Ezel / IRS Rulings / 1025018
Private Letter Ruling 1025018 Released June 25, 2010 Approved

PLR 1025018: IRS approved a title 11 reorganization involving a new company

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This page covers one taxpayer's ruling from 2010, which can't be cited as precedent. Ask about your situation and see what the current Code and IRS guidance say, with citations.

Currency note: this determination was released in 2010
Statutory amendments, regulation changes, court decisions, or later IRS guidance may have changed the analysis since then. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, threshold, or position mentioned here.
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.
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Plain-English summary

The IRS ruled on the federal tax treatment of a proposed chapter 11 restructuring in which a newly formed company would acquire operating assets from a financially distressed company in exchange for stock, debt instruments, warrants, and other consideration. The IRS concluded that the exchange and the liquidation of the existing company would qualify as a reorganization under section 368(a)(1)(G). It also ruled on nonrecognition of gain or loss, the carryover basis and holding period of transferred assets, the treatment of creditor claims and securities, and the successor company's ability to take into account specified tax attributes. The ruling was based on the taxpayer's submitted facts and representations and addressed only the matters specifically listed in the letter.

Ruling snapshot

  • Question: What federal income tax consequences would apply to the proposed chapter 11 restructuring and transfer of assets to the newly formed company?
  • Outcome: Approved
  • Key authorities: IRC §§ 354, 356, 357, 361, 368, 381, and 1032

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201025018 Third Party Communication: None
Release Date: 6/25/2010 Date of Communication: Not Applicable
Index Number: 368.14-00
Person To Contact:
------------------------------- ------------------------, ID No. ------------
---------------------- Telephone Number:
------------------------------------- --------------------
--------------------------------- Refer Reply To:
-------------------------------------- CC:CORP:BO1
In Re: PLR-130073-09
Date:
--------------------------------------
July 08, 2009

Company = -------------------------------------------------------------------------------

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Newco = -------------------------------------------------------------------------------

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LLC 1 = ------------------

LLC 2 = ------------------

Sub 1 = ---------------------------------------------

Sub 2 = ---------------------------

Sub 3 = -------------------------------------------

PLR-130073-09 2

FSub = --------------------------------------------

Products = ---------------------------------------------

Held Interests = -------------------------------------------------------------------------------
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Industry = --------------------------

Court = -------------------------------------------------------------------------------

Lender 1 = -----------------------------------------------------------------

Lender 2 = -------------------------------------------------------------------------------
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A = --------------------------------------------------------------------------------
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B = --------------------------------------------------------------------------------
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Agreed Transaction = --------------------------------------------------------------------------------
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Company Assets = --------------------------------------------------------------------------------
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PLR-130073-09 3

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Unwanted Assets = --------------------------------------------------------------------------

Sale Assets = --------------------------------------------------------------------------------
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Priority Claims = --------------------------------------------------------------------------------
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Senior Claimholders = --------------------------------------------------------------------------------
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Senior Claims = ----------------------------------------------------------

Loan = -------------------------------------------------------------------------------
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Interim Loan 1 = -------------------------------------------------------------------------------
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Interim Loan 2 = ----------------------------------------------------------------

Reorganization
Agreement = --------------------------------------------------------------------------------
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PLR-130073-09 4

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Amount 1 = -------------------------------------------------------------------------------
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Amount 2 = -------------------------------------------------------------------------------
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Exchange = -------------------------------------------------------------------------------
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Newco
Preferred = -------------------------------------------------------------------------------
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Newco Series A
Warrants = -------------------------------------------------------------------------------
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Instrument = -------------------------------------------------------------------------------
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Newco Series B
Warrants = -------------------------------------------------------------------------------
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                        -------------------------------------------------------------------------------
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Note 1 = -------------------------------------------------------------------------------
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Note 2 = -------------------------------------------------------------------------------
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Assumed Liabilities 1 = -------------------------------------------------------------------------------
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Assumed Liabilities 2 = -----------------------------------------------------------

