Timing

I had planned to post this piece during the third week of December, a day or so after the exchange between Senator Manchin and the White House sealed the fate of the Build Back Better plan, at least in its current iteration; by then, however, what had already proven to be one of the most challenging year-ends I’d ever experienced turned downright frenetic.[i]

The lingering threat of substantial federal tax increases,[ii] together with the low interest rate environment,[iii] facilitated the continued roll-up of closely held businesses by private equity buyers, or the transfer of interests in such businesses between related persons.[iv]

However, the projects for which “beat-the-tax” deadlines[v] were imposed were not limited to such transactions; indeed, almost everyone who came to us during the last quarter for assistance on some matter with potential tax implications was eager – or should I say “anxious”? – to complete their project before the end of the 2021 calendar year, as if by doing so they would begin 2022 with a clean slate.[vi]

Those folks either were unfamiliar with, or had forgotten, one of Faulkner’s best-known lines: “The past is never dead. It’s not even past.”[vii] The truth of this statement is certain to be borne out when Congress returns from its holiday recess[viii] during the next week or so.

The “Party’s” Over . . . Or Is It?

Of course, the past to which I refer is Sen. Manchin’s months-long criticism of the Administration’s Build Back Better plan,[ix]  which culminated with his December 19 announcement that he will not vote in favor of the plan.

It appears the Democrats were not expecting that “ending,” as evidenced by the reaction of White House Press Secretary Psaki, who accused the Senator of having “breached his commitments to the President” and to his colleagues in Congress.[x]

Do you recall the ensuing finger-pointing among Democrats, and the almost gleeful (and definitely imprudent) statements by some Republicans?

One day later, however, Sen. Manchin himself broached the possibility of a compromise deal if the Administration’s spending bill were tweaked.[xi] Shortly thereafter, the President indicated that he and the Senator would get something done.

Predictably, the talk since then has revolved around a “less expensive” version of the President’s plan; specifically, one with a smaller number of programs, though few details have emerged to-date.[xii]

Mind you, it appears no one is talking about eliminating the remaining proposed tax hikes – the new spending programs, whatever their number or size, have to be funded.[xiii] Still, to keep things in perspective, the tax increases under consideration pale before what could have been had the Democrats maintained a united front.[xiv]

That said, several of the threatened tax increases that, by all accounts, prompted so many individual and closely held business taxpayers to accelerate plans to dispose of assets before the end of 2021 may still be relevant as we enter 2022. Assuming such tax increases are enacted, query whether their effective date will be retroactive to gains recognized on or after January 1, 2022,[xv] or will they only apply to gains recognized after the date of enactment.[xvi]

The PTET

Many of the businesses sold in 2021 were New York S corporations[xvii] that elected on or before October 15 of 2021[xviii] to pay the optional pass-through entity tax (“PTET”) under New York’s SALT cap workaround for the taxable year beginning January 1, 2021.[xix]

A Helping Hand . . . from the IRS

The PTET is based upon Notice 2020-75,[xx] which was issued by the IRS in November 2020 to clarify that state income taxes imposed on the income of, and paid by, a partnership or an S corporation[xxi] are allowed as a deduction by the partnership or S corporation in computing the entity’s non-separately stated taxable income[xxii] for the taxable year of the payment.[xxiii]

According to the Notice, the tax payment made by the business entity during the taxable year does not constitute an item of deduction that a partner or an S corporation shareholder takes into account separately[xxiv] in determining the partner’s or S corporation shareholder’s own federal income tax liability for the taxable year.[xxv] Instead, the entity-level tax will be reflected in a partner’s or an S corporation shareholder’s distributive or pro-rata share of non-separately stated income or loss reported on a Schedule K-1.[xxvi]

New York’s PTET

The PTET is imposed on the pass-through entity taxable income of an electing eligible entity at the same tax rates that apply to individuals.[xxvii] Generally, pass-through entity taxable income[xxviii] includes all income, gain, loss, or deduction of an electing entity that flows through to a direct partner or shareholder for purposes of New York’s personal income tax.[xxix]

It appears that a pass-through entity’s taxable income for purposes of the PTET should include the gain from the sale of the entity’s assets. But what if, in connection with a sale that occurred after the October 15 election deadline for 2021, the electing entity “disappeared”? Specifically, what if the target S corporation underwent an F reorganization in connection with, and immediately prior to, the sale of its business? What if, as is often the case, the target was then merged into a newly formed LLC, with the LLC as the surviving entity?

