PLR 1109001: The IRS approved a downstream merger as a Type A reorganization

Plain-English summary

A holding company planned to merge into a disregarded limited liability company owned by its subsidiary. The subsidiary would survive the merger, and the holding company's shareholders would receive the subsidiary's common stock, with cash paid for fractional shares. The IRS ruled that the transaction would qualify as a Type A reorganization and addressed the resulting nonrecognition, basis, holding period, tax attribute, ownership change, and consolidated return consequences. The ruling was based on the submitted facts and representations and did not address tax treatment outside the listed rulings.

Ruling snapshot

• Question: Would the proposed downstream merger qualify as a tax-free Type A reorganization, with the stated consequences for the companies and their shareholders?
• Outcome: Approved.
• Key authorities: IRC §§ 354, 357, 361, 362, 368, 381, 382, 383, 384, 1032, 1223, and 1502; Treas. Reg. §§ 1.368-1, 1.368-2, 1.382-2, and 1.1502-75.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201109001 Third Party Communication: None
Release Date: 3/4/2011 Date of Communication: Not Applicable
Index Number: 368.01-00
Person To Contact:
------------------------------- -----------------------, ID No. -------------
------------------------------ Telephone Number:
--------------------------- ---------------------
---------------------------- Refer Reply To:
------------------------------ CC:CORP:B04
PLR-100703-10
Date:
March 02, 2010

LEGEND:

Target = ---------------------------
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Acquiring = -------------
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Shareholder A = ----------------------------------------------------------------
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x = ------
y = ------
z = ------
Date 1 = --------------
Business = -------------------------------------
PLR-100703-10 2

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

  This letter responds to your January 4, 2010 request for rulings on certain federal

income tax consequences of a series of proposed transactions. The information
submitted 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 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.

                                 Summary of Facts

   Target is the common parent of an affiliated group of corporations that files a

consolidated federal income tax return. Target was originally formed as a holding
company for a number of operating subsidiaries. Shareholder A, directly and indirectly,
owns approximately x percent of Target’s outstanding common stock. The remainder of
Target’s common stock is publicly held. Over the years, Target has controlled a number
of businesses; however, as of the end of Date 1, Target had disposed of its interests in
operating companies apart from its interest in Acquiring. Currently, Target’s primary
business is acting as a holding company for Acquiring.

   Acquiring is the common parent of an affiliated group of corporations that files a

consolidated federal income tax return. Acquiring is engaged in Business. Acquiring
has two classes of stock outstanding: Class A common stock and Class B common
stock, which is exchangeable into Class A common stock. Acquiring’s Class A common
stock is widely held and publicly traded. Target owns all of Acquiring’s outstanding
Class B common stock, or approximately y percent (more than 50) of the outstanding
common stock of Acquiring by value.

                               Proposed Transaction

   For what have been represented to be valid business purposes the following

steps have been proposed (the "Proposed Transaction"):

    (i)     Acquiring will form a limited liability company (“LLC”), an entity
            disregarded as separate from its owner under §301.7701-3.

PLR-100703-10 3

  (ii)   Pursuant to state law, Target will merge with and into LLC (together with
         Acquiring, the ”Acquiring Unit”) with LLC surviving (the “Downstream
         Merger”).

   As a result of the Downstream Merger, the Target common stock will be

converted into the right to receive common stock of Acquiring. Target shareholders may
receive Class A common stock of Acquiring, Class B common stock of Acquiring, or
both. It is anticipated that the rights associated with the two classes of stock will be
similar to the currently outstanding Class A common stock and Class B common stock
of Acquiring. During the three-year period preceding the date of the Downstream
Merger, Shareholder A, directly and indirectly, will have owned no less than z percent of
the stock of Target. Immediately after the Downstream Merger, Shareholder A, directly
and indirectly, will own less than z percent of Acquiring.

                               Representations

  The following representations are made in connection with the Proposed

Transaction:

  (a)    The fair market value of Acquiring common stock and cash in lieu of
         fractional shares received in the Downstream Merger by each of the
         Target shareholders will be approximately equal to the fair market value of
         Target common stock surrendered in the Downstream Merger.

  (b)    At least 40 percent of the proprietary interest in Target will be exchanged
         for Acquiring common stock and that proprietary interest will be preserved
         (within the meaning of §1.368-1(e)).

  (c)    Neither Acquiring Unit nor any person related to Acquiring Unit (within the
         meaning of §1.368-1(e)(3)) has any plan or intention to reacquire any
         Acquiring common stock issued in the transaction for any consideration
         other than Acquiring common stock, either directly or through any
         transaction, agreement, or other arrangement with any other person.

  (d)    Acquiring Unit has no plan or intention to sell or otherwise dispose of any
         of the assets of Target acquired in the transaction, except for dispositions
         made in the ordinary course of business or transfers described in
         §368(a)(2)(C) or described in §1.368-2(k).

  (e)    The liabilities of Target assumed by Acquiring Unit and the liabilities to
         which the transferred assets of Target are subject were incurred by Target
         in the ordinary course of its business.

PLR-100703-10 4

 (f)   Following the Downstream Merger, Acquiring Unit will continue the historic
       business of the Target or use a significant portion of Target’s historic
       business assets in a business as required and defined in §1.368-1(d).

 (g)   Acquiring Unit, Target, and Target’s shareholders each will pay their
       respective expenses, if any, incurred in connection with the Downstream
       Merger.

