PLR 1140017: IRS approves a holding-company reorganization and related tax treatment

Plain-English summary

A publicly traded parent corporation proposed inserting a new holding company above it through a merger with a newly formed subsidiary. The parent shareholders would receive holding-company stock, and existing employee awards would be converted into equivalent awards tied to the holding-company stock. The IRS ruled that the transaction would qualify as a tax-free reorganization under IRC § 368, with no gain or loss recognized by the shareholders, the holding company, or holders of the converted awards. It also ruled on stock basis, holding periods, the continuation of the consolidated group, and the treatment of earnings and profits and net operating loss carryovers. The rulings depend on the facts and representations submitted and do not address tax consequences outside the matters specifically covered.

Ruling snapshot

• Question: What are the federal income tax consequences of inserting a holding company above a publicly traded parent through the proposed merger?
• Outcome: Approved, the proposed transaction qualifies for the requested reorganization treatment and related basis and consolidated-group rules.
• Key authorities: IRC §§ 354, 358, 368, 1032, 1223, and 1502; Rev. Ruls. 67-448 and 82-152.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201140017 Third Party Communication: None
Release Date: 10/7/2011 Date of Communication: Not Applicable
Index Number: 368.00-00, 368.01-00,
368.01-02, 368.02-00, Person To Contact:
1502.01-00, 1502.31-00, -----------------------, ID No. -------------------
1502.31-01, 1502.33-00, ---------------------------------------------------
1502.75-10, 1502.75-11 Telephone Number:
---------------------
----------------------- Refer Reply To:
-------------------------------- CC:CORP:B03
-------------------------------------------- PLR-126251-11
--------------------------------- Date:
--------------------- June 29, 2011

Parent = --------------------------------------------

HoldingCo = ------------------------------

MergeCo = -------------------------

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

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

  We respond to your authorized representatives' letter of June 16, 2011,

requesting rulings as to the federal income tax consequences of a proposed
reorganization. The information supplied in the request is summarized below.

   Parent, HoldingCo, and MergeCo are all domestic corporations and members

(along with other corporations) of a single affiliated group filing consolidated federal
income tax returns. The group engages in Business A.

   Parent, a widely held and publicly traded corporation, is the common parent of

the consolidated group. Parent has voting common stock outstanding, has no preferred
stock outstanding, and holds no shares in treasury. Pursuant to various employee and
other plans (the Parent Plans), Parent has issued both restricted stock and unexercised,
unexpired options to purchase Parent common stock (all of which restricted stock and
options are hereinafter referred to as having been issued pursuant to various Parent
Awards).

 HoldingCo is a newly organized and wholly-owned subsidiary of Parent.

MergeCo is a newly organized and wholly-owned subsidiary of HoldingCo.

  Pursuant to a plan, the following consecutive steps will occur:

  (i)     Effective upon the filing of a certificate of merger with the appropriate state
          authority or at a later date specified therein (the Effective Time), Parent
          will merge with MergeCo (the Merger), the separate existence of MergeCo
          will cease, and Parent will continue as the surviving company (the
          Surviving Company).

  (ii)    Each share of Parent common stock issued and outstanding immediately
          prior to the Effective Time (other than shares held in treasury, if any, which
          shall be automatically canceled and retired without payment of any
          consideration therefor) shall be converted into one fully paid share of
          HoldingCo common stock. Each Parent Award will be assumed by
          HoldingCo and will continue to have, and be subject to, the same terms
          and conditions as set forth in the Parent Award and the applicable Parent
          Plan immediately prior to the Effective Time, except that each Parent
          Award will be exercisable (or will become exercisable in accordance with
          its terms) for, or shall be denominated with reference to, that number of
          shares of HoldingCo common stock equal to the number of shares of
          Parent common stock that were subject to such Parent Award immediately
          prior to the Effective Time.

  (iii)   The MergeCo common stock held by HoldingCo will automatically be
          converted into, and thereafter represent, 100 percent of the common stock
          of the Surviving Company.

  (iv)    Each share of HoldingCo common stock owned by Parent immediately
          prior to the Merger shall automatically be canceled and retired and cease
          to exist.

