PLR 201007050: IRS addressed control and subsidiary contributions in a planned corporate split-off
Number
201007050
Outcome
Approved
Document type
Private Letter Ruling
IRS subject
Control
Code sections
§ 301, § 351, § 355, § 368, § 6110
Ruling dated
November 13, 2009
Publicly released
February 19, 2010
Source
Apply this to your situation
This page covers one taxpayer's ruling, issued in 2010, which can't be cited as precedent. Ask about your situation and see what the current Code and IRS guidance say, with citations.
Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.
About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.
View official IRS release (PDF)
Plain-English summary
The IRS considered a proposed series of corporate transactions involving a public parent, its subsidiary, and a controlled corporation. The plan included an internal distribution of the controlled corporation's stock, an exchange offer to the parent's shareholders, a possible follow-up distribution, and contributions of other subsidiaries. The IRS ruled that the planned conversion of the controlled corporation's voting stock would not cause the internal spin-off to fail the requirement that the distributing corporation control the controlled corporation immediately before the distribution. It also ruled that the planned contributions of other subsidiaries would not be treated as consideration received for the controlled corporation stock distributed in the internal spin-off. The letter did not express an opinion on the other tax consequences described in the request.
Ruling snapshot
- Question: Would the planned stock conversion and subsidiary contributions affect the qualification of the internal spin-off under IRC § 355?
- Outcome: Approved
- Key authorities: IRC §§ 301, 351, 355, and 368; Treas. Reg. § 1.1502-19(e)
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 201007050 Third Party Communication: None
Release Date: 2/19/2010 Date of Communication: Not Applicable
Index Number: 355.05-00
Person To Contact:
------------------------- ---------------, ID No. -------------
------------------------------- Telephone Number:
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----------------------- Refer Reply To:
-------------------------------------------- CC:CORP:BO6
PLR-143737-09
Date:
November 13, 2009
LEGEND
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Controlled = -------------------------------------------------------------
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PLR-143737-09 2
Sub 7 = --------------------------------------------------------------
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Business 1 = ---------------------------------------------------------------
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Business 3 = ---------------------------------------------------------------
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Month 1 = ------------------
Date 2 = -----------------------
Date 3 = -----------------------
Date 4 = --------------------------
Date 5 = ---------------------------------------------------------------
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Date 6 = ---------------------------------------------------------------
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Date 7 = ----------------------
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PLR-143737-09 3
f = ---
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Dear --------------:
This ruling is in reply to your letter dated September 30, 2009 requesting rulings
concerning some of the Federal income tax consequences of a proposed transaction.
The material information submitted in the request and in later correspondence is set
forth 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.
This letter is issued pursuant to Rev. Proc. 2009-25, 2009-24 I.R.B. 1088,
regarding one or more significant issues solely under the jurisdiction of the
Associate Chief Counsel (Corporate), involving the tax consequences of a
transaction (or part of a transaction) that occurs in the context of a § 355
distribution. This Office expresses no opinion as to the overall tax consequences
of the transactions described in this letter or as to any issue or step not
specifically addressed by this letter. Rather, the rulings contained in this letter
only address one or more discrete legal issues involved in the transaction.
Summary of Facts
D2 is a public company and the common parent of a consolidated group. D2
owns all the stock of D1, a corporation engaged in Business 1. Until the restructuring
that took place in Month 1 (described below), D2 also owned all the stock of Sub 3, a
corporation engaged in Business 3.
PLR-143737-09 4
For what are represented to be valid business purposes, including the creation of
a holding company structure to facilitate an initial public offering (IPO) with respect to
Business 3, the following steps were taken in Month 1. First, D2 contributed all the Sub
3 stock to D1. Second, Sub 3 issued to D1 a note with a principal amount of c, which
was intended by the parties to qualify as a Section 301 distribution from Sub 3 to D1.
Because the principal amount of the note exceeded D1’s basis in its Sub 3 stock, the
distribution created an excess loss account (“ELA”) in the Sub 3 stock held by D1.
Third, D1 created Controlled, a corporation. D1 owned all the stock of Controlled.
Controlled then created a merger sub that merged into Sub 3 in a transaction that was
intended by the parties to qualify as a reorganization under Sections 368(a)(1)(A) and
368(a)(2)(E). As a result of the merger, D1 owned all the Controlled stock and
Controlled owned all the Sub 3 stock. There are now ELAs in the Controlled stock held
by D1 and in the Sub 3 stock held by Controlled.
In anticipation of an IPO of Controlled, Controlled amended its certificate of
incorporation (the “Charter”) on Date 2 to authorize two classes of common stock:
Class A and Class B (the “Recap”). Both classes have identical economic rights but
Class A stock carries a votes per share while Class B stock carries b votes per share.
As part of the Recap, all of D1’s shares of Controlled stock were converted into d
shares of Class B stock in a reorganization that D2 represents qualified as a
reorganization under Section 368(a)(1)(E). (No shares of Class A stock were
outstanding.) D2 states that the Recap was intended to preserve the D2 group’s control
of Controlled in case the group’s economic ownership of Controlled were reduced below
80% after the IPO.
As amended on Date 2, Controlled’s Charter allows for the possibility of a partial
or total elimination of the tiered voting structure in the Controlled stock that was
created in the Recap. Among other things, the Charter generally provides that: (i) any
holder of Class B stock may convert its Class B stock into Class A stock, (ii) each Class B
share automatically converts into a Class A share upon the transfer of such Class B share
to a person other than D2 or a “subsidiary” (as defined by the Charter) of D2, (iii) all the
Class B stock automatically converts into Class A stock in the event that the aggregate
number of outstanding Class A and Class B shares beneficially owned by D2 and its
“affiliates” (as defined by the Charter) other than Controlled and Controlled’s
“subsidiaries” (as defined by the Charter) represents less than k% of the aggregate
number of outstanding shares of Controlled common stock, and (iv) all the Class B
stock may be converted into Class A stock by a majority vote of the Class B stock.
