The Complete Guide
F Reorganization
Everything a founder, buyer, seller, or deal counsel needs to know about F reorganizations under IRC Section 368(a)(1)(F): what they are, when they're used, the six requirements that make one valid, and how the steps actually work in a deal.
What is an F reorganization?
An F reorganization is a tax-free reorganization defined in IRC Section 368(a)(1)(F) as “a mere change in identity, form, or place of organization of one corporation, however effected.” Unlike most reorganizations, an F reorg doesn't combine two separate businesses. It restructures a single corporation, most often by putting a new parent holding company on top of it, without disturbing the underlying business or creating a taxable event.
In practice, F reorganizations show up constantly in two contexts: M&A deal structuring, where a buyer wants asset-sale tax treatment on what is legally a stock purchase, and pre-transaction cleanup, where a business owner needs a holding company structure in place before a rollover, recapitalization, or estate planning transfer.
The legal basis
The statute itself is only one sentence long. The substance is in the regulations. The IRS first laid out a practical framework in Rev. Rul. 2008-18, which the Treasury later finalized as Treas. Reg. Section 1.368-2(m). That regulation sets out six requirements a transaction must satisfy to qualify as an F reorganization, and it's what every practitioner actually structures around.
The six requirements
At a high level, Treas. Reg. Section 1.368-2(m)(1) requires all of the following:
- The new (resulting) corporation's stock is issued solely in respect of the old (transferor) corporation's stock.
- The same shareholders hold stock in identical proportions before and after, aside from a nominal exception.
- The resulting corporation holds no property and has no tax attributes immediately before the transfer.
- The transferor corporation completely liquidates for federal tax purposes as part of the transaction.
- Immediately after, no other corporation holds property that belonged to the transferor or the resulting corporation before the transaction.
- There is only one resulting corporation.
Each of these has real substance and real failure modes, and they interact with each other in ways that aren't obvious from the list alone. That's the subject of the full requirements breakdown.
Why F reorganizations are used
- Pre-sale structuring: converting the target into a disregarded entity so a stock sale can be taxed like an asset sale, or so a Section 338(h)(10)/336(e) election is available. See why buyers request one before closing.
- Rollups and PE platform deals: creating a holding company shareholders roll equity into, ahead of a private equity investment or add-on acquisition.
- S corporation flexibility: an S corp can't have a corporate parent or issue multiple classes of stock, so an F reorg is the standard way to insert a holding structure without breaking the S election. See F reorgs for S corporations.
- Changing state of incorporation or entity form without a taxable liquidation.
How the steps typically work
The most common pattern, sometimes called an “F/S drop,” looks like this:
- Shareholders form a new holding corporation (“Newco”).
- Shareholders contribute their stock in the operating company (“Oldco”) to Newco in exchange for Newco stock, in identical proportions.
- Oldco converts to a single-member LLC (or otherwise elects disregarded-entity status), owned entirely by Newco.
- Newco makes a new S election (if applicable), and Oldco's activities continue uninterrupted as a disregarded entity.
Done correctly, this entire sequence is tax-free, and the business itself never notices the change. What changes is the ownership structure sitting above it.
Tax consequences
Qualifying as an F reorganization means no gain or loss is recognized on the exchange, shareholder stock basis and holding period carry over into the new holding company stock, and the resulting entity inherits the transferor's tax attributes (earnings and profits, accounting methods, tax year) as if there had been no break in existence. If the transaction fails even one of the six requirements, it can be treated instead as a taxable liquidation or exchange, which is the outcome every properly structured F reorg is built to avoid.
Frequently asked questions
What is an F reorganization?
An F reorganization is a tax-free reorganization under IRC Section 368(a)(1)(F), defined as a mere change in identity, form, or place of organization of one corporation. In practice, it's most commonly used to insert a new holding company above an existing corporation, especially an S corporation, without triggering tax.
Why do buyers ask sellers to do an F reorganization before closing?
A buyer often wants to acquire the target's assets (or make a Section 338(h)(10)/336(e) election) for a stepped-up tax basis, while the seller wants the simplicity and liability protection of a stock sale. An F reorganization can let a seller convert the target into a disregarded entity before closing, so the deal is legally a stock sale but taxed like an asset sale.
Does an F reorganization require IRS approval?
No. An F reorganization does not require advance IRS approval or a private letter ruling. It relies on satisfying the requirements of Treas. Reg. Section 1.368-2(m), which is a self-executing test applied when the return is filed.
Read the full guides
What Is an F Reorganization? A Plain-English Guide
The foundational explainer: what an F reorganization is, the statute behind it, and why it comes up so often in deals.
The Six Requirements of an F Reorganization
The six-part test from Rev. Rul. 2008-18 and Treas. Reg. §1.368-2(m), and where deals actually go wrong on each one.
Why Buyers Request an F Reorganization Before Closing
The M&A use case: why a buyer’s counsel asks a seller to do an F reorg before signing, and what it changes about the deal.
F Reorganizations for S Corporations: Rollups, Rollovers, and PE Deals
How S corporations use an F reorg to create a holding company structure for rollups, rollover equity, and private equity transactions.
Have a deal that needs an F reorg?
I structure and close F reorganizations directly, either as lead tax counsel or alongside the deal counsel already running the transaction.