Tax

How to Handle Type F Reorganizations After Corporate Changes

03.09.2015

Author

Jeff Aleixo

Type F reorganizations regulations merger&acquisitions

Undergoing a name change or keeping legal name effectively the same even though a company is operating as ABC, LLC instead of ABC, Inc. may seem like superficial changes. However, from an employment tax reporting perspective, these changes are considered as formal Type F Reorganizations and require special treatment and reporting.

Type F reorganizations are relatively insignificant compared to other types of reorganizations and their associated reporting requirements are often not fully completed. However, it is advisable to pay closer attention post-Type F reorganizations compliance.

Avoid Underestimating Type F Reorganizations

If an organization undergoes a change of structure and/or a legal name change, their Tax or Legal Department informs the applicable Secretary of State(s) of this change. In fact, after doing this, many employers consider their entity or name change completed, thus causing a common error. It is incorrect to assume that this notification to the Secretary of State will filter down to the Department of Labor and Department of Revenue because separate notifications are required. 

Furthermore, failure to notify agencies of changes may lead to:

  • significant extra work for the agencies to make retroactive corrections on a company account;
  • various delays;
  • additional work for employers that involves identifying old documents and filing and/or re-filing forms;
  • questions at the agency level, raising audit exposure;
  • information potentially sent to the wrong accounts; or
  • unemployment claims possibly recorded against the wrong account.

In addition to this, poor reporting around Type F reorganizations could attract unwanted negative attention from the agency. Therefore, proper reporting can help employers avoid potential problems as well as save money if there is a Transfer of UI Experience opportunity. Also, employers need to make sure there is a match between current company name, entity type, FEIN, and the agency detail on employer accounts.

Use this comprehensive guide to discover differences between a merger and an acquisition, types of mergers and key phases to ensure effective M&A management.

Categories of Change 

There are three common categories of change related to state unemployment insurance and state withholding tax:

  • Name change only (no change of entity structure / ownership or FEIN);
  • Entity change (same FEIN, and no change in structure / ownership);
  • Change of name / entity and new FEIN

For each of these categories, there is a type of documentation typically required by the agencies.

For name change only it is necessary to submit name change via a letter or agency form and include applicable documentation such as:

  • Copy of Articles of Amendment / Conversion with the State of Incorporation.
  • A printout of the change made with the Secretary of State(s) doing business, if applicable.

For entity change only some states require current account to be closed and a new account to be opened. Applicable documentation includes:

  • Copy of Articles of Amendment / Conversion with the State of Incorporation,
  • A printout of the change made with the Secretary of State(s) doing business, if applicable,
  • IRS letter (C147) indicating no change to the FEIN.

For change of name / entity and new FEIN new application is required for most agencies together with documentation such as:

  • Copy of Articles of Amendment / Conversion with the State of Incorporation,
  • A printout of the change made with the Secretary of State(s) doing business.

It is of utmost importance to notify each agency separately:

  • Once for the State Workforce Agency / Department of Labor (for unemployment tax account/s),
  • Once for the State Department of Revenue (for income tax withholding accounts), and
  • Repeat this for each state in which a company has operations.

Final Regulations on Type F Reorganizations

As a type of tax-free reorganization, F reorganizations are typically used to generate a tax-free shift of a single operating company. They are frequently used as part of a pre-sale strategy or for changing certain undesired attributes of an operating company.

The Internal Revenue Service issued final regulations on the qualification of F reorganizations. Six regulations explain the elements for a tax-free F reorganization. For example, there is no gain or loss to the corporation on the transfer of its assets to a new corporation in exchange for stock of the new corporation, and no gain or loss to the shareholders upon the exchange of old stock for new stock. All six conditions must be met in addition to the general requirements of business purpose and plan of reorganization. Employers should ensure that the criteria for F Reorganizations are met during the evaluation period. Otherwise, the transaction cannot receive tax-free treatment.

Outsource M&A management to ensure cost effective and efficient M&A transaction while avoiding potential transaction-related reporting penalties. Disclaimer: This article is general in nature and is not intended to replace the guidance of an employment tax expert and/or legal professional with regards to an appropriate course of action in your particular circumstances. Please consult with a professional for appropriate advice in your case. Pursuant to IRS “Circular 230” rules, any information included herewithin is not intended or written to be used for the purpose of avoiding penalties under the federal Internal Revenue Code.