Other Claims = ---------------------------------------------------

State = ------------

Country = ----------

Year 1 = -------

Date 1 = --------------------------

Date 2 = ------------------

Date 3 = -----------------

Date 4 = ---------------------

Date 5 = --------------------------------------------------------

Date 6 = --------------------------

Date 7 = ------------------

Date 8 = --------------------------

Date 9 = ------------------

Closing Date = -------------------------------------------------------------------------------
PLR-130073-09 6

Month = ------------------

a = ------------------------

b = ----------------

c = ---------------

d = -------------

e = -----------

f = --------------

g = --------------

h = --------------

i = --------------

j = -----------

k = --------------

l = --------------

m = ------------

n = ------

o = ----------------

p = ------------

q = ----------------

r = --------------

s = ------

t = --------------

u = --------------

v = ----------------
PLR-130073-09 7

w = ---

x = ------

y = ------------

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

  This letter responds to your June 19, 2009 request for rulings on certain Federal

income tax consequences of the series of proposed transactions described below (the
“Proposed Transaction”). Additional information was submitted by letters dated June
30, 2009 and July 2, 6, and 8, 2009. The information provided in that request and in the
subsequent correspondence is summarized below.

  The rulings contained in this letter are based upon 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 material
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.

                                  Summary of Facts

     Company is a State corporation and the common parent of an affiliated group of

corporations that files a consolidated Federal income tax return on a calendar year
basis. Company and its a direct and indirect wholly owned domestic and foreign
subsidiaries are engaged primarily in the development, production, and marketing of
Products. Among its domestic and foreign subsidiaries, Company owns: (i) all of the
interests in LLC 1, a limited liability company (“LLC”) organized under State law; (ii) all
of the stock of Sub 1, a State corporation; and (iii) all of the stock of FSub, a Country
corporation that conducts Company’s Country operations directly and through its
affiliates. As of Date 1, Company also owned the Held Interests. Prior to Date 2, LLC 1
owned all of the stock of Sub 2, a State corporation, which owned all of the stock of
Sub 3, a State corporation. On Date 2, Sub 2 converted into LLC 2.

   Company’s common stock is widely held and, prior to Date 3, was publicly

traded. As of Date 4, Company had b shares of common stock outstanding. In
addition, as of Date 1, Company had outstanding stock options, warrants, and rights
under various equity compensation plans to acquire an aggregate of approximately c
shares of Company common stock. The exercise prices of these options, warrants, and
rights are in excess of the Date 5 closing price for such stock.

   Company’s total liabilities are in excess of $d owed to more than e creditors,

including the Senior Claims owed to the Senior Claimholders. On Date 1, Company
entered into the Loan with Lender 1, pursuant to which Lender 1 agreed to provide
PLR-130073-09 8

Company with a $f secured term loan facility subject to certain conditions, including
Company’s issuance of Instrument to Lender 1. At the time when Lender 1 made the
Loan, there was significant uncertainty about the ability of Company to continue as a
going concern. In addition, Lender 1 imposed several restrictions on Company’s
corporate affairs as a condition of receiving advances under the Loan. The Loan has a
maturity date of Date 6. As of Date 9, Company had borrowed from Lender 1
approximately $g under the Loan, including all amendments and related agreements.
Initially, amounts owed to Lender 1 under the Loan were secured by certain of
Company’s property other than the assets of Company that secure the Senior Claims.
Agreements with respect to the Senior Claims and the Loan were amended to provide
Lender 1 with a junior lien on the collateral securing the Senior Claims. FSub has
borrowed approximately $h from Lender 2 under other arrangements.

   Company also has outstanding various unsecured bonds (the “Unsecured

Bonds”). As of Date 4, the Unsecured Bonds had an aggregate principal amount of
approximately $i, with varying interest rates and maturity dates. Further, Company is
obligated pursuant to agreements with A to transfer approximately $j to B beginning in
Month.

   In addition to the obligations described above, Company has a significant amount

of other unsecured debt, including trade payables, accrued expenses, pension liabilities,
and various other liabilities, including capital lease obligations, operating lease
obligations, and contractual commitments.

