PLR 1033007: IRS approved internal and external corporate spin-offs and a Type F reincorporation
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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.
Plain-English summary
A foreign parent planned a complex separation of two business lines from a third business through internal contributions, distributions, a subsidiary reincorporation, and an external spin-off. The IRS ruled that the internal contribution and distribution would qualify as a Type D reorganization and tax-free distribution, and that the later reincorporation would qualify as a Type F reorganization. It also approved the external distribution of the new controlled company's stock to the parent company's shareholders, including the specified basis, holding-period, earnings-and-profits, and fractional-share treatment. The rulings were based on extensive factual representations and did not address several business-purpose, device, qualification, and other tax issues beyond the listed rulings.
Ruling snapshot
- Question: Would the proposed internal and external distributions, asset contributions, and reincorporation receive the requested federal income tax treatment?
- Outcome: Approved
- Key authorities: IRC §§ 332, 351, 354, 355, 357, 358, 361, 362, 368, 381, 382, 383, 384, 897, 1223, 1248, and 1502; Treas. Reg. §§ 1.355-2, 1.355-7, 1.358-2, 1.381-1, and 1.1502-13.
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 201033007 Third Party Communication: None
Release Date: 8/20/2010 Date of Communication: Not Applicable
Index Number: 368.04-00, 355.01-00,
368.06-00, Person To Contact:
--------------------, ID No. -----------------
-------------------------------- Telephone Number:
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--------------------------------------- Refer Reply To:
--------------------------------- CC:CORP:B02
--------------------------------- PLR-108078-10
Date:
May 21, 2010
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Dear -----------------:
This letter responds to your February 16 request for rulings on certain federal income
tax consequences of the Proposed Transactions (as defined below). The information
provided in that request and in later correspondence 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 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. In particular, this office has not reviewed
any information pertaining to, and has made no determination regarding, whether each
Distribution (defined below): (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 earning and profits of the distributing corporation or the controlled
corporation or both (§ 355(a)(1)(B) of the Internal Revenue Code and § 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 greater
interest in the distributing corporation or the controlled corporation (§ 355(e) and
§ 1.355-7).
Summary of Facts
Distributing 2 is a Country 1 corporation that is the parent of a corporate group that
includes domestic and foreign corporations engaged in Business A, Business B, and
Business C.
Distributing 2 owns A percent of FSub 1. FSub 1 wholly owns Distributing 1, a State
corporation. Distributing 1 is the common parent of an affiliated group of corporations
that files a consolidated return for Federal income tax purposes (the “Distributing 1
Group”).
Certain members of the Distributing 1 Group conduct Business A and Business B.
Distributing 1 wholly owns Sub 1, which wholly owns Sub 2. Sub 2 wholly owns Subs 3
and 4, as well as Sub 6. Sub 4 wholly owns FSub 12. Sub 4, Sub 6, and certain of their
subsidiaries conduct Business A in their capacities as members of the Distributing 1
separate affiliated group (or SAG, as defined in § 355(b)(3)(B)). Distributing 1 will rely
on Business A for its active trade or business upon the Internal Distribution (see below),
and Controlled 2 will rely on Business A for its active trade or business upon the
External Distribution (see below). In concert with other entities that Sub 2 owns, Sub 3
conducts Business B, both directly and indirectly via interests in joint ventures.
Distributing 1 wholly owns Sub 5, which is treated under Treas. Reg. § 301.7701-3 as
an entity disregarded as separate from its sole shareholder for federal income tax
PLR-108078-10 5
purposes. Sub 5 and subsidiaries that it owns directly and indirectly conduct Business
C domestically. Upon the Internal Contribution and Distribution (below), Sub 5 and its
subsidiaries will be members of the Controlled 1 SAG and will conduct Business C
domestically, which Controlled 1 will rely upon for its active trade or business after the
Internal Distribution, and which Distributing 2 will rely upon for its active trade or
business after the External Distribution (see below).
Distributing 2 wholly owns FSub 2. FSub 2 wholly owns each of FSubs 10 and 11.
Distributing 2 wholly owns FSub 3, which conducts Business C outside the U.S.,
through a network of domestic and foreign subsidiaries and via joint ventures. FSub 3
owns the balance of the shares in FSub 1 that Distributing 2 does not own. FSub 3
wholly owns FSub 9.
Distributing 2 wholly owns FSub 4. FSub 4 wholly owns each of FSubs 6, 7, and 8.
Distributing 2 wholly owns FSub 5.
The taxpayer has submitted financial information substantiating that members of the
Distributing 1 and Controlled 1 SAGs, as identified above, have conducted Business A
and Business C, respectively, as active trades or businesses for each of the past five
years.
The taxpayer represents that the Proposed Transactions will separate Businesses A
and B from Business C for enumerated corporate business purposes.
