PLR 1020008: IRS approved a planned merger of a holding company into its subsidiary

Plain-English summary

The IRS approved the merger of a holding company into its wholly owned operating subsidiary as a tax-free reorganization under IRC § 368(a)(1)(A). The ruling also approved nonrecognition for the transfer and receipt of assets, the distribution of subsidiary stock to the holding company's shareholders, and the shareholders' exchange of old stock for new stock. Cash paid instead of fractional shares was treated as a redemption under § 302(a), and the ruling addressed carryover basis and holding periods. The IRS relied on stated representations about the transaction's structure, continuity of ownership and business, lack of disqualifying prior transactions, and business purposes.

Ruling snapshot

• Question: Would the proposed merger of a holding company into its wholly owned subsidiary qualify as a tax-free reorganization, with related nonrecognition, basis, and holding-period consequences?
• Outcome: Approved
• Key authorities: IRC §§ 302(a), 357(a), 358(a)(1), 361(a), 361(c)(1), 368(a)(1)(A), 381(a), 382, 383, 384, 1032(a), 1223(1), and 6110(k)(3); Treas. Reg. §§ 1.368-1(e), 1.368-1(e)(3), 1.368-1(e)(4)(i)(A), and 1.381(a)-1

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201020008 Third Party Communication: None
Release Date: 5/21/2010 Date of Communication: Not Applicable
Person To Contact:
Index Number: 368.01-00, 368.08-00, 368.08- --------------------------, ID No. -------------
Telephone Number:
06
---------------------
Refer Reply To:
------------------------- CC:CORP:B05
--------------------- PLR-147090-09
-------------------------------------- Date:
-------------------------- February 19, 2010

LEGEND:

OldCo = ----------------------

Acquiring = ---------------------------------------

H = -------------------------------------

W = ------------------------------------

C = ----------------------------------------------------------

StateA = --------------

CountryB = --------

Year1 = -------

BusinessA = ------------------------------------------------------------------------------------------
---------------------------------------------------------------------------

Dear ----------:

   This letter responds to your representative’s letter of October 20, 2009,

requesting rulings as to the Federal income tax consequences of a proposed

PLR-147090-09 2

transaction. The material information submitted in that letter and subsequent
correspondence is summarized below.

   The rulings contained in this letter are based upon facts and representations that

were submitted on behalf of the taxpayer and that were accompanied by a penalties of
perjury statement executed by an appropriate party. This office has not verified any of
the material submitted in support of the request for rulings. However, verification of the
information, representations, and other data may be required as part of the audit
process.

                       SUMMARY OF FACTS

   OldCo, a State A corporation that uses the accrual method of accounting and a

calendar year, is a holding company whose main asset is stock in Acquiring. OldCo has
outstanding a single class of stock (“OldCo Stock”). Over ---% of the OldCo Stock is
held by three shareholders: H, W, and C. All of OldCo’s previously outstanding
warrants have now expired.

   Acquiring, a StateA corporation that uses the accrual method of accounting and a

calendar year, is engaged in BusinessA. Acquiring has outstanding voting common
stock (“Acquiring Stock”) all of which is held by OldCo. In addition, Acquiring has
outstanding convertible preferred stock and convertible debt, both convertible into
Acquiring Stock. This convertible preferred stock and debt are not held by OldCo. The
Acquiring Stock held by OldCo is over ---% but under ---% of the value of all the
outstanding stock in Acquiring.

                             PRIOR TRANSACTION

  In Year1, OldCo distributed stock in a subsidiary to certain OldCo shareholders in

exchange for OldCo Stock. The subsidiary was directly or indirectly engaged in
business in CountryB.

                         PROPOSED TRANSACTIONS

  Step (I)      OldCo Stock Issuance. OldCo will issue additional shares of OldCo
  Stock to various persons including W in exchange for cash.

  Step (II)     Liability Payments. OldCo will use some or all of the cash it
  receives to pay liabilities.

  Step (III)     The Merger. OldCo will merge with and into Acquiring in accord
  with applicable StateA law with Acquiring surviving and with Acquiring receiving
  all the assets and liabilities of OldCo. The separate corporate existence of OldCo
  will cease. The shareholders of OldCo, including those persons who

PLR-147090-09 3

   became shareholders in Step (I)), (“the “OldCo Shareholders”) will receive solely
   Acquiring Stock, plus cash in lieu of fractional shares (“Fractional Shares”) in
   exchange for their OldCo Stock.

                             FUTURE TRANSACTION

    Within the next year, Acquiring expects to substantially increase its capital

through the issuance of shares of preferred stock to unrelated investors in an unrelated
future transaction (“Future Transaction”).