    Company and each of Sub 1, LLC 2, and Sub 3 (the “Filing Subsidiaries”) filed for

bankruptcy protection under chapter 11 of title 11 of the United States Code in the Court
on Date 5. Company requested the approval by the Court of Interim Loan 1 and Interim
Loan 2, pursuant to which Lender 1 and Lender 2 agreed to provide Company an
aggregate amount of $k; Lender 1 and Lender 2 agreed to provide $l and $m pursuant
to Interim Loan 1 and Interim Loan 2, respectively. Company filed a motion requesting
that the Court approve the Proposed Transaction in the form set forth in the
Reorganization Agreement (the “Newco Reorganization”). Interim Loan 1 and Interim
Loan 2 were extended to Company upon approval by the Court. It is expected that the
Company will borrow the full amount of Interim Loan 1 and Interim Loan 2 prior to the
Exchange.

    Newco was formed by Lender 1 for the sole purpose of effectuating the Newco

Reorganization. Pursuant to the Reorganization Agreement: (i) Newco (or, at the
direction of Newco, one or more newly-formed subsidiaries of Newco) will acquire the
Company Assets in the Exchange; and (ii) Company will be obligated to liquidate no
later than Date 8. Company will retain the Unwanted Assets, with an intention to sell or
wind down those properties as expeditiously as possible, distribute any net cash
proceeds to claimholders of Company, and liquidate for Federal income tax purposes.
The Company Assets include the Sale Assets which are intended to be sold following
the Exchange. In addition, it is anticipated that Newco will implement a holding
PLR-130073-09 9

company structure for the Company Assets following the Closing Date. Although the
specific steps to form the holding company have not been determined, it is anticipated
that it will be accomplished through a series of transactions that either are disregarded
for Federal income tax purposes, or qualify as a tax-free reorganization under section
368(a)(1)(F).

                          The Proposed Transaction

   The Proposed Transaction is necessary for Newco and its affiliates to succeed to

Company’s business and continue its operations. To that end, Company, the Filing
Subsidiaries, and Newco have proposed to undertake, subject to approval by the Court,
the steps of the Proposed Transaction described below:

   (i)    On Date 9, Newco was formed by Lender 1 for the sole purpose of

effectuating the Newco Reorganization. Lender 1 has or will transfer the Loan,
approximately $v of Interim Loan 1, and Instrument to Newco in exchange for (i)
common stock of Newco that will represent approximately n percent of Newco’s total
outstanding common shares at the conclusion of the Proposed Transaction; and (ii)
approximately $o of the Newco Preferred.

    (ii)   On the Closing Date, Lender 2 will loan an additional $p to FSub in

exchange for a promissory note (the “$p Lender 2 Loan”). In addition, Lender 2 will loan
$q directly to Newco (the “Transitory Lender 2 Loan”). Lender 2 will transfer the
Transitory Lender 2 Loan, $r of the $p Lender 2 Loan, and its rights under the Interim
Loan 2 to Newco (collectively, the “Lender 2 Equity Amount”) in exchange for (i)
common stock of Newco that will represent approximately s percent of Newco’s total
outstanding common shares at the conclusion of the Proposed Transaction; and (ii)
approximately $t of the Newco Preferred. The $u portion of the $p Lender 2 Loan that
is not transferred to Newco will remain an outstanding obligation of FSub held by
Lender 2 (the “New Lender 2 Loan Amount”). The Lender 2 Equity Amount and the
New Lender 2 Loan Amount are collectively referred to herein as the “Lender 2
Funding.”

   (iii)   On the Closing Date, Company will transfer the Company Assets to

Newco in the Exchange for the following consideration: (a) common stock of Newco
that will represent approximately w percent of Newco’s total outstanding common
shares at the conclusion of the Proposed Transaction; (b) the Instrument; (c) a credit bid
of the Loan and approximately $v of the Interim Loan 1; (d) a credit bid of the Interim
Loan 2; (e) the assumption by Newco of Assumed Liabilities 1 (including Note 1) and
Company’s obligation to transfer $j to B; and (f) Newco Series A Warrants. In addition,
an adjustment to the above described consideration may be required pursuant to the
Reorganization Agreement if the Court makes certain findings.

