PLR 200843025: Family business split-off received specified Type D reorganization rulings
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This page covers one taxpayer's ruling, issued in 2008, which can't be cited as precedent. Ask about your situation and see what the current Code and IRS guidance say, with citations.
Plain-English summary
Two family shareholder groups disagreed over whether to expand a corporation’s two long-running businesses. The corporation proposed transferring one business and its related liabilities to a new controlled corporation, then exchanging all controlled-company shares for the stock held by the family group that wanted that business. Afterward, one family group would own the original corporation and the other would own the controlled corporation. The IRS granted specified rulings on the transfer and split-off, including that the asset transfer qualified as a Type D reorganization and that the corporations and exchanging shareholders generally recognized no gain or loss. Carryover basis, tacked holding periods, and allocation of earnings and profits applied as specified. The letter expressly made no determination about business purpose, device, or whether the transaction was part of a plan under section 355(e).
Ruling snapshot
- Question: Would the contribution and split-off receive the specified Type D reorganization and § 355 tax treatment?
- Outcome: Specified rulings approved, subject to the stated factual representations and caveats. No determination was made about business purpose, device, or the section 355(e) plan question.
- Key authorities: IRC §§ 355, 357, 358, 361, 362, 368(a)(1)(D), 1032, 1223; Treas. Reg. §§ 1.312-10, 1.355-2, 1.355-7
Full text (IRS public release)
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Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 200843025 Third Party Communication: None
Release Date: 10/24/2008 Date of Communication: Not Applicable
Person To Contact:
Index Number: 368.04-00, 355.01-01 --------------------------, ID No. -------------
Telephone Number:
---------------------
------------------------------- Refer Reply To:
---------------------------------------------------------- CC:CORP:B06
----------------------------- PLR-121879-08
---------------------------------- Date:
July 21, 2008
TY: ------------------
LEGEND
Distributing = -------------------------------
Controlled = -----------------------------------
Family A = --------------------------------------
Family B = --------------------------------------------
State = -------------
Business X = ---------------------------------------------
Business Y = ----------------------------------------------------------------------
Date Z = -----------------------
a = ---------------------------------------------------------------------------------- -------
----------------
b = ------------------------------------------------------------------------------------------
----------------------------------------------
c = -------------------------
d = ---------------------------------------------------------------------------- ------------
---------------------------------------------------------------------
e = -------------------------------------------------------
PLR-121879-08 2
f = ---------------------
g = -------------
aa = -------
Dear ----------------------------
This is in response to a letter dated May 7, 2008, submitted on your behalf by your
authorized representatives, requesting rulings on the federal income tax consequences
of a proposed transaction. The information submitted for consideration is summarized
below.
The rulings contained in this letter are based on facts and representations submitted by
the taxpayer and its shareholders and accompanied by penalties of perjury statements
executed by the appropriate parties. 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, this office has not reviewed any information pertaining to, and has made no
determination regarding whether the distribution (as defined below): (i) satisfies the
business purpose requirement of § 1.355-2(b) of the Income Tax Regulations, (ii) is
being used principally as a device for the distribution of the earnings and profits of the
distributing corporation, the controlled corporation, or both (see § 355(a)(1)(B) of the
Internal Revenue Code (the "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) and § 1.355-7).
SUMMARY OF FACTS
Distributing is a State, accrual basis taxpayer that files a federal income tax return with
a calendar fiscal year end. Distributing has been primarily engaged in Businesses X
and Y since its incorporation on Date Z (more than 5 years from the date of this letter).
Business X includes assets a, b, and c. Business Y includes assets d, e, f, and g.
Distributing has outstanding aa shares of voting common stock that are owned in
various amounts by the members of Family A and Family B, either in their own right or
as beneficiaries of various trusts. There are no securities or other interests of any kind
that could be considered a stock interest.
Financial information has been received that indicates that both Businesses X and Y
have had gross receipts and operating expenses representative of the active conduct of
a trade or business for each of the past five years.
PLR-121879-08 3
The proposed transaction has been agreed to by and between Family A and Family B in
order to resolve their differences of opinion on how best to operate the businesses of
Distributing. The members of Family B see a tremendous opportunity to leverage
Distributing’s assets to acquire other assets. In sharp contrast, the members of Family
A do not share the desires of the members of Family B to expand Distributing’s
operations and would prefer to operate the business as it has historically been
operated. Accordingly, the Distributing shareholders have decided to split off Business
Y from Business X by transferring Business Y to newly formed Controlled, and to
distribute the Controlled stock to the members of Family B in exchange for their shares
of Distributing.
PROPOSED TRANSACTION
The following transaction has been proposed:
(i) Distributing will form Controlled by transferring Business Y and its assets to
Controlled solely in exchange for all of the outstanding stock of Controlled
and the assumption by Controlled of certain liabilities associated with
Business Y.
(ii) Distributing will then distribute all of the Controlled shares to the members of
Family B, in exchange for all of the shares of Distributing held by those Family
B members. After the distribution, those Family B members will own 100% of
the stock in Controlled and members of Family A will own 100% of the stock
in Distributing.
Subsequent to the Proposed Transaction, both Distributing and Controlled will make
elections to be treated as “S” Corporations for federal income tax purposes in the first
tax year that they are eligible.
REPRESENTATIONS
The taxpayers have made the following representations in connection with the proposed
transaction:
(a) The indebtedness, if any, owed by Controlled to Distributing after the
distribution of the Controlled stock will not constitute stock or securities.
(b) The total adjusted bases and fair market value of the assets transferred to
Controlled by Distributing will each equal or exceed the amount of any
liabilities assumed (within the meaning of Section 357(d)) by Controlled in
connection with the exchange. The fair market value of the assets of
Controlled will exceed the amount of its liabilities immediately after the
exchange.