Proposed Transactions
Distributing 2 has undertaken some of, and otherwise proposes to undertake, the
following:
(i) Sub 2 will change its name.
(ii) Distributing 2 will form Controlled 2 under the laws of State. Controlled 2
will file documents with the Securities and Exchange Commission, but will
engage in no other activity before the Controlled 2 Reincorporation (see
Step xxxii below).
(iii) FSub 8 will amalgamate with FSub 7.
(iv) Distributing 2 will contribute minimum capital to a newly formed Country 2
subsidiary in exchange for all of that subsidiary’s stock.
PLR-108078-10 6
(v) Sub 1 will transfer to Sub 2 certain assets and liabilities associated with the
Sub 2 pension plans, as well as any other assets and liabilities that relate to
Businesses A or B.
(vi) FSub 3 will distribute its stock interest in FSub 1 to Distributing 2.
(vii) FSub 1 will distribute its assets to Distributing 2 in liquidation and dissolve
(the “FSub 1 Liquidation”). This will transfer ownership of the Distributing 1
stock to Distributing 2.
(viii) FSub 3 will issue a promissory note to Distributing 2 in the amount of
approximately $B (the “Note”). The Note will have a term of C years and will
bear a market rate of interest.
(ix) Distributing 2 will contribute the Note to Distributing 1 in constructive
exchange for additional Distributing 1 stock (the “Note Contribution”).
(x) Distributing 1 will contribute the Note to Sub 1.
(xi) Sub 1 will transfer the Note and approximately $D to FSub 5 in satisfaction
of an intercompany debt.
(xii) Any intercompany balance existing between an entity that will be a member
of the Distributing 1 SAG immediately following the Internal Distribution and
an entity that will be a member of the Controlled 1 SAG immediately
following the Internal Distribution will be settled before the Internal
Distribution (described below in Step xxx).
(xiii) Sub 1 will convert, under applicable State law, to a limited liability company
that is disregarded as separate from its owner, Distributing 1. As part of the
conversion, Sub 1 will change its name (the “Sub 1 Conversion”).
(xiv) Sub 1 will distribute the stock of Sub 2 to Distributing 1.
(xv) Distributing 1 will contribute its interests in Sub 1 and Sub 5 to newly formed
Controlled 1 in exchange for all of the Controlled 1 stock and the
assumption by Controlled 1 of related liabilities (the “Internal Contribution”).
(xvi) FSub 9 will borrow approximately $D from FSub 5 and will transfer that
amount to FSub 12 to satisfy an outstanding payable.
(xvii) FSub 2 will distribute all the stock of FSub 10 and FSub 11 to Distributing 2.
PLR-108078-10 7
(xviii) Distributing 2 will contribute the stock of FSub 10 and FSub 11 to
Distributing 1 (the “Stock Contribution”).
(xix) Distributing 1 will contribute the stock of FSub 10 and FSub 11 to Sub 2.
(xx) Sub 2 will contribute the stock of FSub 10 and FSub 11 to Sub 4.
(xxi) FSub 4 will elect to become a disregarded entity.
(xxii) FSub 7 will elect to become a disregarded entity.
(xxiii) FSub 7 will transfer to FSub 6 all of the assets and liabilities that relate to
Business C, but will retain any assets and liabilities that relate to Businesses
A or B.
(xxiv) FSub 4 will distribute the FSub 7 stock to Distributing 2.
(xxv) Distributing 2 will contribute the FSub 7 stock to Distributing 1. With the
Note Contribution and the Stock Contribution, this step will complete the
“Asset Contributions”.
(xxvi) Distributing 1 will contribute the FSub 7 stock to Sub 2.
(xxvii) Sub 2 will contribute the FSub 7 stock to Sub 4.
(xxviii) Any ELA existing in the stock of Controlled 1 or its subsidiaries will be
eliminated by one or more capital contributions before the Internal
Distribution (described below in Step xxx).
(xxix) Sub 2 will distribute up to $E in cash to Distributing 1, and Distributing 1 will
contribute the cash to Controlled 1.
(xxx) Distributing 1 will distribute the Controlled 1 stock to Distributing 2 (the
“Internal Distribution”).
(xxxi) Distributing 2 will contribute the Controlled 1 stock to the newly formed
Country 2 subsidiary (see Step iv).
(xxxii) Distributing 1 will merge with and into newly formed Controlled 2 (see Step
ii) with Controlled 2 surviving (the “Controlled 2 Reincorporation”).
(xxxiii) In connection with the Controlled 2 Reincorporation, the Controlled 2 stock
will be subdivided and converted into that number of shares of Controlled 2
stock necessary to effect the pro rata distribution by Distributing 2 of
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Controlled 2 stock to the Distributing 2 shareholders, i.e., the
“Recapitalization” and the “External Distribution”.
(xxxiv) Distributing 2 will complete the External Distribution.
