PLR 1047023: IRS ruled on section 304 and section 351 treatment for a multinational restructuring
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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
The IRS ruled on the federal tax consequences of a proposed restructuring involving a foreign partnership, several foreign corporations, and newly formed companies. The ruling addressed exchanges and contributions of operating assets, stock, partnership interests, and assumed debt. It generally treated the specified transfers as nonrecognition transactions under section 351, but applied section 304 to certain stock acquisitions treated as redemptions, with dividend and basis consequences. The ruling also addressed gain recognition agreements for certain transfers under section 367 and stated that the conclusions depended on the submitted facts and representations.
Ruling snapshot
- Question: How would sections 304 and 351 apply to the proposed exchanges and contributions involving the partnership, its subsidiaries, and the new companies?
- Outcome: approved
- Key authorities: IRC §§ 301, 304, 351, 357, 358, 362, 367, 1032, and 1223.
Full text (IRS public release)
+Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 201047023 Third Party Communication: None
Release Date: 11/26/2010 Date of Communication: Not Applicable
Index Number: 304.02-01, 351.12-00
Person To Contact:
--------------------------------- -----------------------, ID No. -------------
---------------------------------- Telephone Number:
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Refer Reply To:
CC:CORP:B04
PLR-152375-09
Date:
August 06, 2010
Legend:
Taxpayer = ----------------------------------------------------------------------------------
A = -----------------------------------
Partnership 1 = -----------------------------------------------
Partnership 2 = -----------------------------------------------------
Partnership 3 = ----------------------------------------------------
Sub 1 = ------------------------------------------------
Sub 2 = ---------------------------------
Sub 3 = --------------------
NewCo 1 = ----------------------------------------
NewCo 2 = -----------------------
OpCo = -------------------------------------------------------
Bank = -------------------------------------------------------------------------------------
Third Party = ---------------------------------------------------------------------------------------
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Expenses = ---------------------------------------------------------------------------------------
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Stock = -----------------------------------------------------------
Exchange
PLR-152375-09 2
Country A = ------------
Business A = ---------------------------
Business B = -------------------------
Business C = ----------------------------------------
Business D = -------------------------------------
Year 1 = -------
Year 2 = -------
Date A = --------------------------
a = ----
b = ----
c = --------
d = ------
e = -----------------
f = ---------------
g = ---------------
h = ---------------
j = ---------------------
k = ---------------------
m = -----
n = -----
Dear --------------------
This letter is in reply to your letter dated November 30, 2009, requesting rulings as to
the Federal income tax consequences of a Proposed Transaction (defined below). The
information provided in that letter 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 penalty of perjury statement executed by an
appropriate party. This office has not verified any of the materials 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.
FACTS
Taxpayer and A (a Country A tax resident and not a US taxpayer) directly and indirectly
own a% and b%, respectively, of Partnership 1, a Country A entity that is classified as a
partnership for Federal tax purposes. Prior to the Proposed Transaction (described
below), Partnership 1 engaged directly (including through entities that are disregarded
for Federal tax purposes) in Business A, Business B, and Business C predominantly in
Country A. The assets associated with these businesses are referred to as the
“Partnership 1 Operations,” and the liabilities as the “Operations Liabilities.”
PLR-152375-09 3
Prior to the Proposed Transaction, Partnership 1 owned directly or indirectly 100% of
the sole class of stock of Sub 1 and Sub 2, each a Country A entity classified as a
corporation for Federal tax purposes; a c% general partner interest in Partnership 2 and
a d% limited partner interest in Partnership 3, each a Country A entity classified as a
partnership for US Federal tax purposes; and 100% of the stock of each of several
small entities (“Operations Subsidiaries”) that are non-US entities classified as
corporations for Federal tax purposes. Sub 2 owned directly and indirectly the
remaining partnership interest in Partnership 2, and Taxpayer owned directly the
remaining partnership interest in Partnership 3.
Prior to the Proposed Transaction, Partnership 1 also beneficially owned e shares
(greater than 50%) of the sole class of stock of Sub 3, a Country A entity classified as a
corporation for Federal tax purposes. Of the e shares, Partnership 1 directly owned f
shares and Third Party held only legal title to g shares. The remaining h shares of Sub
3 stock were publicly held and traded on Stock Exchange.
Sub 1 engages directly and indirectly in Business A and Business B predominantly
outside of Country A; Sub 2 engages directly and indirectly in Business A predominantly
in Country A; and Sub 3 engages directly and indirectly in Business A and Business D
in numerous countries.
Prior to the Proposed Transaction, Partnership 1 purchased its e shares of Sub 3 stock
during Year 1 and Year 2. Such purchases included shares that A sold to Partnership
1 and shares Partnership 1 acquired through a partnership directly and indirectly owned
by Taxpayer and A (“Related Party Shares”).
