Selling to Private Equity? Maybe You Should “F Reorg” First

Having Fun?

Hope you had a decent weekend. Perhaps you did something interesting, maybe even fun, like some end-of-season apple picking? Or maybe you had a cider donut with some hot coffee at a farm stand you stumbled upon on your way back from attending a football game at a small college? That said, few experiences are better than a midafternoon walk in a quiet park under a blue sky, with the sun on your back like a blanket wrapped over your shoulders to fend off the autumn chill.

Then again, it’s possible you had a weekend similar to the one that someone close to me has been experiencing for months, seemingly living the same day over and over again. Having pilfered some of the leftover Halloween candy their spouse believes is so well hidden that no one can find it, they drove to Dunkin for a large coffee, then proceeded to their office, shut the door, closed the window blinds, and resumed work on several transactions, each at a different stage of the M&A process but all of which “must” close before the end of the year.

Slow It Down – Not

“What’s the rush?” you may ask. “Hasn’t the House Rules Committee removed the retroactive increase in the capital gains rate (from 20 to 25 percent) that the Ways and Means Committee had included in its September version of the Build Back Better Plan? And wasn’t the proposed increase in the corporate income tax rate (from 21 to 26.5 percent) also eliminated from consideration?”

The answer, of course, is “so it seems . . . at least at the moment.” Based upon the bill released by the House Rules Committee on November 3, the income tax rate for long-term capital gains recognized by individuals will remain at 20 percent, and the corporate rate will remain at 21 percent.

Surcharge and Surtax

However, beginning in 2022, a new tax of 5 percent will apply to an individual taxpayer to the extent the taxpayer’s modified adjusted gross income for the year exceeds $10 million, and a tax of 3 percent will apply to the extent of the excess over $25 million.

In addition, and also beginning in 2022, the 3.8 percent “surtax” on net investment income will apply to an individual taxpayer’s share of S corporation or partnership operating income, their share of gain from the disposition of assets by such business entity, and the gain recognized by the taxpayer on their disposition of an interest in such business entity – without regard to whether the individual materially participated in the corporation’s or partnership’s business – if the individual’s modified adjusted gross income for the year exceeds $500,000.

These surcharges and surtaxes do not distinguish among income arising in the ordinary course of business, gain from the sale of the business, and income or gain from the sale of non-business investment assets.

Moreover, their Congressional creators don’t seem to realize that the sometimes gain realized by a business owner from the sale of their business is a one-time event that represents the culmination of years of work and does not necessarily indicate that the owner regularly enjoyed cash flows in excess of the thresholds being considered for the imposition of these taxes.

Private Equity

In any case, there are many transactions that we must close before January 1, 2022. Curiously, in each of these transactions, the target is a family-owned S corporation (or an LLC that has elected to be treated as an S corporation for tax purposes), and the buyer is a private equity fund (“PEF”). In most of them, the deal is, for various reasons, structured as a “no-debt no-cash” sale of a stock.

The Rollover

One feature of a PEF acquisition that tends to distinguish it from a strategic buyer acquisition is the PEF’s strong preference that the owners of a target business “roll over” (i.e., reinvest) a portion of their equity in the target business into the PEF’s “corporate structure” in exchange for a minority interest therein. By requiring such an investment, the PEF hopes to incentive the target owners and to align their interests with those of the PEF’s investors.

Although many owners would prefer to take all their cash off the table, others are attracted to the potential upside that a rollover investment in a PEF may one day realize. After all, the rollover may present the owner with the opportunity to benefit not only from the future growth of their own former business, but also that of the PEF’s other portfolio companies.

However, it is also likely the investing owner will insist that the rollover be completed without adverse tax consequences, meaning that the rollover is not made with after-tax proceeds from the sale of the business and that the rollover itself – if made with a contribution of property in-kind – is not treated as a taxable exchange.

The ability of the PEF to satisfy this request will depend, in no small part, upon the legal form of the target business – in this case, an S corporation – the structure of the transaction (a sale of stock or a sale of assets – we’re assuming the former), and the legal form of the entity – usually the parent of the acquiring entity – into which the rollover investment is being made (we’re assuming a tax partnership).