No fractional shares of Controlled 2 will be issued in the External Distribution. Rather,
all fractional shares of Controlled 2 stock that Distributing 2 shareholders otherwise
would be entitled to receive will be aggregated by a transfer agent and, as soon as
practicable following the effective time of the External Distribution, will be sold at the
prevailing price on the New York Stock Exchange. Any Distributing 2 shareholder
entitled to receive a fractional share of Controlled 2 stock will be entitled to receive a
cash payment in an amount equal to the shareholder’s proportionate interest in the net
proceeds from the open market sale.
Upon the External Distribution, the separation of Businesses A and B from Business C
will be complete, except for limited continuing transactions. Distributing 2 and
Controlled 2 plan to formalize various agreements governing a range of continuing
transactions between their respective groups regarding provision of transitional services
(the “Transitional Agreements”) and contingent obligations that arise before the External
Distribution (the “Contingent Agreements”), as well as provision of certain services that
are not core revenue or operational functions (collectively, the “Continuing
Transactions”). These Continuing Transactions are intended to last until such time as
Distributing 2 and Controlled 2 are able to perform these services on their own behalf,
which is anticipated to be no later than 18-24 months beyond the External Distribution
date, if not sooner in most cases.
Representations
FSub 1 Liquidation
a) The FSub 1 Liquidation will qualify as a complete liquidation of FSub 1 under
§ 332, and no gain or loss will be recognized by FSub 1 or Distributing 2
under §§ 332(a) and 337(a).
Sub 1 Conversion
b) The assets held by Sub 1 when it is contributed to Controlled 1 in the Internal
Contribution will represent less than five percent of the fair market value of
the gross assets held by Sub 1 immediately before the Sub 1 Conversion.
c) The Sub 1 Conversion will qualify as a complete liquidation of Sub 1 under
§ 332, and no gain or loss will be recognized by Sub 1 or Distributing 1 under
§§ 332(a) and 337(a).
PLR-108078-10 9
Internal Contribution and Internal Distribution
d) Any indebtedness owed by Controlled 1 (or any entity controlled directly or
indirectly by Controlled 1) to Distributing 1 (or any entity controlled directly or
indirectly by Distributing 1) after the Internal Distribution will not constitute
stock or securities.
e) No part of the consideration distributed to the Distributing 1 shareholders will
be received as a creditor, employee, or in any capacity other than that of a
shareholder of Distributing 1.
f) The five years of financial information submitted for Business A, conducted by
Sub 4, Sub 6, and certain of their subsidiaries, and for Business C, conducted
by Sub 5 and its subsidiaries, is representative of the present operations of
each business, and there have been no substantial changes in either
business since the date of the last financial statements submitted.
g) Neither Business A, conducted by Sub 4, Sub 6 and certain of their
subsidiaries, nor control of an entity conducting this business will have been
acquired during the five-year period ending on the date of the Internal
Distribution in a transaction in which gain or loss was recognized (or treated
as recognized under Prop. Reg. § 1.355-3) in whole or in part. Throughout
the five-year period ending on the date of the Internal Distribution, Sub 4 will
have been the principal owner of the goodwill and significant assets of
Business A and will continue to be the principal owner following the Internal
Distribution.
h) Neither Business C, conducted by Sub 5 and its subsidiaries, nor control of
any entity conducting this business will have been acquired during the five-
year period ending on the date of the Internal Distribution in a transaction in
which gain or loss was recognized (or treated as recognized under Prop.
Treas. Reg. § 1.355-3) in whole or in part. Throughout the five-year period
ending on the date of the Internal Distribution, certain of Sub 5’s subsidiaries
will have been the principal owners of the goodwill and significant assets of
Business C and will continue to be the principal owners following the Internal
Distribution.
i) Apart from the Continuing Transactions, Distributing 1 (through Sub 4, Sub 6,
and certain of their subsidiaries, all members of the Distributing 1 SAG) will
continue the active conduct of Business A, independently and with its
separate employees, following the Internal Distribution.
j) Apart from the Continuing Transactions, Controlled 1 (through Sub 5 and its
subsidiaries, all members of the Controlled 1 SAG) will continue the active
PLR-108078-10 10
conduct of Business C, independently and with its separate employees,
following the Internal Distribution.
k) The Internal Distribution will be carried out to facilitate the External
Distribution. The Internal Distribution is motivated in whole or substantial part
by this corporate business purpose.
l) The Internal Distribution will not be used principally as a device for the
distribution of the earnings and profits of Distributing 1 or Controlled 1 or both.
m) There is no plan or intention to liquidate any member of the Distributing 1
SAG engaged in Business A or any member of the Controlled 1 SAG
engaged in Business C, to merge any member with any other entity, or to sell
or otherwise dispose of the assets of any member after the Internal
Distribution, except as part of the Proposed Transactions and for sales of
assets in the ordinary course of business.