Partnership 1 financed the purchase of the Sub 3 stock and related costs (including
Expenses) with proceeds from a term loan facility (“Bank Facility”) provided by Bank.
Partnership 1’s obligation under the Bank Facility (“Sub 3 Acquisition Debt”) was
recourse to Partnership 1. Partnership 1 also had a debt to Sub 1 (“Sub 1 Debt”), a
portion of which was incurred to pay (i) interest on the Sub 3 Acquisition Debt and (ii)
Expenses.
On Date A, Bank and Partnership 1 agreed to amend and restructure the Sub 3
Acquisition Debt by dividing it into two tranches: the Senior Debt in the amount of j and
the Junior Debt in the amount of k. The amount of the Senior Debt does not exceed the
sum of (i) the purchase price of the f directly held Sub 3 shares plus (ii) Expenses
incurred in connection with the acquisition of those shares. In connection with and as a
condition subsequent to amending and restructuring the Sub 3 Acquisition Debt, and for
other business reasons, Partnership 1 intends to restructure its group as described in
the Proposed Transaction.
PROPOSED TRANSACTION
PLR-152375-09 4
To accomplish the foregoing business objectives, Taxpayer proposes the following
steps (collectively, the “Proposed Transaction”), some of which have already occurred:
(1) Partnership 1, together with a disregarded entity owned by Partnership 1,
formed a new Country A entity, OpCo. OpCo is an “eligible entity” within the meaning of
Reg. §301.7701-3(a), and its default classification is a disregarded entity. Partnership 1
(and its disregarded entity) contributed the Partnership 1 Operations, all of the stock in
the Operations Subsidiaries, and cash to OpCo in exchange for all the equity interests
in OpCo and OpCo’s assumption of the Operations Liabilities and all or a portion of the
Sub 1 Debt. OpCo will elect to be classified as a corporation for Federal tax purposes
pursuant to Reg. §301.7701-3(c) (the “OpCo Exchange”).
(2) Partnership 1 formed a new Country A entity, NewCo 1, which has a single
class of equity outstanding, is an “eligible entity” within the meaning of Reg. §301.7701-
3(a), and has elected to be disregarded as a separate entity of Partnership 1 for Federal
tax purposes pursuant to Reg. §301.7701-3(c) effective on the date of its formation.
Partnership 1 contributed to NewCo 1 its (i) OpCo interests, (ii) Sub 1 shares, (iii)
directly and indirectly held Sub 2 shares, (iv) f Sub 3 shares, (v) g Sub 3 shares held
through Third Party, (vi) c% partnership interest in Partnership 2, and (vii) d%
partnership interest in Partnership 3 in exchange for (1) all the stock of NewCo 1, (2)
NewCo 1’s assumption of the Senior Debt, Junior Debt, and any portion of the Sub 1
Debt not assumed by OpCo in the OpCo Exchange, and (3) additional consideration
(“NewCo 1 Exchange”).
(3) NewCo 1 formed a new Country A entity, NewCo 2, which has a single class of
equity outstanding, is an “eligible entity” within the meaning of Reg. §301.7701-3(a), and
has elected to be disregarded as a separate entity of Partnership 1 for Federal tax
purposes pursuant to §301.7701-3(c) effective on the date of its formation. NewCo 1
contributed to NewCo 2 its (i) OpCo interests, (ii) Sub 1 shares, (iii) directly and
indirectly held Sub 2 shares, (iv) f Sub 3 shares (none of which are Related Party
Shares), (v) c% partnership interest in Partnership 2, and (vi) d% partnership interest in
Partnership 3 in exchange for (1) all the stock of NewCo 2 and (2) NewCo 2’s
assumption of the Senior Debt and the portion of the Sub 1 Debt assumed by NewCo 1.
NewCo 2 will elect to be classified as a corporation for Federal tax purposes pursuant to
Reg. §301.7701-3(c) (the “NewCo 2 Exchange”).
(4) NewCo 2 purchased for cash Taxpayer’s interest in Partnership 3.
(5) NewCo 2 will contribute its c% partnership interest in Partnership 2 to Sub 2 in
exchange for additional shares of Sub 2 (the “Sub 2 Contribution”).
PLR-152375-09 5
(6) As part of the same plan, NewCo 2 will contribute its (i) Sub 1 shares (ii) and
directly and indirectly owned Sub 2 shares to OpCo in exchange for additional equity
interests in OpCo (“OpCo Contribution”).
(7) NewCo 2 will convert to a Country A entity that is described in Reg. §301.7701-
2(b)(8)(i) (i.e., a so-called per se corporation).