The “F” Reorg

As discussed in earlier posts,[xxx] it is not unusual for the sale of a business that is organized as an S corporation (a “pass-through entity”) to be preceded by an F reorganization.[xxxi]

This form of corporate reorganization may be utilized by a target S corporation to accomplish a number of goals. For example, in connection with the sale of the corporation’s equity, it may enable the target’s shareholders to withdraw from the corporation those assets they want to retain or that the buyer does not want to acquire, in either case without triggering recognition of gain. It may also facilitate the tax-deferred rollover of a portion of the target’s assets to the buyer or to the buyer’s parent in exchange for an equity interest therein (a tax-deferred rollover).[xxxii]

“Mere Change”

The Code describes an F reorganization as “a mere change in identity, form, or place of organization of one corporation, however effected.” Indeed, following an F reorganization, the reorganized corporation is treated for tax purposes as the same entity that existed before the reorganization.

That said, an F reorganization generally involves, in form, two corporations, one of which (for our purposes, the target or Transferor Corporation) transfers (or is deemed to transfer, depending upon the reorganization mechanics) assets to the other (a Resulting Corporation). However, because an F reorganization must involve “one corporation,” it cannot accommodate transactions in which the Resulting Corporation has pre-reorganization activities or tax attributes.[xxxiii]

Requirements for an F

Based on the above principles, IRS Regulations[xxxiv] generally provide that a transaction (a “Potential F Reorganization”) which involves an actual or deemed transfer of property by a Transferor Corporation to a Resulting Corporation qualifies as an F reorganization if six requirements are satisfied. Viewed together, these requirements ensure that an F reorganization involves only one continuing corporation.

  1. All the stock of the Resulting Corporation must have been distributed (or deemed distributed) immediately after the reorganization in exchange for stock of the Transferor Corporation.
  2. The same person or persons own all the stock of the Transferor Corporation at the beginning of the reorganization and all the stock of the Resulting Corporation at the end of the reorganization, in identical proportions.
  3. The Resulting Corporation cannot hold any property or have any tax attributes immediately before the reorganization.
  4. The Transferor Corporation must completely liquidate in the reorganization for federal income tax purposes.[xxxv]
  5. Immediately after the reorganization, only the Resulting Corporation may hold (or be treated as holding for tax purposes) the property that was held by the Transferor Corporation immediately before the Potential F Reorganization.
  6. Immediately after the reorganization, the Resulting Corporation may not hold property acquired from any corporation other than the Transferor Corporation.[xxxvi]

For example, assume an S corporation (Transferor Corporation) wants to change its state of incorporation,[xxxvii] or perhaps its legal structure from a state law corporation to an LLC that is taxable as an association.[xxxviii] A new corporation or LLC (Resulting Corporation) is organized in the desired jurisdiction and Transferor Corporation is merged with and into Resulting Corporation (or LLC/association; the surviving entity), as a result of which all the assets and liabilities of Transferor Corporation are deemed accepted and assumed as a matter of law by Resulting Corporation.

