Taxing Divisive Mergers

Georgia Law Review, Vol. 34, 2000

66 Pages Posted: 22 Mar 2000

See all articles by Steven A. Bank

Steven A. Bank

University of California, Los Angeles (UCLA) - School of Law

Date Written: March 2000


Under the Internal Revenue Code ("Code"), a merger that is "statutory," or conducted pursuant to the corporation laws of a state, is tax-free. Practically since its inception, this provision has invited abuse. Taxpayers have sought refuge behind liberal state merger laws, while the Internal Revenue Service ("Service") and the courts have strained to preserve the integrity of the statutory merger concept. The latest such episode surrounds the invention of something called a "divisive merger." This oxymoron describes a transaction in which more than one party may survive or be created while still meeting the definition of a "merger" under state law. If it qualifies under the Code, it permits a mere sale to receive the favored status of a tax-free reorganization.

On January 19, 2000, the Service responded to the abusive potential of the divisive merger by declaring that such transactions do not qualify as mergers for tax purposes. While its position was not surprising, the analysis was unsettling. Based on its review of traditional state law requirements, the Service for the first time announced that the target must transfer substantially all of its properties and dissolve pursuant to the plan of merger. Thus, contrary to the move to disconnect federal income tax liability from state law classification, the Service explicitly embraced a state law focused interpretation.

This Article argues that the Service should abandon its reliance on traditional state corporate law requirements in determining whether a merger qualifies for tax-free treatment. Instead, the Service can interpret the statutory language in a way that is both faithful to the text and legislative history and less dependent on the vagaries of state corporate law by giving "merger" its own meaning for federal income tax purposes.

JEL Classification: K34

Suggested Citation

Bank, Steven A., Taxing Divisive Mergers (March 2000). Georgia Law Review, Vol. 34, 2000, Available at SSRN: or

Steven A. Bank (Contact Author)

University of California, Los Angeles (UCLA) - School of Law ( email )

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