The term “Assumed Acquisition Debt” will be used to refer collectively to (i) the Senior
Debt and (ii) the Sub 1 Debt assumed by NewCo 2 in the NewCo 2 Exchange to the
extent incurred to pay interest on, and Expenses related to, the portion of the Sub 3
Acquisition Debt that was restructured into the Senior Debt, both of which are for
Federal tax purposes assumed by NewCo 2 in the NewCo 2 Exchange. On the
effective date of this step, the trading price of a share of Sub 3 stock is expected to be
between m and n, and thus the value of the f shares of Sub 3 stock contributed to
NewCo 2 in the NewCo 2 Exchange is expected to be less than the amount of the
Assumed Acquisition Debt.
REPRESENTATIONS
The following representations have been submitted with regard to the OpCo Exchange,
the NewCo 2 Exchange, and the OpCo Contribution:
A. OpCo Exchange
(a) No stock or securities will be issued for services rendered to or for the
benefit of OpCo in connection with the OpCo Exchange, and no stock or securities will
be issued for indebtedness of OpCo that is not evidenced by a security or for interest on
indebtedness of OpCo which accrued on or after the beginning of the holding period of
Partnership 1 for the debt.
(b) No assets to be transferred to OpCo were received by Partnership 1 as
part of a plan of liquidation of another corporation.
(c) The OpCo Exchange is not the result of the solicitation by a promoter,
broker, or investment house.
(d) Partnership 1 will not retain any rights in the property transferred to OpCo.
(e) To the extent that any patents, patent applications, or technical “know-
how” are transferred in the OpCo Exchange, such items will qualify as property within
the meaning of section 351 and Partnership 1 will transfer all substantial rights in such
patents or patent applications within the meaning of section 1235.
PLR-152375-09 6
(f) To the extent that any copyrights are transferred in the OpCo Exchange,
all rights, title, and interests for each copyright held by Partnership 1, in each medium of
exploitation, will be transferred to OpCo.
(g) To the extent that trademarks or trade names are transferred in the OpCo
Exchange, Partnership 1 will not retain any significant power, right, or continuing
interest, within the meaning of section 1253(b), in the trademarks or trade names.
(h) No licenses, leases, etc., will be granted in exchange for stock or
securities, and no material property to be transferred to OpCo will be leased back to
Partnership 1.
(i) The adjusted basis of the assets to be transferred by Partnership 1 to
OpCo will exceed the sum of the liabilities to be assumed by OpCo (within the meaning
of section 357(d)) plus any liabilities to which the transferred assets are subject.
(j) The total fair market value of the assets to be transferred by Partnership 1
to OpCo will exceed the sum of (i) the amount of liabilities assumed by OpCo in
connection with the exchange, (ii) the amount of liabilities owed to OpCo that are
extinguished in connection with the exchange, and (iii) the amount of any money and
the fair market value of any other property received by Partnership 1 in connection with
the exchange. The fair market value of the assets of OpCo will exceed the amount of
its liabilities immediately after the OpCo Exchange.
(k) The aggregate fair market value of the assets to be transferred by
Partnership 1 to OpCo will equal or exceed the aggregate adjusted basis of those
assets.
(l) The liabilities of Partnership 1 to be assumed by OpCo were incurred in
the ordinary course of business and are associated with the assets to be transferred.
(m) There will be no indebtedness created in favor of Partnership 1 as a result
of the OpCo Exchange.
(n) The transfers and exchanges will occur under a plan agreed upon before
the transaction in which the rights of the parties are defined.
(o) All exchanges in the OpCo Exchange will occur on approximately the
same date.
(p) No OpCo interest issued will be placed in escrow, issued later under a
contingent stock arrangement, or issued in the near future.
PLR-152375-09 7
(q) There is no plan or intention on the part of Partnership 1 to dispose of
shares of OpCo after the OpCo Exchange, other than in the NewCo 1 Exchange and
NewCo 2 Exchange as described above.
(r) There is no plan or intention on the part of OpCo to redeem or otherwise
reacquire any OpCo interest or indebtedness to be issued in the OpCo Exchange.
(s) Prior to the transfer of OpCo interest in the NewCo 2 Exchange, taking into
account any issuance of additional shares of OpCo interest; any issuance of stock for
services; the exercise of any OpCo interest rights, warrants, or subscriptions; a public
offering of OpCo interest; and the sale, exchange, transfer by gift, or other disposition of
any of the interest of OpCo to be received in the exchange, Partnership 1 will be in
“control” of OpCo within the meaning of section 368(c).
(t) Partnership 1 will receive interests approximately equal to the net fair
market value of the property transferred to OpCo.
(u) OpCo will remain in existence and retain and use the property transferred
to it in a trade or business.
(v) There is no plan or intention by OpCo to dispose of the transferred
property other than in the normal course of business operations.
