F REORGANIZATION

F REORGANIZATION

All company sellers consider using an F Reorg for their transaction. This type of deal is more beneficial to the seller than a Section 338 (h)(10) election.

Here are the advantages of an F Reorg:

1. No Minimum ownership threshold for a step-up. Sec. 338 requires a purchase of at least 80% of target’s stock.

2. Allows tax-deferred treatment of the seller’s rollover portion; a Sec. 338 rollover is usually fully taxable to the seller.

3. Buyer can be LLC or Partnership, making it attractive to Private Equity.

4. Seller company (target) retains its EIN, contracts, and operating history.

The primary disadvantage of an F Reorg is the expense of legal documentation required to have the Target Company complete a few steps and become an entity disregarded for Federal income tax purposes.