PLR 200030016: Foreign merger qualifies as a C reorganization on stated facts

Plain-English summary

Two corporations in the same foreign country merged, with the target's shareholders receiving voting stock of the acquirer. On the submitted facts and detailed representations, the IRS ruled that the transaction was a C reorganization under section 368(a)(1)(C). It treated the target as transferring substantially all assets for voting stock and liability assumption, then distributing the stock in liquidation. The letter also ruled on nonrecognition for the corporations and target shareholders, carryover basis and holding periods, and succession to specified tax attributes. The IRS gave no opinion on whether either company was a passive foreign investment company or whether those rules could require gain recognition despite the other rulings.

Ruling snapshot

• Question: Did the foreign merger qualify as a C reorganization, and what federal tax consequences followed for the companies and shareholders?
• Outcome: Approved on the stated facts, subject to the express passive foreign investment company caveat.
• Key authorities: IRC §§ 354, 357, 358, 361, 362, 368(a)(1)(C), 381, 1032, 1223, and 1291(f); Notice 2000-1.

Full text (IRS public release)

Internal Revenue Service      Department of the Treasury

Index Number: 368.03-00       Washington, DC 20224

Number: 200030016             Person to Contact:
Release Date: 7/28/2000       Telephone Number:

Refer Reply To:
CC:DOM:CORP:5 - PLR-102748-00
Date:
April 28, 2000

In Re:

Acquiring                 =

Target                    =

Shareholder A             =

Shareholder B             =

Shareholder C             =

Business A                =

Business B                =

Country A                 =

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Date A                     =

Date B                     =

Date C                     =

Date D                     =

a                          =

b                          =

c                          =

d                          =

e                          =

Dear              :

This is in reply to your letter dated January 21, 2000 requesting that we rule on
certain federal income tax consequences of a transaction. The information submitted in
that request and in subsequent correspondence is substantially as set forth below.

Target, a Country A corporation, was engaged in Business A. Target had
issued and outstanding a single class of voting common stock. As of Date A, Acquiring,
a Country A corporation engaged in Business B, owned approximately a percent of
Target’s outstanding shares. Shareholder A, a U.S. corporation, owned approximately
b percent of Target’s outstanding shares. Shareholder B, a U.S. corporation, owned c
percent of Target’s outstanding shares. Shareholder C, a Country A corporation,
owned approximately d percent of Target’s outstanding shares. The employees of
Target and Acquiring owned approximately e percent of Target’s outstanding shares.
Target’s remaining shares were widely dispersed among hundreds of shareholders.
Shareholder A and Shareholder B were both customers of Target.

For what is represented to be a valid business purpose, Target merged into
Acquiring under the laws of Country A on Date B. In the merger, all of Target’s
shareholders were required to exchange their shares in Target solely in exchange for
voting common stock in Acquiring. Following the exchange of shares, Target dissolved,
and Acquiring succeeded to, and became the legal owner of, all of the assets of Target.
Target’s board of directors approved the merger on Date C and Target’s shareholders
approved the merger on Date D.

The following representations have been made in connection with the

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transaction:

(a)      The fair market value of the Acquiring voting stock received by each
Target shareholder was approximately equal to the fair market value of
the Target common stock surrendered in the exchange.

(b)      Acquiring received all of the assets of Target and, thus, acquired at least
90 percent of the fair market value of the net assets and at least 70
percent of the fair market value of the gross assets held by Target
immediately prior to the transaction. For purposes of this representation,
amounts paid by Target to dissenters, amounts used by Target to pay its
reorganization expenses, amounts paid by Target to shareholders who
receive cash or other property, and all redemptions and distributions
(except for regular, normal dividends) made by Target immediately
preceding the transfer are included as assets of Target held immediately
prior to the transaction.

(c)      During the 5-year period beginning on the date of the transaction, there is
no plan or intention for Acquiring, or any person related (as defined in
§ 1.368-1(e)(3)) to Acquiring, to acquire, with consideration other than
Acquiring voting stock, Acquiring voting stock furnished in exchange for a
proprietary interest in Target in the transaction, either directly or through
any transaction, agreement, or arrangement with any other person, except
for cash in lieu of fractional shares paid in the transaction.

