PLR 1039019: IRS approved a Type F reorganization using a new holding company

Plain-English summary

A company that had completed a bankruptcy-related reorganization asked the IRS to supplement an earlier ruling for a new holding company structure. The IRS ruled that the proposed transaction would qualify as a Type F reorganization and would not adversely affect the earlier ruling. It also ruled on the resulting treatment of shareholder exchanges, asset bases, holding periods, tax attributes, and the consolidated group tax year. The ruling was limited to the specified facts and did not address other federal tax consequences.

Ruling snapshot

• Question: Would the proposed new holding company structure qualify as a Type F reorganization and preserve the prior ruling?
• Outcome: Approved
• Key authorities: IRC §§ 354, 358, 361, 362, 368, 381, 382, 383, 384, 904, 1032, and 1223; Treas. Reg. §§ 1.381(a)-1, 1.381(b)-1, 1.108-7, 1.1502-28, and 1.1502-75

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201039019 Third Party Communication: None
Release Date: 10/1/2010 Date of Communication: Not Applicable
Index Number: 368.06-00
Person To Contact:
-------------------------------- ------------------------, ID No. -------------
----------------------- Telephone Number:
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--------------------------------- Refer Reply To:
-------------------------------------- CC:CORP:BO1
In Re: PLR-135355-09
---------------------------------- Date:
September 24, 2009

Company = -------------------------------------------------------------------------------
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Newco = -----------------------------------------------------

New LLC = ------------------------

Company LLC = -----------------------------

Holding Company = ---------------------------------------------------------

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

Shareholder 2 = -------------------------------------------------------------------------------
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Shareholder 3 = --------------------------------------------------------------------------------
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Exchange = -------------------------------------------------------------------------------
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Bankruptcy Court = -------------------------------------------------------------------------------
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Date 1 = ------------------

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

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

Newco
Preferred = -------------------------------------------------------------------------------
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Newco Series A
Warrants = -------------------------------------------------------------------------------
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Newco Series B
Warrants = -------------------------------------------------------------------------------
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Note 1 = -------------------------------------------------------------------------------
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Note 2 = -------------------------------------------------------------------------------
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State = -------------

a = ------

b = ------

c = ------

d = ---

e = ------

f = ------

g = ----

Dear ---------------

   This letter responds to your July 29, 2009 letter requesting that we supplement

our private letter ruling dated July 8, 2009 (PLR 130073-09) (the “Prior Ruling”). The
information submitted for consideration in this supplemental request, and additional
information submitted in letters dated July 31, August 26, and September 17, 2009 is
summarized below. Capitalized terms not defined in this ruling have the meanings
assigned to them in the Prior Ruling.

  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,
PLR-135355-09 4

representations, and other data may be required as part of the audit process.

   The Prior Ruling addresses certain Federal income tax consequences of certain

transactions under § 368(a)(1)(G) of the Internal Revenue Code, and other Code
provisions.

                       Summary of Supplemental Facts

   Newco is a State corporation that was formed on Date 1 in connection with the

Exchange, which was effected on Date 2 pursuant to an order of the Bankruptcy Court
issued in connection with Company’s bankruptcy proceedings. The Prior Ruling
concludes that the transfer by Company of substantially all of its assets to Newco in
exchange for Newco stock and other consideration in the Exchange, together with the
subsequent liquidation of Company for U.S. federal income tax purposes that will occur
no later than Date 3, will qualify as a reorganization under § 368(a)(1)(G) (the
“Reorganization”). As a result of the Reorganization, Newco became the common
parent of an affiliated group of corporations that will file a consolidated U.S. federal
income tax return on a calendar year basis (the “Newco Consolidated Group”). In
addition, Newco owns (directly and indirectly) stock in numerous foreign corporations
and interests in other foreign and domestic entities.

   Following the Reorganization, Newco has outstanding the following equity

interests: (i) Newco common stock; (ii) Newco Preferred stock; (iii) Newco Series A
Warrants; and (iv) Newco Series B Warrants. Newco’s common stock is held in the
following approximate proportions by the following shareholders: a% by Shareholder 1;
b% by Shareholder 3; c% by Shareholder 2; and d% by Company. The Newco
Preferred stock is held in the following approximate proportions by the following
shareholders: (i) e% by Shareholder 3; (ii) f% by Shareholder 1; and (iii) g% by affiliates
of Shareholder 2. Company holds all of the Newco Series A Warrants and Shareholder
3 holds all of the Newco Series B Warrants.

