PLR 200850013: a split-off to settle shareholder disputes, after which both sides still share one office and one payroll
Apply this to your situation
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
A thirteen page private letter ruling, control number "PLR-121886-08", dated September 10, 2008 and released 12/12/2008. It is routed "CC:CORP:B06", carries Index Number "355.00-00, 355.01-01, 368.00-00, 368.04-00", and is signed by Steven J. Hankin, Senior Technician Reviewer, Branch 6, Office of Associate Chief Counsel (Corporate). It answers a letter of May 7, 2008.
The legend is the longest in the batch: sixty-two defined terms, counted between the heading and the salutation. Ten entities, three shareholders, sixteen assets, four dates, six share counts, one dollar amount, twenty percentages, a business and a state. That length is itself the story. The ruling is not about one company. It is about untangling one family of businesses.
Distributing is a State A S corporation formed on Date 1 and engaged in X business ever since. Shareholder AA and Shareholder BB hold its voting stock in equal amounts and are its officers; Shareholder CC holds only non-voting stock. But Distributing is close to a shell in operating terms. The letter says flatly that "Distributing itself has no operational employees." The people, the central office and much of the property sit in PRS-1, a limited partnership in which AA and BB are the general partners and Distributing is a limited partner. PRS-1 lends Distributing its staff, and "These employees perform services for Distributing for an arm's length price." Two more partnerships and two limited liability companies hold the rest of the assets.
The business purpose, given in representation (f), is one line filled into a form: "In order to resolve divergent shareholder interests and disputes." AA and BB want to stop being partners.
The plan runs twelve steps. Corp XYZ merges into Distributing. PRS-1 distributes two assets out to AA and BB, who contribute them back to Distributing as capital. Distributing swaps part of one asset with PRS-1 for two others. Then Distributing forms Controlled and contributes to it a defined half of the enterprise, taking back all of Controlled's stock, and distributes that stock to Shareholder AA alone in exchange for all of AA's Distributing stock. Controlled elects S status. The partnerships are then rebuilt around the new line: PRS-2 and PRS-3 merge into PRS-1, the two limited liability companies liquidate into PRS-1, and two new partnerships are formed, PRS-4 on the Distributing side and PRS-5 on the Controlled side. Finally the two sides indemnify each other for the debts each has taken.
The split is meant to be even, and the redaction lets you see that without telling you the number. Distributing contributes "f% of its interest in PRS-1 and f% of its other assets (thus excluding Asset 1, Asset 3, Asset 6, Asset 8 and Asset 10 and its f% interest in PRS-1)", so the same symbol stands for both the share that moves and the share that stays. The same symbol appears again where two partners split a company down the middle: "PRS-2 and PRS-3 each own a f% capital and profits interest in LLC 1." The letter then confirms the intent in words, saying that afterwards "the value of X Business held by Distributing and Controlled will be approximately the same." A reader cannot recover the digits, but the structure of the redaction is consistent with f% being one half.
What the separation does not separate is the workforce. Step (11) keeps everything shared. PRS-1 retains "management assets (including all associated employees) and the Central office", and then "PRS-1 will be converted to a general partnership with Shareholder AA," with the sentence continuing on the next page to name "Shareholder BB, Distributing and Controlled as general partners." All four are partners in the surviving vehicle. "All of the employees of PRS-1 will continue as employees of PRS-1 after the Proposed" transaction, both companies keep buying their staff back from it at an arm's length fee, and "Shareholder AA and Shareholder BB will continue to guarantee certain debts of PRS-1 after the Proposed Transaction." So a ruling sought to resolve disputes between two shareholders leaves those same two shareholders as general partners of the entity that owns the office and employs everyone, jointly guaranteeing its debt. The corporate ownership is divided. The operating platform is not.
Ten rulings follow and they are the ordinary consequences of a divisive D reorganization: reorganization status under section 368(a)(1)(D) with both companies parties to it under section 368(b), no gain to Distributing on the contribution under sections 361(a) and 357(a) or on the distribution under section 361(c), no gain to Controlled on issuing its stock under section 1032(a), carryover basis and tacked holding periods for the assets, no gain to Shareholder AA under section 355(a)(1) with substituted basis under section 358(a)(1) and a tacked holding period under section 1223(1), and an earnings and profits allocation under sections 312(h) and 1.312-10(a).