Tax Attributes

When the regulatory requirements above are satisfied, Resulting Corporation is treated as the continuation of Transferor Corporation for tax purposes; it “inherits” the tax attributes of Transferor Corporation (including its EIN and its “S” election).[xxxix]

In the case of a reorganization qualifying under section 368(a)(1)(F) . . . the acquiring corporation shall be treated (for purposes of section 381) just as the transferor corporation would have been treated if there had been no reorganization. Thus, the taxable year of the transferor corporation shall not end on the date of transfer merely because of the transfer; a net operating loss of the acquiring corporation for any taxable year ending after the date of transfer shall be carried back in accordance with section 172(b) in computing the taxable income of the transferor corporation for a taxable year ending before the date of transfer; and the tax attributes of the transferor corporation enumerated in section 381(c) shall be taken into account by the acquiring corporation as if there had been no reorganization.[xl]

Consistent with the foregoing result, the acquiring corporation will use the method of accounting used by the transferor corporation,[xli] the tax return for the full taxable year of Transferor Corporation will include the operations of Resulting Corporation for the post-reorganization portion of the taxable year, and the return for the full year will be filed by Resulting Corporation.[xlii]

As regards specific tax attributes, if the acquiring corporation assumes an obligation of the transferor corporation which, after the date of the transfer, gives rise to a liability, and such liability, if paid or accrued by the transferor corporation, would have been deductible in computing its taxable income, the acquiring corporation will be entitled to deduct such items when paid or accrued, as the case may be, as if such corporation were the transferor corporation.[xliii]

Any deduction thus allowed to the acquiring corporation is taken by that corporation in the taxable year ending after the date of the transfer in which the liability is paid or accrued by that corporation, as the case may be.[xliv]

Query whether an electing New York S corporation’s liability under the PTET comes under the purview of the foregoing rule.[xlv]

Pre-Sale “F” by S Corp

As indicated above, prior to its sale, a target S corporation will sometimes undergo an F reorganization, coupled with a merger into an LLC.[xlvi] Among other things, this pre-sale tailoring of the target allows: (1) the purchaser(s) to acquire the equity of the target (see below)[xlvii]; (2) the purchaser to achieve a recoverable cost-basis in the target’s assets;[xlviii] (3) the target shareholders to roll over some of their target equity on a tax-deferred basis;[xlix] and (4) allows the purchaser to avoid the risk of an invalid S corporation election.[l]

One of the methods often used to implement a pre-sale F reorganization is based upon the deemed consequences of the election by an S corporation to treat a wholly owned subsidiary corporation as a qualified subchapter S subsidiary (a “QSub”).[li]

QSub

Specifically, the shareholders of the target S corporation (Transferor Corporation) will organize a new small business corporation[lii] (Resulting Corporation) to which they contribute all their shares of target stock. In exchange for this contribution, the former shareholders of the target (Transferor) receive all the shares of Resulting Corporation. Transferor Corporation thereby becomes a wholly owned subsidiary of Resulting Corporation. Resulting Corporation then elects[liii] to treat Transferor Corporation as a QSub effective the date the latter’s stock was contributed to Resulting Corporation, which itself is treated as an S corporation.[liv]

With the QSub election, the subsidiary is deemed to have liquidated into the S corporation for tax purposes[lv], the corporation that is the QSub (Transferor Corporation) is no longer treated as a separate corporation, and all its the assets and liabilities are treated as belonging to the S corporation (Resulting Corporation). At that point, the F reorganization is completed, with Resulting Corporation being treated as the continuation of Transferor Corporation.

For tax purposes, Resulting Corporation is deemed to hold all the assets (and liabilities) formerly owned by Transferor Corporation (the target).

Although Transferor Corporation is deemed to have liquidated into Resulting Corporation for tax purposes, it continues to exist as a matter of state law.[lvi] For that reason, the IRS has determined that Transferor Corporation must retain its EIN and Resulting Corporation must obtain its own EIN notwithstanding it is treated as the “continuation” of Transferor Corporation for tax purposes.[lvii]

Post QSub Merger Into LLC

That said, Resulting Corporation will often cause Transferor Corporation (all the stock of which it owns as a matter of state law) to merge in accordance with state law with and into a newly formed LLC that is wholly owned by Resulting Corporation, with the LLC surviving. Because each of Transferor Corporation and the LLC is disregarded as an entity separate from Resulting Corporation [lviii] for tax purposes, the merger of the two commonly owned entities is a non-event for tax purposes – though it causes the transfer of all the corporation’s (the QSub’s) assets and liabilities to the LLC as a matter of state law[lix] and results in the LLC’s taking the former QSub’s EIN.[lx]

At this point, Resulting Corporation is free to sell most of its membership interest in LLC to the buyer in a taxable transaction while also contributing the rest of its membership interest to the buyer’s parent in a tax-deferred exchange for an equity interest in the parent.

