PLR 1033021: IRS approved a proposed split-up distributing two businesses to separate shareholders

Plain-English summary

The IRS ruled favorably on a holding company's plan to distribute the stock of two controlled corporations to separate shareholders in exchange for their holding company stock, followed by liquidation of the holding company. The ruling addresses nonrecognition of gain or loss, the shareholders' stock bases and holding periods, and allocation of earnings and profits. The letter relies on representations that each controlled company would continue its active business and that the transaction met the listed statutory conditions. The IRS expressly did not rule on the business-purpose, device, or acquisition-plan questions identified in the letter.

Ruling snapshot

• Question: Would the proposed distribution of two controlled corporations' stock to separate shareholders receive the specified nonrecognition, basis, holding-period, and earnings-and-profits treatment?
• Outcome: Approved
• Key authorities: IRC §§ 312(h), 355, 358, and 1223; Treas. Reg. § 1.312-10

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 201033021                                            Third Party Communication: None
Release Date: 8/20/2010                                      Date of Communication: Not Applicable
Index Number: 355.01-02, 355.00-00
                                                             Person To Contact:
-----------------------------------------                    --------------------, ID No. -------------
------------------------                                     Telephone Number:
-------------------                                          ---------------------
 ----------------------------------                          Refer Reply To:
                                                             CC:CORP:B06
                                                             PLR-150385-09
                                                             Date:
                                                             May 10, 2010

LEGEND

Distributing = ---------------------------

Controlled 1 = -------------------------------

Controlled 2 = -------------------------------

Shareholder 1 = -------------------

Shareholder 2 = -----------------

a = ---------

b = --------

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

d = ----

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

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

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

This letter responds to your November 6, 2009, letter requesting rulings on certain federal
income tax consequences of a proposed transaction described below (the “Proposed
Transaction”). Information in the November 6, 2009 letter as well as subsequent
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 yet 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 the Distribution (described 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 the earnings and profits of the distributing
corporation, the controlled corporations, or both (see § 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 either of the
controlled corporations. (see § 355(e) and § 1.355-7).

                        Summary of Facts

Distributing is a holding company that owns all the stock of Controlled 1 and Controlled 2
(together, “the “Controlled Corporations”). Distributing has two classes of stock
outstanding, Class A voting common stock and Class B voting common stock. There are a
shares of Class A stock outstanding and b shares of Class B common stock
outstanding. Shareholder 1 owns c shares of the Class A voting common stock and d
percent of the Class B voting common stock. Shareholder 2 owns e shares of the Class
A voting common stock and d percent of the Class B voting common stock.

Controlled 1 and Controlled 2 conduct Business A.

Financial information has been received indicating that Business A of Controlled 1 and
Business A of Controlled 2 each has had gross receipts and operating expenses
representing the active conduct of a trade or business for each of the past five years.
The parties have structured the Proposed Transaction, described below.

                        Proposed Transaction

(i) Distributing will distribute the Controlled 1 stock to Shareholder 1 in exchange
for Shareholder 1’s Distributing stock.

(ii) Distributing will distribute the Controlled 2 stock to Shareholder 2 in exchange
for Shareholder 2’s Distributing stock. (Collectively, steps (i) and (ii) are
referred to as the “Distribution”).

(iii) Following the Distribution, Distributing will liquidate.

                          Representations

Distributing has made the following representations with respect to the Proposed
Transaction:

(a) The fair market value of the Controlled 1 and Controlled 2 stock received by
Shareholder 1 and Shareholder 2, respectively, will approximately equal the fair
market value of the Distributing stock surrendered by each shareholder in the
exchange.

(b) No part of the consideration to be distributed by the Distributing corporation will be
received by a shareholder as a creditor, an employee, or in any capacity other than
that other than that of a shareholder of the corporation

(c) The Distributing and the Controlled Corporations will each treat all members of
their respective SAG (as defined in section 355(b)(3)(B)) as one corporation in
determining whether it meets the requirements of section 355(b)(2)(A) regarding
the active conduct of a trade or business.

(d) The five years of financial information submitted on behalf of the Distributing SAG
is representative of the Distributing SAG’s present business operation, and with
regard to such Distributing SAG, there have been no substantial operational
changes since the date of the last financial statements submitted.

(e) The five years of financial information submitted on behalf of the Controlled 1 SAG
is representative of the Controlled 1 SAG’s present business operation, and with
regard to such Controlled 1 SAG, there have been no substantial operational
changes since the date of the last financial statements submitted.

(f) The five years of financial information submitted on behalf of the Controlled 2 SAG
is representative of the Controlled 2 SAG’s present business operation, and with
regard to such Controlled 2 SAG, there have been no substantial operational
changes since the date of the last financial statements submitted.

