PLR 201348006: IRS approves a tax-deferred transfer of structured settlement assets to a new corporation

Plain-English summary

A group of insurance companies planned to move structured settlement annuities and related payment obligations from a subsidiary being liquidated into a new corporation. The IRS ruled that the transfers would generally qualify for nonrecognition under IRC §§ 351 and 357, and that the new corporation would receive carryover bases and holding periods. It also ruled that the transaction would not affect the annuities' status as qualified funding assets or create information-reporting obligations under IRC § 6041, assuming the stated income exclusions continued to apply. The IRS declined to rule on several questions under IRC § 72. The ruling therefore approves most requested consequences but leaves those annuity-status questions unresolved.

Ruling snapshot

• Question: Would transferring structured settlement annuities and related obligations to a new corporation avoid immediate tax and preserve the stated tax attributes?
• Outcome: mixed
• Key authorities: IRC §§ 104, 130, 351, 357, 358, 362, 368, 6041, and 72

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201348006                                              Third Party Communication: None
Release Date: 11/29/2013                                       Date of Communication: Not Applicable
Index Number: 351.00-00, 357.02-02,
              130.01-00, 6041.00-00                            Person To Contact:
                                                               -------------------------, ID No. -----------------
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--------------------------------                               Telephone Number:
------------------------------------------------------------   ---------------------
------------------------------------                           Refer Reply To:
-------------------------------                                CC:CORP:BO1
                                                               PLR-110950-13
In Re: -------------------------------------------------- Date:
---------------                                           September 03, 2013




Parent1                    =         ------------------------------------------
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Sub 1                       =        ----------------------------------------------------------------
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Sub 2             =         --------------------------------------------------------
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Sub 3             =         -------------------------------------------------------------------------
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Sub 4             =                  -----------------------------------------------------------------
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Corp 5                               -----------------------------------------------------
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                           ----------------------

Parent 2                   =         ----------------------------------
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Newco                      =        ------------
PLR-110950-13                                            2

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State X                   =        ------------------

Liquidator                =        ----------------------------------------------------

Court Y                   =        ---------------------------------------------------

a                         =        ---------------

b                         =        --------

c                         =        ---------


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

      This letter responds to your representative’s letter dated March 7, 2013,
requesting rulings on certain federal income tax consequences of a proposed
transaction. Additional information was submitted in a letter dated April 12, 2013. The
material information is summarized below.

                                               Summary of Facts

       Parent 1 is the common parent of an affiliated group of corporations which has
elected to file a consolidated federal income tax return. Sub 1, a first-tier subsidiary of
Parent, is a property and casualty insurance company that is in the process of
liquidation pursuant to State X law. The final liquidation of Sub 1 is not expected to
occur for at least a in the future.

       Parent 2 is the common parent of an affiliated group of corporations which has
elected to file a consolidated federal income tax return that includes Sub 2, Sub 3, and
Sub 4. Sub 2, Sub 3, and Sub 4, (together the “Parent 2 Transferors”) are each life
insurance companies taxed under Part I of Subchapter L. Together the Parent 2
Transferors and Sub 1 comprise the “Transferors.”

        Sub 1 has accepted qualified assignments of periodic payment liabilities (within
the meaning of § 130 of the Code) from tort defendants, employers (in the case of
workers’ compensation settlements), or other insurers. These obligations require that
Sub 1 make periodic payments to the injured parties and family members. To finance
the periodic payments, Sub 1 purchased annuity contracts from the Parent 2
Transferors (including Corp 5, a corporate predecessor of Sub 2), or other issuers of
annuities. The annuity contracts (“Structured Settlement Annuities”) provided for
periodic payments to Sub 1 that match Sub 1’s obligations to the injured parties under
their respective qualified assignments. In addition, Sub 1 is the obligor under
PLR-110950-13                                 3

settlements for injuries suffered by its own insureds (so-called “buy and hold”
settlements), and funded those obligations with annuities from the Parent 2 Transferors
or other issuers of annuities. Both the settlements for Sub 1’s own obligations and the
obligations it assumed under qualified assignments are referred to as “Structured
Settlements.” In most cases, the annuity issuers directly pay the beneficiaries of the
settlements, so that Sub 1 does not actually receive the annuity payments and issue its
own payments.