Step-Up

Like most buyers, a PEF generally prefers an acquisition of the target’s assets in a transaction that gives the PEF a cost basis that may be recovered through immediate expensing or over time through depreciation and amortization. The tax deductions so generated will offset the PEF’s income, thereby allowing the PEF to recover its investment in the target’s business and thus reducing the overall cost of the transaction to the PEF.

By contrast, business owners will often prefer to sell their equity in the business because it will generate long-term capital gain which, it appears, will continue to be taxed at a preferential rate as compared to ordinary income, notwithstanding the Administration’s efforts. In addition, depending on the circumstances, it may be easier to complete a purchase and sale of stock.

P&S of S Corp. Stock

In the context of a stock sale, how can one reconcile the PEF’s goal of acquiring a recoverable cost basis, on the one hand, and the target owner’s goal of capital gain treatment for the sale portion of the transaction and tax-deferral for the rollover portion, on the other?

Qualified Stock Purchase?

Where the PEF is acquiring all of the issued and outstanding shares of stock of an S corporation target, it may achieve a recoverable cost basis for the corporation’s assets only by purchasing at least 80 percent of such stock, and by convincing the target’s shareholders to elect to treat the stock sale as a sale of assets for tax purposes.

Unfortunately for the shareholders of the target S corporation, the corporation with respect to which these conditions are satisfied is treated as having sold all its assets for an amount equal to their fair market value, thereby eliminating the possibility of a tax deferred rollover. The gain from this deemed sale flows through to all the shareholders, including any who, rather than having sold all their shares, contributed some of them to the capital of the purchasing entity in exchange for equity therein.

In light of the foregoing tax treatment, a sale of S corporation stock seems to be out of the question if tax deferral is required for the rollover.

Thankfully, the S corporation and its shareholders have an alternative means of satisfying their goals as well as those of the PEF buyer: the pre-sale “F” reorganization.

The “F” Reorganization

In general, gain or loss must be recognized upon the exchange of a property by a taxpayer for another property that differs materially in kind from the one surrendered.

The purpose of the so-called corporate “reorganization” provisions of the Code is to defer the recognition of gain for certain property exchanges that are undertaken by corporations and their shareholders for bona fide business reasons and that effect only a readjustment of a shareholder’s continuing interest in the property under a modified corporate form.

Mere Change

One of these tax-deferred reorganizations – which may be especially useful in the context of a transaction similar to the ones described above – is described inSection 368(a)(1)(F) of the Code: “a mere change in identity, form, or place of organization of one corporation, however effected” – the “F” reorganization.

Although the statutory definition of an F reorganization is short, questions have arisen regarding its application in various contexts. In particular, when a corporation undertakes an F reorganization, what other transactions or changes may occur, either before or after the reorganization, without affecting its “tax-free” status? In other words, what other changes to the corporation are compatible with the F reorganization?

One Corporation

Like other types of corporate reorganizations, an F reorganization generally involves, in form, two corporations, one (a Transferor Corporation) that transfers (or is deemed to transfer) assets to the other (a Resulting Corporation). However, the Code describes an F reorganization as being undertaken with respect to “one corporation.” What gives?

Indeed, an F reorganization is treated for most purposes of the Code as if the reorganized corporation were the same entity as the corporation in existence before the reorganization. Thus, the tax treatment accorded an F reorganization is more consistent with that of a single continuing corporation; for example, the taxable year of the Transferor Corporation does not close and includes the operations of the Resulting Corporation for the remainder (post-reorganization portion) of the taxable year.

Requirements

Based on the above principles, the Regulations generally provide that a transaction (a “Potential F Reorganization”) which involves an actual or deemed transfer of property by a Transferor Corporation to a Resulting Corporation qualifies as an F reorganization if six requirements are satisfied. Viewed together, these six requirements ensure that an F reorganization involves only one continuing corporation and is neither an acquisitive nor a divisive transaction.

1. All the stock of the Resulting Corporation must have been distributed (or deemed distributed) immediately after the reorganization in exchange for stock of the Transferor Corporation.
2. The same person or persons own all the stock of the Transferor Corporation at the beginning of the reorganization and all of the stock of the Resulting Corporation at the end of the reorganization, in identical proportions.
3. The Resulting Corporation cannot hold any property or have any tax attributes immediately before the reorganization.
4. The Transferor Corporation must completely liquidate in the reorganization for federal income tax purposes, though it is not required to legally dissolve (as a matter of state law).
5. Immediately after the reorganization, only the Resulting Corporation may hold the property that was held by the Transferor Corporation immediately before the Potential F Reorganization.
6. Immediately after the reorganization, the Resulting Corporation may not hold property acquired from any corporation other than the Transferor Corporation; thus, a transaction that involves simultaneous acquisitions of property from multiple transferor corporations will not qualify.

