PLR 200453003: Related corporate spin offs qualify for specified tax deferral rulings

Plain-English summary

A publicly traded parent proposed to separate several businesses through contributions to two new corporations and three successive stock distributions, ending with a distribution of one new corporation's stock to its public shareholders. The IRS ruled that the specified contributions and distributions would qualify as reorganizations under section 368(a)(1)(D), and that the stated transfers and stock distributions generally would not trigger gain or loss for the corporations or recipients under the cited provisions. It also addressed carryover basis and holding periods, earnings and profits allocations, and gain or loss when shareholders receive cash for fractional shares. One foreign subsidiary's purchase of a business would not prevent the new corporation from meeting the five year active business requirement. The IRS expressly declined to decide whether the distributions met the business purpose, anti-device, or section 355(e) plan requirements, among other reserved issues.

Ruling snapshot

• Question: Would the proposed contributions and stock distributions receive the specified tax treatment as corporate separations?
• Outcome: Approved for the listed rulings, subject to the stated representations and express caveats.
• Key authorities: IRC §§ 355, 368(a)(1)(D), 361, 357, 1032, 362, 1223, 358, 312; Treas. Reg. §§ 1.355-3(b)(4)(iii), 1.312-10(a).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200453003
Third Party Communication: None
Release Date: 12/31/2004
Date of Communication: Not Applicable
Index Number: 355.00-00, 368.04-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
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CC:CORP:B06
PLR-116661-04
Date:
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September 15, 2004
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Distributing 3 = -----
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Distributing 2 = -------------------------------------------------------------
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Distributing 1 = -------------------------------------------------------------
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Sub 1 = -----------------------------------------
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Sub 2 = -------------------------------------------------------------
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Sub 3 = ---------------------------------------------
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FSub 1 = . -----------------------------------------------------------
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FSub 2 = --------------------------------------
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FSub 3 = --------------------------
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FSub 4 = --------------------------------------------------------
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Controlled 1 = -------------------------------------

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Controlled 2 = -------------------------------------------------------------
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Business A = -------------------------------------------------------------
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Business B = -------------------------------------------------------------
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Business C = -------------------------------------------------------------
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Business D = -------------------------------------------------------------
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Business E = -------------------------------------------------------------
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Business F = -------------------------------------------------------------
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Business G = -------------------------------------------------------------
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Business H = -------------------------------------------------------------
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Business I = -------------------------------------------------------------
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Business J = -------------------------------------------------------------
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PLR-116661-04
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Business K = -------------------------------------------------------------
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Asset BB = --------------------------

Continuing Contract A1 = ------------------------

$X = ---------------------------------------------

$Y = -------------------------------------------

$Z = ---------------------------------------------

Country X = -----------

Date 1 = -------

Date 2 = ----------------

Month AA = -----------

Month BB = ------

Month CC = -----
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Month DD = -----------

#AAA = ----

#BBB = ----

#CCC = ----------

#DDD = --
PLR-116661-04
5

Dear -----------------

We respond to your representative’s letter dated March 19, 2004, in which rulings were requested as to the federal income tax consequences of a proposed transaction. Additional information was submitted in the First Supplemental letter dated June 18, 2004, the Second and Third Supplemental letters dated August 10, 2004, the Fourth Supplemental letter dated August 18, 2004, the Fifth Supplemental Letter dated August 23, 2004, the Sixth Supplemental Letter dated August 31, 2004, the Seventh Supplemental Letter dated September 7, 2004 and the Eight Supplemental Letter dated September 15, 2004.

The rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party. This Office has not verified any of the materials submitted in support of the request for rulings. Verification of the information, representations, and other data may be required as part of the audit process. Moreover, no information provided by the taxpayer has been reviewed and no determination has been made regarding whether the proposed transaction: (i) satisfies the business purpose requirement of
§ 1.355-2(b) of the Income Tax Regulations, (ii) is used principally as a device for the distribution of the earnings and profits of the distributing corporation or the controlled corporation or both (see § 355(a)(1)(B) of the Internal Revenue Code and § 1.355-2(d)), or (iii) is part of a plan (or series of related transactions) pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent or greater interest in the distributing corporation or the controlled corporation (see
§ 355(e)(2)(A)(ii) and § 1.355-7T).

The information submitted for consideration is summarized below.