F Reorg and PTET

Which brings us back to the question presented in this post: what happens to Transferor Corporation’s New York PTET election for the tax year ending December 31, 2021 following the corporation’s F reorganization and merger into an LLC just prior to Resulting Corporation’s disposition of the LLC?

Do the shareholders of Transferor Corporation – now shareholders of Resulting Corporation – lose the above-described benefit of the PTET election[lxi] they otherwise would have enjoyed with respect to the gain from the sale because Transferor Corporation (the electing entity) became a subsidiary of another corporation (Resulting) in connection with the F reorganization? Does it matter that Resulting Corporation (a New York S corporation) did not make its “own” PTET election? How about the fact that, following its merger into LLC, Transferor Corporation no longer exists as a matter of state corporate law, or that its successor is a single member LLC which is not eligible to make a PTET election?

New York has not yet issued guidance regarding the application of the PTET following the F reorganization of a New York S corporation that made a proper and timely PTET election.[lxii]

Conformity

Notwithstanding the absence of express guidance, there is nothing in New York’s PTET law or in the IRS Notice on which it is based that would suspend the application of the usual tax rules, including the rules generally applicable to F reorganizations.

New York imposes an annual tax on every corporation for the privilege of doing business in the state. The tax is imposed on the basis of the corporation’s entire net income for the taxable year. “Entire net income” is defined as the entire taxable income which the taxpayer is required to report (or would have been required to report if it had not made an S corporation election) to the IRS, except as modified by the Tax Law.[lxiii]

Similarly, for purposes of the annual personal income tax, the New York taxable income of a resident individual is based upon their New York adjusted gross income, which is based upon their federal adjusted gross income, with certain modifications.[lxiv]

In the case of an eligible S corporation, the shareholders of the corporation may elect to take into account, for purposes of the New York personal income tax, the S corporation items of income, loss, deduction, and reductions for certain taxes which are taken into account for federal income tax purposes for the taxable year.[lxv]

There is no modification or adjustment in any of the foregoing New York tax provisions for a transaction treated as a reorganization pursuant to section 368(a)(1)(F) of the Code. Therefore, for New York corporate tax and personal income tax purposes, such a reorganization should be treated the same as it is treated for federal income tax purposes.[lxvi]

In addition, the Tax Law provides that “[a]ny term used in this article shall have the same meaning as when used in a comparable context in the laws of the United States relating to federal income taxes, unless a different meaning is clearly required.”[lxvii]

Moreover, according to New York’s Department of Taxation, when an interpretation of a law of the United States relating to federal income taxes is established by the Internal Revenue Service through a Revenue Ruling or a Revenue Procedure, such federal interpretation will be followed for New York State personal income tax purposes, as well.[lxviii]

Based on the foregoing, an F reorganization should be treated for New York income tax purposes the same as it is treated for federal income tax purposes, including the situation where the F reorganization involves the use of a newly created S corporation (the Resulting Corporation) coupled with a QSub election for the Transferor Corporation.[lxix]

Thus, following the F reorganization of Transferor Corporation, Resulting Corporation should be treated just as Transferor Corporation would have been treated if there had been no reorganization – it is treated as the continuation of Transferor Corporation. The taxable year of Transferor Corporation that began on January 1, 2021 does not end on the date of transfer merely because of the transfer. Transferor’s PTET election should be treated as having been made by the Resulting Corporation, and the tax attributes of Transferor Corporation (including the PTET “deduction”) should be taken into account by Resulting Corporation as if there had been no reorganization.[lxx]


[i] This year, as in years past, I have been fortunate to work with (and to learn from) some very capable professionals, from a variety of disciplines.

