PLR 200138015: Revised ESOP stock formula leaves earlier distribution rulings in place

Plain-English summary

A company requested a supplement to earlier rulings about distributions of controlled corporation stock. It proposed to change the formula for how much stock an employee stock ownership plan (ESOP) would acquire after one distribution. Under the revised step, the controlled company would issue enough stock to reach a stated ownership level if the ESOP had not acquired that level within five years. Based on the submitted information and representations, the IRS reaffirmed the earlier rulings and caveats. This letter does not restate the earlier rulings' full tax analysis.

Ruling snapshot

• Question: Would changing the ESOP stock acquisition formula disturb the earlier distribution rulings?
• Outcome: Approved: the IRS reaffirmed the prior rulings and caveats.
• Key authorities: IRC §§ 355, 401(a), 4975(e)(7).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200138015
Washington, DC 20224
Release Date: 9/21/2001
Index Number: 0355.00-00
Person to Contact:

Telephone Number:

Refer Reply To:
CC:CORP:B4/PLR-127364-01
Date:
June 25, 2001

h
=

This responds to your May 14, 2001 request that we supplement our letter ruling dated June 16, 1997 (PLR-253457-96) (the "Prior Letter Ruling"). An earlier supplemental letter ruling (PLR-116822-97) was issued on December 27, 1997. Capitalized terms not defined in this ruling have the meanings originally assigned them in the Prior Letter Ruling.

The Prior Letter Ruling addresses certain federal income tax consequences of certain distributions of stock of controlled corporations (the "Distributions") and related transactions. The Distributions were undertaken in part to establish an Employee Stock Ownership Plan for the employees of Controlled I (the “Controlled I ESOP”). The Prior Letter Ruling contains a representation provided by Distributing regarding the amount of Controlled I common stock that would be issued to the Controlled I ESOP.

Due to circumstances not anticipated at the time of the Distributions, it has been determined that the formula for determining the amount of Controlled I common stock to be issued to the Controlled I ESOP should be modified. Consequently, transaction step (xx) of the Prior Letter Ruling will be changed to read as follows:

(xx) As soon as possible after the Controlled I Distribution, Controlled I will establish, solely for its Business I employees, an ESOP that satisfies the requirements of §§ 401(a) and 4975(e)(7) (the "Controlled I ESOP"). If within five years of the transaction, the Controlled I ESOP has not acquired shares representing at least h percent of the total number of shares of Controlled I common stock outstanding immediately after the Controlled I Distribution, Controlled I will issue to the Controlled I ESOP, in exchange for a debt obligation, sufficient Controlled I common stock to increase the amount of Controlled I common stock acquired by the Controlled I ESOP to that level.

Based on the information and representations submitted with the original and supplemental requests, we reaffirm the rulings and caveats set forth in the Prior Letter Ruling.

This supplement is directed only to the taxpayer who requested it. Section 2

6110(k)(3) provides that it may not be used or cited as precedent.

Each taxpayer involved in the transaction should attach a copy of this supplemental letter to the taxpayer’s federal income tax return, as appropriate, for the taxable year in which the transaction is consummated. Pursuant to a power of attorney on file in this office, a copy of this letter is being sent to the taxpayer.

Sincerely,

Associate Chief Counsel (Corporate)
By: Wayne T. Murray
Senior Technician/Reviewer
Branch 4