(d)      During the 5-year period ending on the date of the transaction, (i) neither
Acquiring, nor any person related (as defined in § 1.368-1(e)(3)) to
Acquiring, will have acquired Target stock with consideration other than
Acquiring voting stock (excluding exchanges by Acquiring of Target stock
for a direct interest in the Target enterprise); (ii) neither Target, nor any
person related (as defined in § 1.368-1(e)(3) determined without regard to
§ 1.368-1(e)(3)(i)(A)) to Target, will have acquired Target stock with
consideration other than Acquiring voting stock or Target stock; and (iii) no
distributions will have been made with respect to Target stock (other than
ordinary, normal, regular, dividend distributions made pursuant to Target’s
historic dividend paying practice), either directly or through any
transaction, agreement, or arrangement with any other person except for
(i) certain acquisitions by Acquiring of Target stock in connection with
capital calls and pro rata stock dividends, and (ii) acquisitions by
Shareholder C.

(e)      The aggregate value of the acquisitions, redemptions, and distributions
described in paragraphs (c) and (d) does not exceed 50 percent of the
value (without giving effect to the acquisitions, redemptions, and

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distributions) of the proprietary interests in Target on Date C.

(f)   Shareholder A, Shareholder B, Target, Acquiring, and to the best of the
knowledge and belief of the taxpayer, any other shareholder that is a U.S.
citizen or resident, will treat the acquisition of Target by Acquiring as a tax-
free reorganization under § 368(a)(1)(C) of the Internal Revenue Code.

(g)   To the best of taxpayer’s knowledge, it is unlikely that any shareholder of
Target paid an amount for its stock in Target that exceeded the fair
market value of the Acquiring voting stock that such shareholder received
in the transaction.

(h)   Acquiring has no plan or intention to sell or otherwise dispose of any of
the assets of Target acquired in the transaction, except for dispositions
made in the ordinary course of business.

(i)   Target did not distribute any property as part of or as a result of the
transaction except in the ordinary course of business. Pursuant to the
plan of reorganization, the assets of Target became the assets of
Acquiring. In addition, under the plan of reorganization, Target did not
receive any shares of Acquiring; rather each of Target’s shareholders
received its proportionate number of Acquiring voting shares under the
applicable merger procedures.

(j)   The liabilities of Target assumed by Acquiring and the liabilities to which
the transferred assets were subject were incurred by Target in the
ordinary course of its business.

(k)   Following the transaction, Acquiring will continue the historic business of
Target.

(l)   Acquiring, Target, and the shareholders of Target paid their respective
expenses, if any, incurred in connection with the transaction.

(m)   There was no intercorporate indebtedness existing between Acquiring and
Target that was issued, acquired, or settled at a discount.

(n)   Neither Target nor Acquiring was an investment company as defined in
§ 368(a)(2)(F)(iii) and (iv)

(o)   The fair market value of the assets of Target transferred to Acquiring
equaled or exceeded the sum of the liabilities assumed by Acquiring, plus
the amount of liabilities, if any, to which the transferred assets were
subject.

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(p)    Target was not under the jurisdiction of a court in a Title 11 or similar case
within the meaning of § 368(a)(3)(A).

(q)    The payment of cash in lieu of fractional share interests of Acquiring
voting stock was solely to avoid the expense and inconvenience to
Acquiring of issuing fractional share interests, and did not represent
separately bargained for consideration. The total cash consideration that
was paid in the transaction to Target shareholders instead of issuing
fractional shares of Acquiring voting stock did not exceed 1 percent of the
total consideration that was issued in the transaction to Target
shareholders in exchange for their shares of Target stock. The fractional
share interests of each Target shareholder were aggregated, and no
Target shareholder received cash in an amount equal to or greater than
the value of one full share of Acquiring voting stock.

(r)    Acquiring has not transferred and has no plan or intention of transferring
any of the assets received from Target in the merger to any of its
subsidiaries pursuant to § 368(a)(2)(C).

(s)    Target was not a controlled foreign corporation, within the meaning of
§ 957(a), at the time of Target’s merger with and into Acquiring or at any
time during the 5 year period immediately preceding the merger.

(t)    As part of the merger of Target with and into Acquiring, Target did not
transfer to Acquiring any United States Real Property Interests as such
term is defined in § 897(c).