  (v)     From and after the Effective Time, holders of certificates formerly
          evidencing Parent common stock shall cease to have any rights
          as shareholders of Parent.


 (vi)   Parent has in place a share repurchase program whereby Parent may
        purchase Parent common stock from time to time on the open market or
        through privately negotiated transactions. HoldingCo will adopt a
        repurchase program identical to the Parent repurchase program to
        repurchase HoldingCo common stock (the HoldingCo Repurchase
        Program).

 The taxpayer makes the following representations:

 (a)    The fair market value of the HoldingCo common stock received by each
        Parent shareholder who participates in the proposed reorganization will be
        approximately equal to the fair market value of the Parent common stock
        surrendered by the shareholder in the proposed reorganization.

 (b)    Except for any repurchases made pursuant to the HoldingCo or Parent
        Repurchase Program, there is no plan or intention for HoldingCo or any
        person related (within the meaning of § 1.368-1(e)(3) of the Income Tax
        Regulations) to HoldingCo, to acquire, directly or indirectly, any HoldingCo
        common stock issued in the proposed reorganization. In addition, neither
        HoldingCo nor any person related (within the meaning of § 1.368-1(e)(3))
        will have acquired, directly or indirectly, any stock of Parent with
        consideration other than HoldingCo common stock.

 (c)    Parent has no plan or intention to issue additional shares of stock that
        would result in HoldingCo's losing control (within the meaning of § 368(c)
        of the Internal Revenue Code) of Parent.

 (d)    In connection with the proposed reorganization, any warrants, options,
        convertible securities, restricted stock, or any other type of right pursuant
        to which any person could acquire stock in Parent will be converted into
        an identical right to acquire HoldingCo stock. Subsequent to the proposed
        reorganization, there will be no outstanding warrants, options, convertible
        securities, restricted stock, or any other type of right pursuant to which
        any person could acquire stock in Parent that, if exercised or converted, would
        affect HoldingCo's acquisition or retention of control of Parent, as defined
        in § 368(c).

 (e)    HoldingCo has no plan or intention to liquidate or merge Parent with and
        into another corporation, to sell or otherwise dispose of the stock of
        Parent, or to cause Parent to sell or otherwise dispose of any of its assets,
        except for transfers made in the ordinary course of business or transfers of
        assets to a corporation controlled by Parent or transfers of cash made

         to HoldingCo in connection with cash management of Parent by
         HoldingCo.

  (f)    HoldingCo and Parent each will pay its own expenses incurred in
         connection with the proposed reorganization. It is not anticipated that the
         shareholders of Parent will have any expenses in connection with the
         proposed transaction.

  (g)    HoldingCo will acquire Parent common stock solely in exchange for
         HoldingCo voting stock. In addition, liabilities of Parent or the Parent
         shareholders will not be assumed by HoldingCo, nor will any of the stock
         of Parent acquired by HoldingCo be subject to any liabilities except that
         HoldingCo may become secondarily liable on a Parent credit facility and
         HoldingCo will assume Parent's obligations under the Parent Plans.

  (h)    HoldingCo does not own, directly or indirectly, nor has it owned during the
         past five years, directly or indirectly, any stock of Parent.

  (i)    No two parties to the proposed reorganization will be investment
         companies as defined in §§ 368(a)(2)(F)(iii) and (iv).

  (j)    The shareholders of Parent will have no dissenters' rights with respect to
         the proposed transaction and therefore no funds will be supplied, directly
         or indirectly, by HoldingCo nor will HoldingCo directly or indirectly
         reimburse Parent for any payments to any dissenting shareholders for the
         value of their stock.

  (k)    At the time of the proposed reorganization, the fair market value of the
         assets of Parent will exceed the sum of its liabilities plus the liabilities, if
         any, to which the assets are subject.

  (l)    None of Parent, HoldingCo, nor MergeCo will be under the jurisdiction of a
         court in a Title 11 or similar case within the meaning of § 368(a)(3)(A).

  (m)    Following the proposed reorganization, HoldingCo and Parent will
         continue Parent's historic business or use a significant portion of Parent's
         historic assets in a business.