(g) Following the transaction, the Controlled 1 SAG and Controlled 2 SAG will each
continue the active conduct of its business, independently and with its separate
employees.

(h) For purposes of § 355(d), immediately after the 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 the Distributing corporation’s stock
entitled to vote, or 50 percent or more of the total value of shares of all classes of
the Distributing corporation’s 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 Distribution.

(i) For purposes of § 355(d), immediately after the 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 the Controlled 1 corporation’s stock
entitled to vote, or 50 percent or more of the total value of shares of all classes of
the Controlled 1 corporation’s 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 Distribution or (ii) attributable to
distributions on the Distributing corporation’s 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 Distribution.

(j) For purposes of § 355(d), immediately after the 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 the Controlled 2
corporation’s stock entitled to vote, or 50 percent or more of the total value of
shares of all classes of the Controlled 2 corporation’s 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 Distribution or (ii)
attributable to distributions on the Distributing corporation’s 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 Distribution.

(k) The distribution of the stock, or stock and securities, of the Controlled Corporations
is carried out for the following business purposes: (1) retention of key employees
and removing management conflicts; (2) allowing profit maximization through risk
taking and business planning and (3) simplify ownership structure for Business A
sign-up and payment limitation purposes. The distribution of the stock, or stock
and securities, of the Controlled Corporations is motivated, in whole or substantial
part, by one or more of these corporate business purposes.

(l) The transaction is not used principally as device for the distribution of the earnings
and profits of the Distributing corporation or the Controlled Corporations or both.

(m) No intercorporate debt will exist between the Distributing corporation and the
Controlled Corporations at the time of, or subsequent to the, the distribution of the
Controlled Corporation’s stock.

(n) Payments made in connection with all continuing transactions, if any, between the
Distributing and Controlled Corporations, will be for fair market value based on
terms and conditions arrived at by the parties bargaining at arm’s length.

(o) There is no acquisition of stock of the Distributing corporation or any Controlled
Corporation (including any predecessor or successor of any such corporation) that
is part of a plan or series of related transactions (within the meaning of § 1.355-7)
that includes the distribution of the Controlled Corporations’ stock.

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

(q) Immediately after the Distribution, neither the Distributing corporation nor the
Controlled 1 corporation or the Controlled 2 corporation will be a disqualified
investment corporation (within the meaning of § 355(g)(2)).

                              Rulings

1) No gain or loss will be recognized by (and no amount will otherwise be included in
the income of) Shareholder 1 and Shareholder 2 on the Distribution (§ 355(a)(1)).

2) No gain or loss will be recognized by Distributing on the Distribution (§ 355(c)).

3) The aggregate basis of the Controlled 1 stock in the hands of Shareholder 1
immediately after the Distribution will equal Shareholder 1's aggregate basis in
the Distributing stock surrendered in the Distribution (§ 358(a)(1)).

4) The aggregate basis of the Controlled 2 stock in the hands of Shareholder 2
immediately after the Distribution will equal Shareholder 2's aggregate basis in
the Distributing stock surrendered in the Distribution (§ 358(a)(1)).

5) The holding period of the Controlled 1 stock received by Shareholder 1 will include
the holding period of the Distributing stock surrendered by that shareholder in
exchange therefore, provided such stock is held as a capital asset on the date of
the Distribution (§ 1223(1)).

6) The holding period of the Controlled 2 stock received by Shareholder 2 will include
the holding period of the Distributing stock surrendered by that shareholder in
exchange therefore, provided such stock is held as a capital asset on the date of
the Distribution (§ 1223(1)).

7) Earnings and profits will be allocated between Controlled 1 and Controlled 2 in
accordance with section 312(h) and Treas. Reg. §§ 1.312-10.

                               Caveats

No opinion is expressed about the tax treatment of the Proposed Transaction under
other provisions of the Code or regulations or the tax treatment of any condition
existing at the time of, or effects resulting from, the Proposed Transaction that is not
specifically covered by the above rulings. In particular, no opinion is expressed
regarding: (i) whether the Distribution satisfies the business purpose requirement of
§ 1.355-2(b), (ii) whether the Distribution is used principally as a device for the
distribution of the earnings and profits of Distributing or the Controlled Corporations
or both (see § 355(a)(1)(B) and § 1.355-2(d)), or (iii) whether the Distribution 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
Distributing or either of the Controlled Corporations (see § 355(e) and § 1.355-7).

                                Procedural Matters

The 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 this letter
ruling.

In accordance with the power of attorney on file in this office, a copy of this letter is
being sent to your authorized representative.



                                  Sincerely,


                                  __________________________
                                  Richard M. Heinecke
                                  Assistant to the Branch Chief, Branch 6
                                  Office of Associate Chief Counsel (Corporate)