  (iv)   On or shortly after the Closing Date, Newco will issue the following

consideration to B in satisfaction of Company’s $j obligation to B that was assumed in
PLR-130073-09 10

the Exchange: (i) common stock of Newco that will represent x percent of Newco’s total
outstanding common shares at the conclusion of the Proposed Transaction; (ii)
approximately $y of Newco Preferred; (iii) the Newco Series B Warrants; and (iv) Note 2
issued by Newco.

 (v)    After the Closing Date, Company will attempt to sell or wind down the

Unwanted Assets, and may sell the Newco common stock and Newco Series A
Warrants received in step (iii) above.

  (vi)   Company will liquidate, distributing its remaining assets to Company’s

claimholders (possibly through use of a liquidating trust within the meaning of Treas.
Reg. § 301.7701-4(d) for the benefit of such claimholders) no later than Date 8.

   Newco and its affiliates and Company and its affiliates will have certain ongoing

relationships. These relationships will be formalized in a transition services agreement.

                               Representations

  Company makes the following representations regarding the Proposed

Transaction:

(a) Company will be under the jurisdiction of the Court in a case under title 11 of the
United States Code at the time of the Exchange.

(b) Provided that the Newco Reorganization is an Agreed Transaction, (i) the
Reorganization Agreement will constitute a plan of reorganization for purposes of
section 368, and (ii) the Court will approve the Newco Reorganization in the form
of the Reorganization Agreement.

(c) Lender 1 will receive Newco stock from Company in constructive exchange for a
portion of the Loan.

(d) In the Newco Reorganization, Newco will acquire more than 50 percent of the fair
market value of the gross assets held by Company (including the stock of and
interests in affiliates) as of Date 5 and more than 70 percent of the fair market
value of the operating assets held by Company (including the stock of and
interests in affiliates) as of Date 5. For purposes of this representation, operating
assets are all of Company’s assets other than cash, accounts receivable, and
investment assets; however, the Unwanted Assets (i.e., assets of Company that
were taken out of operation with the intention of effecting a sale thereof) are not
considered operating assets.

(e) Lender 1, in its capacity as a creditor with respect to the Loan, will be the most
senior class of Company creditors to receive an interest in Newco in the Newco
PLR-130073-09 11

  Reorganization in the form of common stock, preferred stock, or warrants in
  satisfaction of its claims against Company.

(f) Taking into account (i) the value of Newco common stock and Newco Preferred
to be received by Lender 1 with respect to the Loan, and (ii) the value of all
consideration to be received by creditors of Company with respect to claims that
are equal and junior to that of Lender 1 with respect to the Loan (collectively, the
“proprietary interests” of Company), at least 40 percent of the fair market value of
the total consideration received by all such holders of proprietary interests of
Company will consist of Newco common stock and Newco Preferred. For
purposes of this representation, (i) the Senior Claimholders and holders of
Priority Claims are senior to the claim of Lender 1 with respect to the Loan, and
(ii) neither Interim Loan 1 nor Interim Loan 2 will be treated as a creditor’s claim.

(g) Amount 1 has been, or will be, used by Company to: (i) satisfy or pay the Senior
Claims; and (ii) pay its existing debts when they become due, including payroll,
Other Claims, interest, and other operating expenses.

(h) There is no plan or intention for Newco, or for any party related to Newco (within
the meaning of Treas. Reg. § 1.368-1(e)(4)), to redeem or acquire any Newco
stock issued in the Newco Reorganization, either directly or through any
transaction, agreement, or other arrangement with any other person.

(i) The fair market value of the Newco common stock and Newco Preferred and any
other consideration to be constructively received in the Newco Reorganization by
Lender 1 and B will be approximately equal to the fair market value (at the time of
the exchange) of such creditors’ claims constructively surrendered in exchange
therefor.

(j) The fair market value of the assets to be acquired by Newco in the Newco
Reorganization will be approximately equal to the value of the consideration
constructively issued by Newco in exchange therefor.