Summary of Facts

Distributing 3 is a domestic, publicly traded corporation that has served as the common parent of a group of corporations filing a U.S. consolidated tax return which includes Sub 1, Sub 2, Sub 3, Distributing 1 and Distributing 2. Distributing 3 has a single class of common stock outstanding. Each outstanding share of common stock possesses one preferred share purchase right. The right is not exercisable, however, until #AAA days after a person or group acquires or announces a tender offer that would result in the ownership of #BBB percent or more of Distributing 3’s outstanding common stock.

Certain employees of Distributing 3 and its subsidiaries hold stock subject to certain restrictions (“Restricted Stock”) that was issued by Distributing 3 pursuant to its existing and prior equity participation plans. Under the terms of the Distributing 3 plans, holders of Restricted Stock are entitled to receive dividends (including without limitation dividends payable in shares of stock) to the same extent as holders of unrestricted shares of Distributing 3 common stock.
PLR-116661-04
6

Distributing 3 has regularly paid quarterly dividends every year since Date 1. The dividends are typically paid on or about the #CCC business day of Month AA, Month BB, Month CC and Month DD. Distributing 3 also has a stock repurchase program which entitles Distributing 3 to purchase up to #DDD percent of its outstanding stock. In Date 2, Distributing 3 adopted plans enabling it to purchase shares of its stock on the open market every day of the year.

Distributing 3, either directly or indirectly through its subsidiaries, engages in Business A throughout the world. The ownership and businesses of each of the entities involved in the transaction are as follows.

Distributing 3 conducts Business B and Business C. Distributing 3 owns all of the outstanding stock of Sub 1, Sub 2 and Distributing 1, all of which are domestic corporations. Sub 1 acts as a holding company. Sub 2 is engaged in Business D. Distributing 1 is engaged in Business E and Business F.

Distributing 3 owns all of the outstanding common stock of Distributing 2, a domestic corporation with outstanding common stock and nonparticipating preferred stock. Sub 1 owns all of the outstanding preferred stock of Distributing 2. Distributing 2 is engaged in Business G. In addition to conducting Business G, Distributing 2 owns almost all of the Asset BB used by Distributing 3 and its various U.S. subsidiaries, funds all future Asset BB development, and bears all associated entrepreneurial risk with respect to Asset BB.

Distributing 2 owns all of the outstanding stock of Sub 3, a domestic corporation. Sub 3 owns all of the outstanding stock of FSub 1. FSub 1 owns all of the stock of FSub 2. FSub 2 owns all of the outstanding stock of FSub 3. FSub 3 is engaged in Businesses H, I and J. FSub 1, FSub 2 and FSub 3 are all Country X corporations.

Distributing 3’s management has determined that it no longer wishes to focus on, and invest time, money and its other corporate resources in, Businesses C, D, E, H, I, and J. In order to enhance the fit and focus of the core businesses conducted by Distributing 3 and its subsidiaries, Distributing 3 has decided to engage in the following transactions (hereinafter referred to as the “Proposed Transactions”):

1. Distributing 1 has created Controlled 1, a domestic corporation, and will transfer
   to it the assets and employees associated with Business E solely in exchange for
   Controlled 1 stock and the assumption of liabilities associated with the transferred
   assets (the “First Contribution”).

2. Distributing 1 will distribute all of Controlled 1’s outstanding stock to Distributing 3
   (the “First Distribution”).

3. Distributing 2 has formed Controlled 2, a domestic corporation, as a wholly owned
   subsidiary. Controlled 2 will have solely common stock outstanding.
   PLR-116661-04 7

4. Controlled 2 will form FSub 4, a company formed under one of the Provinces of
   Country X. Because FSub 4 is a foreign entity and its shareholder has unlimited
   liability, FSub 4 will be treated as a disregarded entity wholly owned by Controlled
   2 for U.S. federal income tax purposes. Treas. Reg. § 301.7701-3(b)(2)(i)(C).

5. Controlled 2 will borrow $X from unrelated lenders.

6. Distributing 2 will contribute $Y to Controlled 2.

7. Controlled 2 will contribute $Z to FSub 4.

8. FSub 4 will purchase all of the assets and hire the employees associated with
   Businesses H, I and J from FSub 3 in exchange for $Z and the assumption of the
   liabilities associated with Businesses H, I and J. Because FSub 4 is treated as a
   disregarded entity that is wholly owned by Controlled 2, Controlled 2 will be
   considered to conduct Businesses H, I and J after the purchase.

