PLR 200850018: a spin-off that ends with one shareholder, after a death put the rest of the stock in trust
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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
A six page private letter ruling, control number "PLR-123614-08", dated September 11, 2008 and released 12/12/2008. It is routed "CC:CORP:03", carries Index Number "355.00-00, 355.01-00", and is signed by Ken Cohen, Senior Technician Reviewer, Branch 3, Office of Associate Chief Counsel (Corporate). It answers a request dated May 15, 2008, with additional information supplied in a letter dated August 6, 2008.
The transaction is a spin-off, and a small one. Distributing owns all of Controlled, the two file a consolidated return, and both are directly engaged in the same line of business, called Business in the letter. Each has a single class of stock outstanding. The ruling asks whether Distributing can hand the Controlled stock to its shareholder without anyone recognizing gain.
What makes the letter worth reading is who the shareholder is, and how that came about. Distributing's shares are held by Shareholder A and by Trust. The shares Trust holds "had been owned by Shareholder B until his death on Date E." So this is a family business after a death, with part of the stock sitting in an estate or trust structure. Before the spin-off, Trust will distribute those shares to Shareholder A, and from that point "Shareholder A will own all of the outstanding shares of Distributing."
The death has a second consequence. The letter records that the shares Trust holds "may be subject to an estate tax liability", and that if they are, "a portion of the Distributing stock will be redeemed in a §303 redemption" to pay it. Section 303 is a relief provision for exactly this situation. Normally a corporation buying back stock from a shareholder who keeps control is treated as paying a dividend, taxable in full. Section 303 carves out a redemption whose proceeds go to estate taxes and administration expenses, and lets it be treated as a sale instead. Without it, a family would have to pull dividend income out of the company to pay the estate tax on the company. The letter does not rule on the section 303 redemption. It simply notes it as part of the surrounding facts.
Then the spin-off proper. Distributing will "distribute pro rata all of its Controlled stock to Shareholder A". The phrase pro rata is doing no work by that point, since Shareholder A is the only shareholder left. It is template wording carried into a one-shareholder deal.
Thirteen representations run from (a) to (m). The ones with content are that five years of financial information is representative of present operations for both companies, that after the split each will carry on its business "independently and with its separate employees, except that Employee X will perform certain services for both Distributing and Controlled for an interim period", that no intercorporate debt will exist afterward, and that continuing dealings between them will be at arm's length fair market value. Employee X is the only named individual role in the document, and appears twice, once in the legend and once in that representation. It is the small loose end in an otherwise clean separation.
The stated business purposes are "maintaining economic separateness for the reduction of risk, increasing the borrowing capacity of each corporation, and streamlining business operations and financial matters."
Five rulings follow. Distributing recognizes no gain or loss on distributing the Controlled stock. Shareholder A recognizes none on receiving it. The holding period of the Controlled stock tacks onto the holding period of the Distributing shares it came from, provided those were held as capital assets. Earnings and profits are allocated between the two companies.
Ruling (3) is the one with real substance. Shareholder A's basis in Distributing is carried over and split between the Distributing and Controlled stock in proportion to their fair market values. But the letter then adds that because Shareholder A's Distributing shares "may have different bases (e.g., shares of stock were acquired at different times and at different prices)", the allocation is done "block by block" rather than on a single blended basis. That matters on a later sale. A shareholder who accumulated stock over years holds several separate lots, each with its own cost, and the spin-off splits each lot rather than averaging them. Given that some of these shares have just come out of a trust following a death, and others Shareholder A has held all along, the blocks here are unlikely to look alike.
Four points of transcription, recorded rather than repaired, since the document came from a clean text layer.
First, ruling (5) reads that earnings and profits "will be allocated between Distributing and Controlled in accordance with to §§312(h), 1.312-10(b), and 1.1502-33(e)." The phrase "in accordance with to" carries a preposition too many. It appears once. The citations themselves are ordinary.
Second, the same parenthetical citation is spelled two ways in adjacent representations. Representation (k) defines purchase "as defined in §355(d)(5) and (8)". Representation (l) defines the identical term "as defined in §§355(d)(5) and (8)", twice, with the section symbol doubled. Both spellings point at the same two provisions, and both are listed above.
