On August 1, 2025, the Internal Revenue Service (the “Service”) issued PLR 2025310011 (the “Ruling”) confirming that the proposed merger transaction outlined in the ruling qualified as a tax-free reorganization under section 368(a)(1)(B).
Facts of the Ruling
The transaction at issue in the Ruling is relatively straightforward. The “Acquiring” corporation, unrelated to the “Target”, will form “Merger Sub,” which will merge with and into Target under state law, with Target surviving the merger. By operation of state law, all of the existing shares of Target’s stock will be cancelled, and the Target shareholders will receive common stock of Acquiring in its place.
Several other notable facts were established in the Ruling. First, the Ruling provides that fractional shares of Acquiring common stock will not be issued in the transaction. Rather, cash will be paid in lieu of any fractional shares.
Second, while Target and Acquiring are generally unrelated to one another, they have historically engaged in business, with Acquiring and its affiliates being the largest customer of Target and its affiliates.
Third, while Target has, in the past, declared distributions with respect to its stock and has an authorized share repurchase plan in place, any distributions on or redemptions of Target stock pre-dated any merger discussions between Target and Acquiring.
Fourth, Acquiring has a history of making cash advances to Target and its affiliates in order to enable Target to continue delivering products to Acquiring, to allow Target to satisfy its obligations, and to allow Target to continue to fund its operations. Cash advances may continue up and until the merger is effectuated, but in all cases, would only be used to fund the business operations of Target and its affiliates. No portion of such cash advances would fund distributions, redemptions, or make other similar payments to Target’s shareholders.
Fifth, the merger agreement requires Target to use reasonable best efforts to dispose of another one of its business lines (such business referred to as Business C in the Ruling). In connection with that disposition, Target may be required to make a divestiture payment related to the Business C disposition. The facts of the Ruling provide that a portion of such payment may need to be funded by Acquiring. Certain other business and asset divestitures and employee-related incentive payments might also arise in the pre-closing period.
Section 368(a)(1)(B)
Section 368(a)(1)(B) defines as a tax-free reorganization (a “B Reorganization”):
The acquisition by one corporation, in exchange solely for all or a part of its voting stock (or in exchange solely for all or a part of the voting stock of a corporation which is in control of the acquiring corporation), of stock of another corporation if, immediately after the acquisition, the acquiring corporation has control of such other corporation (whether or not such acquiring corporation had control immediately before the acquisition).
Most notably here is that the word “solely,” which as used in this context actually means what it says2: the only transaction consideration permitted to be paid by the Acquiring corporation (or the Acquiring corporation’s parent corporation) is voting stock of the Acquiring corporation (or its parent corporation, as the case may be).3 This is colloquially referred to as the requirement that there can be “no boot in a B” (reorganization), with “boot” referring to impermissible money or property other than acquiring voting stock.4
Analysis in the Ruling
The rule that there can be “no boot in a B” provides context to the Facts offered and established by the taxpayer in the Ruling as well as the taxpayer’s motivation for requesting the Ruling. The taxpayer requesting the Ruling was concerned about pre-merger business payments and financing transactions between Acquiring and Target potentially being characterized as payments of non-voting stock consideration in the merger transaction. To alleviate this concern, the taxpayer identified all of the transactions engaged in between Acquiring and Target and then the Service assessed whether the payments were business motivated payments that directly benefited Target’s business, which is distinguishable from boot consideration that is paid to Target shareholders. To ensure that the Target shareholders’ benefit was not direct and proximate, the Service ensured that no portion of the funds or Target’s fungible cash were used to pay distributions to or make redemptions from its shareholders in the period after negotiations first commenced.
Substantively, even payments by Acquiring related to Target’s business do arguably provide an indirect shareholder benefit because they help sustain or enhance the share price. But apparently this is acceptable, presumably due to the Target shareholders not being the primary beneficiary of the payment. This was also true of Acquiring’s potential financing of the divestiture payment, which (as a pre-requisite step to the merger) arguably facilitates the overall merger transaction. Finally, with respect to the payment of cash to Target shareholders in lieu of a fractional share, the Service concluded that the relevant Target shareholders would be viewed as receiving the fractional share, and then transferring the fractional share back to acquiring in exchange for cash, in a transaction under section 302. This is acceptable in the context of B Reorganization, because based on long standing practice, the cash for fractional shares is not viewed as “separately bargained for consideration,” but is a “mere mechanical rounding-off of fractions in the exchange.”5
What does this mean?
Due to the rigid requirements of B Reorganizations, stock acquisitions intending to qualify for tax-free reorganization treatment are often structured as reorganizations under section 368(a)(1)(A) pursuant to section 368(a)(2)(E) due to that provision’s more lenient requirements. The merger described in the Ruling had the form of a reorganization under that Internal Revenue Code section, so it is not entirely clear why a B Reorganization ruling was necessary. One possibility is that even though the form of the transaction could satisfy sections 368(a)(1)(A) and 368(a)(2)(E), the advances and other payments were of a quantum that, in the aggregate, was so large that they would exceed the 20 percent boot limitation under section 368(a)(2)(E), making that section similarly unavailable if the advances were viewed as payments of boot to the Target shareholders.
Another instance where B Reorganization versus section 368(a)(2)(E) qualification can matter is from a basis perspective, where the basis in the Target stock post-acquisition is either based on the Target shareholder’s historical basis in their Target stock (in a B Reorganization) as opposed to the net inside tax basis in the Target corporation’s assets (in a reorganization under section 368(a)(2)(E) that does not also qualify as a B Reorganization).6 Therefore, if the Target shareholders held their Target stock with a basis that in the aggregate exceeded the net inside asset basis of Target, then B Reorganization qualification is preferred.
The Ruling is also unique in that it has been quite some time since a taxpayer last received a private letter ruling affirmatively concluding that a transaction qualified as a B Reorganization.7 However, the Ruling seems like a sensible use of the Service’s private letter ruling practice because it is a clear way to give taxpayers assurance where the Code provision requirements are rigid. WilliamsMarston has significant experience advising on fundamental business transactions, including tax-free reorganizations, and is here to assist.8
1 May 7, 2025.
2 Cf. Sections 351(a) as modified by section 351(b) ((a)“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 (as defined in section 368(c)) of the corporation…(b) If subsection (a) would apply to an exchange but for the fact that there is received, in addition to the stock permitted to be received under subsection (a), other property or money….).
3 As the parenthetical indicates, in a triangular B Reorganization, voting stock of the parent corporation of Acquiring is permitted.
4 In Southwest Consolidated, the Supreme Court of the United States held that the statutory phrase “solely for voting stock” leaves no leeway. Helvering v. Southwest Consol. Corp., 315 U.S. 194 (1942).
5 Rev. Rul. 66-365, 1966-2 C.B. 116.
6 See Treas. Reg. § 1.358-6.
7 For example, in PLR 201416002 (Dec. 23, 2013), the Service ruled that a transaction qualified as a reorganization under section 368(a)(1)(B), but even that ruling was backstopped by tax-free treatment as an exchange under section 351.
8 The information in this article is not intended to be “written advice concerning one or more federal tax matters.” The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax advisor. This article represents the views of the author(s) only and does not necessarily represent the views of WilliamsMarston LLC.