9. Distributing 2 will contribute to Controlled 2 Business K that Controlled 2 will use
   in its business in exchange for stock or as a capital contribution (the “Second
   Contribution”).

10. Distributing 2 will distribute all of the outstanding stock of Controlled 2 to its
    common shareholder, Distributing 3 (the “Second Distribution”). No portion of the
    Controlled 2 stock will be distributed on, or with respect to, the preferred stock, all
    of which is held by Sub 1. As a result, Sub 1 will not receive any stock in the
    Second Distribution.

11. Distributing 3 will contribute Business C to Controlled 2 in exchange for stock or
    as a capital contribution (the “Third Contribution”).

12. Distributing 3 will contribute all of the outstanding stock of Sub 2 to Controlled 2
    either in exchange for stock or as a capital contribution (the “Fourth Contribution”).

13. Distributing 3 will contribute all of the outstanding stock of Controlled 1 to
    Controlled 2 either in exchange for stock or as a capital contribution (the “Fifth
    Contribution”).

14. Distributing 3 will distribute all of the outstanding stock of Controlled 2 to its public
    shareholders (the “Third Distribution”), including the holders of the Restricted
    Stock. Distributing 3 will not distribute its own cash in lieu of fractional shares.
    Instead, Distributing 3 will aggregate the fractional shares that each shareholder
    would otherwise be entitled to receive and will sell them in the public market via a
    distribution agent. The aggregate net cash proceeds of these sales will be
    distributed ratably to those stockholders who would otherwise have received
    fractional shares of Controlled 2 common stock.
    PLR-116661-04 8

    Distributing 3 (and its subsidiaries) and Controlled 2 (and its subsidiaries) have
    entered into an agreement for the provision of various transitional services. In
    addition, the parties have entered into a tax-sharing agreement, an employee
    matters agreement, a shared facilities agreement and a Continuing Contract A1
    agreement which are not expected to be merely transitional in nature. The First
    Distribution, Second Distribution and Third Distribution are referred to collectively
    as the “Distributions”.

Representations

The following representations have been made with respect to the General Applicability of the Proposed Transactions:

1. FSub 4 will be a disregarded entity within the meaning of § 301.7701 of the
   Procedure and Administration regulations before and after the Proposed
   Transactions.

2. FSub 1, FSub 2 and FSub 3 will be controlled foreign corporations within the
   meaning of § 957(a) of the Code before and after the Proposed Transactions.

3. FSub 1, FSub 2 and FSub 3 will not be passive foreign investment companies
   within the meaning of § 1297(a) of the Code before and after the Proposed
   Transactions.

The following representations have been made concerning the First Contribution and the First Distribution:

4. No part of the consideration to be distributed by Distributing 1 will be received by
   a shareholder as a creditor, employee, or in any capacity other than that of a
   shareholder of the corporation.

5. No part of the consideration to be distributed by Distributing 1 will be received by
   a security holder as an employee or in any capacity other than that of a security
   holder of the corporation.

6. The 5 years of financial information submitted on behalf of Business F is
   representative of its present operations, and with regard to such business, there
   have been no substantial operational changes since the date of the last financial
   statements submitted.

7. The 5 years of financial information submitted on behalf of Business E is
   representative of its present operations, and with regard to such business, there
   have been no substantial operational changes since the date of the last financial
   statements submitted.
   PLR-116661-04 9

8. Following the Proposed Transactions, Distributing 1 and Controlled 1 will each
   continue the active conduct of its business, independently and with its separate
   employees.

9. The distribution of stock, or stock and securities, of Controlled 1 is being carried
   out to facilitate the Third Distribution. The Third Distribution is being carried out
   for the following corporate business purpose: to enhance the “fit and focus” of
   Distributing 3 and its subsidiaries by allowing them to focus on their core
   business. The Distributions are motivated, in whole or substantial part, by this
   corporate business purpose.

10. The First Distribution is not used principally as a device for the distribution of the
    earnings and profits of Distributing 1 or Controlled 1 or both.