        The taxpayers represent that, with respect to the Parent 2 Structured Settlements
(those funded by annuities from the Parent 2 Transferors and Corp 5) that involve
qualified assignments of personal injury liabilities under § 130, the settlement recipients
are eligible to exclude the damages or workers’ compensation payments under § 104(a)
and have not subjected Sub 1 or the Parent 2 Transferors to reporting obligations under
§ 6041. These structured settlements have produced no net income to Sub 1 (other
than initial administrative fees it received when it accepted assignments) in connection
with the ownership of annuities from the Parent 2 Transferors.

                                 Proposed Transaction

        For valid business purposes, the Transferors and the State X statutory liquidator
(the “Liquidator”) wish to transfer the Structured Settlement Annuities issued by the
Parent 2 Transferors and the corresponding Structured Settlements to a separate
corporation before the final liquidation of Sub 1. The Liquidator will apply to Court Y for
an order (the Court Order) which will provide that (i) the new separate corporation
(Newco) will replace Sub 1 as obligor under the Structured Settlements with respect to
payments that will be funded by the related Structured Settlement Annuities, (ii) Newco
will replace Sub 1 as owner of the corresponding annuities, and (iii) the liquidation
estate of Sub 1 will be discharged from any further obligations under the Structured
Settlements. The transaction will include the following steps:

(i)    Sub 1 or one of the Parent 2 Transferors will form Newco. Thereafter Sub 1 will
       transfer the Structured Settlement Annuities and b dollars in cash to Newco in
       exchange for Newco stock and Newco’s assumption of the Structured
       Settlements.

(ii)   The Parent 2 Transferors will transfer a total of c dollars in cash to Newco in
       exchange for Newco stock.

                                    Representations

      The following representations have been made in connection with the proposed
transaction:

(a)    No stock or securities will be issued for services rendered to or for the benefit of
       Newco in connection with the Proposed Transaction.
PLR-110950-13                               4


(b)   No stock or securities will be issued for indebtedness of Newco.

(c)   No stock will be transferred to Newco.

(d)   The transfer of assets to Newco is not the result of the solicitation by a promoter,
      broker, or investment house.

(e)   The Transferors will not retain any rights in the property transferred to Newco in
      connection with the Proposed Transaction.

(f)   The adjusted basis and the fair market value of the assets to be transferred by
      each Transferor to Newco will, in each instance, be equal to or exceed the sum
      of the liabilities to be assumed by Newco (within the meaning of section 357(d)).
      For purposes of determining whether the adjusted basis of the transferred assets
      equals or exceeds the sum of the liabilities assumed by Newco, liabilities
      described in section 357(c)(3) are not taken into account.

(g)   The liabilities of Sub 1 to be assumed by Newco (within the meaning of section
      357(d)) were incurred in the ordinary course of business and are associated with
      the assets to be transferred.

(h)   There is no indebtedness between Newco and the Transferors, and there will be
      no indebtedness created in favor of the Transferors as a result of the Proposed
      Transaction.

(i)   The transfers of assets to Newco will occur under a plan agreed upon before the
      transaction in which the rights of the parties are defined.

(j)   All exchanges will occur on approximately the same date.

(k)   There is no plan or intention on the part of Newco to redeem or otherwise
      reacquire any stock issued in the Proposed Transaction.

(l)   Taking into account any issuance of additional shares of Newco stock; any
      issuance of stock for services; the exercise of any Newco stock rights, warrants,
      or subscriptions; a public offering of Newco stock; and the sale, exchange,
      transfer by gift, or other disposition of any of the stock of Newco received in the
      exchange, the Transferors will be in “control” of Newco within the meaning of
      section 368(c) immediately after the exchange.

(m)   Each Transferor will receive stock of Newco approximately equal to the fair
      market value of the net assets transferred to Newco (less any liabilities assumed
      by Newco within the meaning of section 357(d)).
PLR-110950-13                                5

(n)   Newco will remain in existence and will retain and use the property transferred to
      it in a trade or business.

(o)   There is no plan or intention by Newco to dispose of the transferred property
      other than in the normal course of business operations.

(p)   Each of the parties to the transaction will pay its own expenses, if any, incurred in
      connection with the Proposed Transaction.

(q)   Newco will not be an investment company within the meaning of section
      351(e)(1) and section 1.351-1(c)(1)(ii) of the Income Tax Regulations.

