PLR 201124018: Supplemental ruling on a revised stock conversion

Plain-English summary

The IRS issued a supplemental private letter ruling addressing changes to a previously approved corporate conversion transaction. The revised transaction would exchange two classes of preferred stock for cash, common stock, or a combination of both, with the amounts and share counts redacted. The IRS ruled that the changes would not disturb the prior rulings, except that one holding was amended to address the treatment of preferred stock converted into common stock under the Hold Constant Principle. The ruling did not address tax consequences outside the specific matters covered by the prior and supplemental rulings.

Ruling snapshot

• Question: Would the revised stock conversion change the conclusions of the prior private letter ruling?
• Outcome: Approved.
• Key authorities: IRC §§ 382, 305, 6110; Notice 2010-50.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201124018
Third Party Communication: None
Release Date: 6/17/2011
Date of Communication: Not Applicable
Person To Contact:
Index Numbers: 382.00-00, 382.12-00, 382.12- ----------------------, ID -------------- Telephone Number:
06
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Refer Reply To:
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CC:CORP:04
--------------------------------------------------------- PLR-150119-10
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Date:
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March 14, 2011
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Expanded Legend

O = -------------

P = ---------------

Q = -------------

R = ---------------

S = -----------

T = ------------------

Date 12 = --------------------------

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

This letter responds to your December 6, 2010 request for a letter ruling supplementing our prior letter ruling dated July 23, 2010 (the “Prior Letter Ruling”). The legend abbreviations, factual summary and representations appearing in the Prior Letter Ruling are hereby incorporated by reference, except as otherwise indicated.

The Prior Letter Ruling addressed certain federal income tax consequences of the Conversion Transaction, as well as the Hold Constant Principle methodology that Parent could employ in applying Notice 2010-50. The Conversion Transaction has yet to be consummated. Because certain considerations in the Conversion Transaction
PLR-150119-10
2

have changed from the manner described in the Prior Letter Ruling, you have asked us to amend the Prior Letter Ruling. Pursuant to your request, the Prior Letter Ruling has been amended as follows:

(A) In the Conversion Transaction, all of the outstanding Preferred C and Preferred D will now be exchanged for cash and/or Common Stock (hereafter, the “Revised Conversion Transaction”). Specifically, the Preferred C shareholders will be offered the right to receive either (i) a combination of cash and Common Stock or (ii) Common Stock. It is anticipated that approximately $O in cash and P shares of Common Stock, in the aggregate, will be issued to the Preferred C shareholders. The Preferred D shareholders will be offered the right to receive cash and Common Stock. In the aggregate, it is anticipated that the Preferred D shareholders will be issued approximately $Q in cash and R shares of Common Stock. A total of $S in cash and T shares of Common Stock will be issued to the Preferred C and Preferred D shareholders, pro rata based upon their liquidation preference (including accrued and unpaid dividends through Date 12). No Preferred C or Preferred D shareholder will receive solely cash in the Revised Conversion Transaction. The Revised Conversion Transaction has been negotiated at arm’s length and is subject to the approval of the majority of both the Preferred C and Preferred D shareholders.

(B) Representations (8) and (9) have been modified to read as follows:

(8) The conversion terms of the Preferred C and Preferred D in connection with the Revised Conversion Transaction have been negotiated in an arm’s-length transaction.

(9) The Revised Conversion Transaction will be undertaken as a value-for- value exchange of the Preferred C and Preferred D for cash and/or Common Stock, as described herein.

Based solely on the information and representations set forth above (as well as in the Prior Ruling Letter), we rule that the above changes will not affect the rulings in the Prior Letter Ruling and those rulings will remain in full force and effect, except that ruling (2) is amended to read as follows:

(2) In applying the Hold Constant Principle, to the extent that there is a value-for- value conversion of the Preferred D into Common Stock, such conversion shall be disregarded and the exchanging shareholder shall be considered to have acquired such newly issued Common Stock as of the date it acquired the Preferred D stock exchanged therefor. The Common Stock received in the exchange will also retain the same hold-constant characteristics as the surrendered Preferred D shares (see Notice 2010-50).
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We express no opinion about the tax treatment of the Revised Conversion Transaction under other provisions of the Code and the Federal Income Tax Regulations, or the tax treatment of any conditions existing at the time of, or effects resulting from, the Revised Conversion Transaction that are not specifically covered by the rulings contained in the Prior Letter Ruling, as reaffirmed and modified in part above.

In addition, we express no opinion as to (i) the federal income tax treatment of any cash received by the Preferred C and Preferred D shareholders in the Revised Conversion Transaction, and (ii) the federal income tax consequences, if any, that may arise under § 305 due to the Revised Conversion Transaction. Furthermore, all caveats contained in the Prior Letter Ruling continue to apply.

The rulings contained in the Prior Letter Ruling, as reaffirmed and modified herein, are based on facts and representations submitted under the penalties of perjury. Verification of the information submitted may be required as part of the audit process.

This supplemental ruling letter is directed only to the taxpayer who requested it.
Section 6110(k)(3) provides that it cannot be used or cited as precedent.

A copy of this supplemental ruling letter and a copy of the Prior Letter Ruling should be attached to any federal income tax return to which they are relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to his or her return that provides the date and control number of this letter and the Prior Letter Ruling.

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

Sincerely,

______
Marie C. Milnes-Vasquez
Senior Technician Reviewer, Branch 4
Associate Chief Counsel (Corporate)

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