11. The total adjusted bases and the fair market value of the assets transferred to
    Controlled 1 by Distributing 1 each equals or exceeds the sum of the liabilities
    assumed (as determined under § 357(d)) by Controlled 1 plus the fair market
    value of any other property, and the amount of any money, transferred by
    Controlled 1 to Distributing 1 that is distributed to the shareholders of Distributing
    1, or transferred to the creditors of Distributing 1, pursuant to the plan of
    reorganization. The sum of the liabilities assumed (as determined under §
    357(d)) were incurred in the ordinary course of business and are associated with
    the assets being transferred.

12. No intercorporate debt will exist between Distributing 1 and Controlled 1 at the
    time of, or subsequent to, the distribution of the Controlled 1 stock.

13. Immediately before the distribution, items of income, gain, loss, deduction, and
    credit will be taken into account as required by the applicable intercompany
    transaction regulations. Further, Distributing 1’s excess loss account (if any) with
    respect to Controlled 1 will be included in income immediately before the
    distribution.

14. Payments made in connection with all continuing transactions, if any, between
    Distributing 1 and Controlled 1 will be for fair market value based on terms and
    conditions arrived at by the parties bargaining at arm’s length.

15. Neither Distributing 1 nor Controlled 1 is an investment company as defined in
    § 368(a)(2)(F)(iii) and (iv).

16. Distributing 1 will complete the First Distribution within 12 months after the receipt
    of a ruling from the Internal Revenue Service.
    PLR-116661-04 10

17. No cash will be distributed in lieu of fractional shares in connection with the First
    Distribution.

18. No shareholder of Distributing 1 will be entitled to dissenters’ rights in connection
    with the First Distribution.

19. For purposes of § 355(d), immediately after the distribution, no person
    (determined after applying § 355(d)(7)) will hold stock possessing 50 percent or
    more of the total combined voting power or 50 percent or more of the total value
    of shares of all classes of Distributing 1 stock, that was acquired by purchase (as
    defined in § 355(d)(5) and (8)) during the five year period (determined after
    applying § 355(d)(6)) ending on the date of the distribution.

20. For purposes of § 355(d), immediately after the distribution, no person
    (determined after applying § 355(d)(7)) will hold stock possessing 50 percent or
    more of the total combined voting power or 50 percent or more of the total value
    of shares of all classes of Controlled 1 stock, that was either (i) acquired by
    purchase as defined in § 355(d)(5) and (8)) during the five year period
    (determined after applying § 355(d)(6)) ending on the date of the distribution or (ii)
    attributable to distributions on Distributing 1’s stock that was acquired by
    purchase (as defined in § 355(d)(5) and (8)) during the five year period
    (determined after applying § 355(d)(6)) ending on the date of the distribution.

21. Distributing 1 does not have an excess loss account within the meaning of Treas.
    Reg. § 1.1502-19(a)(2) with respect to Controlled 1’s stock.

22. The First Distribution is not part of a plan or series of related transactions (within
    the meaning of § 1.355-7T) pursuant to which one or more persons will acquire
    directly or indirectly stock representing a 50-percent or greater interest (within the
    meaning of § 355(d)(4)) in Distributing 1 or Controlled 1 (including any
    predecessor or successor of any such corporation).

The following representations have been made concerning the Second Contribution and the Second Distribution:

23. No part of the consideration to be distributed by Distributing 2 will be received by
    a shareholder as a creditor, employee, or in any capacity other than that of a
    shareholder of Distributing 2.

24. No part of the consideration to be distributed by Distributing 2 will be received by
    a security holder as an employee or in any capacity other than that of a security
    holder of Distributing 2.

25. The 5 years of financial information submitted on behalf of Business G is
    representative of its present operations, and with regard to such business, there
    PLR-116661-04 11

    have been no substantial operational changes since the date of the last financial
    statements submitted.

26. The 5 years of financial information submitted on behalf of Business H is
    representative of its present operations, and with regard to such business, there
    have been no substantial operational changes since the date of the last financial
    statements submitted.

27. Following the Proposed Transactions, Distributing 2 and Controlled 2 will each
    continue the active conduct of its business, independently and with its separate
    employees.

28. The distribution of the stock, or stock and securities, of Controlled 2 is carried out
    to facilitate the Third Distribution. The Third Distribution is being carried out for
    the following corporate business purpose: to enhance the “fit and focus” of
    Distributing 3 and its subsidiaries by allowing them to focus on their core
    businesses. The Distributions are motivated, in whole or substantial part, by this
    corporate business purpose.

29. The Second Distribution is not used principally as a device for the distribution of
    the earnings and profits of Distributing 2 or Controlled 2 or both.