[ii] Oddly enough, many state governments are now contemplating tax reductions as they seek to retain or attract private investments.

[iii] Following the Fed’s December 15 meeting, many observers speculated we will see increases in 2022.

[iv] Primarily gifts, sales to grantor trusts, GRATs.

[v] December 31, 2021 deadlines were the conservative approach, with clients and advisers assuming Congressional action in early 2022 would be made retroactive to January 1, 2022.

[vi] In general, the tax law treats each taxable year of a taxpayer as a “separate unit” for tax accounting purposes and requires that one look at a particular transaction on an “annual basis,” using the facts as they exist at the end of the taxable year; in other words, one determines the tax consequences of the transaction at the end of the taxable year in which it occurred, without regard to events in subsequent years.

[vii] William Faulkner, Requiem for a Nun.

[viii] The humorist Will Rogers once said, “The U.S. is safest when Congress is in recess.”

The Senate is already back; the House returns next week.

[ix] If there was any lingering doubt among the Party faithful regarding Mr. Manchin’s intentions, his press release that same day should have put such doubt to rest: “I cannot vote to move forward on this mammoth piece of legislation.”https://www.manchin.senate.gov/newsroom/press-releases/manchin-statement-on-build-back-better-act .

The proposed legislation, H.R. 5376, which was approved by the House on November 19, has been languishing in the Senate ever since, primarily because of dissension within the President’s Party; in fact, prior to Mr. Manchin’s announcement, many Democratic Senators conceded their bill would not pass before the end of the year, notwithstanding the “efforts” of Senate Majority Leader Schumer.

[x] https://www.whitehouse.gov/briefing-room/statements-releases/2021/12/19/statement-from-press-secretary-jen-psaki-4/ .

[xi] The opening salvo from the progressive wing of the Democratic Party called for a $6 trillion budget, which was eventually cut to just under $2 trillion before Senator Manchin put the kibosh on it. Talk about tweaking.

[xii] Don’t forget these folks are politicians.

In the 1990 movie, Hunt for Red October, the National Security Adviser says to Dr. Ryan, “I’m a politician, which means I’m a cheat and a liar, and when I’m not kissing babies, I’m stealing their lollipops. But it also means I keep my options open.” Excellent movie, sad statement.

[xiii] That said, there is a federal tax reduction in play for folks in California, New York, and other high-tax, Democratic Party-controlled states; specifically, a temporary relaxation of the cap on the SALT deduction.

Unfortunately for the residents of those states, their Democratic representatives in Congress remain divided over how, and how much, to relax the cap that was enacted as part of the Tax Cuts and Jobs Act in 2017.

[xiv] Notwithstanding the continued threat and, I think, likelihood of tax increases, a quick recap of some of the proposals included in the Administration’s tax plan released in April, and of their evolution through the November vote in the House of Representatives, should reassure business owners:

  • prohibiting higher income taxpayers from using like kind exchanges, reducing the estate and gift tax exemption amount by fifty percent, eliminating the basis step-up at death, imposing a mark-to-market tax at death – off the table since mid-September (the House Ways and Means Committee);
  • increasing the tax rate for long-term capital gains and ordinary income for individuals, revising the grantor trust rules, increasing the corporate tax rate – off the table since early November (the House Rules Committee . . . and Senator Sinema?); and
  • expanding the reach of the 3.8 percent surtax on net investment income, reducing by 50 percent the benefits from the sale of Section 1202 stock by higher income taxpayers, introducing a new 5 percent surcharge (8 percent in some cases) for higher-income individuals, making permanent the excess loss rules – suspended for now (Senator Manchin’s announcement), but may be revived this year under a more limited version of the President’s spending plan.

[xv] In which case a taxpayer who did not close their deal in 2021, or who is expecting large post-2021 installment payments, may be out of luck unless they elect out of installment reporting and include on their 2021 tax return all the gain realized in the transaction.