(w) Each of the parties to the transaction will pay its own expenses, if any,
incurred in connection with the OpCo Exchange.
(x) OpCo will not be an investment company within the meaning of section
351(e)(1) and Reg. §1.351-1(c)(1)(ii).
(y) Partnership 1 is not under the jurisdiction of a court in a title 11 or similar
case (within the meaning of section 368(a)(3)(A)) and the stock or securities received in
the exchange will not be used to satisfy the indebtedness of such debtor.
(z) OpCo will not be a “personal service corporation” within the meaning of
section 269A.
(aa) OpCo will be a controlled foreign corporation, within the meaning of
section 957, after the transaction.
(bb) The transfer of the Partnership 1 Operations and Operations Subsidiaries
by Partnership 1 to OpCo will, for purposes of section 367(a)(1) and Reg. §1.367(a)-
1T(c)(3)(i), be treated as a transfer by Taxpayer of his proportionate share of the
Partnership 1 Operations and Operations Subsidiaries to OpCo. If gain is realized on
the deemed transfer of the stock of the Operations Subsidiaries by Taxpayer to OpCo,
PLR-152375-09 8
Taxpayer will comply with the requirements of Reg. §1.367(a)-3(b)(1)(ii) and -8(c) by
entering into a five-year gain recognition agreement in accordance with Reg. §1.367(a)-
8(d) and -8(g).
(cc) The Partnership 1 Operations transferred to OpCo will be used by OpCo in
the active conduct of a trade or business outside the US within the meaning of section
367(a)(3)(A) and Reg. §1.367(a)-2T.
(dd) Taxpayer will recognize the gain, if any, that is required to be recognized
under section 367(a)(3)(B) notwithstanding the application of section 367(a)(3)(A).
(ee) Taxpayer will recognize his share of income, if any, that is required to be
recognized under Reg. §1.367(a)-4T or -5T.
(ff) Taxpayer will recognize his share of income, if any, that is required to be
recognized under section 367(d) on the transfer of intangible property as defined under
section 936(h)(3)(B).
(gg) To the extent section 304(a)(1) applies to the OpCo Exchange, the transfer
by Partnership 1 to OpCo of its shares of each of the Operations Subsidiary’s stock in
exchange for OpCo’s respective assumption of liabilities will be treated as a transfer of
stock of a foreign corporation to OpCo in exchange for stock of OpCo in a transaction to
which section 351(a) applies ("Deemed Section 351 Exchange") followed by a
redemption of the OpCo stock received in the Deemed Section 351 Exchange
("Deemed Redemption"). No amount of the distribution received by Partnership 1 in the
Deemed Redemption will be applied against and reduce (in whole or in part), pursuant
to section 301(c)(2), the basis of the stock of OpCo held by Partnership 1 other than the
OpCo stock deemed issued in the Deemed Section 351 Exchange.
B. NewCo 2 Exchange
(hh) NewCo 1 will retain its initial classification as an entity disregarded from its
sole owner, Partnership 1, for Federal tax purposes pursuant to Reg. §301.7701-
3(b)(2)(i)(C) at the time of the NewCo 1 Exchange and after the Transaction.
(ii) There is no plan or intention to make an election to classify NewCo 1 as a
corporation for US tax purposes.
(jj) No stock or securities will be issued for services rendered to or for the
benefit of NewCo 2 in connection with the NewCo 2 Exchange, and no stock or
securities will be issued for indebtedness of NewCo 2 that is not evidenced by a security
or for interest on indebtedness of NewCo 2 which accrued on or after the beginning of
the holding period of Partnership 1 for the debt.
PLR-152375-09 9
(kk) No assets to be transferred to NewCo 2 were received by Partnership 1 or
NewCo 1 as part of a plan of liquidation of another corporation.
(ll) No patents or patent applications, copyrights, trademarks, or trade names
are being transferred to NewCo 2 pursuant to the NewCo 2 Exchange, and the
transaction does not involve an agreement that purports to furnish technical “know-how”
in exchange for stock.
(mm) The NewCo 2 Exchange is not the result of the solicitation by a promoter,
broker, or investment house.
(nn) Partnership 1 through NewCo 1 will not retain any rights in the property
transferred to NewCo 2.
(oo) No licenses, leases, etc., will be granted in exchange for stock or
securities, and no material property to be transferred to NewCo 2 will be leased back to
Partnership 1 or to NewCo 1.
(pp) The adjusted basis of the assets to be transferred by Partnership 1
through NewCo 1 to NewCo 2 will exceed the sum of the liabilities to be assumed by
NewCo 2 (within the meaning of section 357(d)) plus any liabilities to which the
transferred assets are subject.