    Based solely on the information submitted and the representations made, we rule

as follows:

  (1)    For federal income tax purposes, the formation of MergeCo and its merger
         with and into Parent pursuant to the proposed reorganization will be
         disregarded, and the transaction instead will be treated as the acquisition

       by HoldingCo of all of the outstanding Parent common stock in exchange
       solely for shares of HoldingCo common stock (Rev. Rul. 67-448, 1967-2
       C.B. 144).

 (2)   The acquisition by HoldingCo of all the outstanding Parent common stock
       in exchange solely for shares of HoldingCo common stock in the proposed
       reorganization will be a reorganization within the meaning of
       § 368(a)(1)(B) and/or § 368(a)(1)(A) by application of § 368(a)(2)(E).
       HoldingCo and Parent each will be "a party to a reorganization" within the
       meaning of § 368(b).

 (3)   The Parent shareholders will not recognize gain or loss on the exchange
       of their Parent common stock solely for HoldingCo common stock in the
       proposed reorganization (section 354(a)(1)).

 (4)   A holder of Parent options and/or restricted stock pursuant to the Parent
       Awards will not recognize gain or loss upon the exchange of Parent
       options and/or restricted stock for HoldingCo options and/or restricted
       stock with identical terms (sections 354(a) and 1.354-1(e)).

 (5)   HoldingCo will not recognize any gain or loss upon the receipt of Parent
       common stock in exchange solely for HoldingCo common stock in the
       proposed reorganization (section 1032(a)).

 (6)   The basis of each Parent shareholder in the HoldingCo common stock
       received by such Parent shareholder in the proposed reorganization
       described above will be the same as the basis of the Parent shareholder
       in the Parent common stock surrendered in exchange therefor (section
       358(a)(1)).

 (7)   The holding period of the HoldingCo common stock received by each Parent
       shareholder in the proposed reorganization will include the period
       during which the Parent common stock surrendered by such shareholder
       was held, provided that the Parent common stock surrendered by such
       shareholder was held as a capital asset on the date of the exchange
       (section 1223(1)).

 (8)   The affiliated group of which Parent is the common parent immediately
       before the proposed reorganization will not terminate as a result of the
       proposed reorganization and will be treated as remaining in existence
       after the consummation of the proposed reorganization with HoldingCo
       becoming the common parent of such affiliated group (Rev. Rul. 82-152,
       1982-2 C.B. 205). As a result, the members of the affiliated group of
       which Parent is the common parent immediately before the proposed

          reorganization (other than MergeCo) will not close their taxable years as a
          result of the proposed reorganization, and the continuing affiliated group
          will remain on the taxable year previously used by the Parent affiliated
          group (Rev. Rul. 82-152, 1982-2 C.B. 205).

   (9)    For purposes of §§ 1.1502-31 and 1.1502-33, the proposed reorganization
          will qualify as a "group structure change" (section 1.1502-33(f)(1)).
          HoldingCo's basis in Parent common stock immediately after the group
          structure change will be Parent's net asset basis as determined under
          § 1.1502-31(c), subject to adjustments described in § 1.1502-31(d)
          (section 1.1502-31(b)(2)). The earnings and profits of HoldingCo will be
          adjusted immediately after HoldingCo becomes the new common parent
          to reflect the earnings and profits of Parent immediately before Parent
          ceases to be the common parent (section 1.1502-33(f)(1)).

   (10)   The consolidated net operating loss carryovers of the affiliated group of
          which Parent is the common parent immediately before the proposed
          reorganization will be available for carryover to taxable years of the
          affiliated group ending after the date of the proposed reorganization
          (section 1.1502-1(f)(2)(i) and Rev. Rul. 82-152, 1982-2 C.B. 205).

  The rulings contained in this letter are based upon the information and

representations submitted by the taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. While this Office has not verified any of
the material submitted in support of the request for rulings, it is subject to verification on
examination.

   Except as expressly provided herein, no opinion is expressed or implied

concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. We express no opinion about the tax treatment of transactions
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, transactions that are not
specifically covered by the rulings above.

  This ruling is directed only to the taxpayer(s) requesting 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 with this office, a copy of this

letter is being sent to your first-listed authorized representatives.

                                   Sincerely,



                                   Filiz A. Serbes
                                   Chief, Branch 3
                                   Office of the Associate Chief Counsel (Corporate)

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