For example, the House Ways and Means version of the President’s proposed capital gains tax increase indicated the higher rate would apply to gains recognized after September 13, 2021 (the day the committee issued its report). https://www.rivkinradler.com/publications/tax-hikes-effective-dates-and-selling-a-business/ .

[xvi] In which case such a taxpayer may feel pressured to close a deal as soon after January 1, 2022 as possible, to beat Congress to the punch.

[xvii] New York Tax Law Sec. 208(1-A).

[xviii] https://www.tax.ny.gov/pdf/memos/ptet/m21-1c-1i.pdf.

[xix] New York Tax Law Article 24A. For tax years beginning on or after January 1, 2021, an eligible pass-through entity can opt into the PTET through the entity’s Business Online Services account. The PTET is imposed on each electing entity’s PTE taxable income. https://www.rivkinradler.com/publications/new-york-budget-deal-includes-salt-cap-workaround/ .

The following forms of business entity are not eligible to make the election: a single-member LLC that is disregarded for tax purposes, a sole proprietorship, and a corporation that is not a New York S corporation. https://www.nysenate.gov/legislation/laws/TAX/860.

[xx] https://www.irs.gov/pub/irs-drop/n-20-75.pdf .

[xxi] “Specified Income Tax Payments” as defined in the Notice.

[xxii] IRC Sec. 1366(a)(1)(B) and 1366(a)(2), in the case of an S corporation.

[xxiii] An electing cash basis taxpayer had to pay the tax before the end of 2021. The situation of an accrual basis taxpayer is less clear, though many advisers believe such a taxpayer may rely upon the so-called “recurring item” exception to claim the benefit. https://www.law.cornell.edu/cfr/text/26/1.461-5.

Query how the recurring item exception would apply where the stock of an electing S corporation was sold before the tax was paid; after all, it is an entity-level tax that is payable by the S corporation.

[xxiv] Under IRC Sec. 702 or Sec. 1366.

[xxv] In other words, it is not subject to the SALT deduction cap.

[xxvi] By permitting such an entity-level deduction for the State tax imposed upon the entity, the entity’s individual partners and shareholders to whom the entity’s non-separately stated taxable income is allocated are able to claim the equivalent of a deduction for such taxes which is not subject to the SALT cap enacted by the Tax Cuts and Jobs Act; P.L. 115-97. IRC Sec. 164(b)(6).

[xxvii] NY Tax Law Sec. 862. https://www.tax.ny.gov/pdf/memos/ptet/m21-1c-1i.pdf . TSB-M-21(1)C.

[xxviii] NY Tax Law Sec. 860(h)(2). An electing S corporation must apportion this net amount of taxable income to New York based on the apportionment rules; in other words, the tax applies to New York source income. In the case of an electing partnership, the tax is applied to all the income allocated to resident partners and to the New York source income of nonresident partners.

[xxix] Under Article 22 of the NY Tax Law.

[xxx] https://www.taxslaw.com/2021/11/selling-to-private-equity-maybe-you-should-f-reorg-first/#_ednref17 .

[xxxi] IRC Sec. 368(a)(1)(F).

[xxxii] IRC Sec. 721 or Sec. 351, depending upon whether the issuing entity is a partnership or a corporation (the latter has a “control” requirement).

[xxxiii] Other than those of the Transferor Corporation.

[xxxiv] Reg. Sec. 1.368-2(m).

[xxxv] Though, in the case of an S-corporation-turned-QSub, it is not required to legally dissolve as a matter of state law.

[xxxvi] Thus, a transaction that involves simultaneous acquisitions of property from multiple transferor corporations will not qualify as an F reorganization. But see IRC Sec. 368(a)(1)(D) and Sec. 354 for an “acquisitive” D reorganization.

[xxxvii] For example, from New York to Delaware.

[xxxviii] Treas. Reg. Sec. 301.7701-3.

[xxxix] IRC Sec. 381: https://www.law.cornell.edu/uscode/text/26/381 ; Rev. Rul. 64-250; Rev. Rul. 73-526.