n) The total adjusted basis and the fair market value of the assets transferred by
Distributing 1 to Controlled 1 in the Internal Contribution will equal or exceed
the sum of (i) the total amount of any liabilities assumed (as determined under
§ 357(d)) by Controlled 1 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 1 and transferred to its creditors in connection with the
reorganization.
o) Any liabilities assumed (as determined under § 357(d)) by Controlled 1 in the
Internal Contribution will have been incurred in the ordinary course of
business and will be associated with the assets transferred.
p) The total fair market value of the assets transferred to Controlled 1 in the
Internal Contribution will exceed the sum of (i) the amount of any liabilities
assumed (as determined under § 357(d)) by Controlled 1 in connection with
the Internal Contribution, (ii) the amount of any liabilities owed to Controlled 1
by Distributing 1 that are discharged or extinguished in connection with the
Internal Contribution, 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 1 in connection with the Internal Contribution. The fair market
value of the assets of Controlled 1 will exceed the amount of its liabilities
immediately after the Internal Contribution.
q) The aggregate fair market value of the assets Distributing 1 transfers to
Controlled 1 in the Internal Contribution will equal or exceed the aggregate
adjusted basis of those assets.
PLR-108078-10 11
r) Distributing 1 will neither accumulate its receivables nor make extraordinary
payment of its payables in anticipation of the Internal Contribution and
Distribution.
s) No two parties to the Internal Distribution are investment companies as
defined in § 368(a)(2)(F)(iii) and (iv).
t) Apart from debt arising in the Continuing Transactions, no intercorporate debt
will exist between Distributing 1 (or any entity controlled directly or indirectly
by Distributing 1) and Controlled 1 (or any entity controlled directly or
indirectly by Controlled 1) at the time of, or after, the Internal Distribution,
other than intercompany loans or other obligations that have arisen, or will
arise, in the ordinary course of business.
u) Apart from payments for certain services that may be rendered at cost under
the Transitional Agreements, payments made in connection with the
Continuing Transactions between Distributing 1 (or any entity controlled
directly or indirectly by Distributing 1) and Controlled 1 (or any entity
controlled directly or indirectly by Controlled 1) will be for fair market value
based on terms and conditions arrived at by the parties bargaining at arm’s
length or terms and conditions comparable to those that would be arrived at
by parties bargaining at arm’s length.
v) Immediately before the Internal Distribution, items of income, gain, loss,
deduction, and credit will be taken into account as required by the applicable
intercompany transaction regulations (see Treas. Reg. § 1.1502-13 and -14
as in effect before the publication of T.D. 8597, 1995-2 C.B. 147, and as
currently in effect; Treas. Reg. § 1.1502-13 as published in T.D. 8597).
Further, any excess loss account that Distributing 1 has in the Controlled 1
stock or the stock of any direct or indirect subsidiary of Controlled 1 will be
included in income immediately before the Internal Distribution to the extent
required by regulations (see Treas. Reg. § 1.1502-19). At the time of the
Internal Distribution, Distributing 1 will not have an excess loss account in the
stock of Controlled 1 or the stock of any direct or indirect subsidiary of
Controlled 1.
w) For purposes of § 355(d), immediately after the Internal 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 1 stock entitled to vote, or 50 percent or more of the total value of
shares of all classes of Distributing 1 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 Internal Distribution.
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x) For purposes of § 355(d), immediately after the Internal 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 1 stock entitled to vote, or 50 percent or more of the total value of
shares of all classes of Controlled 1 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 Internal
Distribution or (ii) attributable to distributions on Distributing 1 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 Internal Distribution.
y) The Internal Distribution is not part of a plan or series of related transactions
(within the meaning of Treas. Reg. § 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 1 or
Controlled 1 (including any predecessor or successor of any such
corporation).
z) Immediately after the transaction (as defined in § 355(g)(4)), either (1) if any
person holds a 50-percent or greater interest (within the meaning of
§ 355(g)(3)) in any disqualified investment corporation (within the meaning of
§ 355(g)(2)), such person will have held such interest in such corporation
immediately before the transaction, or (2) neither Distributing 1 nor Controlled
1 will be a disqualified investment corporation (within the meaning of
§ 355(g)(2)).
aa) Neither Distributing 1 nor Controlled 1 will have been a U.S. real property
holding corporation (as defined in § 897(c)(2)) at any time during the five-year
period preceding the Internal Distribution, and neither will be a U.S. real
property holding corporation immediately after the Internal Distribution.
bb) There is no regulatory, legal, contractual, or economic compulsion or
requirement that the Asset Contributions be made as a condition of the
Internal Distribution. The fact that the value of Distributing 1 will decrease as
a result of the Internal Distribution was not a consideration in the decision to
contribute property to Distributing 1. The Internal Distribution is not
contingent on there being contributed to Distributing 1 assets having a
specified (or roughly specified) value.
cc) The Asset Contributions together will qualify as a nonrecognition transfer
under § 351.