One thing is conspicuously absent. Section 355(b), the active trade or business requirement, is never cited anywhere in the letter. The string does not appear once. Yet the facts section spends page after page on exactly the question 355(b) asks: who conducts the business, whose employees do the work, and whether the officers of a corporate partner perform enough management to count. The document builds the record and never names the provision the record is for. The rulings do not address it and the caveats do not reserve it.
Four caveats are stated, covering business purpose, device, the plan question under section 355(e), and whether the Corp XYZ merger qualifies as a reorganization. The same three reservations appear again in the letter's opening paragraphs.
The text was released with a clean text layer, so the following defects are recorded as found and not repaired.
Ruling (4) is missing its citation opener. It reads that Controlled's basis "will be the same as the basis of that asset in the hands of Distributing immediately before its transfer 362(b))." The closing parenthesis survives, the opening parenthesis and the section symbol do not. The letter never writes "§ 362(b)" anywhere. Section 362(b) is listed in the code sections above because the provision is legibly and correctly identified; only the punctuation around it was lost.
Ruling (1) cites a revenue ruling with no page. It reads "See Rev. Rul. 77-11, 1977-1 C.B." and the line then runs off the bottom of the page, verified here: nothing follows "C.B." in the text stream except the running header for page 12. The Cumulative Bulletin page number is simply absent. This entry does not supply it. The released text stops after "C.B."; no Cumulative Bulletin page number is present.
The opening reservation drops the first item of its own list. It says the office has made no determination regarding whether the Distribution "satisfies the business purpose requirement of Treas. Reg. § 1.355-2(b); (ii) is used principally as a device", and continues to "(iii)". Items (ii) and (iii) are numbered. Item (i) is not.
Representation (q) drops a closing parenthesis where representation (p) keeps it. The letter writes "§ 355(d)(7))" once and "§ 355(d)(7) will hold stock possessing 50 percent or more" once, the second being the unclosed one.
A quotation mark pair does not match. Step (5) defines a term as "(‘The Contribution”)", opening with a single quote and closing with a double. The count corroborates it: four opening double quotes against five closing ones, and exactly one opening single quote in the whole document.
Several names are written two ways. The partnership is "PRS-1" forty-four times and "PRS 1" once, in representation (e). The limited liability companies are worse: "LLC-1" three times against "LLC 1" three times, and "LLC-2" twice against "LLC 2" four times, so the unhyphenated form is actually the majority for the second one. The business is "X business" twelve times and "X Business" three times. The regulation prefix is "Treas. Reg." five times and "Treas.Reg." once, in caveat (i).
Two ordinary typing errors survive in adjacent sentences. Shareholder AA's profits interest is "not more than b%" and Shareholder BB's, one line later, is "not more then b%". Each phrase appears exactly once. In step (11) an article is doubled: "Controlled will own a approximately an s% capital and profits interest in PRS-1."
Representation (e) has been edited away from its standard wording in a way that matters. The form text has each corporation continue the business "independently and with its separate employees". Here a parenthesis is cut into the middle of it: "(such employees will be provided by PRS 1 to Distributing and Controlled for an arms length price)". The representation asserts separate employees and then explains that the employees are not separate, they are rented from a shared partnership. Note also "arms length" without the apostrophe, against four correct uses elsewhere.
Finally, the September 2008 Corporate letters continue to disagree with each other about citations, and this one supplies the third variant. For a disqualified investment corporation, this letter cites section 355(g)(2), docs/2008/0850014.md cites section 355(g)(2)(A), and docs/2008/0850018.md cites section 355(g)(3). Each form appears exactly once in its own letter and zero times in either of the other two. Three letters from the same Associate Chief Counsel (Corporate) inside a week, on the same concept, with three different citations. Which is correct is not decided here. This letter also writes "§ 361(c)" where 0850014 writes "§ 361(c)(1)", prints "section 355(e)(2)(a)(ii)" with a lowercase subparagraph letter where the other letters capitalise it, and writes the section symbol detached in "§ 355 (a)(1)(B)", a form used once and never repeated. The legend heading varies too: capitals indented nine columns here, capitals indented fifty-five columns in 0850014, "Legend" in 0850015 and 0850016, "Legend:" with a colon in 0850017, and no heading at all in 0850018. The perjury sentence is singular here, as in 0850015, and plural in 0850014 and 0850018.