Third, the document has no legend heading. The defined terms begin at the first line after the date block, with Distributing on the line immediately following "September 11, 2008", and the words Legend and LEGEND appear nowhere in the letter. This is not unique. docs/2008/0850026.md, released the same day and signed by the same officer, also prints its legend with no heading, verified before this entry was written. Two letters from one signer sharing an omission suggests a habit of that desk rather than a fault in this copy.
Fourth, the perjury statement is described as "a penalties of perjury statement", plural, where the usual house form is the singular. The singular phrase does not appear in this document at all.
One routing detail is worth recording alongside the legend point. This letter is marked "CC:CORP:03". docs/2008/0850026.md, signed by the same Ken Cohen one day earlier, is marked "CC:CORP:B03". The string CC:CORP:B03 does not appear in this letter. The Corporate branch designator is written inconsistently across this release, sometimes with the B and sometimes without, even in consecutive letters from the same reviewer.
The caveats are the standard three for a spin-off, and they are given twice, once at the front and once at the back. No opinion is expressed on whether the distribution meets the business purpose requirement, on whether it is a device for distributing earnings and profits, or on whether it is part of a plan under section 355(e)(2)(A)(ii). Those are the three questions on which spin-offs are most often challenged, and the ruling deliberately leaves all three alone. What it does rule on is the mechanical tax consequences, assuming the answers to those three come out the taxpayer's way.
The citation check this corpus normally runs could not be performed because the legal research tool is unavailable in this session. Every section listed above was verified against the released text itself, and nothing has been supplied or corrected from memory.
Ruling snapshot
- Question: Can Distributing spin its wholly owned subsidiary Controlled out to its sole remaining individual shareholder, after trust-held shares from a deceased shareholder are consolidated into that shareholder's hands, without gain or loss to either the corporation or the shareholder?
- Outcome: Approved. Five rulings were given: no gain or loss to Distributing under section 355(c); no gain or loss to and no income included by Shareholder A under section 355(a)(1); basis allocated between the Distributing and Controlled stock by fair market value and block by block; holding period tacked under section 1223(1); and earnings and profits allocated between the two companies. No opinion was expressed on business purpose, on device, or on whether the distribution is part of a plan under section 355(e)(2)(A)(ii).
- Key authorities: Sections 355(c), 355(a)(1), 358(a), (b) and (c), 1223(1) and 312(h) of the Code, and sections 1.358-2(a)(2), 1.312-10(b) and 1.1502-33(e) of the regulations, with section 303 noted in the facts and sections 355(d) and 355(g) addressed by representation.
Full text (IRS public release)
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Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 200850018 Third Party Communication: None
Release Date: 12/12/2008 Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-00
Person To Contact:
-----------------------, ID No. -------------
Telephone Number:
---------------------
Refer Reply To:
CC:CORP:03
PLR-123614-08
Date:
September 11, 2008
Distributing = -------------------------------------------
Controlled = -----------------------------
Business = --------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------
------------------------------------
Shareholder A = --------------------
Shareholder B = ------------------------------------
Trust = ----------------------------------------------------
c = ----
d = ----
Date E = --------------------------
Employee X = ----------------------------------------------
PLR-123614-08 2
Dear ---------------:
We respond to your request dated May 15, 2008, for rulings on the Federal
income tax consequences of a proposed transaction. Additional information was
provided in a letter dated August 6, 2008. 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 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 any
distributing corporation or controlled corporation (see §355(a)(1)(B) of the Internal
Revenue Code and §1.355-2(d)), and (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 any distributing corporation or
controlled corporation (see §355(e)(2)(A)(ii) and §1.355-7).
Distributing files a consolidated Federal income tax return with its wholly owned
subsidiary, Controlled. Both Distributing and Controlled are directly engaged in
Business. Distributing and Controlled each have one class of stock issued and
outstanding.
The Distributing shares are owned by Shareholder A (c %) and Trust (d %). The
shares held by Trust had been owned by Shareholder B until his death on Date E.
Prior to the transaction described below, Trust will distribute the Distributing shares,
which may be subject to an estate tax liability, to Shareholder A. Accordingly,
Shareholder A will own all of the outstanding shares of Distributing. Distributing
anticipates that if the Distributing shares are subject to an estate tax liability, then, in
order to pay the estate tax liability, a portion of the Distributing stock will be redeemed in
a §303 redemption.