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dd) Distributing 1’s aggregate adjusted bases in the assets of FSub 7, as well as
in the stock of FSub 10 and FSub 11, immediately after the transfer
(determined without regard to § 362(e)(1)) will not exceed the aggregate
value.
The Controlled 2 Reincorporation
ee) The fair market value of the Controlled 2 stock received by Distributing 2 in
the Controlled 2 Reincorporation will be approximately equal to the fair market
value of the Distributing 1 stock deemed surrendered in the exchange.
ff) Immediately after the Controlled 2 Reincorporation, Distributing 2 will own all
of the outstanding Controlled 2 stock and will own such stock solely by reason
of its having owned Distributing 1 stock immediately before the Controlled 2
Reincorporation.
gg) Apart from the Recapitalization, and as contemplated by the corporate
business purposes for the Proposed Transactions, Controlled 2 will not have
at the time of the Controlled 2 Reincorporation, nor does it currently have, any
plan or intention to issue additional shares of its stock following the Controlled
2 Reincorporation.
hh) Immediately following consummation of the Controlled 2 Reincorporation,
Controlled 2 will possess the same assets and liabilities, except for a nominal
amount of assets held to facilitate its organization, as those possessed by
Distributing 1 immediately before the Controlled 2 Reincorporation. Assets
distributed to shareholders, assets used to pay expenses, and all
redemptions and distributions (except for regular, normal dividends) made by
Distributing 1 immediately preceding the Controlled 2 Reincorporation will, in
the aggregate, constitute less than one percent of the net assets of
Distributing 1. There will be no dissenting shareholders.
ii) At the time of the Controlled 2 Reincorporation, Distributing 1 will not have
outstanding any warrants, options, convertible securities, or any other type of
right pursuant to which any person could acquire stock in Distributing 1.
jj) Controlled 2 will not have at the time of the Controlled 2 Reincorporation, nor
does it currently have, any plan or intention to reacquire any of its stock
issued in the Controlled 2 Reincorporation.
kk) The liabilities of Distributing 1 to be assumed (within the meaning of § 357(d))
by Controlled 2 plus the liabilities, if any, to which the transferred assets are
subject, were incurred by Distributing 1 in the ordinary course of its business
and are associated with the assets to be transferred.
PLR-108078-10 14
ll) Distributing 2 will pay all expenses incurred in connection with the Controlled
2 Reincorporation.
mm) At the time of the Controlled 2 Reincorporation, Distributing 1 will not be
under the jurisdiction of a court in a title 11 or similar case within the meaning
of § 368(a)(3)(A).
The Recapitalization
nn) The Recapitalization will qualify as a reorganization under § 368(a)(1)(E).
The External Distribution
oo) Any indebtedness owed by Controlled 2 (or any entity controlled directly or
indirectly by Controlled 2) to Distributing 2 (or any entity controlled directly or
indirectly by Distributing 2) after the External Distribution will not constitute
stock or securities.
pp) No part of the consideration distributed to the Distributing 2 shareholders will
be received as a creditor, employee or in any capacity other than that of a
shareholder of Distributing 2.
qq) The five years of financial information submitted for Business A, conducted by
Sub 4, Sub 6, and certain of their subsidiaries (all members of the Controlled
2 SAG), and for Business C, conducted by Sub 5 and its subsidiaries (all
members of the Distributing 2 SAG), is representative of the present
operations of each business, and there have been no substantial operational
changes in either business since the date of the last financial statements
submitted.
rr) Neither Business A, conducted by Sub 4, Sub 6, and certain of their
subsidiaries, nor control of an entity conducting this business will have been
acquired during the five-year period ending on the date of the External
Distribution in a transaction in which gain or loss was recognized (or treated
as recognized under Prop. Reg. § 1.355-3) in whole or in part. Throughout
the five-year period ending on the date of the External Distribution, Sub 4 will
have been the principal owner of the goodwill and significant assets of
Business A and will continue to be the principal owner following the External
Distribution.
ss) Neither Business C, conducted by Sub 5 and its subsidiaries, nor control of
an entity conducting this business will have been acquired during the five-
year period ending on the date of the External Distribution in a transaction in
PLR-108078-10 15
which gain or loss was recognized (or treated as recognized under Prop. Reg.