   Also following the Reorganization, Newco has debt obligations outstanding,

including Note 1 and Note 2, owed to Shareholder 1 and Shareholder 3, respectively.

                          Supplemental Transactions

    At the time of the Reorganization, it was determined that the legal ownership of

Newco would not accommodate certain legal and regulatory considerations. As a
result, Newco has determined that the formation of a holding company structure for
Newco’s business should be undertaken as soon as practicable after the
Reorganization, as described below in the “Proposed Transaction.”

   (i)    Newco will form a wholly owned State corporation (“Holding Company”).

   (ii)   Holding Company will form New LLC as a wholly owned State limited

PLR-135355-09 5

liability company (“LLC”), which will be a disregarded entity for U.S. federal income tax
purposes (a “disregarded entity”).

   (iii)   New LLC will form a wholly owned State corporation (“Merger Sub”).

   (iv)   Merger Sub will merge with and into Newco, with Newco surviving (the

“Newco Merger”). Pursuant to State law, in the Newco Merger, the Newco stock and
warrants held by Shareholder 1, Shareholder 2, Shareholder 3, and Company will be
automatically converted into Holding Company stock and warrants (the “Holding
Company common stock,” “Holding Company Series A Preferred Stock,” “Holding
Company Series A Warrants,” and “Holding Company Series B Warrants”), in the same
proportions that the Newco stock and warrants were held prior to the Newco Merger. In
addition, the Merger Sub stock held by New LLC will be automatically converted into
Newco stock.

   (v)    On the day following the completion of the Newco Merger, Newco will

convert into a State LLC and change its name to Company LLC. Company LLC will be
a disregarded entity.

   (vi)    Company LLC will distribute its equity interests in certain businesses and

foreign subsidiaries, joint ventures, and investments to New LLC. Company LLC will
also distribute and assign, and New LLC will assume, Note 1 and Note 2.

                        Supplemental Representations

  As a result of the Proposed Transaction, Newco makes the following

representation to reaffirm certain representations made by its predecessor, Company, in
connection with the Prior PLR:

    (a)   The representations (other than representations (h), (k), and (m) as

modified below) and caveats set forth in the Prior PLR remain in effect for purposes of
that ruling and this supplemental ruling, except that references to “Newco” are replaced
by references to “Holding Company” as of the effective date of the Proposed
Transaction.

    In addition, Newco makes the following representations to modify representations

(h), (k), and (m) as made in connection with the Prior PLR:

   (b)     Other than in connection with the Proposed Transaction, there is no plan

or intention for Newco or Holding Company, or for any party related to Newco or
Holding Company (within the meaning of Treas. Reg. § 1.368-1(e)(4)), to redeem or
acquire any Newco stock or Holding Company stock issued in the Reorganization or the
Proposed Transaction, respectively, either directly or through any transaction,
agreement, or other arrangement with any other person.
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   (c)    Except for the Sale Assets and in connection with the Proposed

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

  (d)     Other than in connection with the Proposed Transaction, Newco had, and

Holding Company has, no plan or intention to liquidate or merge with or into another
corporation subsequent to the Reorganization and the Proposed Transaction,
respectively.

   In connection with its request for a supplemental ruling, Newco makes the

following representations regarding the Proposed Transaction:

   (e) The fair market value of the Holding Company stock and warrants

received by each Newco shareholder and warrant holder, respectively, will be
approximately equal to the fair market value of the Newco stock and warrants
surrendered in exchange therefor in the Proposed Transaction.

  (f)     As a result of the Proposed Transaction, Newco’s shareholders and

warrant holders will own all of the outstanding Holding Company stock and warrants,
and will own such interests solely by reason of their ownership of Newco stock and
warrants immediately prior to the Proposed Transaction.

  (g)   Holding Company has no plan or intention to issue additional stock in the

Proposed Transaction.

  (h)   As a result of the Proposed Transaction, Holding Company will possess

the same assets and liabilities as those possessed by Newco immediately prior to the
Proposed Transaction.