(k) Except for the Sale Assets, Newco has no plan or intention to sell or otherwise
dispose of any of the assets of Company acquired in the transaction, except for
dispositions made in the ordinary course of business, transfers described in
section 368(a)(2)(C) or Treas. Reg. § 1.368-2(k).

(l) Newco (and members of Newco’s “qualified group,” within the meaning of Treas.
Reg. § 1.368-1(d)) will continue the historic business of Company or use a
significant portion of its historic business assets in a business.

(m) Newco has no plan or intention to liquidate or merge with or into another
corporation subsequent to the Newco Reorganization.
PLR-130073-09 12

(n) The liabilities of Company to be assumed by Newco (within the meaning of
section 357(d)) were incurred by Company in the ordinary course of its business.

(o) There is no intercorporate indebtedness existing between Company and Newco
that was acquired at a discount, discounted, or will be treated as settled at a
discount.

(p) No two parties to the transaction are “investment companies” as defined in
section 368(a)(2)(F)(iii) and (iv).

(q) The total fair market value of the assets transferred by Company to Newco will
exceed the sum of: (a) the amount of liabilities assumed (as determined under
section 357(d)) by Newco in connection with the exchange; (b) the amount of
liabilities owed to Newco by Company that were constructively discharged or
extinguished in connection with the exchange; and (c) the amount of any money
and the fair market value of any other property (other than stock permitted to be
received under section 361 without the recognition of gain) received by Company
in consideration for the transfer of the Company Assets to Newco. The fair
market value of the assets of Newco will exceed the amount of Newco’s liabilities
immediately after the Exchange.

(r) Company will liquidate (as determined for Federal income tax purposes) no later
than Date 8.

(s) Company and Newco will each pay its own expenses, if any, in connection with
the Newco Reorganization, except for transfer taxes and certain other expenses
as described in the Reorganization Agreement.

                                   Rulings

  Based solely on the information submitted and the representations set forth

above, we rule as follows:

  1. For Federal income tax purposes, in the Lender 2 Funding, Lender 2 will be
    treated as: (i) transferring the Lender 2 Equity Amount to Newco in exchange for
    Newco common stock and Newco Preferred of equal value; and (ii) loaning the
    New Lender 2 Loan Amount to FSub (Revenue Ruling 72-343, 1972-2 C.B. 213).

  2. For Federal income tax purposes, Lender 1 will be treated as transferring
    Amount 2 to Newco in exchange for Newco common stock, Newco Preferred,
    and Note 1 of equal value (Revenue Ruling 72-343, 1972-2 C.B. 213; Notice
    2009-38, I.R.B. 2009-18, April 13, 2009).

  3. For Federal income tax purposes, the Exchange will be treated as: (i) Company
    transferring the Company Assets to Newco in exchange for Newco common
    PLR-130073-09 13

    stock, Newco Preferred, Newco Series A Warrants, Newco Series B Warrants,
    Note 2, Amount 1, and the assumption of Assumed Liabilities 2; and (ii) except to
    the extent sold by Company, Company distributing the Newco common stock,
    Newco Preferred, Newco Series A Warrants, Newco Series B Warrants, Note 2,
    and Amount 1 to satisfy creditor claims, including the claims of Lender 1, B, and
    possibly other Company claimholders (Helvering v. Alabama Asphaltic Limestone
    Co., 315 U.S. 179 (1942)).

  4. The Newco Reorganization (i.e., the Exchange and the liquidation of Company)
    will constitute a reorganization within the meaning of section 368(a)(1)(G).
    Company and Newco will each be “a party to a reorganization” within the
    meaning of section 368(b).

  5. No gain or loss will be recognized by Company on the transfer of the Company
    Assets to Newco in exchange for Newco common stock, Newco Preferred,
    Newco Series A Warrants, Newco Series B Warrants, Note 2, Amount 1, and the
    assumption of Assumed Liabilities 2 (sections 361(a), 361(b)(1)(A), 361(b)(3),
    and 357(a)).