However, the Charter also generally provides, notwithstanding items (i)-(iv) of the
preceding sentence, that in the event of a distribution of the Controlled stock to the
public that is intended to qualify under Section 355, the Class B stock loses its
conversion rights and the voting power of the Class B stock is reduced to the lowest
positive whole number of votes per share that is possible while still permitting the
distribution to qualify under Section 355(a).
PLR-143737-09 5
On Date 2 and Date 3, the assets pertaining to Business 3 that were not held by
Sub 3 were transferred to Controlled (i) by D2 in exchange for Class A stock of
Controlled (which was intended by the parties to qualify as an exchange under Section
351) and (ii) by certain subsidiaries of D2 in exchange for cash or short-term notes of
Controlled (all of which have been repaid).
On Date 4, Controlled issued e shares of Class A stock to the public in the IPO.
Since the IPO, Controlled’s stock price has appreciated considerably, including in
relation to D2’s stock price. To take advantage of this situation, and for what are
represented to be valid business purposes, D2 proposes the following steps (“the
Proposed Transaction”):
(i) On Date 5, D1 (the sole shareholder of the Controlled Class B stock) will
distribute all of its Controlled stock to D2 (the “Internal Spin-off”).
(ii) On Date 6, D2 will announce and file with the SEC an exchange offer to
D2’s shareholders, pursuant to which D2 will offer to exchange all of its
Controlled Class A stock for outstanding shares of D2 stock (the
“Exchange Offer”). The consummation of the Exchange Offer will be
conditioned upon a minimum level of participation in the Exchange Offer
by tendering D2 shareholders, which minimum level of participation will
be determined by D2 prior to the commencement of the Exchange Offer but
will be no less than f% of the number of shares of Controlled held by D2
after the Unwind described below in step (iii). The exchange ratio for the
Exchange Offer will be set at a level intended to encourage the D2
shareholders to tender their D2 stock in the Exchange Offer. The
expiration date of the Exchange Offer (the “Expiration Date”) will be at
least 20 business days after the Exchange Offer is announced.
(iii) On or shortly after the Expiration Date, if the tender condition in Step (ii)
and other conditions to the Exchange Offer are met, D2 will convert its
Controlled Class B stock into Class A stock, with g votes per share, in a
reorganization that D2 represents will qualify under Section 368(a)(1)(E)
(“the Unwind”). As a result of the Internal Spin-off and the Unwind, D2
will hold shares of Controlled stock with h% of the voting power and j% of
the value of all the outstanding stock of Controlled. After the Unwind, D2
will transfer its Controlled stock to tendering D2 shareholders pursuant to
the Exchange Offer in exchange for D2 stock (the “External Split-off”).
(iv) If D2 does not distribute all of its Controlled stock in the External Split-off,
then promptly after completion of the External Split-off D2 will distribute to
its shareholders all its remaining Controlled stock (the “Clean-up
Distribution”). After this step, D2 will not own any Controlled stock.
PLR-143737-09 6
(v) D2 will contribute the stock of Sub 4, Sub 5 and Sub 6 to D1. In addition,
on Date 7, D2 previously contributed Sub 7 to D1 (along with the contributions
of Subs 4-6, the “Subsidiary Contributions”). The Subsidiary Contributions
were planned without regard to the Internal Spin-off, and would have occurred
or will occur whether or not the Internal Spin-off occurs.
Representations
(a) To the best knowledge and belief of D2, the Internal Spin-off will qualify
under Section 355(a) assuming that the Service issues the rulings set
forth below regarding the Unwind and the Subsidiary Contributions.
(b) To the best knowledge and belief of D2, the External Split-off and the
Clean-Up Distribution will qualify under Section 355(a), assuming that the
Service issues the rulings set forth below regarding the Unwind.
(c) To the best knowledge and belief of D2, the Recap qualifies as a tax-free
reorganization under Section 368(a)(1)(E).
(d) There is, and there will be (as of immediately after the Internal Spin-off),
no legally binding obligation to change the capital structure or the Charter of
Controlled, including an obligation (i) to exercise any conversion rights, (ii)
to change the relative voting power of any shareholder or class of shares of
Controlled, and/or (iii) to affect any other right created in the Recap.
PLR-143737-09 7
Rulings
Based solely on the information submitted and representations set forth above,
we rule as follows:
(1) The Unwind will not cause the Internal Spin-off to fail to satisfy the “controls
immediately before” requirement of Section 355(a)(1)(A).
(2) The Subsidiary Contributions will not be treated as having been received
by D1 in exchange for Controlled stock distributed by D1 in the Internal
Spin-off.
Caveat
No opinion is expressed or implied concerning the tax consequences of any
other aspect of any transaction or item discussed or referenced in this letter, including
the tax consequences or characterization of the distributions, other issues related to the
distributions, and the application of the anti-avoidance rule of Treasury Regulation
Section 1.1502-19(e) to the excess loss accounts in the stock of Controlled and Sub 3.
Procedural Statements
This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3)
provides that it may not be used or cited as precedent. 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.
In accordance with the power of attorney on file in this office, a copy of this letter
is being sent to your authorized representative.
Sincerely,
_________________________
Stephen P. Fattman
Special Counsel to the Associate Chief
Counsel (Corporate)
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