(r)   Sub 1 is under the jurisdiction of a court in a title 11 or similar case (within the
      meaning of section 368(a)(3)(A)). The stock received in the exchange will not be
      used to satisfy the indebtedness of Sub 1. Sub 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 Sub 2.

(s)   Newco will not be a “personal service corporation” within the meaning of section
      269A.

(t)   To the best of the taxpayers’ knowledge, the obligations assumed by Sub 1 from
      parties obligated to make periodic payments under structured settlements were
      received by Sub 1 in qualified assignments under § 130(c).

(u)   To the best of the taxpayers’ knowledge, the Parent 2 Structured Settlement
      Annuities purchased by Sub 1 to fund Sub 1’s structured settlement obligations
      met the requirements for qualified funding assets under § 130(d), without regard
      to whether there was a qualified assignment, when issued and their terms have
      not been modified.

(v)   All terms and conditions of the Parent 2 Structured Settlement obligations and
      qualified assignments entered into by Sub 1 and all terms and conditions of the
      corresponding Parent 2 Structured Settlement Annuities issued to Sub 1 will be
      the same both before and after the proposed transaction, except for, pursuant to
      the Court Order, (i) the substitution of Newco for Sub 1 and (ii) the express
      discharge and release of any obligations under the Parent 2 Structured
      Settlements in excess of what can be funded by the corresponding Parent 2
      Structured Settlement Annuities.

                                        Rulings

      Based solely on the information submitted and the representations set forth
above, we rule as follows:
PLR-110950-13                              6


(1)   No gain or loss will be recognized by Transferors on the transfer of assets to
      Newco in exchange for Newco stock and the assumption by Newco of liabilities
      associated with the Structured Settlements (sections 351(a) and 357(a)).

(2)   No income, gain, or loss will be recognized by Newco on the receipt of assets in
      exchange for its stock (section 1032(a).

(3)   The basis of each asset received by Newco will be the same as the basis of that
      asset in the hands of the respective Transferor immediately before the transfer
      (section 362(a)).

(4)   The holding period of each asset received by Newco will include the period in
      which the asset was held by each Transferor (section 1223(2)).

(5)   The basis of the Newco stock received by Transferors will be the same as the
      basis of the assets transferred by each respective Transferor to Newco,
      decreased by the sum of Transferor liabilities assumed by Newco (as determined
      under section 357(d)) (sections 358(a) and (d)).

(6)   The holding period of the Newco stock received by each Transferor will include
      the period during which the respective Transferor held the transferred assets,
      provided the transferred assets were held by the respective Transferor as capital
      assets on the date of the transfer (section 1223(1)).

(7)   Assuming that the Parent 2 Structured Settlement Annuities constitute qualified
      funding assets under section 130(d) (without regard to whether there were
      qualified assignments) when the annuities were purchased by Sub 1, then the
      proposed transaction will not adversely affect the status of such annuities as
      qualified funding assets for purposes of section 130(d).

(8)   The proposed transaction will not subject Newco or the Parent 2 Transferors to
      information reporting under section 6041. This conclusion is based on the
      determination that the proposed transaction will not affect the continued
      applicability of the section 104(a)(1) and section 104(a)(2) exclusion from the
      claimants’ gross income to the periodic payments, assuming that the exclusion
      applied before the proposed transaction.

(9)   We decline to rule on the status of the annuities under section 72(q)(2)(G),
      72(s)(5)(D), and 72(u)(3)(C). See Rev. Proc. 2013-1, Sec. 6.11, 2013-1 I.R.B. 1.

                                       Caveats
PLR-110950-13                                  7

       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.

       Section 6.11 of Rev. Proc. 2013-1, states in part that generally, a letter ruling will
not be issued with respect to an issue that is clearly and adequately addressed by
statute, regulations, decisions of a court, revenue rulings, revenue procedures, notices,
or other authority published in the Internal Revenue Bulletin.

      The rulings contained in this letter are based upon 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 a ruling, it is subject to verification on
examination.

                                    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 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 ruling letter.

         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,




                                                   Mark J. Weiss____________
                                                   Mark J. Weiss
                                                   Reviewing Attorney, Branch 6
                                                   Office of Associate Chief Counsel
                                                   (Corporate)




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