  6. No gain or loss will be recognized by Newco upon the receipt of the Company
    Assets from Company in exchange for Newco common stock, Newco Preferred,
    Newco Series A Warrants, and Newco Series B Warrants (section 1032(a)).

  7. The adjusted basis of the Company Assets in the hands of Newco will be, in
    each instance, the same as the adjusted basis of such assets in the hands of
    Company immediately prior to the exchange (section 362(b)).

  8. Newco’s holding period for the assets received from Company will include, in
    each instance, the holding period of those assets in the hands of Company
    immediately prior to the exchange (section 1223(2)).

  9. No gain or loss will be recognized by Company upon the distribution of Newco
    stock or Newco obligations to Company claimholders (section 361(c)).

  10. Pursuant to section 381(a) and Treas. Reg. § 1.381(a)-1, Newco will succeed to
    and take into account the items described in section 381(c), including the foreign
    tax credit carryovers of Company, on the date of the Exchange subject to
    reduction with respect to excluded cancellation of indebtedness income of
    Company as required by section 108, Treas. Reg. §§ 1.1502-28, and 1.108-7(c).
    These items will be taken into account by Newco subject to the provisions and
    limitations specified in sections 381, 382, 383, 384, 904, 1502, and the
    regulations thereunder (Treas. Reg. § 1.381(b)-1(b)(1); Revenue Ruling 70-27,
    1970-1 C.B. 83; Revenue Ruling 80-144, 1980-1 C.B. 80).
    PLR-130073-09 14

  11. To the extent that a claim of any Company claimholder qualifies as a security for
    Federal income tax purposes, no gain or loss will be recognized by such holder
    upon the receipt of solely Newco stock or Newco securities (including Newco
    Series A Warrants and Newco Series B Warrants) in exchange for the holder’s
    Company security, except that the claimholder may recognize ordinary income to
    the extent that the consideration is treated as received in satisfaction of accrued
    but unpaid interest (section 354(a)). If a holder of a Company security also
    receives money or other property in exchange for a Company security, the holder
    will recognize gain in an amount not in excess of the fair market value of such
    money or other property (section 356(a)(1)). No loss will be recognized by such
    Company security holder (section 356(c)).

  12. To the extent that a claim of any Company claimholder qualifies as a security for
    Federal income tax purposes, the adjusted basis of the Newco stock received by
    a Company claimholder will equal the adjusted basis of the Company security in
    the hands of the holder immediately before the distribution (excluding any
    amount attributable to interest which has accrued during the exchanging
    claimholder's holding period), less the fair market value of any money or other
    property distributed to the holder (excluding money or other property attributable
    to interest which has accrued during the exchanging claimholder’s holding
    period), plus any gain recognized by the holder (section 358(a)(1)). The basis of
    money or other property received by a Company claimholder will be the fair
    market value of such money or other property (section 358(a)(2)).

  13. To the extent that a claim of any Company claimholder qualifies as a security for
    Federal income tax purposes, the holding period of Newco stock received by
    such holder (other than Newco stock received with respect to a claim for accrued
    interest) will include the period during which the holder has held the Company
    security exchanged therefor, provided such Company security was a capital
    asset in the hands of the holder (section 1223(1)).

                                    Caveats

    No opinion is expressed about the Federal income tax treatment of the Proposed
    Transaction under other provisions of the Code or regulations or the Federal income 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.

                              Procedural Matters

    This ruling is directed only to the taxpayers who requested it. Section 6110(k)(3)
    provides that it may not be used or cited as precedent.

    A copy of this ruling letter must be attached to the Federal income tax return of
    each party involved in the Proposed Transaction for the taxable year in which the
    PLR-130073-09 15

Proposed Transaction is completed. Alternatively, taxpayers filing their returns
electronically may satisfy this requirement by attaching a statement to their returns that
provides the date and control number of the letter ruling.
In accordance with the power of attorney on file with this office, a copy of this
letter is being sent to your authorized representatives.

                                       Sincerely,




                                        Lisa A. Fuller
                                        Senior Counsel, Branch 1
                                        Office of Associate Chief Counsel
                                        (Corporate)

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