§ 1.355-3) in whole or in part. Throughout the five-year period ending on the
date of the External Distribution, certain of the subsidiaries of Sub 5 will have
been the principal owners of the goodwill and significant assets of Business C
and will continue to be the principal owners following the External Distribution.
tt) Apart from the Continuing Transactions, Controlled 2 (through Sub 4, Sub 6,
and certain of their subsidiaries, all members of the Controlled 2 SAG) will
continue the active conduct of Business A, independently and with its
separate employees, following the External Distribution.
uu) Apart from the Continuing Transactions, Distributing 2 (through Controlled 1
and its subsidiaries, all members of the Distributing 2 SAG) will continue the
active conduct of Business C, independently and with its separate employees,
following the External Distribution.
vv) The External Distribution will be carried out to (i) improve positioning for
Controlled 2 and Distributing 2 to accelerate growth based on the distinct
corporate strategy, market opportunities, free cash flow, and customer
relationships of each company; (ii) more efficiently allocate capital, which will
allow Controlled 2 and Distributing 2 each to develop its own investment
program without the constraints of a holding company, conglomerate
structure; (iii) establish a distinct publicly traded stock for each company,
which may be used as a “currency” to facilitate future acquisitions or to retain
key employees; (iv) eliminate the risk to the combined businesses posed by
recent modifications to the Regulations that limit Activities; and (v) sharpen
the focus and strategic vision of the managements of Controlled 2 and
Distributing 2. The External Distribution is motivated in whole or substantial
part by these corporate business purposes.
ww) The External Distribution will not be used principally as a device for the
distribution of the earnings and profits of Controlled 2 or Distributing 2 or both.
xx) There is no plan or intention to liquidate any member of the Controlled 2 SAG
engaged in Business A or any member of the Distributing 2 SAG engaged in
Business C, to merge any member with any other entity, or to sell or
otherwise dispose of the assets of any member after the External Distribution,
except for sales of assets in the ordinary course of business.
yy) Apart from debt arising in the Continuing Transactions, no intercorporate debt
will exist between Controlled 2 (or any entity controlled directly or indirectly by
Controlled 2) and Distributing 2 (or any entity controlled directly or indirectly
by Distributing 2) at the time of, or after, the External Distribution, other than
PLR-108078-10 16
intercompany loans or other obligations that have arisen, or will arise, in the
ordinary course of business.
zz) Apart from payments for certain services that may be rendered at cost under
the Transitional Agreements, payments made in connection with the
Continuing Transactions between Controlled 2 (or any entity controlled
directly or indirectly by Controlled 2) and Distributing 2 (or any entity
controlled directly or indirectly by Distributing 2) will be for fair market value
based on terms and conditions arrived at by the parties bargaining at arm’s
length or terms and conditions comparable to those that would be arrived at
by parties bargaining at arm’s length.
aaa) For purposes of § 355(d), immediately after the External 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 2 stock entitled to vote, or 50 percent or more of the total value of
shares of all classes of Distributing 2 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 External Distribution.
bbb) For purposes of § 355(d), immediately after the External 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 2 stock entitled to vote, or 50 percent or more of the total value of
shares of all classes of Controlled 2 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 External
Distribution or (ii) attributable to distributions on Distributing 2 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 External Distribution.
ccc) The External Distribution is not part of a plan or series of related transactions
(within the meaning of Treas. Reg. § 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 Controlled 2 or
Distributing 2 (including any predecessor or successor of any such
corporation).
ddd) Immediately after the transaction (as defined in § 355(g)(4)), either (1) no
person will hold a 50-percent or greater interest (within the meaning of
§ 355(g)(3)) in Controlled 2 or Distributing 2, (2) if any person holds a 50-
percent or greater interest (within the meaning of § 355(g)(3)) in any
disqualified investment corporation (within the meaning of § 355(g)(2)), such
PLR-108078-10 17
person will have held such interest in such corporation immediately before the
transaction, or (3) neither Controlled 2 nor Distributing 2 will be a disqualified
investment corporation (within the meaning of § 355(g)(2)).
eee) Neither Distributing 2 nor Controlled 2 will have been a U.S. real property
holding corporation (as defined in § 897(c)(2)) at any time during the five-year
period preceding the External Distribution, and neither will be a U.S. real
property holding corporation immediately after the External Distribution.
fff) The receipt by Distributing 2 shareholders of cash in lieu of fractional shares
of Controlled 2 stock resulting from the open market sale of the fractional
shares has been arranged solely for the purpose of avoiding the expense and
inconvenience to Controlled 2 of issuing fractional shares and does not
represent separately bargained-for consideration. It is intended that the total
cash consideration received by the shareholders of Distributing 2 from the
open market sale of their fractional shares will not exceed one percent of the
total consideration that will be distributed in the External Distribution. It is also
intended that no Distributing 2 shareholder will receive cash in an amount
equal to or greater than the value of one full share of Controlled 2 common
stock. Further, neither Controlled 2 nor Distributing 2 is aware of any overall
plan (within the meaning of § 355(e)) to acquire an ownership interest in
Controlled 2 through the purchase of the bundled Controlled 2 shares sold in
connection with the issuance of cash in lieu of fractional shares.