The code sections listed above are every provision cited by number in the letter, reproduced in the form printed. Compound citations have been broken out: sections 355(d)(5) and 355(d)(8) from "§ 355(d)(5) and (8)", sections 50(a)(1) and 50(a)(2) from "§ 50(a)(1) or (a)(2)", and sections 368(a)(2)(F)(iii) and 368(a)(2)(F)(iv) from "§ 368(a)(2)(F)(iii) and (iv)". Section 355(e)(2)(a)(ii) is listed with the lowercase letter the document actually prints.
Ruling snapshot
- Question: Can an S corporation whose operations run on a partnership's employees split off half of itself to one of two feuding shareholders as a tax-free divisive reorganization?
- Outcome: Approved. Ten rulings were given, treating the contribution and the split-off to Shareholder AA as a reorganization under section 368(a)(1)(D) with no gain to the company, the new corporation or the departing shareholder, and allocating earnings and profits between them. No opinion was expressed on business purpose, device, the plan question under section 355(e), or whether the merger of Corp XYZ into Distributing qualifies as a reorganization. Section 355(b) is never cited.
- Key authorities: Sections 355(a)(1) and 368(a)(1)(D) with sections 312(h), 357, 358(a)(1), 361, 362(b), 368(b), 1032(a) and 1223, and regulations sections 1.312-10(a), 1.355-2(b), 1.355-2(d) and 1.355-7.
Full text (IRS public release)
```text
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 200850013 Third Party Communication: None
Release Date: 12/12/2008 Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-01,
368.00-00, 368.04-00 Person To Contact:
--------------------, ID No. -------------
----------------------------------------- Telephone Number:
---------------------------- ---------------------
---------------------------------------- Refer Reply To:
--------------------------- CC:CORP:B06
PLR-121886-08
Date:
September 10, 2008
LEGEND
Distributing = -------------------------------
-----------------------------------
Controlled = --------------------------------
Corp XYZ = ------------------------
------------------------------------------------------------------------------
PRS-1 = -----------------------------------------------------
-----------------------------------------------------------------------------------------
PRS-2 = ---------------------------------------------
----------------------------------------------------------------------------------------
PRS-3 = -------------------------
----------------------------------------------------------------------------------------
PRS-4 = ---------------------------------------------------
PRS-5 = --------------
PLR-121886-08 2
LLC-1 = ----------------------------------
---------------------------------------------------------------------------------------------------------
LLC-2 = -------------------------
---------------------------------------------------------------------------------------------------------
Shareholder AA = -----------------
Shareholder BB = --------------------
Shareholder CC = ------------------------
Asset 1 = --------------------
Asset 2 = --------------
Asset 3 = --------------
Asset 4 = -----------
Asset 5 = -------------------
Asset 6 = ---------------
Asset 7 = ---------------
Asset 8 = ---------------
Asset 9 = ------------------
Asset 10 = -------------------
Asset 11 = ---------------
Asset 12 = --------------------------
Asset 13 = --------------
Asset 14 = -----------------------
PLR-121886-08 3
Asset 15 = --------------
Asset 16 = ---------------
Date 1 = --------------------------
Date 2 = -------
Date 3 = -------
Date 4 = -------
#a = ---------
#b = -----------
#c = ----------------
#d = ---------
#e = -----
#f = -------
$gg = -----------------
a% = ------
b% = ------
c% = ---
d% = -----
e% = ------
f% = ---
g% = --
h% = ---
i% = ---
j% = ---
PLR-121886-08 4
k% = -------------
l% = ----
m% = ---------------
n% = ---------------
o% = --------
p% = --------
q% = ---
r% = ------
s% = --------
t% = ------
X business = -----------------------------------
State A = ----------
Dear -------------------:
This letter responds to your May 7, 2008, letter requesting rulings on certain federal income tax
consequences of the Proposed Transaction (described below). The information provided in
that letter and in later correspondence is summarized below.
The rulings contained in this letter are based upon information and representations submitted
by the taxpayer and accompanied by a penalty 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, this office has not reviewed any information pertaining to, and has made no
determination regarding, whether the Distribution (described below): satisfies the business
purpose requirement of Treas. Reg. § 1.355-2(b); (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 section 355(a)(1)(B) of the Internal Revenue Code (the “Code”) and
Treas. Reg. § 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
PLR-121886-08 5
greater interest in the distributing corporation or the controlled corporation (see section
355(e)(2)(a)(ii) and Treas. Reg. § 1.355-7).
FACTS
Distributing was formed on Date 1 in State A. Distributing is an S corporation.