(qq) The total fair market value of the assets to be transferred by Partnership 1
through NewCo 1 to NewCo 2 will exceed the sum of (i) the amount of liabilities
assumed by NewCo 2 in connection with the exchange, (ii) the amount of liabilities
owed to NewCo 2 that are extinguished in connection with the exchange, and (iii) the
amount of any money and the fair market value of any other property received by
Partnership 1 through NewCo 1 in connection with the exchange. The fair market value
of the assets of NewCo 2 will exceed the amount of its liabilities immediately after the
NewCo 2 Exchange.
(rr) The aggregate fair market value of the assets to be transferred by
Partnership 1 through NewCo 1 to NewCo 2 will equal or exceed the aggregate
adjusted basis of those assets.
(ss) Except for debt related to the Sub 3 acquisition, the liabilities of
Partnership 1 through NewCo 1 to be assumed by NewCo 2 were incurred in the
ordinary course of business and are associated with the assets to be transferred.
(tt) There will be no indebtedness created in favor of Partnership 1 or NewCo
1 as a result of the NewCo 2 Exchange.
PLR-152375-09 10
(uu) The transfers and exchanges will occur under a plan agreed upon before
the transaction in which the rights of the parties are defined.
(vv) All exchanges in the NewCo 2 Exchange will occur on approximately the
same date.
(ww) No stock issued will be placed in escrow, issued later under a contingent
stock arrangement, or issued in the near future.
(xx) There is no plan or intention on the part of Partnership 1 through NewCo 1
to dispose of shares of NewCo 2 after the exchange.
(yy) There is no plan or intention on the part of NewCo 2 to redeem or
otherwise reacquire any NewCo 2 stock or indebtedness to be issued in the NewCo 2
Exchange.
(zz) Taking into account any issuance of additional shares of NewCo 2 stock;
any issuance of stock for services; the exercise of any NewCo 2 stock rights, warrants,
or subscriptions; a public offering of NewCo 2 stock; and the sale, exchange, transfer by
gift, or other disposition of any of the stock of NewCo 2 to be received in the exchange,
Partnership 1 through NewCo 1 will be in “control” of NewCo 2 within the meaning of
section 368(c) immediately after the NewCo 2 Exchange.
(aaa) Partnership 1 through NewCo 1 will receive stock, securities, or other
property approximately equal to the fair market value of the property transferred to
NewCo 2.
(bbb) NewCo 2 will remain in existence and retain and use the property
transferred to it in a trade or business.
(ccc) There is no plan or intention by NewCo 2 to dispose of the transferred
property other than (i) NewCo 2’s contribution of property to Sub 2 in the Sub 2
Contribution, (ii) NewCo 2’s contribution of property to OpCo in the OpCo Contribution,
and (iii) in the normal course of business operations.
(ddd) Each of the parties to the transaction will pay its own expenses, if any,
incurred in connection with the NewCo 2 Exchange.
(eee) NewCo 2 will not be an investment company within the meaning of section
351(e)(1) and Reg. §1.351-1(c)(1)(ii).
(fff) Partnership 1 and NewCo 1 are not under the jurisdiction of a court in a
title 11 or similar case (within the meaning of section 368(a)(3)(A)) and the stock or
PLR-152375-09 11
securities received in the exchange will not be used to satisfy the indebtedness of such
debtor.
(ggg) NewCo 2 will not be a “personal service corporation” within the meaning of
section 269A.
(hhh) The assumption of the Senior Debt and whatever portion of the Sub 1 Debt
by NewCo 2 will be a valid and legally binding assumption of the indebtedness under
applicable Country A law.
(iii) None of the Sub 3 stock to be transferred is section 306 stock within the
meaning of section 306(c).
(jjj) Immediately before the NewCo 2 Exchange, Partnership 1 is the owner for
Federal tax purposes of the shares of Sub 3 stock held as to legal title by Third Party.
(kkk) NewCo 2 will be a controlled foreign corporation, within the meaning of
section 957, after the transaction.
(lll) Any non-stock assets transferred to NewCo 2 will be used in the active
conduct of a trade or business outside of the United States.
(mmm) Taxpayer will recognize the gain, if any, that is required to be recognized
under section 367(a)(3)(B) notwithstanding the application of section 367(a)(3)(A).
(nnn) Taxpayer will recognize his share of income, if any, that is required to be
recognized under Reg. §1.367(a)-4T or -5T.
(ooo) Taxpayer will recognize his share of income, if any, that is required to be
recognized under section 367(d) on the transfer of intangible property as defined under
section 936(h)(3)(B).
(ppp) The transfer by Partnership 1 through NewCo 1 to NewCo 2 of its shares of
Sub 2, Sub 1, Sub 3 and OpCo stock will, for purposes of section 367(a)(1) and Reg.
