisions on a transfer of an ownership interest in the LLC.”).

42 Dover, 122 T.C. at 352.

43 See note 39 and accompanying text.

44 T reas. Reg. §301.7701-3(g)(2) specifically refers to the “step transaction doctrine,” however, the preamble to the proposed regulations for that section provides that the purpose of that provision is “to ensure that the tax consequences of an elective change will be identical to the consequences that would have occurred if the taxpayer had actually taken the steps described in the [] regulations.” Treatment of Changes in Elective Entity Classification, 1997-2 C.B. 649.

45 See notes 18, 23-29, and accompanying text.

46 See Stephen L. Tolles, Section 338 Reorganizations and the Step Transaction Doctrine, 2009
Emerging Issues 4407 (Oct. 8, 2009).

47 I. R.C. §334(b)(2) (1954).

48 T EFRA, Pub. L. No. 97-248, § 224, 96 Stat. 324, 485-90 (1982).

49 H. R. Conf. Rep. 97-760 (1982), reprinted in 1982-2 C.B. 600, 632 (TEFRA “repeals the provision of present law (sec. 334(b)(2)) that treats a purchase and liquidation of a subsidiary as an asset purchase”).

50 I. R.C. §338(d)(3) (qualified stock purchase means “any transaction or series of transactions in which stock (meeting the requirements of section 1504(a)(2)) of 1 corporation is acquired by another corporation by purchase during the 12-month acquisition period”).

51 I. R.C. §338(a).

52 I. R.C. §338 (b).

53 U pon purchase of target corporations stock, the purchasing corporation takes a §1012 cost basis in the target stock and the target’s assets basis remains the same. Upon the §332 liquidation of the target into the acquiring parent corporation, the parent takes a §334(b) carryover basis.

54 See note 49.

55 R ev. Rul. 90-95, 1990-2 C.B. 67.

56 Id.

57 T reas. Reg. §1.338-3(d).

58 R ev. Rul. 2001-46, 2001-2 C.B. 321.

59 Id. (the two-step transaction analyzed resulted in a carryover basis to the acquiring corporation when each step was viewed independently or when the transaction was viewed as a whole).

60 R ev. Rul. 2008-25, 2008-1 C.B. 986.

61 Id.

62 Id.

63 Id.

64 Esmark, Inc. v. Commissioner, 90 T.C. 171, 196-97 (1988), aff’d, 886 F.2d 1318 (7th Cir. 1989).

65 I. R.C. §§358 and 362(b) (carryover basis is still subject to certain adjustments).

66 R ev. Rul. 70-140, 1970-1 C.B. 73 (applied the step transaction doctrine to collapse a taxpayer’s §351 incorporation transaction followed by a merger and, therefore, the transaction was treated as a purchase of the taxpayer’s assets by the acquiring corporation).

67 I. R.C. §1012.

68 See notes 47-62 and accompanying text.

69 See notes 63-64 and accompanying text.

70 R evenue Act of 1921, ch. 136, §202(c), 42 Stat. 227, 230; S. Rep. No. 67-275, at 11 (1921), reprinted in 1939-1 C.B. (Part 2), 181, 188-89.

71 H. R. Rep. No. 73-704 at 13 (1934), reprinted in 1939-1 C.B. (Part 2) 554, 564;
Boris I. Bittker & James S. Eustice, Federal Income Taxation of Corporations and Shareholders, 500 (2d ed. 1966);
Paul R. McDaniel, et al. , Federal Income Taxation of Corporations, 539 (3d ed. 2006).

72 I. R.S. Notice 95-14, 1995-1 C.B. 297.

73 Id.

74 R obert C. Art, Conversion and Merger of Disparate Business Entities, 76
Wash. L. Rev. 349, 372-73 (2001) (discussing the advantages of allowing cross-entity mergers); Delaware, Texas, Colorado, Nevada, California, Georgia, Illinois, Kansas, Maryland, Oklahoma, Tennessee, and West Virginia all permit some form of cross-entity merger. Id. at 379-80; see also Fla. Stat. §608.438.

Joseph M. Percopo practices law primarily in Oviedo and Orlando. He practices in the areas of estate planning, asset protection, and business and tax law. He is a graduate of the Florida State University College of Law with highest honors and earned his LL.M. in taxation from the University of Florida Levin College of Law graduate tax program. The author thanks Samuel Ullman of Bilzin Sumberg for his input and assistance.