Reverse Mergers - Tax Free Exchanges?

IRS issues rare private letter ruling on "reverse acquisition" transaction
The IRS earlier this year issued a private letter ruling (PLR 200905001) concluding that a series of transactions including a so-called "reverse acquisition" qualified as a tax-free reorganization and did not terminate the existence of an affiliated group of corporations that may file consolidated returns.

Reverse acquisitions commonly occur in two situations: (1) when two groups are combined (that is, when the parent of one group acquires all the stock of the parent of another) and (2) when a single group undergoes an internal restructuring transaction in which the parent is replaced by another member. It can be very important in those situations to determine whether a group remains in existence, to determine whether there are stub years (making tax attributes one year older), and to compute the common parent's E&P. Through the years the IRS has issued public and private rulings that have created substantial uncertainty in applying the reverse acquisition regulations.

In part because of that checkered history, the IRS for the past 10 or 12 years has been reluctant to issue private rulings on reverse acquisitions. Because this is an area in which the form of a transaction is extremely important to its tax treatment, the issuance of this PLR is a positive development for taxpayers engaging in similar transactions that would welcome the certainty provided by a private letter ruling.