Federalizing the Tax-Free Merger: Toward an End to the Anachronistic Reliance on State Corporation Laws

Abstract:     
This articles examines the requirement that a merger be "statutory," or conducted pursuant to the corporation laws of a state, to be tax-free. The statutory merger requirement for "A" reorganizations is an anachronistic remnant of the 1930s belief that state corporation laws are effective regulators of corporate combinations and bulwarks against abuse of the tax-free reorganization provisions. This reliance on state corporate law standards is not only inconsistent with the recently adopted check-the-box regulations and no longer much of a regulator of any kind, but also is counterproductive in that it introduces disparities of treatment between parties based on their location. Ironically, the statutory merger requirement could conceivably prevent de facto mergers and mergers involving single-member limited liability companies, but permit mergers under nouveau corporate law statutes that do not require the parties to "merge" under any conventional sense of the word. Form is elevated above substance in a way that is both irrational and unproductive. In light of the failed efforts to remove the A reorganization from the Code altogether, the Article concludes that the statutory merger requirement should be eliminated from the A reorganization so that a more uniform standard can be applied by the courts and the IRS.

Working Paper Series