FAQ on F Reorganizations
If you’ve hung out in middle market M&A long enough, you’ve heard of a Section 368(a)(1)(F) reorganization transaction (the cool kids just call them F Reorgs). It’s not important that you understand the legal and tax steps involved in an F Reorg, but it is important that you understand their benefits and risks.
What is an F Reorg?
An F Reorg, in the M&A context, generally refers to a transaction effected to treat a sale of the stock of an S corporation as the sale of assets of the S corporation for tax purposes.
Can you F Reorg an entity other than an S corporation?
You can – technically, C corporations can undergo F reorganizations and practitioners will occasionally refer to “F reorging” partnerships when what they really mean is a partnership continuation transaction, but the main usage is with S corporations.
If I’m a Buyer, why do I want to do an F Reorg?
The F reorg enables you to buy stock of the S corporation (which is much simpler legally and allows you to avoid certain regulatory hassles) while still getting a basis step-up for tax purposes.
If I’m a Seller, why do I want to do an F Reorg?
Well, you might not want to. There are some risks inherent in the F reorg structure for the Seller and asset sales are sometimes adverse for the Seller. However, assuming that you’ve agreed to ensure the Buyer gets a basis step-up for their money, an F reorg is generally the most efficient way to do that.
Any other benefits to an F Reorg?
Why yes, thanks for asking. An F reorg allows the Buyer to switch the investment vehicle from a corporation to a pass-through, thus enabling the Buyer to enhance its return through pass-through investing.
Why wouldn’t I just make a Section 338(h)(10) election?
Oh, look who’s the tax expert now. A Section 338(h)(10) election has the benefit of treating a stock purchase of an S corporation like an asset purchase for tax purposes, but with one major drawback – assuming you qualify for a Section 338(h)(10) (generally, the transaction must be a purchase of 80% or more of the S corp), any seller rollover would be fully taxed in a Section 338(h)(10) election, whereas an F Reorg transaction can generally defer tax on the rollover portion.