(u)    Target never has been engaged in a U. S. trade or business within the
meaning of § 882.

Based solely on the information submitted and on the representations set forth
above, and on Notice 2000-1, 2000-2 I.R.B. 288 (Jan. 10, 2000), it is held as follows:

(1)    For federal income tax purposes, the transaction described above is
treated as the transfer by Target of substantially all of its assets to
Acquiring solely in exchange for Acquiring voting stock and the
assumption of the liabilities of Target, followed by the distribution by
Target of the Acquiring voting stock to its shareholders in complete
liquidation.

(2)    The acquisition by Acquiring of substantially all of the assets of Target in
exchange for Acquiring voting stock and the assumption by Acquiring of
the liabilities of Target followed by Target's distribution of the Acquiring

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voting common stock in liquidation constitutes a "reorganization" within
the meaning of § 368(a)(1)(C). For purposes of this ruling, "substantially
all" means at least 90 percent of the fair market value of the net assets
and at least 70 percent of the fair market value of the gross assets of
Target. Target and Acquiring are each a "party to a reorganization" within
the meaning of § 368(b).

(3)    No gain or loss was recognized by Target on the transfer of substantially
all of its assets to Acquiring solely in exchange for shares of Acquiring
voting stock and the assumption by Acquiring of the liabilities of Target or
on the deemed distribution of the Acquiring voting stock to Target’s
shareholders (§§ 357(a), 361(a), and 361(c)).

(4)    No gain or loss was recognized by Acquiring on the receipt of Target's
assets solely in exchange for shares of Acquiring voting stock
(§ 1032(a)).

(5)    The basis of the assets of Target in the hands of Acquiring is the same as
the basis of those assets in the hands of Target immediately prior to the
transaction (§ 362(b)).

(6)    The holding period for the assets of Target in the hands of Acquiring
includes the period during which those assets were held by Target
(§ 1223(2)).

(7)    No gain or loss was recognized by the shareholders of Target on the
exchange of their stock in Target for shares of Acquiring voting stock (§
354(a)(1)).

(8)    The basis of the Acquiring voting stock (including any fractional shares
interests of stock deemed received) received by shareholders of Target is
the same as the basis of the Target stock surrendered in exchange
therefor (§ 358(a)(1)).

(9)    The holding period of the Acquiring voting stock (including any fractional
share interests of stock deemed received) received by shareholders of
Target includes the holding period of the Target stock surrendered in
exchange therefor, provided the Target stock was held as a capital asset
on the date of the exchange (§ 1223(1)).

(10)   The taxable year of Target ended on the effective date of the transaction
(§ 1.381(b)-1(a) of the Income Tax Regulations), and as provided in
§ 381(a) and § 1.381(a)-(1), Acquiring succeeded to and took into account
those attributes of Target described in § 381(c), subject to the provisions

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and limitations specified in §§ 381, 382, 383, and 384, if applicable, and
the regulations thereunder.

(11)   Pursuant to § 381(c)(2) and § 1.381(c)(2)-1, Acquiring succeeded to and
took into account the earnings and profits, or deficit in earnings and
profits, of Target as of the date of transfer. Any deficit in earnings and
profits of either Target or Acquiring will be used only to offset the earnings
and profits accumulated after the date of the transfer.

No opinion is expressed 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. Specifically, no opinion is expressed
whether any or all of the above-referenced foreign corporations are passive foreign
investment companies (within the meaning of § 1297(a) of the Code and regulations to
be promulgated thereunder). If it is determined that any or all of the above-referenced
corporations are passive foreign investment companies, no opinion is expressed with
respect to the application of §§ 1291 through 1298 to the proposed transactions. In
particular, in a transaction in which gain is not otherwise recognized, regulations under
§ 1291(f) may require gain recognition notwithstanding any other provision of the Code.

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

It is important that a copy of this letter be attached to the federal income tax
returns of the taxpayers involved for the taxable year in which the transaction covered
by this ruling letter is consummated.

Pursuant to the power of attorney on file in this office, copies of this letter have
been sent to the taxpayer and the taxpayer’s representative.

Sincerely yours,

Assistant Chief Counsel (Corporate)

By:
Charles Whedbee
Senior Technical Reviewer, Branch 5