PLR 200010031: IRS addresses one issue in a two-step corporate merger

Plain-English summary

A company first acquired a target through a subsidiary merger and then proposed merging the surviving target into the parent. The IRS ruled that, if the two steps formed an integrated plan and both were statutory mergers under state law, the transaction would be treated for federal tax purposes as a direct acquisition of the target's assets for parent stock and assumption of liabilities through a statutory merger. The IRS expressly did not decide whether the steps were an integrated plan or whether the transaction actually qualified as a reorganization under section 368(a)(1)(A). The ruling therefore resolves the stated transaction form issue, subject to those conditions.

Ruling snapshot

• Question: If the two mergers were integrated statutory mergers, how would their form be treated under IRC § 368(a)(1)(A)?
• Outcome: Approved on the stated form issue only; overall reorganization qualification was left open.
• Key authorities: IRC §§ 332, 368(a)(1)(A), 368(a)(2)(E); Rev. Rul. 67-274; Rev. Rul. 72-405.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Index Number: 0368.01-00 Washington, DC 20224

Person to Contact:

Telephone Number:
Number: 200010031
Release Date: 3/10/2000
Refer Reply To:
CC:DOM:CORP:3-PLR-114034-99
Date:
December 9, 1999

Acquiring
=

Acquiring Sub =

Target
=

State A
=

Business X =

Date 1
=

Date 2
=

This letter is in reply to a letter from your authorized representative, dated August 2, 1999, requesting rulings about the federal income tax consequences of a proposed transaction. Additional information was submitted in a letter dated November 30, 1999. The information submitted is summarized below.

Acquiring is a State A corporation engaged in Business X. Acquiring is a publicly traded corporation that is the common parent of a consolidated group of corporations which includes Target. Acquiring has only common stock outstanding. Acquiring files its federal consolidated income tax returns on the calendar year using the accrual method of accounting.

Acquiring Sub was a State A corporation organized by Acquiring solely for the purpose of acquiring Target. Acquiring Sub conducted no business or operations except those necessary to facilitate the transaction. Before the Acquisition Merger, described below, Acquiring owned all of the stock of Acquiring Sub.

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PLR-114034-99

Prior to the Acquisition Merger, Target, a State A corporation, was also engaged in Business X. Target had only common stock outstanding. Target filed its federal income tax return on the calendar year using the accrual method of accounting. Target was neither the common parent of nor a member of a consolidated group.

On Date 1, the management of Acquiring and Target entered into an agreement to combine the businesses of the two companies. Both Acquiring and Target believed that to maximize the benefits of a combination of the companies, a fast and efficient integration was necessary. However, while management would have preferred to merge Target directly into Acquiring, this type of combination was not possible because Target had significant contracts which required careful review and analysis to determine which contracts could be assigned.

Therefore, on Date 2, pursuant to State A law and in accordance with a plan of reorganization, Acquiring Sub merged with and into Target (the “Acquisition Merger”). Target survived the merger and Target shareholders received shares of Acquiring stock in exchange for their Target stock. Now, Acquiring proposes to merge Target with and into Acquiring (the “Upstream Merger”).

The taxpayer has made the following representations in connection with the proposed transaction:

(1) The Acquisition Merger, viewed independently of the proposed Upstream Merger, qualified as a reorganization under § 368(a)(1)(A) by reason of § 368(a)(2)(E).

(2) The proposed Upstream Merger will qualify as a statutory merger under applicable state law and, viewed independently of the Acquisition Merger, would qualify under § 332.

(3) If the Acquisition Merger had not occurred and Target had merged directly into Acquiring, such merger would have qualified as a reorganization under § 368(a)(1)(A).

(4) Acquiring has no plan or intention to sell or otherwise dispose of any of Target’s assets received in the proposed Upstream Merger, except for dispositions in the ordinary course of business, or transfers described in § 368(a)(2)(C) or the regulations thereunder.

Pursuant to § 3.01(23) of Rev. Proc. 99-3, 1999-1 I.R.B. 103, 106, the Internal Revenue Service will not rule as to whether a proposed transaction qualifies under § 368(a)(1)(A). However, the Service has the discretion to rule on significant subissues that must be resolved to determine whether a transaction qualifies under

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§ 368(a)(1)(A).

Based solely on the information submitted and the representations made, and provided that (i) the Acquisition Merger and the Upstream Merger are treated as steps in an integrated plan pursuant to the step-transaction doctrine, and (ii) the Acquisition Merger and the Upstream Merger qualify as statutory mergers under applicable state law, we hold as follows:

For federal income tax purposes, the Acquisition Merger and the Upstream Merger will be treated as if Acquiring directly acquired the Target assets in exchange for Acquiring stock and the assumption of Target liabilities through a “statutory merger” as that term is used in § 368(a)(1)(A). See Rev. Rul. 67-274, 1967-2 C.B. 141 and Rev. Rul. 72-405, 1972-2 C.B. 217.

We express no opinion regarding whether the Acquisition Merger and the Upstream Merger are steps in an integrated plan or whether the Acquisition Merger and Upstream Merger qualify as a reorganization under § 368(a)(1)(A). Additionally, we express no opinion about the tax treatment of the proposed transaction under other provisions of the Code and regulations or about the tax treatment of any conditions existing at the time of, or effects resulting from, the proposed transaction that are not specifically covered by the above rulings.

This ruling is directed only to the taxpayers on whose behalf it was requested.
Section 6110(k)(3) provides that it may not be used or cited as precedent.

Each affected taxpayer should attach a copy of this letter to its federal income tax return for the taxable year in which the transaction covered by this ruling letter is consummated.

In accordance with the power of attorney on file this office, copies of this letter are being sent to your authorized representatives.

Sincerely yours,

Assistant Chief Counsel (Corporate)
By
Chief, Branch 3