PLR-121879-08 4
(c) The total fair market value of the assets transferred to Controlled by
Distributing in the Contribution will equal or exceed the aggregate adjusted
basis of the transferred assets.
(d) The fair market value of the Controlled stock and other consideration to be
received by the Family B shareholders of Distributing will be approximately
equal to the fair market value of the Distributing stock surrendered by the
Family B shareholders in the exchange.
(e) No part of the Controlled stock to be distributed by Distributing to the
Family B shareholders will be received by a Family B shareholder of
Distributing as a creditor, employee, or in any capacity other than that of a
shareholder of Distributing.
(f) The liabilities assumed (as determined under Section 357(d)) by
Controlled in the Contribution will have been incurred in the ordinary
course of business and will be associated with the assets transferred.
(g) The 5 years of financial information submitted on behalf of Distributing’s
Business X is representative of Business X’s present operations, and with
regard to such operations, there have been no substantial operational
changes since the date of the last financial statements submitted.
(h) The 5 years of financial information submitted on behalf of Distributing’s
Business Y is representative of the Business Y’s present operations, and
with regard to such operations, there have been no substantial operational
changes since the date of the last financial statements submitted.
(i) The distribution of the stock of Controlled is carried out for the following
corporate business purpose: To enable each of the shareholder groups to
devote their attention and apply a consistent business strategy to the
business which each group is most interested in. The distribution of the
stock of Controlled is motivated, in whole or substantial part, by this
corporate business purpose.
(j) Following the distribution, Distributing and Controlled will each continue,
independently and with its separate employees, the active conduct of its
business.
(k) The Proposed Transaction is not used principally as a device for the
distribution of earnings and profits of Distributing or Controlled.
(l) Distributing neither accumulated its receivables nor made extraordinary
payment of its payables in anticipation of the transaction.
PLR-121879-08 5
(m)For purposes of §355(d), immediately after the distribution, no person
(determined after applying the aggregation rules of § 355(d)(7)) will hold
stock possessing 50 percent or more of the total combined voting power of
all classes of Distributing stock entitled to vote, or 50 percent or more of
the total value of shares of all classes of Distributing 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.
(n) 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 of all classes of
Controlled stock entitled to vote, or 50 percent or more of the total value of
shares of all classes of Controlled 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 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.
(o) There is no acquisition of stock of Distributing or Controlled (including any
predecessor or successor of any such corporation) that is part of a plan or
series of related transactions (within the meaning of Treas. Reg. § 1.355-
7) that includes the distribution of Controlled stock.
(p) No intercorporate debt will exist between Distributing and Controlled at the
time of the distribution, and no intercorporate debt will exist between
Distributing and Controlled subsequent to the Proposed Transaction
(except as may arise in the ordinary course of business or with respect to
payments pursuant to any continuing transactions between Distributing
and Controlled).
(q) 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.
(r) No two parties to the transaction are investment companies defined in
368(a)(2)(F)(iii) and (iv).
(s) Distributing and Controlled, and their respective shareholders, will each
pay their own expenses, if any, incurred in connection with the Proposed
Transaction.
PLR-121879-08 6
(t) Immediately after the Proposed Transaction (as defined in § 355(g)(4)),
neither Distributing nor Controlled will be a disqualified investment
corporation (within the meaning of § 355(g)(2)).
(u) No property with respect to which any investment credit determined under
Section 46 has been (or will be) claimed will be transferred from
Distributing to Controlled in the Proposed Transaction.
RULINGS
Based solely on the information submitted and on the representations set forth above,
we hold as follows:
(1) The transfer by Distributing to Controlled of assets associated with
Business Y, solely in exchange for all of the issued and outstanding stock
of Controlled, plus the assumption by Controlled of certain liabilities, will
qualify as a reorganization within the meaning of 368(a)(1)(D) of the Code.
Distributing and Controlled will each be a party to a “reorganization" within
the meaning of § 368(b) of the Code.
(2) Distributing will recognize no gain or loss in connection with the transfer of
the assets associated with Business Y to Controlled and the assumption
by Controlled of certain liabilities in the Proposed Transaction. Section
361(a) and 357(a).
(3) Controlled will recognize no gain or loss upon the receipt of Distributing’s
Business Y assets in exchange for Controlled stock. Section 1032(a).
(4) Controlled's basis in each asset received in the proposed transaction will
be, in each instance, the same as the basis of such assets in the hands of
Distributing immediately prior to the proposed transaction. Section 362(b).
(5) Controlled's holding period of the assets received in the Proposed
Transaction will include the period during which such assets were held by
Distributing. Section 1223(2).
(6) No gain or loss will be recognized by Distributing on the distribution of the
Controlled stock. Section 361(c).
(7) No gain or loss will be recognized by and no amount will be included in
the income of the members of Family B on the exchange of their stock in
Distributing for the stock of Controlled in the Proposed Transaction.
Section 355(a).
PLR-121879-08 7
(8) The basis of the Controlled stock in the hands of the Family B
shareholders of Distributing will be the same as the basis of the
Distributing stock surrendered in exchanged therefore. Section 358(a)(1).
(9) The holding period of Controlled stock received by the Family B
shareholders of Distributing will include their holding period of Distributing
stock exchanged therefore, provided that the Distributing stock is held as
a capital asset on the date of the Proposed Transaction. Section 1223(1).
(10) As provided in Section 312(h), proper allocation of earnings and profits
between Distributing and Controlled will be made in accordance with
Treas. Reg. § 1.312-10(a).
CAVEATS
Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.
PROCEDURAL STATEMENTS
This ruling is directed only to the taxpayer requesting it. 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.
A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.
Sincerely,
_______________________________
Steven J. Hankin
Senior Technician Reviewer, Branch 6
(Corporate)
cc:
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