§1.367(a)-1T(c)(3)(i), be treated as a transfer by Taxpayer of his proportionate share of
the Sub 2, Sub 1, Sub 3 and OpCo stock to NewCo 2. If gain is realized on the deemed
transfer by Taxpayer of such shares to NewCo 2, Taxpayer will comply with the
requirements of Reg. §1.367(a)-3(b)(1)(ii), -8(c), and -8(k) by entering into a five-year
gain recognition agreement in accordance with Reg. §1.367(a)-8(d) and -8(g).
(qqq) To the extent section 304(a)(1) applies to the NewCo 2 Exchange, the
transfer by Partnership 1 to NewCo 2 of its shares of each of Sub 1, Sub 2, Sub 3, or
OpCo stock in exchange for NewCo 2’s respective assumption of liabilities will be
treated as a transfer of stock of a foreign corporation to NewCo 2 in exchange for stock
PLR-152375-09 12
of NewCo 2 in a transaction to which section 351(a) applies ("Deemed Section 351
Exchange") followed by a redemption of the NewCo 2 stock received in the Deemed
Section 351 Exchange ("Deemed Redemption"). No amount of the distribution received
by Partnership 1 in the Deemed Redemption will be applied against and reduce (in
whole or in part), pursuant to section 301(c)(2), the basis of the stock of NewCo 2 held
by Partnership 1 other than the NewCo 2 stock deemed issued in the Deemed Section
351 Exchange.
C. OpCo Contribution
(rrr) No stock or securities will be issued for services rendered to or for the
benefit of OpCo in connection with the OpCo Contribution, and no stock or securities
will be issued for indebtedness of OpCo that is not evidenced by a security or for
interest on indebtedness of OpCo which accrued on or after the beginning of the holding
period of NewCo 2 for the debt.
(sss) No assets to be transferred to OpCo were received by NewCo 2 as part of
a plan of liquidation of another corporation.
(ttt) No patents or patent applications, copyrights, trademarks, or trade names
are being transferred to OpCo pursuant to the OpCo Contribution, and the transaction
does not involve an agreement that purports to furnish technical “know-how” in
exchange for stock.
(uuu) The OpCo Contribution is not the result of the solicitation by a promoter,
broker, or investment house.
(vvv) NewCo 2 will not retain any rights in the property transferred to OpCo.
(www) No licenses, leases, etc., will be granted in exchange for stock or
securities, and no material property to be transferred to OpCo will be leased back to
NewCo 2.
(xxx) The adjusted basis and the fair market value of the assets to be
transferred by NewCo 2 to OpCo will exceed the sum of the liabilities to be assumed by
OpCo, if any, plus any liabilities to which the transferred assets are subject.
(yyy) The liabilities of NewCo 2 to be assumed by OpCo, if any, were incurred in
the ordinary course of business and are associated with the assets to be transferred.
(zzz) There will be no indebtedness created in favor of NewCo 2 as a result of
the OpCo Contribution.
PLR-152375-09 13
(aaaa) The transfers and exchanges will occur under a plan agreed upon before
the transaction in which the rights of the parties are defined.
(bbbb) All exchanges will occur on approximately the same date.
(cccc) No OpCo stock issued will be placed in escrow, issued later under a
contingent stock arrangement, or issued in the near future.
(dddd) There is no plan or intention on the part of NewCo 2 to dispose of shares
of OpCo after the exchange.
(eeee) There is no plan or intention on the part of OpCo to redeem or otherwise
reacquire any stock or indebtedness to be issued in the transaction.
(ffff) Taking into account any issuance of additional shares of OpCo stock; any
issuance of stock for services; the exercise of any OpCo stock rights, warrants, or
subscriptions; a public offering of OpCo stock; and the sale, exchange, transfer by gift,
or other disposition of any of the stock of OpCo to be received in the exchange, NewCo
2 will be in “control” of OpCo within the meaning of section 368(c).
(gggg) NewCo 2 will receive stock, securities, or other property approximately
equal to the fair market value of the property transferred to OpCo.
(hhhh) OpCo will remain in existence and retain and use the property transferred
to it in a trade or business.
(iiii) There is no plan or intention by OpCo to dispose of the transferred
property other than in the normal course of business operations.
(jjjj) Each of the parties to the transaction will pay its own expenses, if any,
incurred in connection with the OpCo Contribution.
(kkkk) OpCo will not be an investment company within the meaning of section
351(e)(1) and Reg. §1.351-1(c)(1)(ii).
(llll) NewCo 2 is not under the jurisdiction of a court in a title 11 or similar case
(within the meaning of section 368(a)(3)(A)) and the stock or securities received in the
exchange will not be used to satisfy the indebtedness of such debtor.
(mmmm)OpCo will not be a “personal service corporation” within the meaning of
section 269A.