Related Transactions

Significantly for our purposes, an F reorganization may be undertaken as a preliminary step before the implementation of another transaction that effects more than a “mere change.” In some cases, an F reorganization may set the stage for a later transaction by alleviating certain nontax impediments to a transfer.

Although an F reorganization may facilitate another transaction that is part of the same plan, the IRS has concluded that step transaction principles generally should not be applied to re-characterize F reorganizations because such reorganizations, by definition, involve only one corporation.

Thus, the Regulations provide that related events which follow the Potential F Reorganization generally will not cause the reorganization to fail to qualify as an F reorganization.

The Regulations also provide that the qualification of a Potential F Reorganization as an F reorganization would not alter the treatment of other related transactions.

Finally, the Regulations provide that, if a shareholder receives money or other property (including in exchange for its shares) from the Transferor Corporation or the Resulting Corporation in a transaction that constitutes an F reorganization, the money or other property will be treated as having been distributed by the Transferor Corporation in a transaction separate from the F reorganization. In substance, such a distribution – for example, a redemption of shares – is functionally separate from the “mere change” transaction and should not be treated the same as an exchange of money or other property for stock of a target corporation in an acquisitive reorganization.

S Corporation Target

One of the methods most commonly used to effect an F reorganization of an S corporation is based upon the deemed consequences of the election by an S corporation to treat a wholly owned subsidiary corporation as a qualified subchapter S subsidiary (“QSub”).

Specifically, if an S corporation makes a valid QSub election with respect to such a subsidiary, the subsidiary is deemed to have liquidated into the S corporation for tax purposes. Consequently, the corporation that is a QSub is not treated as a separate corporation, and all the assets, liabilities, and items of income, deduction, and credit of the QSub are treated as belonging to its parent S corporation.

F Reorganization Mechanics

In the case of an S corporation that is the intended target of a PEF, the equity of the corporation may be acquired by the PEF, a cost basis for the target’s assets may be achieved, and the target shareholders may enjoy a tax-deferred rollover of a portion of their equity, as follows:

1. The shareholders of the target S corporation organize a new corporation (“Newco”)
2. These shareholders contribute all the shares of target stock to Newco (Newco has no other assets)
3. In exchange for this contribution, each of the former target shareholders receives shares of the single class of Newco stock with a value equal to the that of the target shares surrendered
4. The target corporation becomes a wholly own subsidiary of Newco
5. The former shareholders of the target S corporation become all the shareholders of Newco (there is no change in ownership)
6. Newco elects to be treated as an S corporation
7. Newco elects to treat the target as a QSub effective the date the target stock was contributed to Newco
8. The target corporation continues to exist as a matter of state law, but it is deemed to liquidate into Newco for tax purposes (Newco does not receive property from any other corporation), thereby becoming a disregarded entity
9. For tax purposes, Newco is deemed to hold all the assets formerly owned by the target corporation
10. With the QSub election, the F reorganization is essentially completed, with Newco being treated as the continuation of the target corporation
11. That said, Newco will often cause the target corporation (all the stock of which it owns as a matter of state law) to merge (in accordance with state law) with and into a newly formed LLC that is wholly owned by Newco, with the LLC surviving
12. Because both the target and the LLC are disregarded for tax purposes, the merger is a non-event for tax purposes, but causes the transfer of all the target corporation’s assets to the LLC as a matter of state law
13. Newco owns 100 percent of an LLC that is disregarded for tax purposes but that owns all the assets, etc., that were previously owned by the target corporation.

Acquisition Mechanics

At this point, Newco may sell a portion (say X%) of its membership interest in the LLC to the PEF (or to the PEF’s acquisition subsidiary).

The PEF (or its subsidiary) is treated as having purchased an X% interest in each of the LLC’s assets (which are treated as owned by Newco for tax purposes). As a result, it takes a costs basis in these assets.

Newco will recognize the gain from this deemed sale of assets and, because it is an S corporation, the gain will flow through to Newco’s shareholders to be included in their gross income.