Shareholder AA owns #a shares of Distributing Class A common voting stock and #b shares of
Distributing Class B non-voting common stock. Shareholder BB owns #a shares of Distributing
Class A common voting stock and #c shares of Distributing Class B non-voting common stock.
Shareholder CC owns #d shares of Distributing Class B non-voting common stock.
Shareholder AA and Shareholder BB are officers of Distributing.
Distributing has been engaged in X business since Date 1.
Distributing owns Assets 1-7. These assets are X business assets. In addition, Distributing
owns other X business assets. Distributing itself has no operational employees. Shareholder
AA and Shareholder BB make all of the significant business decisions with respect to
Distributing’s X business.
Corp XYZ was formed on Date 2 in State A. Corp XYZ is an S corporation.
Shareholder AA owns #e shares of Corp XYZ Class A voting common stock and #f shares of
Corp XYZ, Class B, non-voting common stock. Shareholder BB owns #e shares of Corp XYZ,
Class A, voting common stock and #f shares of Corp XYZ, Class B, non-voting common stock.
Corp XYZ owns a% of X Business’ Asset 13. Shareholder AA and Shareholder BB are officers
of Corp XYZ.
PRS-1 is a domestic limited partnership formed on Date 3. Shareholder AA and Shareholder
BB are the general partners of PRS-1. For the past five years, Shareholder AA has had a
profits interest in PRS-1 of not more than b%. For the past five years, Shareholder BB has
had a profits interest in PRS-1 of not more then b%. Distributing is a limited partner of PRS-1.
Distributing acquired its limited partnership interest in PRS-1 on Date 4. During the past five
years, Distributing had a profits interest in PRS-1 of not less than c%. During the past five
years, Distributing had a capital interest in PRS-1 of d%.
PRS-1 owns X business’ Assets 8-12 and Asset 16 and e% of X business’ Asset 13. In
addition, PRS-1 owns the land and building which serves as the central office for the entities,
herein described.
PRS-1 provides some of its employees to Distributing’s X business. These employees perform
services for Distributing for an arm’s length price. These employees provide both
management and operational functions for Distributing’s X business. PRS-1 is responsible for
both hiring and training these employees. Distributing through its officers (Shareholder AA and
Shareholder BB) has performed active and substantial management functions for PRS-1.
PLR-121886-08 6
Distributing through its officers (Shareholder AA and Shareholder BB) make significant
business decisions regarding significant business issues of PRS-1. In addition, Shareholder
AA and Shareholder BB participate in the overall supervision, and direction, and control of the
employees of PRS-1 performing operational and management functions for Distributing. In
addition, Shareholder AA and Shareholder BB participate in the overall supervision, and
direction, and control of the remaining employees of PRS-1 who perform operational and
management functions for other entities. PRS-1 currently owes Distributing $gg (“The
Intercompany Note”).
LLC 1 is a domestic limited liability company that has been classified as a partnership for
federal income tax purposes. The members of LLC 1 are PRS-2 and PRS-3. PRS-2 and
PRS-3 each own a f% capital and profits interest in LLC 1.
LLC-1 owns X business’ Asset 14.
LLC 2 is a domestic limited liability company that has been classified as a partnership for
federal income tax purposes. The members of LLC 2 are PRS-2 and PRS-3. PRS-2 and
PRS-3 each own a f% capital and profits interest in LLC 2. LLC 2 owns X business Asset 15.
PRS-2 is a domestic limited partnership. Shareholder AA and Shareholder AA’s spouse are
the general partners of PRS-2. Shareholder AA and Shareholder AA’s spouse each own a g%
capital and profits interest in PRS-2. Shareholder AA’s children are the limited partners of
PRS-2. Shareholder AA’s children each own a h% capital and profits interest in PRS-2.
PRS-3 is a domestic limited partnership. Shareholder BB is the general partner of PRS-3.
Shareholder BB and Shareholder CC are the limited partners of PRS-3. Shareholder CC owns
a i% capital and profits interest in PRS-3. Shareholder BB owns a j% capital and profits
interest in PRS-3.
Financial information has been received indicating that X Business has had gross receipts and
operating expenses representing the active conduct of a trade or business for each of the past
five years.
For what are represented as constituting valid business reasons, Distributing has proposed the
following transaction:
PROPOSED TRANSACTION
(1) Corp XYZ will be merged into Distributing pursuant to § 368(a)(1) with Distributing as .
the surviving corporation.