Financial information has been received that indicates that Business conducted
by Distributing and Controlled each has had gross receipts and operating expenses
representative of the active conduct of a trade or business for each of the past five
years.
PLR-123614-08 3
For what are represented to be valid business purposes, Distributing proposes to
distribute pro rata all of its Controlled stock to Shareholder A (the “Distribution”). No
property will be transferred by Distributing to Controlled in anticipation of or in
connection with the transaction.
The following representations have been made in connection with the proposed
transaction:
(a) No part of the consideration to be distributed by Distributing will be
received by a shareholder as a creditor, employee, or in any capacity
other than that of a shareholder of Distributing.
(b) The five years of financial information submitted on behalf of Distributing is
representative of its present operations, and with regard to Distributing,
there have been no substantial operational changes since the date of the
last financial statements submitted.
(c) The five years of financial information submitted on behalf of Controlled is
representative of its present operations, and with regard to Controlled,
there have been no substantial operational changes since the date of the
last financial statements submitted.
(d) Following the transaction, Distributing and Controlled will each continue
the active conduct of its business, independently and with its separate
employees, except that Employee X will perform certain services for both
Distributing and Controlled for an interim period.
(e) The Distribution is being carried out for the following corporate business
purposes: maintaining economic separateness for the reduction of risk,
increasing the borrowing capacity of each corporation, and streamlining
business operations and financial matters. The Distribution is motivated,
in whole or substantial part, by one or more of these corporate business
purposes.
(f) The Distribution is not used principally as a device for the distribution of
the earnings and profits of Distributing or Controlled or both.
(g) 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 §1.355-7) that
includes the distribution of the Controlled stock.
(h) No intercorporate debt will exist between Distributing and Controlled at the
time of, or subsequent to, the Distribution.
PLR-123614-08 4
(i) 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’s excess loss
account (if any) with respect to the Controlled stock will be included in
income immediately before the Distribution.
(j) 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.
(k) 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.
(l) 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.
(m) Immediately after the transaction (as defined in §355(g)(4)) neither
Distributing nor Controlled will be a disqualified investment corporation
(within the meaning of §355(g)(3)).
Based solely on the information submitted and on the representations set forth
above, we rule as follows:
(1) No gain or loss will be recognized by Distributing upon the distribution of
its stock in Controlled to Shareholder A (§355(c)).
PLR-123614-08 5
(2) No gain or loss will be recognized by (and no amount will be included in
the income of) Shareholder A on the receipt of Controlled stock
(§355(a)(1)).
(3) The aggregate basis of the Distributing and Controlled stock in the hands
of Shareholder A immediately after the Distribution will be the same as the
aggregate basis of the Distributing stock in the hands of Shareholder A
immediately before the Distribution, allocated between the Distributing and
Controlled stock in proportion to the fair market value of each in
accordance with § 1.358-2(a)(2) (§ 358(a), (b) and (c)). Because the
Distributing stock held by Shareholder A immediately before the
transaction may have different bases (e.g., shares of stock were acquired
at different times and at different prices), the bases of the Distributing
blocks of shares will be allocated between the Distributing blocks and
Controlled blocks (block by block allocation).
(4) The holding period of the Controlled stock in the hands of Shareholder A
will include the holding period of the Distributing shares with respect to
which the shares are received, provided the Distributing shares are held
as capital assets by Shareholder A on the date of the Distribution
(§1223(1)).
(5) As a result of the Distribution, earnings and profits will be allocated
between Distributing and Controlled in accordance with to §§312(h),
1.312-10(b), and 1.1502-33(e).
No opinion is expressed about the tax treatment of the proposed transaction
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 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
§1.355-2(b); (ii) whether the proposed transaction 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) and §1.355-2(d)); and (iii) whether the
Distribution and an acquisition or acquisitions are part of a plan (or series of related
transactions) under §355(e)(2)(A)(ii).
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 representatives.
PLR-123614-08 6
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,
_______________________
Ken Cohen
Senior Technician Reviewer, Branch 3
Office of Associate Chief Counsel (Corporate)
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