Newco may also contribute (roll over) its remaining interest in the LLC (say, Y%) to the PEF – which we will assume is treated as a tax partnership – in exchange for a partnership/membership interest in the PEF. Thus, the PEF will own 100 percent of the LLC, which will be treated as a disregarded entity for tax purposes.

The equity interest in the PEF that Newco receives in exchange for the Y% interest in the LLC is received on a tax-deferred basis.

Still Awake?

Phew! That was taxing, wasn’t it?

But not as taxing as it would have been if the sale of S corporation stock to the PEF had been undertaken without the pre-transaction F reorganization.

The F reorganization may not be as sexy as its sibling reorganizations (A through G), but it can be a very useful tool for preparing a target S corporation for sale. The foregoing reviewed the basic requirements for an F reorganization and provided a simple illustration. In practice, however, there will often be many more wrinkles that a lay person, such as a business owner, may not appreciate. Thus, it would behoove the business owner to consult their tax adviser before undertaking any pre-sale changes to the form of their business.

If I said “years,” you’d think this person a bit touched in the head.

Forget Bill Murray’s character in the “Groundhog Day” movie.

Mostly Snickers with peanuts and Snickers with Almonds. I’m not myself when I’m hungry.

Believe it or not, one is still in the negotiation phase. In another, the LOI is close to being finalized. In a couple of others, due diligence has begun in earnest and there have been promises about delivering drafts of agreements of agreements in the near future (one can only hope). Most of the remaining deals have either seen comments exchanged on first drafts of purchase and sale agreements or have moved beyond that initial step to consider employment and other related agreements. One is almost ready to close.

Of course, they can’t drop the ball on the other dozen or so active matters on their dance card. Aside from waiting for lunchtime, so they can order the large Double Bacon Quarter Pounder with Cheese Meal from the McDonald’s down the street, the highlight of their weekend is reading about the legislative developments in Washington, then sharing their assessment thereof with colleagues and with the folks on whose deals they have been working.

https://www.rivkinradler.com/publications/disposing-of-assets-under-the-ways-and-means-committees-proposals/.

Interestingly, the number of taxpayers who are seeking to use their remaining exemption amount by the end of the year has not dropped off notwithstanding the House Rules Committee’s having omitted from its bill the proposal by the House Ways and Means Committee to restore the basic exclusion amount to its pre-2018 level – a 50 percent reduction. Why is that? Clients are telling me they don’t trust Congress not to slip it into the final bill. Many are saying the same about the Ways and Means proposal to increase the capital gains rate from 20 to 25 percent.

How did we get here?

Whatever. At this point, Congress is awaiting the Congressional Budget Office cost analysis of the Build Back Better Plan, which is expected the week of November 15 (when Congress reconvenes). If the report is consistent with the Administration’s claims, there should be a House vote, and then a Senate vote, before Thanksgiving. I hope we have something to be grateful for.

The Rules Committee bill refers to it as a “surcharge.”

“A rose by any other name.” It didn’t end well for Romeo or Juliet. Foolish kids.

Speaking of foolish, the increase in the capital gain and ordinary income tax rates for individuals was removed from consideration because Senator Sinema told someone (the President?) she opposed increasing the marginal tax rates on individuals.

Apparently, the Senator believes a “surcharge” is not the same as a tax.

The thresholds are $5 million and $12.5 million for an individual filing as single.

IRC Sec. 1411.

A surtax is a tax the revenue from which is dedicated to a specified government program. The revenue from the surtax on net investment income is dedicated to the Medicare program.

I guess Senator Sinema is making a distinction between an increase in the numerical rate itself and the expansion of the base to which it is applied. Splitting hairs or not appreciating the difference? My vote is the latter.

$400,000 in the case of an individual taxpayer filing as single.

Under current law, the surtax does not apply to an individual who materially participates in the S corporation’s or partnership’s business.

Their only purpose is to raise revenue to fund programs for which one Party claims to have a “mandate” – like paying millions of dollars to certain individuals who sought to enter the country illegally.

Are the legislators aware of how businesses are valued, or how deals are priced? Does it matter that the former owner is not likely to ever realize such gain or income again from the investment of the after-tax net sale proceeds?