(2) PRS-1 will distribute Asset 16 and an e% interest in Asset 13 to Shareholder AA and
Shareholder BB.
(3) Shareholders AA and BB will transfer Asset 16 and an e% interest of
PLR-121886-08 7
Asset 13 to Distributing as contributions to capital.
(4) Distributing will transfer k% of Asset 7 to PRS-1 in exchange for
Assets 8 and 10.
(5) Distributing will form Controlled and will transfer the following assets (subject to liabilities):
Asset 2, Asset 4, Asset 5, l% of Asset 7, Asset 13, f% of its interest in PRS-1 and f% of its
other assets (thus excluding Asset 1, Asset 3, Asset 6, Asset 8 and Asset 10 and its
f% interest in PRS-1) to Controlled in exchange for all of Controlled’s stock (‘The
Contribution”). Distributing will assign f% of the Intercompany Note to Controlled. After
the completion of the above mentioned transaction, the value of X Business held
by Distributing and Controlled will be approximately the same.
(6) Distributing will distribute all of the stock of Controlled to Shareholder AA in exchange
for all of Shareholder AA’s stock in Distributing. (“The Distribution”).
(7) Controlled will elect to be an S corporation.
(8) PRS-2 and PRS-3 will be merged into PRS-1. LLC-1 and LLC-2 will be liquidated and their
assets subject to liabilities will be distributed to PRS-1.
(9) Shareholder BB and Shareholder CC and Distributing will form PRS-4. PRS-1 will transfer
Assets 9, 11 and 14, and other assets (subject to mortgages and other related liabilities
including f% of the Intercompany Note) to Shareholder BB, Shareholder CC and
Distributing. Shareholder BB, Shareholder CC and Distributing will then contribute the
above-mentioned assets and related liabilities to PRS-4. Distributing will own
approximately an m% capital and profits in PRS-4. Shareholder BB will own approximately
a n% capital and profits interest in PRS-4. Shareholder CC will own approximately an o%
capital and profits interest in PRS-4.
(10) Shareholder AA, Shareholder AA’s spouse and Shareholder AA’s children and Controlled
will form PRS-5. PRS-1 will transfer Asset 12, 15 and k% of Asset 7 and other assets
(subject to mortgages and related liabilities including f% of the Intercompany Note) to
Shareholder AA, Shareholder AA’s spouse, Shareholder AA’s children and Controlled.
Shareholder AA, Shareholder AA’s spouse, Shareholder AA’s children and Controlled will
then contribute the above-mentioned assets and liabilities to PRS-5. Controlled will then
receive approximately an m% capital and profits interest in PRS-5. Shareholder AA will
receive approximately a p% profits and capital interest in PRS-5. Shareholder AA’s
spouse will receive approximately a q% capital and profits interest in PRS-5. Each of
Shareholder AA’s children will receive approximately an r% profits and capital interest in
PRS-5.
(11) PRS-1 will retain management assets (including all associated employees) and the
Central office. PRS-1 will be converted to a general partnership with Shareholder AA,
PLR-121886-08 8
Shareholder BB, Distributing and Controlled as general partners.
Distributing will own approximately an s% capital and profits interest in PRS-1.
Controlled will own a approximately an s% capital and profits interest in PRS-1.
Shareholder AA will own approximately a t% capital and profits interest in PRS-1.
Shareholder BB will own approximately a t% capital and profits interest in PRS-1.
After the Proposed Transaction, PRS-1 (through its employees) will provide management
and operational services for X businesses of Distributing and Controlled. PRS-1 will
provide employees to Distributing for an arm’s length fee. PRS-1 will provide employees to
Controlled for an arm’s length fee. Distributing through its officer (Shareholder BB) will
continue to perform active and substantial management functions for PRS-1.
Distributing through its officer (Shareholder BB) will continue to make significant business
decisions regarding the significant business issues of PRS-1. In addition, Shareholder BB
will continue to participate in the overall supervision, direction, and control of the
employees of PRS-1 performing operational and management functions for Distributing.
Shareholder BB will make the significant business decisions for Distributing.
Controlled through its officer, (Shareholder AA), will perform active and substantial
management functions for PRS-1. Controlled through its officer, (Shareholder AA), will
make significant business decisions regarding significant business issues of PRS-1.