(nnnn) To the extent a five year gain recognition agreement was entered into by
Taxpayer with respect to the transfer of Sub 1 and Sub 2 shares in the NewCo 2
PLR-152375-09 14
Exchange, Taxpayer will comply with the requirements of Reg. §1.367(a)-8(c) and -8(k)
by entering into a five-year gain recognition agreement in accordance with Reg.
§1.367(a)-8(d) and -8(g).
D. Sub 2 Contribution
(oooo) The transfer by NewCo 2 of its Partnership 2 interest to Sub 2 following
Partnership 1’s transfer of the Partnership 2 interest to NewCo 2 will, for purposes of
section 367(a)(1) and Reg. §1.367(a)-3(d)(1)(vi), be treated as a transfer by Taxpayer of
his proportionate share of the Sub 2 stock (received in exchange for the Partnership 2
interest) to NewCo 2. If gain is realized on the deemed transfer by Taxpayer of such
shares to NewCo 2, Taxpayer will comply with the requirements of Reg. §§1.367(a)-
3(d)(1)(vi) and -(d)(2), and 1.367(a)-1T(c)(3)(i), by entering into a five-year gain
recognition agreement in accordance with Reg. §1.367(a)-8(d) and -(g).
RULINGS
Based solely on the information submitted and representations made above, we rule as
follows regarding the OpCo Exchange, the NewCo 2 Exchange, and the OpCo
Contribution:
A. OpCo Exchange
(1) Except as provided in ruling 2, Partnership 1 will recognize no gain or loss in
connection with the OpCo Exchange (sections 351(a) and 357(a) and (c), and Rev. Rul.
2003-51, 2003-1 C.B. 938).
(2) Section 304(a) (and not section 351 and not so much of sections 357 and 358
as relates to section 351) will apply to OpCo’s acquisition of the portion of the stock of
the Operations Subsidiaries treated as received in exchange for OpCo’s assumption of
the Operations Liabilities and the portion of the Sub 1 Debt assumed by OpCo (section
304(b)(3)(A)). The acquisition by OpCo of the portion of the stock of the Operations
Subsidiaries treated as received in exchange for OpCo’s assumption of the Operations
Liabilities and a portion of the Sub 1 Debt will be treated as a distribution in redemption
of a corresponding portion of OpCo stock. Partnership 1 and OpCo will be treated in
the same manner as if Partnership 1 had transferred that portion of the stock of the
Operations Subsidiaries to OpCo in exchange for a corresponding portion of OpCo
stock in a transaction to which section 351(a) applies, and then OpCo had redeemed
the corresponding portion of OpCo stock it was treated as issuing (section 304(a)(1)).
The deemed distribution in redemption of OpCo stock will constitute a dividend to the
extent of the earnings and profits of OpCo and, as the case may be, of the Operations
Subsidiaries. The balance of the deemed distribution in redemption of OpCo stock, if
any, will reduce Partnership 1’s basis in the OpCo stock (section 301(c)(2)). The
PLR-152375-09 15
remaining balance of the deemed distribution in redemption of OpCo stock, if any, will
be treated as gain from the sale or exchange of property (section 301(c)(3)).
(3) Except as provided in ruling (2), the basis in the OpCo stock received by
Partnership 1 will be the same as the basis of the property transferred to OpCo,
decreased by the amount of liabilities assumed by OpCo and increased by the amount
of gain or dividend, if any (section 358(a)(1) and (d)).
(4) Partnership 1’s holding period of the OpCo stock received will include the
holding period of the assets transferred to OpCo, provided the assets are held by
Partnership 1 as capital assets or section 1231 assets on the date of the OpCo
Exchange (section 1223(1)).
(5) OpCo will recognize no gain or loss on the receipt of property in exchange for
OpCo stock (section 1032(a)).
(6) OpCo’s basis in the stock and other assets received will equal Partnership 1’s
basis in the stock and other assets immediately before the OpCo Exchange, increased
by any gain recognized by Partnership 1 in the section 351 exchange (section 362(a)).
(7) OpCo’s holding period of each asset it receives will include the period during
which Partnership 1 held the asset prior to the OpCo Exchange (section 1223(2)).
B. NewCo 2 Exchange
(8) For Federal income tax purposes, Steps (2) and (3) of the Proposed
Transaction will be treated as if Partnership 1 transferred to NewCo 2 its (i) OpCo
interests, (ii) Sub 1 shares, (iii) directly and indirectly held Sub 2 shares, (iv) f Sub 3
shares, (v) c% partnership interest in Partnership 2, (vi) d% partnership interest in
Partnership 3 in exchange for (1) all of the stock of NewCo 2 and (2) NewCo 2’s
assumption of the Senior Debt and a portion of the Sub 1 Debt.