EBITDA – or earnings before interest, taxes, depreciation, and amortization – is a “formula” that tries to measure the actual operating profit, or financial performance, of a business by eliminating the above “accounting costs” plus the cost of debt. (You may have noticed that most transactions are “debt-free,” meaning that the seller is required to pay off any debt before or at the time of sale – the buyer is not assuming such debt.)

A multiple of EBITDA is often applied to determine the enterprise value of a business. In general, the riskier the business or the lower its profit margin, the lower the multiple. However, even a lower multiple may be enough to push the enterprise value – the sale price – over the threshold and within the reach of the tax, I mean surcharge.

Is that the proper result as a matter of policy?

The check the box rules under Reg. Sec. 301.7701-3.

In general, PEFs are not engaged in any “conventional” business. Rather, they are well-funded investment vehicles that are engaged in the acquisition of conventional businesses (“portfolio companies”). A typical PEF’s strategic plan is to grow its portfolio of companies and then to sell this portfolio to another buyer at a price that will generate a significant return for the PEF’s investors.

I’m not an economist but, based upon my simplistic analysis, I find this disturbing. The PEF strategy calls for consolidating businesses within an industry with the goal of increasing their aggregate value before selling the consolidated business and generating a hefty profit for its investors. Where does the buy/sell strategy end? Is someone left holding the bag, as it were? Is the end product of the strategy good for consumers and employees?

In a couple of cases, the buyer wants to preserve the target’s EIN. In others, the parties (having started the process relatively late in the year) want to ensure a timely closing and, so, want to avoid the often more cumbersome process of an asset deal. There is also the question of the rollover.

Meaning that, on or prior to the closing date, the target corporation must have distributed its cash to its shareholders and satisfied its indebtedness. This ensures that the amount paid by the buyer reflects the enterprise value of the target business.

A sale of stock may also be accomplished via a reverse merger. This may be a useful tool when dealing with a recalcitrant target shareholder.

From the perspective of the PEF, such a roll-over yields several benefits. For one thing, it aligns the former owners of the target business with the interests of the PEF – their rolled-over investment is at risk similar to that of the PEF’s investors. Thus, the former owners are incentivized (the theory goes) to remain with the business, to cooperate fully in the transition of the business and its customers, and to work toward its continued growth and success. The roll-over also saves the PEF some money: issuing equity is less expensive than paying out funds that the PEF already has or that it has to borrow.

For our purposes, we will assume that entity is treated as a partnership for tax purposes; for example, an LLC with at least two members that has not elected under Reg. Sec. 301.7701-3 to be treated as an association for tax purposes.

In general, a contribution to a partnership in exchange for a partnership interest is not taxable to the contributing partner. IRC Sec. 721. There are exceptions; see, for example, IRC Sec. 707 and Sec. 752.

However, a contribution of property to a corporation in exchange for shares of stock therein will be treated as a taxable disposition of the property unless the contributor is treated as part of a so-called “control group” – a group of persons that, acting “in concert,” contributed assets to the corporation in exchange for shares of its stock and, immediately following such contribution, was in “control” of the corporation.

The target’s owners, on the other hand, will generally not prefer an asset sale because such a sale may result in both the recognition of ordinary income by the target’s owners as well as an entity-level tax, thus reducing the net economic benefit to the owners. Rather, they would choose to sell their equity interest in the target, at least in the case of a corporate target. The gain realized on such a sale will generally be treated as long-term capital gain. However, such a sale will not generate a depreciable or amortizable basis for the PEF.

If tax deferral for the rollover is not imperative for the shareholders – for example, they have capital losses to offset much of the gain – the target S corporation may sell its assets to the PEF, and the gain realized on the sale of its assets would flow through and be taxable to its shareholders. Depending upon the nature of the assets sold, the gain may be taxed as ordinary income or as capital gain. The S corporation may then distribute the net proceeds from the sale of its assets to its shareholders, who may then invest a portion of their after-tax proceeds in the PEF, which they would take with a cost basis and a new holding period.

From the perspective of a PEF, the acquisition of 80 percent of the target’s stock may be an expensive proposition. Indeed, two of our transactions require a rollover of 25 percent and 30 percent of the target’s equity, with the PEF purchasing the balance.

IRC Sec. 336(e) and Sec. 338(h)(10). It is often, if not usually, the case that the purchaser will gross up the purchase price to compensate the selling shareholders for tax on any ordinary income that may be realized on the deemed sale of assets; for example, from depreciation recapture under IRC Sec. 1245.