30. The total adjusted bases and the fair market value of the assets transferred to
    Controlled 2 by Distributing 2 each equals or exceeds the sum of the liabilities
    assumed (as determined under § 357(d)) by Controlled 2 plus the fair market
    value of any other property, and the amount of any money, transferred by
    Controlled 2 to Distributing 2 that is distributed to the shareholders of Distributing
    2, or transferred to the creditors of Distributing 2, pursuant to the plan of
    reorganization. The sum of the liabilities assumed (as determined under §
    357(d)) were incurred in the ordinary course of business and are associated with
    the assets being transferred.

31. No intercorporate debt will exist between Distributing 2 and Controlled 2 at the
    time of, or subsequent to, the distribution of the Controlled 2 stock.

32. Immediately before the distribution, items of income, gain, loss, deduction, and
    credit will be taken into account as required by the applicable intercompany
    transaction regulations. Further, Distributing 2’s excess loss account (if any) with
    respect to Controlled 2 will be included in income immediately before the
    distribution.

33. Payments made in connection with all continuing transactions, if any, between
    Distributing 2 and Controlled 2 will be for fair market value based on terms and
    conditions arrived at by the parties bargaining at arm’s length.
    PLR-116661-04 12

34. Neither Distributing 2 nor Controlled 2 is an investment company as defined in
    § 368(a)(2)(F)(iii) and (iv).

35. Distributing 2 will complete the Second Distribution within 12 months after the
    receipt of a ruling from the Internal Revenue Service.

36. No cash will be distributed in lieu of fractional shares in connection with the
    Second Distribution.

37. No shareholder of Distributing 2 will be entitled to dissenters’ rights in connection
    with the Second Distribution.

38. For purposes of § 355(d), immediately after the distribution, no person
    (determined after applying § 355(d)(7)) will hold stock possessing 50 percent or
    more of the total combined voting power or 50 percent or more of the total value
    of shares of all classes of Distributing 2’s stock, that was acquired by purchase
    (as defined in § 355(d)(5) and (8)) during the five year period (determined after
    applying § 355(d)(6)) ending on the date of the distribution.

39. Taking into account the contribution of $Y, for purposes of § 355(d), immediately
    after the distribution, no person (determined after applying § 355(d)(7)) will hold
    stock possessing 50 percent or more of the total combined voting power or 50
    percent or more of the total value of shares of all classes of Controlled 2 stock,
    that was either (i) acquired by purchase (as defined in § 355(d)(5) and (8)) during
    the five year period (determined after applying § 355(d)(6)) ending on the date of
    the distribution or (ii) attributable to distributions on Distributing 2’s stock that was
    acquired by purchase (as defined in § 355(d)(5) and (8)) during the five year
    period (determined after applying § 355(d)(6)) ending on the date of the
    distribution.

40. Distributing 2 does not have an excess loss account within the meaning of Treas.
    Reg. § 1.1502-19(a)(2) with respect to Controlled 2’s stock.

41. The distribution is not part of a plan or series of related transactions (within the
    meaning of § 1.355-7T) pursuant to which one or more persons will acquire
    directly or indirectly stock representing a 50-percent or greater interest (within the
    meaning of § 355(d)(4)) in Distributing 2 or Controlled 2 (including any
    predecessor or successor of any such corporation).

42. Each share of Controlled 2 common stock will possess a preferred share
    purchase right of the type described in Rev. Rul. 90-11, 1990-1 C.B. 10.

    The following representations have been made concerning the Third, Fourth and
    Fifth Contributions and the Third Distribution:
    PLR-116661-04 13

43. Neither Distributing 3 nor Controlled 2 has been a United States real property
    holding corporation (a “USRPHC”), as defined in section 897(c)(2), at any time
    during the 5 year period ending on the date of the Third Distribution, and neither
    Distributing 3 nor Controlled 2 will be a USRPHC immediately after the Third
    Distribution.

44. Except for the Controlled 2 stock distributed to the holders of the Restricted Stock,
    no part of the consideration to be distributed by Distributing 3 will be received by a
    shareholder as a creditor, employee, or in any capacity other than that of a
    shareholder of Distributing 3.

45. If a holder of Distributing 3 securities also owns Distributing 3 common stock, that
    security holder may receive common stock of Controlled 2, but only in their
    capacity as common stock shareholders of Distributing 3.