[xl] Reg. Sec. 1.381(b)-1(a)(2).

[xli] IRC Sec. 381(c)(4).

[xlii] IRC Sec. 381(b)(1). It follows that Transferor Corporation should not file a return marked “final.”

[xliii] IRC Sec. 381(c)(16).

[xliv] Reg. Sec. 1.381(c)(16)-1.

[xlv] In PLR 200013044, in addressing whether the state and local taxes of a branch can be deducted by the “successor” corporation after the incorporation of the branch, the IRS discussed IRC Sec. 381(c)(16) before pointing out it did not apply to a Sec. 351 transaction.

[xlvi] The F reorg is often followed by a merger into an LLC that is disregarded for tax purposes.

[xlvii] Which may be important for business or regulatory reasons.

[xlviii] Thus, reducing the economic cost of the deal. The acquisition of all the membership interests is treated as the acquisition of the LLC’s assets.

[xlix] This would not be possible in the case of an election under IRC Sec. 338(h)(10) or Sec. 336(e) pursuant to which the target is treated as selling all its assets, the gain from which is allocated among all its shareholders (including those who rolled over their equity in the corporation).

[l] As discussed below, the QSub election for the target corporation treats it as having liquidated into its parent S corporation and converts the target into a disregarded entity. But what if the S election is invalid for some reason? The QSub election would also be invalid, and the target would be treated as a C corporation. The “conversion” of the corporation into an LLC removes this risk.

[li] IRC Sec. 1361(b)(3); Reg. Sec. 1.1361-4; IRS Form 8869.

[lii] IRC Sec. 1361(b)(1).

[liii] The QSub election Form 8869 asks whether the election is being made in connection with an F reorganization.

[liv] Rev. Rul. 2008-18. Query whether a separate New York “S” election is required for Resulting Corporation. The better argument is that New York will conform to the Revenue Ruling. See below.

[lv] Under IRC Sec. 332, a tax-deferred exchange. See Reg. 1.1361-4(b)(3)(ii) for the timing of the liquidation.

[lvi] Compare to the form of F reorg described earlier in which Transferor Corporation merges into Resulting Corporation. In that case, Resulting Corporation steps into the shoes of Transferor Corporation for all tax purposes, and Transferor ceases its separate existence as a state law entity.

[lvii] Rev. Rul. 2008-18.

[lviii] One as a QSub, the other as a single member LLC. Reg. Sec. 1.1361-4 and Sec. 301.7701-3.

[lix] They continue to be treated as owned by Resulting Corporation for tax purposes.

[lx] Reg. Sec. 301.6109-1(i).

[lxi] The reduction of the S corporation’s non-separately stated income that is allocated pro rata among the shareholders.

[lxii] Considering the number of transactions that were completed in the last quarter of 2021 which were preceded by F reorganizations, I imagine it won’t be long before the State acts.

[lxiii] Tax Law Sec. 208.9.

[lxiv] Tax Law Sec. 611 and Sec. 612.

[lxv] Tax Law Sec. 660(a).

[lxvi] See, e.g., TSB-A-93 (11) C (May 25, 1993).

[lxvii] Tax Law Sec. 607(a).

However, this provision was amended in April 2020: for taxable years beginning before January 1, 2022, any amendments made to the Code after March 1, 2020 – basically, the federal CARES Act enacted March 27, 2020 – do not apply to the New York personal income tax.

[lxviii] See, e.g., TSB-A-87(11)C (May 29, 1987) and TSB-A-91(14)C (May 28, 1991).

[lxix] See the IRS’s interpretation in Rev. Rul. 2008-18.

[lxx] Resulting Corporation steps into the shoes of Transferor Corporation and takes all its tax attributes notwithstanding that Transferor remained in existence after the F reorganization as matter of state corporate law and even retained its EIN (as a QSub), and notwithstanding Transferor was subsequently merged out of existence into an LLC which assumed that EIN.