 (h)   There is no intercorporate indebtedness existing between Acquiring Unit
       and Target that was or will be issued, acquired or settled at a discount.

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

 (j)   Target is not under the jurisdiction of a court in a title 11 or similar case
       within the meaning of §368(a)(3)(A).

 (k)   The fair market value of the assets of Target to be transferred to Acquiring
       Unit will equal or exceed the sum of liabilities assumed by Acquiring Unit,
       plus the amount of liabilities, if any, to which the transferred assets are
       subject.

 (l)   Target and Acquiring Unit will adopt a plan of merger, and the
       Downstream Merger will occur pursuant to such plan.

 (m)   The payment of cash in lieu of fractional shares, if any, of Acquiring
       common stock will be solely for the purpose of avoiding the expense and
       inconvenience to Acquiring of issuing fractional shares and will not
       represent separately bargained-for consideration. The total cash
       consideration that will be paid in the Downstream Merger to the Target
       shareholders, instead of issuing fractional shares of Acquiring common
       stock, will not exceed one percent of the total consideration that will be
       issued in the Downstream Merger to the Target shareholders in exchange
       for their shares of Target common stock. The fractional share interests of
       each Target shareholder will be aggregated, and no Target shareholder
       will receive cash in an amount equal to or greater than the value of one full
       share of Acquiring common stock.

 (n)   Target, Acquiring, and each of their affiliates will be eligible to file a
       consolidated return immediately after the Downstream Merger.

PLR-100703-10 5

                                    Rulings

          Based solely on the information submitted and the representations set

forth above, we rule as follows regarding the Proposed Transaction:

  (1)    The Downstream Merger will qualify as a reorganization within the
         meaning of §368(a)(1)(A). Acquiring and Target will each be “a party to
         the reorganization” within the meaning of §368(b).

  (2)    Target will recognize no gain or loss upon the transfer of the assets of
         Target to Acquiring Unit solely in exchange for Acquiring common stock
         and the assumption of liabilities by Acquiring Unit (§§361(a) and 357(a)).

  (3)    Target will recognize no gain or loss on the distribution of Acquiring
         common stock to its shareholders (§361(c)).

  (4)    Acquiring will recognize no gain or loss upon Acquiring Unit’s receipt of
         Target’s assets in exchange for Acquiring common stock (§1032(a)).

  (5)    The basis of Target’s assets in the hands of Acquiring Unit will be the
         same as the basis of such assets in the hands of Target immediately
         before the Downstream Merger (§362(b)).

  (6)    The holding period of Target’s assets in the hands of Acquiring Unit will
         include the period during which Target held such assets (§1223(2)).

  (7)    A Target shareholder will recognize no gain or loss upon the receipt of
         Acquiring common stock in exchange for Target common stock
         (§354(a)(1)).

  (8)    A Target shareholder’s basis in the Acquiring common stock received will
         be the same as the basis of the Target common stock surrendered in
         exchange therefor (§358(a)(1)).

  (9)    A Target shareholder’s holding period in the Acquiring common stock
         received will include the period during which the Target common stock
         surrendered in exchange therefor was held, provided the Target common
         stock was held as a capital asset on the date of the exchange (§1223(1)).

  (10)   The payment of cash in lieu of issuing fractional shares of Acquiring
         common stock will be treated as if the fractional shares were issued in the
         Downstream Merger and then redeemed by Acquiring with the cash
         payments treated as having been received as distributions in full payment
         in exchange for the redeemed fractional shares as provided in §302(a).
         Provided the fractional share interest is a capital asset in the hands of the
         recipient shareholder, the gain or loss will constitute capital gain or loss

PLR-100703-10 6

          subject to the provisions and limitations of Subchapter P of Chapter 1.
          Rev. Rul. 66-365, 1966-2 C.B. 116; Rev. Proc. 77-41, 1977-2 C.B. 574.

   (11)   Acquiring will succeed to and take into account, as of the close of the
          effective date of the Downstream Merger, the items of Target described in
          §381(c), subject to the conditions and limitations specified in §§381, 382,
          383, and 384 and the regulations thereunder (§1.381(a)-1).

   (12)   With regard to the §382 testing date applicable that occurs as a result of
          the Downstream Merger, Shareholder A will not contribute to any owner
          shift in Target because (a) Shareholder A's percentage of stock ownership
          interest in Target will not increase during the testing period; and (b)
          immediately following the Downstream Merger, Shareholder A's
          percentage of stock ownership interest in Acquiring (Target's successor)
          will not exceed Shareholder A's lowest percentage of stock interest in
          Target during the testing period (§§1.382-2T(c) and 1.382-2(a)(1)(ii)).

   (13)   The Downstream Merger will constitute a reverse acquisition within the
          meaning of §1.1502-75(d)(3), with Acquiring becoming the common
          parent of the affiliated group.



                                     Caveats

   We express no opinion about the tax treatment of the Proposed Transaction

under other provisions of the Code and regulations or about 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.

                                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.
PLR-100703-10 7

   A copy of this letter 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.

   Under the power of attorney on file with this office, a copy of this letter is being

sent to your authorized representative.

                                   Sincerely,


                                   __________________
                                   Lewis K Brickates
                                   Chief, Branch 4
                                   Office of Associate Chief Counsel (Corporate)