In addition, Shareholder AA will continue to participate in the overall supervision, and
direction, and control of the employees of PRS-1 performing operational and management
functions for Controlled. Shareholder AA will make the significant business decisions for
Controlled.
All of the employees of PRS-1 will continue as employees of PRS-1 after the Proposed
transaction. Shareholder AA and Shareholder BB will continue to guarantee certain debts
of PRS-1 after the Proposed Transaction.
(12) Distributing, PRS-4 and Shareholder BB will enter into an indemnification agreement in
which they agree to indemnify Controlled, PRS-5 and Shareholder AA for any liabilities on
any debts retained by Distributing or assumed by PRS-4. Controlled, PRS-5 and
Shareholder AA will enter into an indemnification agreement in which they agree to
indemnify Distributing, PRS-4 and Shareholder BB for any liability on any debts assumed
by Controlled or PRS-5.
REPRESENTATIONS
The following representations are made with respect to the Distribution:
.
(a) The fair market value of the controlled corporation stock and other consideration to
be received by Shareholder AA of the distributing corporation will be approximately
PLR-121886-08 9
equal to the fair market value of the distributing corporation stock surrendered by
Shareholder AA in the exchange.
(b) No part of the consideration to be distributed by the distributing corporation 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 the distributing
corporation is representative of the corporation’s present operation, and with regard
to such corporation, there have been no substantial operational changes since the
date of the last financial statements submitted.
(d) The five years of financial information submitted on behalf of the business
contributed to Controlled is representative of the corporation’s present operation,
and with regard to such corporation, there have been no substantial operational
changes since the date of the last financial statements submitted.
(e) Following the transaction, the distributing and controlled corporation will each
continue, independently and with its separate employees, (such employees will be
provided by PRS 1 to Distributing and Controlled for an arms length price) the active
conduct of its share of all the integrated activities of the business conducted by the
distributing corporation prior to the consummation of the transaction.
(f) The distribution of the stock, or stock and securities, of the controlled corporation is
carried out for the following corporate business purpose: In order to resolve
divergent shareholder interests and disputes. The distribution of the stock, or stock
and securities, of the controlled corporation is motivated, in whole or substantial part,
by this corporate business purpose.
(g) The transaction is not 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).
(h) The total adjusted basis and the fair market value of the assets transferred to
Controlled in the Contribution will equal or exceed the sum of (i) the total liabilities
assumed (within the meaning of § 357(d)) by Controlled, and (ii) the total amount of
any money and the fair market value of any other property (within the meaning of §
361(b)) received by Distributing and transferred to its creditors in connection with the
reorganization.
(i) The liabilities assumed (within the meaning of § 357(d)) by Controlled in the
Contribution were incurred in the ordinary course of business and are associated
with the assets being transferred.
PLR-121886-08 10
(j) The total fair market value of the assets transferred to Controlled in the Contribution
will exceed the sum of (i) the amount of any liabilities assumed (within the meaning
of § 357(d)) by Controlled in connection with the exchange, (ii) the amount of any
liabilities owed to Controlled by Distributing that are discharged or extinguished in
connection with the exchange, and (iii) the amount of any cash and the fair market
value of any other property (other than stock and securities permitted to be received
under § 361(a) without the recognition of gain) received by Distributing in connection
with the exchange.
(k) The fair market value of the assets of Controlled will exceed the amount of its
liabilities immediately after the exchange.
(l) The aggregate fair market value of the assets transferred to Controlled in the
Contribution will equal or exceed the aggregate adjusted basis of these assets.
(m) The income tax liability for the taxable year in which investment credit property
(including any building to which § 47(d) applies) is transferred will be adjusted
pursuant to § 50(a)(1) or (a)(2) (or § 47, as in effect before amendment by Public
Law 101-508, Title 11, 104 Stat. 1388, 536 (1990), if applicable) to reflect an early
disposition of the property.
(n) The distributing corporation neither accumulated its receivables nor made
extraordinary payment of its payables in anticipation of the transaction.
(o) No intercorporate debt will exist between the distributing corporation and the
controlled corporation at the time of, or subsequent to, the distribution of the
controlled stock.
(p) 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 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.
(q) 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 or securities that
were 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.
PLR-121886-08 11
(r) Payments made in connection with all continuing transactions, if any, between the
distributing and controlled corporations, will be for fair market value based on terms
and conditions arrived at by the parties bargaining at arm’s length.
(s) No two parties to the transaction are investment companies as defined in
§ 368(a)(2)(F)(iii) and (iv).