46. The 5 years of financial information submitted on behalf of Business B is
    representative of its present operations, and with regard to such business, there
    have been no substantial operational changes since the date of the last financial
    statements submitted.

47. The 5 years of financial information submitted on behalf of Business H is
    representative of its present operations, and with regard to such business, there
    have been no substantial operational changes since the date of the last financial
    statements submitted.

48. Following the Proposed Transactions, Distributing 3 and Controlled 2 will each
    continue the active conduct of its business, independently and with its separate
    employees.

49. The distribution of the stock, or stock and securities, of Controlled 2 is being
    carried out to facilitate the Third Distribution. The Third Distribution is being
    carried out for the following corporate business purpose: to enhance the “fit and
    focus” of Distributing 3 and its subsidiaries by allowing them to focus on their core
    business. The Distributions are motivated, in whole or substantial part, by this
    corporate business purpose.

50. The Third Distribution is not used principally as a device for the distribution of the
    earnings and profits of Distributing 3 or Controlled 2 or both.

51. The total adjusted bases and the fair market value of the assets transferred to
    Controlled 2 by Distributing 3 each equals or exceeds the sum of the liabilities
    assumed (as determined under § 357(d)) by Controlled 2 plus the fair market
    value of any other property, and the amount of any money, transferred by
    Controlled 2 to Distributing 3 that is distributed to the shareholders of Distributing
    3, or transferred to the creditors of Distributing 3, pursuant to the plan of
    PLR-116661-04 14

    reorganization. The sum of the liabilities assumed (as determined under §
    357(d)) were incurred in the ordinary course of business and are associated with
    the assets being transferred.

52. No intercorporate debt will exist between Distributing 3 and Controlled 2 at the
    time of, or subsequent to, the distribution of the Controlled 2 stock.

53. Immediately before the distribution, items of income, gain, loss, deduction, and
    credit will be taken into account as required by the applicable intercompany
    transaction regulations. Further, Distributing 3’s excess loss account (if any) with
    respect to Controlled 2 will be included in income immediately before the
    distribution.

54. Payments made in connection with all continuing transactions, if any, between
    Distributing 3 and Controlled 2 will be for fair market value based on terms and
    conditions arrived at by the parties bargaining at arm’s length.

55. Neither Distributing 3 nor Controlled 2 is an investment company as defined in
    § 368(a)(2)(F)(iii) and (iv).

56. Distributing 3 will complete the Third Distribution within 12 months after the
    receipt of a ruling from the Internal Revenue Service.

57. No shareholder of Distributing 3 will be entitled to dissenters’ rights in connection
    with the Third Distribution.

58. For purposes of § 355(d), immediately after the distribution, no person
    (determined after applying § 355(d)(7)) will hold stock possessing 50 percent or
    more of the total combined voting power or 50 percent or more of the total value
    of shares of all classes of Distributing 3 stock, that was acquired by purchase (as
    defined in § 355(d)(5) and (8)) during the five year period (determined after
    applying § 355(d)(6)) ending on the date of the distribution.

59. For purposes of § 355(d), immediately after the distribution, no person
    (determined after applying § 355(d)(7)) will hold stock possessing 50 percent or
    more of the total combined voting power or 50 percent or more of the total value
    of shares of all classes of Controlled 2 stock, that was either (i) acquired by
    purchase (as defined in § 355(d)(5) and (8)) during the five year period
    (determined after applying § 355(d)(6)) ending on the date of the distribution or (ii)
    attributable to distributions on Distributing 3’s stock that was acquired by
    purchase (as defined in § 355(d)(5) and (8)) during the five year period
    (determined after applying § 355(d)(6)) ending on the date of the distribution.

60. Distributing 3 does not have an excess loss account within the meaning of Treas.
    Reg. § 1.1502-19(a)(2) with respect to Controlled 2’s stock.
    PLR-116661-04 15

61. The distribution is not part of a plan or series of related transactions (within the
    meaning of § 1.355-7T) pursuant to which one or more persons will acquire
    directly or indirectly stock representing a 50-percent or greater interest (within the
    meaning of § 355(d)(4)) in Distributing 3 or Controlled 2 (including any
    predecessor or successor of any such corporation).

62. Shares of Controlled 2 common stock distributed with respect to Distributing 3’s
    Restricted Stock will not exceed, in the aggregate, 20 percent of Controlled 2’s
    common stock outstanding immediately after Distributing 3 distributes the stock of
    Controlled 2 to the public.