(9) Except as provided in ruling (10), Partnership 1 will recognize no gain or loss
in connection with the NewCo 2 Exchange (sections 351(a) and 357(a)).
(10) Section 304 will not apply to NewCo 2’s assumption of the Assumed
Acquisition Debt (section 304(b)(3)(B)(i) and (ii)). Section 304(a) (and not section 351
and not so much of sections 357 and 358 as relates to section 351) will apply to NewCo
2’s acquisition of the portion of the stock of Sub 1, Sub 2, Sub 3, and OpCo treated as
received in exchange for NewCo 2’s assumption of the portion of the Sub 1 Debt that is
not included in the Assumed Acquisition Debt (Nonqualifying Debt”) (section
304(b)(3)(A)). The acquisition by NewCo 2 of the portion of the stock of Sub 1, Sub 2,
Sub 3, and OpCo treated as received in exchange for NewCo 2’s assumption of the
PLR-152375-09 16
Nonqualifying Debt will be treated as a distribution in redemption of a corresponding
portion of NewCo 2 stock. Partnership 1 and NewCo 2 will be treated in the same
manner as if Partnership 1 had transferred that portion of the stock of Sub 1, Sub 2, Sub
3, and OpCo to NewCo 2 in exchange for a corresponding portion of NewCo 2 stock in
a transaction to which section 351(a) applies, and then NewCo 2 had redeemed the
corresponding portion of NewCo 2 stock it was treated as issuing (section 304(a)(1)).
The deemed distribution in redemption of NewCo 2 stock will constitute a dividend to
the extent of the earnings and profits of NewCo 2 and, as the case may be, either Sub
1, Sub 2, Sub 3, or OpCo. The balance of the deemed distribution in redemption of
NewCo 2 stock, if any, will reduce Partnership 1’s basis in the NewCo 2 stock (section
301(c)(2)). The remaining balance of the deemed distribution in redemption of NewCo
2 stock, if any, will be treated as gain from the sale or exchange of property (section
301(c)(3)).
(11) Except as provided in ruling (10), the basis in the NewCo 2 stock received by
Partnership 1 will be the same as the basis of the property transferred to NewCo 2,
decreased by the amount of liabilities assumed by NewCo 2 and increased by the
amount of gain or dividend, if any (section 358(a)(1) and (d)).
(12) Partnership 1’s holding period of the NewCo 2 stock received will include the
holding period of the assets transferred to NewCo 2, provided the assets are held by
Partnership 1 as capital assets on the date of the NewCo 2 Exchange (section 1223(1)).
(13) NewCo 2 will recognize no gain or loss on the receipt of property in exchange
for NewCo 2 stock (section 1032(a)).
(14) NewCo 2’s basis in the stock and other assets received will equal Partnership
1’s basis in the stock and other assets immediately before the NewCo 2 Exchange,
increased by any gain recognized by Partnership 1 in the section 351 exchange (section
362(a)).
(15) NewCo 2’s holding period of each asset it receives will include the period
during which Partnership 1 held the asset prior to the NewCo 2 Exchange (section
1223(2)).
C. OpCo Contribution
(16) NewCo 2 will recognize no gain or loss in connection with the OpCo
Contribution (sections 351(a) and 357(a)).
(17) The basis in the OpCo stock received by NewCo 2 will be the same as the
basis of the property transferred to OpCo, decreased by the amount of liabilities
assumed by OpCo (section 358(a)(1) and (d)).
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(18) NewCo 2’s holding period of the OpCo stock received will include the holding
period of the assets transferred, provided the assets are held by NewCo 2 as capital
assets on the date of the OpCo Contribution (section 1223(1)).
(19) OpCo will recognize no gain or loss on the receipt of property in exchange for
OpCo stock (section 1032(a)).
(20) OpCo’s basis in the stock and other assets received will equal NewCo’s basis
in the stock and other assets immediately before the OpCo Contribution (section
362(a)).
(21) OpCo’s holding period of each asset it receives will include the period during
which NewCo 2 held the asset prior to the OpCo Contribution (section 1223(2)).
CAVEATS
No opinion is expressed about the tax treatment of the Proposed Transaction 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 Transaction that are not
specifically covered by the above rulings. Additionally, no opinion is expressed (and
none was requested) regarding (i) the federal tax classification of any of the entities
involved in the Proposed Transaction and (ii) the validity of any entity classification
election made with respect to any of the entities.
PROCEDURAL STATEMENTS
This 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 the taxpayer’s federal income tax return for the
taxable year in which the transaction is consummated. 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.
In accordance with the power of attorney on file with this office, a copy of this letter is
being sent to your authorized representative.
___________________________
Lewis K Brickates
Chief, Branch 4
Office of Associate Chief Counsel (Corporate)
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