(t) The distribution is not part of a plan or series of related transactions (within the
meaning of § 1.355-7) 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 or Controlled (including any predecessor or successor of
any such corporation).
(u) Immediately after the Distribution, neither Distributing nor Controlled will be a
disqualified investment corporation (within the meaning of § 355(g)(2)).
OTHER REPRESENTATIONS
(v) The Merger of Corp XYZ into Distributing will qualify as a tax-free reorganization
under § 368(a)(1).
(w) Controlled and PRS-5 will be solely responsible for the debts assumed by
Controlled and PRS-5. Shareholder AA, Controlled and PRS-5 will indemnify
Shareholder BB, Distributing and PRS-4 for any liability on the debts assumed by
Controlled and PRS-5.
(x) Distributing and PRS-4 will be solely responsible for the debts retained by
Distributing or assumed by PRS-4. Shareholder BB, Distributing and PRS-4 will
indemnify Shareholder AA, Controlled and PRS-5 for any liability on the debts
retained by Distributing or assumed by PRS-4.
RULINGS
Based solely on the information and representations submitted, we rule as follows on the
proposed transaction:
(1) The transfer by Distributing to Controlled of assets in exchange for all of the
outstanding stock of Controlled and Controlled’s assumption of Distributing’s liabilities,
followed by Distributing’s distribution of the Controlled stock to Shareholder AA in
exchange for all of Shareholder AA’s stock in Distributing, will be a reorganization
within the meaning of § 368(a)(1)(D). Distributing and Controlled each will be “a party
to a reorganization” under § 368(b). See Rev. Rul. 77-11, 1977-1 C.B.
PLR-121886-08 12
(2) Distributing will not recognize any gain or loss on its transfer of property to Controlled in
exchange for Controlled stock and Controlled’s assumption of liabilities (§ 361(a) and
§ 357(a)).
(3) Controlled will not recognize any gain or loss on the receipt of assets from Distributing
in exchange for Controlled stock (§ 1032(a)).
(4) Controlled’s basis in each asset received from Distributing, will be the same as the
basis of that asset in the hands of Distributing immediately before its transfer
362(b)).
(5) Controlled’s holding period in each asset received from Distributing, will include the
period during which Distributing held that asset (§ 1223(2)).
(6) Distributing will not recognize any gain or loss on the distribution of all the Controlled
stock to Shareholder AA in exchange for all of Shareholder AA’s Distributing stock
(§ 361(c)).
(7) Shareholder AA will not recognize any gain or loss (and will not otherwise include any
amount in income) on the receipt of all of the shares of Controlled stock in exchange for
all of its Distributing stock (§ 355(a)(1)).
(8) The basis of the Controlled stock in the hands of Shareholder AA immediately after the
exchange will be the same as that shareholder’s basis in the Distributing stock held
immediately before the exchange (§ 358(a)(1)).
(9) The holding period of the Controlled stock received by Shareholder AA will include the
holding period of the Distributing stock exchanged therefor, provided the Distributing
stock is held as a capital asset on the date of the Distribution (§ 1223(1)).
(10) Earnings and profits, if any, will be allocated between Distributing and
Controlled in accordance with §§ 312(h) and 1.312-10(a).
CAVEATS
We express no opinion about the tax treatment of the Proposed Transaction under other
provisions of the Code and regulations or the tax treatment of any condition existing at the time
of, or effects resulting from, the Proposed Transaction that are not specifically covered by the
above rulings. In particular, no opinion is expressed regarding;
(i) Whether the Distribution satisfies the business purpose requirement of
Treas.Reg. § 1.355-2(b);
PLR-121886-08 13
(ii) Whether the Distribution is being used principally as a device for the distribution of
earnings and profits of Distributing or the controlled corporation. (see section
355(a)(1)(B) and Treas. Reg. § 1.355-2(d));
(iii) Whether the Distribution 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 Distributing or the controlled
corporation (see section 355(e) and Treas. Reg. § 1.355-7).
(iv) Whether the merger of Corp XYZ into Distributing qualifies as a reorganization under
§ 368(a)(1).
PROCEDURAL STATEMENTS
This ruling letter is directed only to the taxpayer (Distributing). 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
this letter ruling.
Sincerely,
_________________________________
Steven J. Hankin
Senior Technician Reviewer, Branch 6
Office of Associate Chief Counsel (Corporate)
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