                                REPRESENTATIONS

   (a)    The Prior Transaction was consummated prior to any plan being

established, any commitments being made, or any agreements being entered into with
regard to the Proposed Transactions.

   (b)    At the time the Proposed Transactions are consummated, there will be no

plan established, no commitments made, and no agreements entered into with regard to
any other transaction, including the Future Transaction.

   (c)    The Step (I) OldCo Stock Issuance will be at fair market value. For each

shareholder, the amount of cash transferred to OldCo will approximately equal the value
of the OldCo Stock received in exchange therefor.

      (d)  The Step (II) Liability Payments will be payments by OldCo of OldCo

liabilities. None of any liabilities being paid by OldCo are primarily liabilities of any
person other than OldCo.

   (e)     At the time the Step (IIl) Merger is undertaken, OldCo’s only outstanding

stock will be OldCo Stock. At such time, OldCo will have outstanding no debt or
convertible securities, warrants or options, or any other type of right, where such
interest in OldCo in actuality constitutes an equity interest in OldCo.

   (f)      Under applicable state law, none of the holders of OldCo Stock will have

dissenter’s rights.

   (g)    Acquiring will acquire all the outstanding stock in OldCo solely in

exchange for Acquiring Stock (and cash for fractional share interests).

   (h)    The fair market value of the Acquiring Stock (and cash for fractional share

interests) received by each OldCo Shareholder will be approximately equal to the fair
market value of the OldCo Stock surrendered by such OldCo Shareholder in exchange
therefor.

PLR-147090-09 4

  (i)    At least forty percent (---%) of the proprietary interest in OldCo will be

exchanged in the reorganization for a proprietary interest in Acquiring that will be
preserved (within the meaning of § 1.368-1(e) of the Income Tax Regulations).

   (j)    At the time the Step (III) Merger is undertaken, OldCo will have no assets

other than stock in Acquiring and, possibly, some cash.

    (k)    There is no plan or intention by Acquiring (or through any person related

to Acquiring within the meaning of § 1.368-1(e)(3)), to either directly or indirectly
purchase any of the Acquiring Stock issued in the Step (III) Merger (other than the cash
for fractional share interests).

   (l)    Acquiring, OldCo, and each of the OldCo Shareholders will each pay his,

her, or its own expenses incurred in connection with each of the Proposed
Transactions.

     (m) Acquiring will neither pay nor assume (either directly or indirectly) any

liabilities of the OldCo Shareholders.

  (n)     Neither OldCo nor Acquiring is, or will be, an investment company as

defined in § 368(a)(2)(F)(iii) and (iv).

   (o)     None of the Acquiring Stock is being received by an OldCo Shareholder

as a creditor, employee, or in any capacity other than as a holder of OldCo Stock.

   (p)     The receipt of cash by an OldCo Shareholder in lieu of receiving a

Fractional Share will be the result of the exchange ratio which was negotiated without
seeking to maximize the issuance of Fractional Shares. Neither the use of Fractional
Shares, or the amount of Fractional Shares, or the payment of cash for fractional share
interests was separately bargained for. The payment of cash for fractional share
interests is solely for the purpose of avoiding the expense and inconvenience of issuing
Fractional Shares and having Fractional Shares outstanding. The total amount of cash
that Acquiring will pay for fractional share interests in the entire transaction is less than
one percent (1%) of the total fair market value of all the shares of Acquiring Stock being
issued in the Step (III) Merger.

    (q)  OldCo is not under the jurisdiction of a court in a Title 11 or similar case

within the meaning of § 368(a)(3)(A) of the Internal Revenue Code.

   (r)    The Proposed Transactions are being undertaken for business purposes

of Acquiring and OldCo including simplifying capital structure and reducing filing
requirements.

PLR-147090-09 5

   (s)    Immediately prior to the Step (III) Merger, the fair market value of the

assets of OldCo will exceed the sum of its liabilities (if any) plus the liabilities (if any) to
which its assets are subject.

    (t)     There is no indebtedness existing between OldCo and Acquiring.

    (u)   Acquiring does not own, directly or indirectly, nor has it owned during the

past five years, directly or indirectly, any stock in OldCo.

   (v)     During the 5-year period prior to Step (III): (i) neither Acquiring nor any

person related to Acquiring (within the meaning of § 1.368-1(e)(3)) will have acquired
stock in OldCo with consideration other than Acquiring Stock; (ii) neither OldCo nor any
person related to OldCo (as defined in § 1.368-1(e)(3) without regard to
§ 1.368-1(e)(4)(i)(A)) will have acquired OldCo Stock (with consideration other than
stock in OldCo or stock in Acquiring); and (iii) OldCo will have made no distributions,
either directly or indirectly, to its shareholders other than ordinary, normal, regular
dividend distributions pursuant to OldCo’s historic dividend practice.