Rulings
Based solely on the information submitted and the representations set forth above, we
rule as follows:
The Internal Contribution and Internal Distribution
-
The Internal Contribution, followed by the Internal Distribution, will be a
reorganization under § 368(a)(1)(D). Distributing 1 and Controlled 1 will each be
“a party to a reorganization” within the meaning of § 368(b). -
No gain or loss will be recognized by Distributing 1 on the Internal Contribution
(§§ 361(a) and 357(a)). -
No gain or loss will be recognized by Controlled 1 on the Internal Contribution
(§ 1032(a)). -
The basis of each asset received by Controlled 1 in the Internal Contribution will
equal the basis of that asset in the hands of Distributing 1 immediately before the
Internal Contribution (§ 362(b)).
PLR-108078-10 18
-
The holding period of each asset received by Controlled 1 in the Internal
Contribution will include the period during which Distributing 1 held that asset
(§ 1223(2)). -
No gain or loss will be recognized by Distributing 1 on the Internal Distribution
(§ 361(c)(1)). -
No gain or loss will be recognized by (and no amount will be included in the
income of) Distributing 2 on the Internal Distribution (§ 355(a)(1)). -
The aggregate basis of the Distributing 1 stock and the Controlled 1 stock in the
hands of Distributing 2 immediately after the Internal Distribution will equal the
aggregate basis of the Distributing 1 stock held by Distributing 2 immediately
before the Internal Distribution, allocated between the stock of Distributing 1 and
Controlled 1 in proportion to the fair market value of each immediately following
the Internal Distribution in accordance with Treas. Reg. § 1.358-2(a)(2)
(§ 358(b)(2) and (c)). -
The holding period of the Controlled 1 stock received by Distributing 2 in the
Internal Distribution will include the holding period of the Distributing 1 stock on
which the Internal Distribution is made, provided the Distributing 1 stock is held
as a capital asset on the date of the Internal Distribution (§ 1223(1)). -
The earnings and profits of FSub 10 and FSub 11, to the extent attributable to
Distributing 1 under §§ 1.1248-2 or 1.1248-3 (whichever is applicable), that were
accumulated in tax years of such foreign corporations beginning after
December 31, 1962, and during the period in which each such corporation was a
CFC, will be attributable to such stock held by Sub 2. Treas. Reg. § 1.1248-
1(a)(1). -
The earnings and profits of FSub 10 and FSub 11, to the extent attributable to
Sub 2 under §§ 1.1248-2 or 1.1248-3 (whichever is applicable), that were
accumulated in tax years of such foreign corporations beginning after
December 31, 1962, and during the period in which each such corporation was a
CFC, will be attributable to such stock held by Sub 4. Treas. Reg. § 1.1248-
1(a)(1). -
Earnings and profits, if any, will be allocated between Distributing 1 and
Controlled 1 in accordance with § 312(h) and Treas. Reg. §§ 1.312-10(a) and
1.1502-33(e)(3).
PLR-108078-10 19
-
The Asset Contributions will not be treated as having been received by
Distributing 1 in exchange for Controlled 1 stock distributed in the Internal
Distribution. -
Except for purposes of § 355(g), payments made between any of the Distributing
1 and Controlled 1 and their respective affiliates under Contingent Agreements
regarding liabilities, indemnities, or other obligations that (i) have arisen or will
arise for a taxable period ending on or before the Internal Distribution and (ii) will
not become fixed and ascertainable until after the Internal Distribution, will be
viewed as occurring before the Internal Distribution (cf. Arrowsmith v.
Commissioner, 344 U.S. 6, 73 S. Ct. 71, 97 L. Ed. 6, 1952-2 C.B. 136 (1952)
(tax character of later transaction will derive from earlier, related transaction);
Rev. Rul. 83-73, 1983-1 C.B. 84). -
Following the Internal Distribution, Controlled 1 will not be a successor of
Distributing 1 for purposes of § 1504(a)(3). Therefore, Controlled 1 and its direct
and indirect subsidiaries that are “includible corporations” (under § 1504(b)) and
satisfy the ownership requirements of § 1504(a)(2) will be members of an
affiliated group of corporations entitled to file a consolidated U.S. Federal income
tax return with Controlled 1 as the common parent.
The Controlled 2 Reincorporation
-
The Controlled 2 Reincorporation will qualify as a reorganization under
§ 368(a)(1)(F). Distributing 1 and Controlled 2 will each be “a party to a
reorganization” under § 368(b). -
No gain or loss will be recognized by Distributing 1 in the Controlled 2
Reincorporation (§§ 361(a), (c), and 357(a)). -
No gain or loss will be recognized by Controlled 2 in the Controlled 2
Reincorporation (§ 1032(a)). -
The basis of each asset received by Controlled 2 in the Controlled 2
Reincorporation will equal the basis of that asset in the hands of Distributing 1
immediately before the Controlled 2 Reincorporation (§ 362(b)). -
The holding period of each asset received by Controlled 2 in the Controlled 2
Reincorporation will include the period during which Distributing 1 held that asset
(§ 1223(2)). -
No gain or loss will be recognized by Distributing 2 in the Controlled 2
Reincorporation (§ 354(a)).
PLR-108078-10 20
-
The basis of the Controlled 2 common stock received by Distributing 2 will equal
the basis of the Distributing 1 stock exchanged therefore (§ 358(a)). -
The holding period of the Controlled 2 stock received by Distributing 2 in the
Controlled 2 Reincorporation will include the holding period of the Distributing 1
stock exchanged therefor, provided the Distributing 1 stock is held by Distributing
2 as a capital asset on the date of the Controlled 2 Reincorporation (§ 1223(1)). -
Controlled 2 will succeed to and take into account the tax attributes of
Distributing 1 described in § 381(c) (§ 381(a) and Treas. Reg. § 1.381(a)-1),
subject to the conditions and limitations specified in §§ 381, 382, 383, and 384
and the Treasury Regulations thereunder. -
The taxable year of Distributing 1 will not close on the date of the Controlled 2
Reincorporation, and such tax year will continue in the name of Controlled 2
(Treas. Reg. § 1.381(b)-1; Rev. Rul. 57-276, 1957-1 C.B. 126).
The External Distribution
-
No gain or loss will be recognized by Distributing 2 on the External Distribution
(§ 355(c)). -
No gain or loss will be recognized by (and no amount will be included in the
income of) any shareholder of Distributing 2 on the External Distribution
(§ 355(a)(1)). -
The aggregate basis of the Distributing 2 stock and the Controlled 2 stock in the
hands of each shareholder of Distributing 2 (including any fractional share
interest in Controlled 2 to which the shareholder may be entitled) immediately
after the External Distribution will equal the aggregate basis of the Distributing 2
stock held by the shareholder immediately before the External Distribution,
allocated between the stock of Distributing 2 and Controlled 2 in proportion to the
fair market value of each immediately following the External Distribution in
accordance with Treas. Reg. § 1.358-2(a)(2) (§ 358(b)(2) and (c)). -
The holding period of the Controlled 2 stock received by each shareholder of
Distributing 2 in the External Distribution (including any fractional share interest
in Controlled 2 to which the shareholder may be entitled) will include the holding
period of the Distributing 2 stock on which the External Distribution is made,
provided the Distributing 2 stock is held by the shareholder as a capital asset on
the date of the External Distribution (§ 1223(1)). -
Earnings and profits, if any, will be allocated between Distributing 2 and
Controlled 2 in accordance with § 312(h) and Treas. Reg. § 1.312-10(b).
PLR-108078-10 21
- The receipt by Distributing 2 shareholders of cash in lieu of fractional shares of
Controlled 2 stock will be treated for U.S. Federal income tax purposes as if the
fractional shares had been distributed to the Distributing 2 shareholders as part
of the External Distribution and then had been disposed of by such shareholders
for the amount of such cash in a sale or exchange. The gain (or loss), if any
(determined using the basis allocated to the fractional shares in ruling (28) and
the holding period attributed to the fractional shares in ruling (29)), will be treated
as a capital gain (or loss), provided the stock was held as a capital asset by the
selling shareholder (§ 1222).Caveats
No opinion is expressed about the tax treatment of the Proposed Transactions under
other provisions of the Code and regulations or on the tax treatment of any conditions
existing at the time of, or effects resulting from, the Proposed Transactions that are not
specifically covered by the above rulings. In particular, this office has not reviewed any
information pertaining to and has made no determination regarding:
(i) Whether the Distributions satisfy the business purpose requirement of Treas.
Reg. § 1.355-2(b);
(ii) Whether the Distributions are used principally as a device for the distribution
of earnings and profits of the distributing corporations or the controlled
corporations or both; and
(iii) Whether the Distributions and an acquisition or acquisitions are part of a plan
(or series of related transactions) under § 355(e)(2)(A)(ii).
In addition, no opinion is expressed regarding the Federal income tax treatment of (i)
the FSub 1 Liquidation; (ii) the Sub 1 Conversion; (iii) the Recapitalization; or (iv)
payments for certain services that may be rendered at cost under the Transitional
Agreements.
Procedural Statements
This ruling letter is directed only to the taxpayer 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 any income tax return to which it is
relevant. Alternatively, any taxpayers filing their returns electronically may satisfy this
requirement by attaching a statement to the returns that provides the date and control
number of this letter ruling.
In accordance with the power of attorney on file with this office, a copy of this letter
ruling is being sent to your authorized representatives.
PLR-108078-10 22
Sincerely,
______________________________
Gerald B. Fleming
Senior Technician Reviewer, Branch 2
Associate Chief Counsel (Corporate)
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