  (i)    The liabilities of Newco assumed (within the meaning of § 357(d)) by

Holding Company plus the liabilities, if any, to which the transferred assets were
subject, were incurred by either Newco or Company in the ordinary course of its
business or were incurred in connection with Company’s bankruptcy proceedings, and
were associated with the assets transferred.

  (j)   Newco will pay its own expenses, if any, incurred in connection with the

Proposed Transaction.

  (k)    Newco and Holding Company are not and, at the time of the Proposed

Transaction, will not be under the jurisdiction of a court in a title 11 or similar case within
the meaning of § 368(a)(3)(A).

                              Supplemental Rulings

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  Based solely on the information submitted and the representations made herein

and submitted with the Prior Ruling, we rule as follows:

    1.     The Proposed Transaction will not adversely affect the Prior Ruling, which

will remain in full force and effect.

      2.    The Proposed Transaction will be treated as: (i) the transfer by Newco of

all of its assets to Holding Company in exchange for the assumption of all of Newco’s
liabilities and all of the Holding Company stock and Holding Company warrants; and (ii)
the distribution by Newco in complete liquidation of all such Holding Company stock and
Holding Company warrants to its shareholders and warrant holders in exchange for all
of the outstanding stock and warrants in Newco.

  3.     The Proposed Transaction will qualify as a reorganization under

§ 368(a)(1)(F). Newco and Holding Company will each be “a party to a reorganization”
under § 368(b).

   4.    No gain or loss will be recognized by Newco’s shareholders and security

holders upon their exchange of Newco common stock, Newco Preferred stock, Newco
Series A Warrants, and Newco Series B Warrants for Holding Company common stock,
Holding Company Preferred stock, Holding Company Series A Warrants, and Holding
Company Series B Warrants, respectively (§ 354(a)).

   5.    No gain or loss will be recognized by Newco upon the transfer of its assets

to Holding Company in exchange for Holding Company common stock, Holding
Company Preferred stock, Holding Company Series A Warrants, and Holding Company
Series B Warrants (§ 361(a)).

   6.    No gain or loss will be recognized by Holding Company upon the receipt

of Newco’s assets in exchange for Holding Company common stock, Holding Company
Preferred stock, Holding Company Series A Warrants, and Holding Company Series B
Warrants (§ 1032(a)).

  7.    The basis of each asset of Newco held by Holding Company will be the

same as the basis of that asset in the hands of Newco immediately prior to the
Proposed Transaction (§ 362(b)).

    8.     The holding period for each asset of Newco received by Holding Company

will include the period during which such asset was held by Newco and Company
(§ 1223(2)).

   9.      The basis of the Holding Company common stock, Holding Company

Preferred stock, Holding Company Series A Warrants, and Holding Company Series B
Warrants received by each Newco shareholder or warrant holder will be the same as
the basis of the Newco common stock, Newco Preferred stock, Newco Series A
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Warrants, and Newco Series B Warrants for which they will be deemed exchanged
(§ 358(a)).

   10.   The holding period of the Holding Company common stock, Holding

Company Preferred stock, Holding Company Series A Warrants, and Holding Company
Series B Warrants received in the Proposed Transaction will include the holding period
of the Newco common stock, Newco Preferred stock, Newco Series A Warrants, and
Newco Series B Warrants received in exchange therefor (§ 1223(1)).

  11.     Holding Company will succeed to and take into account the tax attributes

of Newco described in § 381(c), including the foreign tax credit carryovers of Newco,
subject to reduction with respect to excluded cancellation of indebtedness income of
Company (section 381(a), Treas. Regs. §§ 1.381(a)-1, 1.1502-28, and 1.108-7(c), and
Revenue Ruling 80-144, 1980-1 C.B. 80). These items will be taken into account by
Holding Company subject to the conditions and limitations specified in §§ 381, 382, 383,
384, 904, and 1502, and the Regulations thereunder.

  12.    The tax year of the Newco affiliated group will not end on the date of the

Proposed Transaction and such tax year will continue with Holding Company as the
successor to Newco in its capacity as the common parent of the affiliated group of
corporations of which Newco was the common parent (Treas. Regs. §§ 1.381(b)-1(a)(2)
and 1.1502-75(d)(2)(i)).

                                     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 letter ruling must be attached to the Federal income tax return of

each party involved in the Proposed Transaction for the taxable year in which the
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.
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     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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