  (w)    Acquiring has no plan or intention to sell or otherwise dispose of any of the

assets of OldCo acquired in the Step (III) Merger.

   (x)    There are no liabilities of OldCo that will be assumed (within the meaning

of section 357(d)) by Acquiring, nor are there any liabilities to which the assets
transferred by OldCo to Acquiring will be subject.

   (y)    Following the Proposed Transactions, Acquiring will continue its historic

business or use a significant portion of its historic business assets in a business.

   (z)     OldCo will distribute the stock, securities, and other property it receives in

the Step (III) Merger, and its other properties, in pursuance of the plan of reorganization.

                                 RULINGS

  Based solely on the information submitted and the representations set forth

above, we rule as follows:

  (1)    The Step (III) Merger pursuant to applicable state law, as described

above, of OldCo into Acquiring with Acquiring surviving is a reorganization within the
meaning of § 368(a)(1)(A). OldCo and Acquiring will each be a "party to a
reorganization" within the meaning of meaning of § 368(b).

  (2)    No gain or loss will be recognized by OldCo upon the transfer of all its

assets to Acquiring solely in exchange for Acquiring Stock (including Fractional Shares)
and the assumption of OldCo liabilities (if any) by Acquiring (§§ 361(a) and 357(a)).

PLR-147090-09 6

  (3)    No gain or loss will be recognized by Acquiring upon its receipt of OldCo’s

assets in exchange for Acquiring Stock (including Fractional Shares) (§ 1032(a)).

   (4)     No gain or loss will be recognized to OldCo on the distribution of Acquiring

Stock (including Fractional Shares) to the OldCo Shareholders in the reorganization
(§ 361(c)(1)).

    (5)   Under § 381(a) and § 1.381(a)-1, the taxable year of OldCo will end on the

effective date of the reorganization, and Acquiring will succeed to and take into account
the OldCo items described in § 381(c), subject to the provisions and limitations of
§§ 381, 382, 383, and 384, and the regulations thereunder.

   (6)    No gain or loss will be recognized by an OldCo Shareholder on the

exchange of its OldCo Stock for Acquiring Stock (including any Fractional Share) in the
Step (III) Merger. The payment of cash to an OldCo shareholder in lieu of receiving a
Fractional Share of Acquiring stock will be treated for federal income tax purposes as if
the Fractional Share was distributed as part of the Merger and subsequently redeemed
by Acquiring. These cash payments will be treated as distributions in full payment in
exchange for the stock redeemed as provided in § 302(a). See Rev. Rul. 66-365, 1966-
2 C.B. 116.

   (7) For each OldCo Shareholder, such shareholder’s basis in the Acquiring

Stock received (including any Fractional Share) will be equal to the basis of the OldCo
Stock surrendered by such shareholder in exchange therefor (§ 358(a)(1)).

   (8) For each OldCo Shareholder, the shareholder’s holding period for the

Acquiring Stock (including any Fractional Share) received will include the period during
which such shareholder held the OldCo Stock exchanged therefor, provided such
OldCo Stock is held as a capital asset in the hands of such shareholder on the date of
the exchange (§ 1223(1)).

                               CAVEATS

   Except as expressly provided herein, no opinion is expressed or implied

concerning the tax consequences of any aspect of any matter or item discussed or
referenced in this letter. In particular, opinion is expressly reserved with regard to: the
Prior Transaction; the Future Transaction; and Steps (I) and (II) of the Proposed
Transactions.

    Furthermore, no opinion is expressed about the tax treatment of the transactions

(or of any other matter) under other provisions of the Code or regulations or about the
tax treatment of any conditions existing at the time of, or effects resulting from, the
transactions not specifically covered by the above rulings.

PLR-147090-09 7

                        PROCEDURAL STATEMENTS

   This private letter ruling is directed only to the taxpayers who requested it.

Section 6110(k)(3) of the Code provides that this private letter ruling may not be used or
cited as precedent.

   A copy of this letter must be attached to the Federal income tax returns of each

taxpayer involved for the taxable year(s) in which the transactions are consummated.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching to the return a statement that provides the date and control number
(PLR-147090-09) of this ruling letter.

   Pursuant to a power of attorney on file in this matter, a copy of this letter is being

sent to your authorized representative.

                                       Sincerely,



                                       _Douglas C. Bates__________
                                       Douglas C. Bates
                                       Assistant to the Branch Chief, Branch 5
                                       Office of Associate Chief Counsel
                                       (Corporate)

cc: