PLR 1033016: IRS approved a Type F reorganization for a subsidiary becoming a joint venture business

Plain-English summary

The IRS ruled that a subsidiary's restructuring into a new holding-company chain would qualify as a Type F reorganization. The transaction would convert the existing operating entity into a wholly owned corporation, a disregarded LLC would be formed below it, and the operating entity would merge into that LLC before an unrelated investor acquired half of the LLC. The IRS provided nonrecognition, carryover basis, holding-period, and tax-attribute rulings for the restructuring. The ruling did not address the tax consequences of the stock disposition or joint venture formation except for their effect on the reorganization qualification.

Ruling snapshot

• Question: Would the proposed reincorporation and later joint venture formation qualify as a Type F reorganization with the specified tax consequences?
• Outcome: Approved
• Key authorities: IRC §§ 354, 357, 358, 361, 362, 368, 381, 1032, and 1223; Rev. Rul. 96-29

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201033016 Third Party Communication: None
Release Date: 8/20/2010 Date of Communication: Not Applicable
Index Number: 368.00-00, 368.06-00
Person To Contact:
------------------------------------------------------- -----------------------, ID No. -------------
---------------------------------- Telephone Number:
--------------------------------- ---------------------
--------------------------------- Refer Reply To:
CC:CORP:01
PLR-117041-10
Date:
May 20, 2010

Legend:

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

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Sub 2 = ----------------------------------------
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Sub 3 = ------------------------------------------------------

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Sub 4 = ---------------------------------------------
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Sub 5 = ------------------------------------------------------

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Sub 6 = ------------------------------------------------------

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State A = -------------

Business A = ----------------------------------------

Date A = --------------------------

Date B = --------------------------

X = ----

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

This letter responds to your April 16, 2010 request for rulings as to the federal income
tax consequences of a proposed transaction. The information provided in that letter and
in later correspondence is summarized below.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalties of perjury statement
executed by an appropriate party. While this office has not verified any of the material
submitted in support of the request for rulings, it is subject to verification on
examination.

                                     Facts

Parent, a State A corporation, is the common parent of an affiliated group of
corporations that files a consolidated federal income tax return (the “Parent Group”).
The Parent Group is engaged in various businesses, including Business A, which is
operated by Sub 4 (a State A limited liability company).

Parent indirectly owns all interests in Sub 4 through a chain of wholly-owned State A
corporations comprised of Sub 1, Sub 2, and Sub 3. From the date of its formation until
Date A, Sub 4 was disregarded as an entity separate from Sub 3 (its sole owner) for
federal income tax purposes. Effective on Date B, Sub 4 made an election under
Treasury Regulation § 301.7701-3 to be classified as an association taxable as a
corporation. Sub 4 owns approximately X percent of the common stock of Sub 5, a
State A corporation. Parent also indirectly owns (through another chain of corporations)
all the stock of Sub 6, a State A corporation.

As part of its efforts to expand Business A and to raise capital for use in its other
businesses, Parent is seeking an unrelated party to invest in Business A through a joint
venture that is expected to be treated as a partnership for federal income tax purposes.
Under Treasury Regulation § 301.7701-3(c)(1)(iv), Sub 4 cannot presently make
another election to change its classification for federal income tax purposes. Parent

also has determined that a contribution by Sub 4 of the Business A assets and liabilities
to a newly formed legal entity would not be practicable. Accordingly, to facilitate the
establishment of a joint venture for Business A, Parent has proposed the transaction
described below (the “Proposed Transaction”).

                               Proposed Transaction

To achieve the business purpose described above, Parent has proposed the following
steps:

(i) Sub 4 will sell its stock in Sub 5 to Sub 6 for fair market value (the “Disposition”).

(ii) Sub 3 will form a wholly owned State A corporation (“Holdco”).

(iii) Holdco will form a wholly owned State A limited liability company (“Investco”) that
will be treated as a disregarded entity for federal income tax purposes.

(iv) Investco will form a wholly owned State A limited liability company (“Opco”) that
will be treated as a disregarded entity for federal income tax purposes.

(v) Sub 4 will merge with and into Opco, with Opco surviving (together with steps (ii)
through (iv), the “Reincorporation”).

(vi) Holdco will sell a 50 percent interest in Investco to an unrelated third-party
investor for a cash payment equal to the fair market value of such interest (the
“JV Formation”).

                                  Representations

In connection with the Proposed Transaction, the taxpayer has made the following
representations:

(a) Immediately prior to the Reincorporation, Holdco will be engaged in no business
activity, will have no tax attributes (including those specified in section 381(c)),
and will hold no assets (except for nominal assets necessary to pay incidental
expenses or maintain Holdco's status as a corporation under State A law).

(b) The fair market value of the stock of Holdco received by Sub 3 in the
Reincorporation will be approximately equal to the fair market value of the
interests in Sub 4 surrendered in the exchange.

(c) There is no plan or intention by Sub 3 to sell, exchange or otherwise dispose of
any of the stock of Holdco received in the Reincorporation.

(d) Immediately following the Reincorporation, Sub 3 will own all of the outstanding
stock of Holdco; Sub 3 will own such stock solely by reason of its ownership of the
interests in Sub 4 immediately prior to the Reincorporation.

(e) Holdco has no plan or intention to issue additional stock following the
Reincorporation.
(f) Immediately following the Reincorporation, Holdco (through Opco) will possess
the same assets and liabilities as those possessed by Sub 4 immediately prior to
the Reincorporation.

(g) At the time of the Reincorporation, Sub 4 will not have outstanding any warrants,
options, convertible securities, or any other type of right pursuant to which any
person could acquire an interest in Sub 4, except that it is possible that Parent,
Sub 3, Sub 4 or their affiliates may enter into an exclusivity or similar agreement
with an unrelated investor with respect to the JV Formation.

(h) Holdco has no plan or intention to reacquire any of its stock issued in the
Reincorporation.

(i) Holdco (through its indirect interest in Opco) has no current plan or intention to
sell or otherwise dispose of any of the assets of Sub 4 acquired (through its
indirect interest in Opco) in the Reincorporation, except for the JV Formation,
dispositions made in the ordinary course of business, or transfers described in
Treasury Regulation § 1.368-2(k).

(j) The liabilities of Sub 4 to be assumed by Holdco (within the meaning of section
357(d)) plus the liabilities, if any, to which the Sub 4 assets are subject at the time
of the Reincorporation were incurred by Sub 4 in the ordinary course of its
business and are associated with such assets.

(k) Neither Investco nor Opco will elect to be classified as an association taxable as a
corporation under Treasury Regulation § 301.7701-3 effective on or before the
date that Sub 4 merges with and into Opco.

(l) Sub 3, Sub 4 and Holdco will pay their respective expenses, if any, incurred in
connection with the Reincorporation.

(m) There is no plan for Holdco to liquidate or to merge into any other corporation.

(n) Sub 4 is not under the jurisdiction of a court in a Title 11 or similar case within the
meaning of Section 368(a)(3)(A).

                                     Rulings

Based solely on the information submitted and the representations made, we rule as
follows:

(1) For federal income tax purposes, the Reincorporation will be treated as a direct
transfer by Sub 4 of all of its assets to Holdco in exchange for all of the Holdco
stock and the assumption by Holdco of the Sub 4 liabilities, followed by a
liquidation of Sub 4 in which the Holdco stock is distributed to Sub 3 in
cancellation of its interests in Sub 4.

(2) The Reincorporation will constitute a reorganization under section 368(a)(1)(F).
Sub 4 and Holdco each will be “a party to a reorganization” under section 368(b).

(3) Sub 4 will recognize no gain or loss on the transfer of assets to Holdco in
exchange for Holdco stock and Holdco’s assumption of Sub 4’s liabilities in the
Reincorporation. Sections 361(a) and 357(a).

(4) Holdco will recognize no gain or loss on the receipt of Sub 4’s assets in
exchange for Holdco stock in the Reincorporation. Section 1032(a).

(5) Holdco’s basis in each asset received from Sub 4 in the Reincorporation will be
the same as Sub 4’s basis in such asset immediately before the Reincorporation.
Section 362(b).

(6) Holdco’s holding period for each asset received from Sub 4 in the
Reincorporation will include the period during which such asset was held by Sub
4. Section 1223(2).

(7) Sub 4 will recognize no gain or loss on the distribution of Holdco stock to Sub 3
in the Reincorporation. Section 361(c)(1).

(8) Sub 3 will recognize no gain or loss on its exchange of Sub 4 interests for Holdco
shares in the Reincorporation. Section 354(a)(1).

(9) Sub 3’s basis in the Holdco stock received in the Reincorporation will be the
same as its basis in the Sub 4 interests surrendered in exchange therefor.
Section 358(a)(1).

(10) Sub 3’s holding period for the Holdco stock received in the Reincorporation will
include the holding period for the Sub 4 interests exchanged therefor, provided
the Sub 4 interests are held as capital assets on the date of the exchange.
Section 1223(1).

(11) Holdco will succeed to and take into account the tax attributes of Sub 4 described
in Section 381(c). Section 381(a). These items will be taken into account by
Holdco subject to the conditions and limitations specified in sections 381 through
384 and the Treasury Regulations thereunder.

(12) The Disposition and the JV Formation will not prevent the Reincorporation from
qualifying as a reorganization under section 368(a)(1)(F). Rev. Rul. 96-29, 1996-
1 C.B. 50.

                                     Caveats

Except as specifically set forth above, we express no opinion concerning the tax
consequences of the Proposed Transaction under any other provision of the Internal
Revenue Code or Treasury Regulations or the tax treatment of any conditions existing
at the time of, or effects resulting from, the Proposed Transaction that are not
specifically covered by the above rulings. In particular, other than as expressly provided
above, no opinion is expressed regarding the tax consequences of the Disposition or
the JV Formation.

                            Procedural Statements

This letter ruling 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 letter must be
attached to any income tax return to which it is relevant. Alternatively, taxpayers filing
their returns electronically may satisfy this requirement by attaching a statement to their
return that provides the date and control number of the letter ruling. Pursuant to a
power of attorney on file in this office, a copy of this letter ruling will be sent to your
authorized representative.

Sincerely,

Mark S. Jennings
Branch Chief, Branch 1
Office of Associate Chief Counsel (Corporate)