I S S U E 2 , 2 0 2 2 22 nebraska cpas 1This article refers to “S corporations” generally to refer to limited liabilities companies or corporations that have made an “S” election under Section 1361 of the Code. Under the check-the-box rules, a multi-member limited liability company can elect taxation other than its default partnership status. 2For purposes of this article, the term “corporations” when used in the phrase “S corporations” is intended to ref lect the tax status of the entity, not the entity’s state law entity form. 3If the Operating Entity is already a limited liability company, this step may be skipped. Note, however, that complexities apply relating to a limited liability company making a QSub election. Special attention should be given to the election forms required for such an election. 4For purposes of this article, the term “stock” when used in the phrase “S corporation stock” is intended to refer generally to ownership interests of an entity taxed as an “S” corporation. 5With that said, there are nuances related to the tax election forms to be filed during the reorganizations that would apply to limited liability companies, but not state-law corporations. Care should be taken to ensure that the proper forms are filed with the Internal Revenue Service. practitioners would be well-advised to identify a business purpose in the Plan of Reorganization as part of their due diligence. D. Carryover of the S Election Guidance from the IRS provides that the above steps result in the original S election carrying over to NewCo. Accordingly, NewCo need not make a separate “S” election nor file a Form 2553. For such carryover to occur, the parent must cause the subsidiary to make the QSub election. Note that a QSub election must be made for the Operating Entity effective immediately following the transaction to allow for such carryover.5 E. Carryover of EIN IRS guidance provides that, if carried out properly, the Operating Entity will retain its original EIN. This allows the Operating Entity to utilize the same business registrations and other aspects associated with its unique EIN. NewCo must apply for a new EIN. F. Tax Results If structured properly, the follow tax results apply: • No gain or loss is recognized on the transaction by the Operating Entity. • No gain or loss is recognized by the owners of the Operating Entity (at least until a subsequent sale of the equity of the Operating Entity). The owners’ basis in the equity interests of NewCo will be the same as the basis they had in their equity interests of the Operating Entity. The holding period for the equity interests of NewCo will include the holding period of the Operating Entity equity interests. • No gain or loss is recognized by NewCo on its receipt of assets in exchange for its equity interests (until a subsequent event such as a sale). NewCo succeeds to all tax attributes of the Operating Entity under Section 381(c). Again, there are many t raps for the unwary, but an “F” reorganization can be a useful tool for restructuring an entity taxed as an “S” corporation prior to certain investments or acquisitions. Practitioners should follow the above steps and assure compliance with all aspects of Section 368(a)(1)(F) as well as the various forms required to be filed with the IRS. Hannah Fischer Frey and Jesse Sitz are partners at Baird Holm LLP, focusing their law practices in the areas of federal and state income tax law and business succession planning. Fischer Frey and Sitz work closely with other tax practitioners and preparers to document and structure deals for their clients in a tax-efficient manner. For more information, contact them at hfrey@bairdholm.com and jsitz@bairdholm.com, respectively. Again, there are many traps for the unwary, but an “F” reorganization can be a useful tool for restructuring an entity taxed as an “S” corporation prior to certain investments or acquisitions.
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