Rulings

Based solely on the information submitted and the representations set forth above, we rule as follows:

The First Contribution and the First Distribution:

1. The First Contribution followed by the First Distribution will constitute a
   reorganization within the meaning of § 368(a)(1)(D). Distributing 1 and Controlled
   1 will each be a “party to a reorganization” within the meaning of § 368(b).

2. No gain or loss will be recognized by Distributing 1 upon the transfer of its assets
   to Controlled 1 in exchange for Controlled 1 stock and the assumption by
   Controlled 1 of Distributing 1’s liabilities, if any. Sections 361(a) and 357(a).

3. No gain or loss will be recognized by Controlled 1 upon the receipt of Distributing
   1’s assets in exchange for stock of Controlled 1. Section 1032(a).

4. The basis of Distributing 1’s assets in the hands of Controlled 1 will be the same
   as the basis of those assets in the hands of Distributing 1 immediately prior to the
   transfer. Section 362(b).

5. The holding period of the Distributing 1 assets acquired by Controlled 1 will
   include the period during which those assets were held by Distributing 1. Section
   1223(2).

6. No gain or loss will be recognized by Distributing 1 on the First Distribution.
   Section 361(c)(1).

7. No gain or loss will be recognized by (and no amount will otherwise be included in
   the income of) the shareholder of Distributing 1 upon its receipt of the Controlled 1
   stock. Section 355(a)(1).
   PLR-116661-04 16

8. The holding period of the Controlled 1 stock received by Distributing 3 will include
   the holding period of its Distributing 1 stock, provided the Distributing 1 stock is
   held as a capital asset on the date of the First Distribution. Section 1223(1).

9. As provided in § 312(h), proper allocation of earnings and profits between
   Distributing 1 and Controlled 1 will be made under Treas. Reg. § 1.312-10(a) and
   Treas. Reg. § 1.1502-33(f)(2).

The Second Contribution and the Second Distribution:

10. The Second Contribution and the Second Distribution will constitute a
    reorganization within the meaning of § 368(a)(1)(D). Distributing 2 and Controlled
    2 will each be a “party to a reorganization” within the meaning of § 368(b).

11. No gain or loss will be recognized by Distributing 2 upon the transfer of its
    Business K assets to Controlled 2 in exchange for Controlled 2 stock and the
    assumption by Controlled 2 of Distributing 2’s liabilities, if any. Sections 361(a)
    and 357(a).

12. FSub 4’s purchase of Business H from FSub 3 will not prevent Controlled 2 from
    satisfying the 5-year active trade or business requirement. Section 355(b); Treas.
    Reg. § 1.355-3(b)(4)(iii); and Rev. Rul. 78-442, 1978-2 C.B. 143.

13. No gain or loss will be recognized by (and no amount will otherwise be included in
    the income of) Distributing 3 upon its receipt of the Controlled 2 stock. Section
    355(a)(1).

14. No gain or loss will be recognized by Controlled 2 upon the receipt of Distributing
    2’s Business K assets in exchange for stock of Controlled 2. Section 1032(a).

15. No gain or loss will be recognized by Distributing 2 with respect to the Second
    Distribution. Section 361(c).

16. The basis of Distributing 2’s Business K assets in the hands of Controlled 2 will be
    the same as the basis of those assets in the hands of Distributing 2 immediately
    prior to the transfer. Section 362(b).

17. The holding period of the Distributing 2 Business K assets acquired by Controlled
    2 will include the period during which those assets were held by Distributing 2.
    Section 1223(2).

18. The holding period of the Controlled 2 stock received by Distributing 3 will include
    the holding period of its Distributing 2 stock, provided the Distributing 2 stock is
    held as a capital asset on the date of the Second Contribution and the Second
    Distribution. Section 1223(1).
    PLR-116661-04 17

19. As provided in § 312(h), proper allocation of earnings and profits between
    Distributing 2 and Controlled 2 will be made under Treas. Reg. § 1.312-10(a) and
    Treas. Reg. § 1.1502-33(f)(2).

The Third, Fourth and Fifth Contributions and the Third Distribution:

20. The Third, Fourth and Fifth Contributions followed by the Third Distribution will
    constitute a reorganization within the meaning of § 368(a)(1)(D). Distributing 3
    and Controlled 2 each will be “a party to a reorganization” within the meaning of §
    368(b).

