FOREIGN CORPORATION'S CONVERSION TO DOMESTIC STATUS WILL BE TREATED AS AN 'F' REORGANIZATION.

Rev. Rul. 88-25

ISSUE

What is the federal income tax treatment of the conversion of a foreign corporation to a domestic corporation under a state domestication statute?

FACTS

F was incorporated in Country Y. For valid business reasons, the shareholders of F decided that it would be advantageous for F to become a State A corporation. Under State A corporate law, a foreign corporation may become a State A corporation by filing a certificate of domestication and a certificate of incorporation with the appropriate official. Pursuant to a plan of reorganization, F filed a certificate of domestication and a certificate of incorporation in State A.

Upon filing the certificate of domestication and certificate of incorporation, F was considered by State A to be incorporated in State A and became subject to State A law, whether or not F continued to be considered a Country Y corporation for Country Y purposes. Thus, F was not required to incorporate anew in State A, but merely "converted" itself into a State A corporation by filing the appropriate documents. For State A law purposes, the existence of F was deemed to have commenced on the date F commenced its existence in Country Y.

Following the domestication, F possessed the same assets and liabilities as before the domestication and continued its previous business without interruption. There was no change in the shareholders of F or in the shareholders' proprietary interests.

LAW AND ANALYSIS

For federal income tax purposes, the conversion of F from a Country Y to a State A corporation under the State A domestication statute is treated as: (1) a transfer by a foreign corporation (F) of all of its assets and liabilities to a new domestic corporation (F-D) in exchange for F-D stock; and (2) a liquidating distribution by F to its shareholders of the F-D stock received in exchange for F's assets and liabilities. There was no change in the shareholders of F or in the shareholders' proprietary interests. Furthermore, F-D possessed the same assets and liabilities and continued the same business activities after the conversion as F did before the conversion. Because there was no alteration in shareholder continuity, asset continuity, or business enterprise, the effect of the conversion was a mere change in the place of organization of F. Therefore, the conversion qualified as a reorganization under section 368(a)(1)(F) of the Internal Revenue Code, which provides that the term "reorganization" includes a mere change in identity, form or place of organization of one corporation, however effected. See Rev. Rul. 87- 27, 1987-15 I.R.B. 5, concluding that the reincorporation in a foreign country of a dual resident U.S. corporation was a reorganization under section 368(a)(1)(F). F, the transferor corporation, and F-D, the transferee corporation, are considered "part[ies] to a reorganization" under section 368(b).

Generally, section 361 and section 354 of the Code provide the transferor corporation and the shareholders of the transferor corporation, respectively, with nonrecognition treatment in a reorganization under section 368. However, in certain circumstances, the nonrecognition treatment normally accorded to the transferor corporation and its shareholders in an international reorganization is overridden by the operation of section 367 and the corresponding regulations, or the rules of sections 897(d) and (e). If, for example, a corporate shareholder of F is a "United States shareholder" under section 7.367(b)-2(b) of the Temporary Income Tax Regulations, then the shareholder is denied section 354 nonrecognition treatment unless it agrees to include the "all earnings and profits amount" in income as a dividend. See section 7.367(b)-7(c)(2) of the Temporary Regulations.

In addition, section 897(e)(1) of the Code denies section 361 nonrecognition treatment to F with respect to the transfer by F to F- D of any "United States real property interest[s]" if F-D is not a "United States real property holding corporation" immediately after the exchange. Furthermore, subject to section 897(d)(2) or regulations to be promulgated, section 897(d)(1) denies section 361 nonrecognition treatment to F on the distribution to its shareholders (whether U.S. or foreign) of the F-D stock constitutes a U.S. real property interest at the time of the distribution. See Rev. Rul. 87- 66, 1987-29 I.R.B. 6, for a more complete discussion of the treatment of reorganizations involving the transfer of U.S. real property interests by a foreign corporation to a U.S. corporation.

HOLDING

For federal income tax purposes, the conversion of F from a Country Y corporation to a State A corporation under the State A domestication statute is treated as a transfer by F of its assets and liabilities to a new corporation (F-D) and distribution by F to its shareholders of the F-D stock received in exchange. The transaction qualifies as a reorganization under section 368(a)(1)(F) of the Code.

DRAFTING INFORMATION

The principal author of this revenue ruling is Jerilynn V. Chapman of the Corporation Tax Division. For further information regarding this revenue ruling contact Howard Staiman on (202) 566- 3342 (not a toll-free call).