If the S corporation is subject to the built-in gains tax of IRC Sec. 1374, a corporate level tax will also be imposed upon the corporation as a result of the deemed sale of assets.

IRC Sec. 1366.

Because an F reorganization must involve “one corporation,” it cannot accommodate transactions in which the Resulting Corporation has pre-existing activities or tax attributes.

Similarly, the requirement that there be “one corporation” means that the status of the Resulting Corporation as the successor to the Transferor Corporation must be unambiguous.

Reg. Sec. 1.368-2(m).

Deemed asset transfers include, but are not limited to, the deemed asset transfer by the Transferor Corporation to the Resulting Corporation resulting from a so-called “liquidation- reincorporation” transaction; and the deemed transfer of the Transferor Corporation’s assets to the Resulting Corporation in a so-called “drop-and-check” transaction in which a newly formed Resulting Corporation acquires the stock of a Transferor Corporation from its shareholders and, as part of the plan, the Transferor Corporation liquidates into the Resulting Corporation. The latter is especially useful in the case of an S corporation target.

Thus, the Regulations provide that a transaction which involves the introduction of a new shareholder or new equity capital into the corporation does not qualify as an F reorganization.

That said, the corporation may recapitalize, redeem its stock, or make distributions to its shareholders, without causing the Potential F Reorganization to fail to qualify as an F reorganization.

These exceptions reflect the determination of the IRS that allowing certain transactions to occur contemporaneously with an F reorganization is appropriate so long as one corporation could otherwise effect the transaction without undergoing an F reorganization.

However, the Resulting Corporation may hold a de minimis amount of assets to facilitate its organization or to preserve its existence (and to have tax attributes related to these assets), and the Resulting Corporation may hold proceeds of borrowings undertaken in connection with the Potential F Reorganization.

Thus, the Regulations provide that only one Transferor Corporation can transfer property to the Resulting Corporation in the Potential F Reorganization.

For example, Corp. assume A sells its assets; alternatively, assume Corp. A “converts” into a disregarded entity owned 100% by Corp. B in a transaction that meets the requirements for an F reorganization; Corp. B then sells its interest in Corp. A in a transaction which, for tax purposes, is treated as a sale of Corp. B’s assets. Why should these be treated differently from one another if Corp. A and Corp. B are the “same” entity for tax purposes?

For example, if an F reorganization is part of a plan that includes a subsequent merger involving the Resulting Corporation, the qualification of a Potential F Reorganization as an F reorganization will not alter the tax consequences of the subsequent merger.

IRC Sec. 1361(b)(3).

Reg. Sec. 1.1361-4.

IRC Sec. 1362.

This prevents the target from ever being treated as a C corporation – after all, a corporation is not eligible to hold shares of stock in an S corporation. IRC Sec. 1361(b).

At this point, if there were assets or a line of business that Newco did not want to sell to PEF, it could cause the QSub to distribute these assets to Newco without income tax consequences because Newco is already treated as owning them for tax purposes. The subsequent sale by Newco of the QSub stock or the LLC membership interests (see below) would not convey the assets being retained.

An important item to note: although Newco is treated as the continuation of the target corporation for tax purposes, it must obtain its own EIN. Rev. Rul. 2008-18. The target corporation retains its EIN. Reg. Sec. 301.6109-1(i).

The LLC takes target’s EIN. Reg. Sec. 301.6109-1(h).

Rev. Rul. 99-5, Situation 1.

This gain may include some ordinary income (recapture, inventory, etc.) for which a gross-up may have been negotiated to achieve the same after-tax proceeds had all the gain been treated as long-term capital gain.

If the contribution precedes the sale so that Newco is treated as selling a partnership interest, IRC Sec. 751 would cause part of the gain (which would otherwise be capital gain under IRC Sec. 741) to be treated as ordinary (“hot assets”). According to Rev. Rul. 99-6 (Situation 1), the PEF would be treated as purchasing assets directly from Newco.

Newco should examine the PEF’s partnership or operating agreement before agreeing to be bound by it; that said, it is likely Newco will have little chance of changing any provisions.

If Newco had not merged the QSub into the LLC, Newco’s sale and contribution of the QSub shares to PEF would have converted the QSub into a taxable C corporation.

IRC Sec. 721.