21. No gain or loss will be recognized by Distributing 3 upon the transfer of its
    Business C, stock Sub 2 and stock of Controlled 1 assets to Controlled 2 in
    exchange for Controlled 2 stock and the assumption by Controlled 2 of
    Distributing 3’s liabilities, if any. Sections 361(a) or 357(a).

22. No gain or loss will be recognized by Controlled 2 upon the receipt of Distributing
    3’s Business C, stock Sub 2 and stock of Controlled 1 assets in exchange for
    Controlled 2 stock. Section 1032(a).

23. The basis of Distributing 3’s Business C, stock Sub 2 and stock of Controlled 1
    assets in the hands of Controlled 2 will be the same as the basis of those assets
    in the hands of Distributing 3 immediately prior to the transfer. Section 362(b).

24. The holding period of the Distributing 3 Business C, stock Sub 2 and stock of
    Controlled 1 assets acquired by Controlled 2 will include the period during which
    those assets were held by Distributing 3. Section 1223(2).

25. No gain or loss will be recognized by Distributing 3 on the Third Distribution.
    Sections 361(c)(1).

26. No gain or loss will be recognized by (and no amount will otherwise be included in
    the income of) Distributing 3’s shareholders upon their receipt of the Controlled 2
    stock or the preferred stock purchase rights associated with that stock. Section
    355(a)(1); Rev. Rul. 90-11, 1990-1 C.B. 10.

27. The basis of the Controlled 2 stock in the hands of Distributing 3’s shareholders
    immediately after the Third Distribution will be the same as the aggregate basis of
    the Distributing 3 stock held immediately before the Third Distribution, allocated in
    proportion to the relative fair market value of the Distributing 3 and Controlled 2
    stock after the distribution. Section 358(b)(2); and Treas. Reg. § 1.358-2(a)(2).

28. The holding period of the Controlled 2 stock received by Distributing 3’s
    shareholders will include the holding period of their Distributing 3 stock, provided
    PLR-116661-04 18

    the Distributing 3 stock is held as a capital asset on the date of the Third
    Distribution. Section 1223(1).

29. Stockholders of Distributing 3 who receive cash from the distribution agent in
    respect of fractional shares will recognize gain or loss on the sale of the fractional
    share interest equal to the difference between the cash received and the
    stockholder's basis in the fractional share interest. The gain or loss will be capital
    gain or loss to the stockholder provided the fractional share interest is a capital
    asset in the hands of the stockholder.

30. As provided in § 312(h), proper allocation of earnings and profits between
    Distributing 3 and Controlled 2 will be made under Treas. Reg. § 1.312-10(a) and
    Treas. Reg. § 1.1502-33(e)(3).

Caveats

No opinion is expressed about the tax treatment of the Proposed Transactions under other provisions of the Code or regulations or the tax treatment of any conditions existing at the time of, or effects resulting from, the Proposed Transactions that are not specifically covered by the above rulings. Particularly (but not exclusively), no opinion is expressed regarding: (i) whether any distributions satisfy the business purpose requirement of § 1.355-2(b); (ii) whether any of the Proposed Transactions are used principally as a device for the distribution of the earnings and profits of the distributing corporations or the controlled corporations or both the distributing and controlled corporations (see § 355(a)(1)(B) and § 1.355-2(d)); or (iii) whether any distribution and an acquisition or acquisitions (of the stock of the controlled or distributing corporation) are part of a plan (or series of related transactions) under § 355(e)(2)(A)(ii). No opinion is expressed regarding: (a) the basis of Controlled 1 stock in the hands of Distributing 3 immediately after the First Distribution, and (b) the basis of Controlled 2 stock in the hands of Distributing 3 immediately after the Second Distribution. Other than as provided in ruling #12, the Service expresses no opinion as to the tax consequences with respect to FSub 4’s purchase of Business H from FSub 3.

This ruling is only directed to Distributing 3 acting on behalf of all members, (for the affected tax years) of the Distributing 3 consolidated group. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative.
PLR-116661-04
19

A copy of this letter must be attached to any income tax return to which it is relevant.

Sincerely,

Steven J. Hankin
Steven J. Hankin
Senior Technician Reviewer, Branch 6
Office of Associate Chief Counsel
(Corporate)

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