PLR 200134014: Business split between two shareholders qualifies as reorganization

Plain-English summary

Two related shareholders disagreed about managing a corporation's businesses, and the disagreement disrupted operations. The corporation proposed transferring part of its business assets to a new corporation, then giving all the new corporation's stock to one shareholder in exchange for all his stock in the original corporation. The IRS ruled that the asset transfer and stock exchange together would qualify as a Type D reorganization under § 368(a)(1)(D). It also ruled that the corporations and the departing shareholder would recognize no gain or loss on the stated steps, with carryover basis and holding period treatment as specified in the letter. The rulings relied on representations that both corporations would continue active businesses and that the split served a business purpose.

Ruling snapshot

• Question: Would the proposed transfer and shareholder stock exchange qualify as a tax-free corporate split-off?
• Outcome: Approved as a Type D reorganization with the stated nonrecognition, basis, and holding period consequences.
• Key authorities: IRC §§ 355(a)(1), 361, 362(b), 368(a)(1)(D), 1032(a), 1223.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200134014
Washington, DC 20224
Release Date: 8/24/2001
Index Numbers: 0355.01-00
Person to Contact:
0368.04-00
Telephone Number:

Refer Reply To:
CC:CORP:B03-PLR-107773-01
Date:
May 25, 2001

Distributing
=

Controlled
=

State X
=

A
=

B
=

business a
=

business b
=

This letter replies to a request for rulings, dated January 31, 2001, on the federal income tax consequences of a proposed transaction concerning § 355 of the Internal Revenue Code. We received additional information in letters dated March 3, March 27, April 11, and May 23, 2001. The information submitted for consideration is summarized below.

Distributing is a State X company whose voting common stock is held equally by A and B, who are related. Distributing conducts business a and business b on the accrual method of accounting and uses a calendar tax year.

We have received financial information indicating that each of Distributing's business a and business b had gross receipts and operating expenses representative -2-
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of the active conduct of a trade or business for each of the past five years.

The taxpayer wishes to separate its business a activities into two corporations because A and B disagree on how business a and business b should be conducted. This disagreement is having an adverse effect on the day-to-day operations of Distributing. In order to eliminate the problems generated by this situation, the following transaction has been proposed:

(i) Distributing will organize Controlled as a State X accrual basis corporation with only voting stock outstanding. Distributing will transfer assets to be used in business a (the “Controlled assets") to Controlled in exchange for all of the Controlled stock.

(ii) Distributing will distribute all of the Controlled stock to B in exchange for all of his Distributing stock.

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

(a) The fair market value of the Controlled stock and other consideration to be received by B approximately equals the fair market value of the Distributing stock surrendered by B in the exchange.

(b) No part of the consideration to be distributed by Distributing will be received by a shareholder as a creditor, employee, or in any capacity other than that of a shareholder of the corporation.

(c) The five years of financial information submitted on behalf of Distributing is representative of the corporation's present operations, and there have been no substantial operational changes since the date of the last financial statements submitted.

(d) Following the transaction, Distributing and Controlled will each continue independently and with its own separate employees, the active conduct of its share of all of the integrated activities of business a. Distributing will also continue the active conduct of business b independently and with its own separate employees.

(e) The distribution of the stock of Controlled is being carried out for the following corporate business purpose: avoiding significant disagreements between the shareholders of Distributing concerning management of business a and business b. The distribution of the stock of Controlled is motivated in whole, or substantial part, by this corporate business purpose.
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(f) There is no plan or intention by the shareholders of Distributing to sell, exchange, transfer by gift, or otherwise dispose of any of their stock in either Distributing or Controlled subsequent to the proposed transaction.

(g) There is no plan or intention by either Distributing or Controlled, directly or through any subsidiary corporation, to purchase any of its outstanding stock after the transaction other than through stock purchases meeting the requirements of § 4.05(1)(b) of Rev. Proc. 96-30.

(h) There is no plan or intention to liquidate Distributing or Controlled, to merge either corporation with any other corporation, or to sell or otherwise dispose of the assets of either corporation subsequent to the transaction, except in the ordinary course of business.

(i) Controlled is not assuming any liabilities or receiving any assets subject to liabilities.

(j) No Investment tax credit has been claimed (or will be claimed) on the property to be transferred to Controlled.

(k) No intercorporate debt will exist between Distributing and Controlled at the time of, or subsequent to, the distribution of Controlled stock.

(l) Payments made in connection with all continuing transactions, if any, between Distributing and Controlled will be for fair market value based on terms and conditions arrived at by the parties bargaining at arm's-length.

(m) No two parties to the transaction are investment companies as defined in § 368(a)(2)(F)(iii) and (iv).

(n) Distributing is not an S corporation (within the meaning of § 1361(a)) and there is no plan or intention by Distributing or Controlled to make an S corporation election pursuant to §1362(a).

(o) The Distribution is not part of a plan or series of related transactions (within the meaning of § 355(e)) pursuant to which one or more persons will acquire directly or indirectly stock possessing 50 percent or more of the total combined voting power of all classes of stock entitled to vote, or stock possessing 50 percent or more of the total value of all classes of stock of Distributing or Controlled.

Based solely on the information submitted and the representations set forth above, we hold as follows:
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(1) The transfer by Distributing to Controlled of the Controlled assets solely in exchange for all of the stock of Controlled, as described above, followed by the distribution of all of the Controlled stock to B in exchange for all of his Distributing stock will be a reorganization within the meaning of § 368(a)(1)(D). Distributing and Controlled will each be "a party to a reorganization" within the meaning of § 368(b).

(2) Distributing will recognize no gain or loss upon the transfer of assets to Controlled in exchange for Controlled stock, as described above (§ 361(a)).

(3) Controlled will recognize no gain or loss on the receipt of Controlled assets in exchange for Controlled stock (§ 1032(a)).

(4) The basis of each asset received by Controlled will be the same as the basis of that asset in the hands of Distributing immediately prior to the transaction (§ 362(b)).

(5) The holding period of the Controlled assets will include the period during which these assets were held by Distributing (§ 1223(2)).

(6) B will not recognize gain or loss (and no amount will be included in the income of B) upon the receipt of the Controlled stock in exchange for all of his Distributing stock, as described above (§ 355(a)(1)).

(7) Distributing will recognize no gain or loss upon the distribution of all of its Controlled stock (§ 361(c)).

(8) B ’s basis in his Controlled stock will equal the aggregate basis of his Distributing stock surrendered in the exchange (§ 358(a)(1)).

(9) The holding period of the Controlled stock received by B will include the holding period of the Distributing stock surrendered in the exchange, provided that the Distributing stock is held as a capital asset on the date of the exchange (§ 1223(1)).

(10) As provided in § 312(h), proper allocation of earnings and profits between Distributing and Controlled will be made under § 1.312-10(a) of the Income Tax Regulations.

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

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

We have sent a copy of this letter to Distributing pursuant to the power of attorney on file in this office.

Sincerely yours,
Assistant Chief Counsel (Corporate)
By
Senior Technician Reviewer, Branch 3