Transitory merger removes minority owner without ending S status

Plain-English summary

The continuing owners of an S corporation planned to form a temporary corporation, contribute their shares to it, and merge it back into the original corporation while cashing out a minority shareholder. The IRS ruled that the creation and merger of the temporary corporation would be disregarded for federal tax purposes. The continuing shareholders would be treated as never transferring their original shares and would recognize no gain or loss. The temporary corporation's brief ownership would not terminate the original corporation's S election. Cash paid to the minority shareholder would be treated as a stock redemption subject to IRC § 302. The ruling follows Rev. Rul. 78-250 and requires the ruling information to accompany the return for the transaction year.

Ruling snapshot

• Question: What are the tax consequences of the transitory merger used to redeem the minority shareholder, including its effect on S status?
• Outcome: Approved
• Key authorities: IRC §§ 302 and 1362(d)(2); Rev. Rul. 78-250

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201444007 Third Party Communication: None
Release Date: 10/31/2014 Date of Communication: Not Applicable
Index Number: 1362.00-00, 1362.02-00,
1362.02-02, 302.00-00 Person To Contact:
-----------------, ID No. ----------------
------------------------------ Telephone Number:
------------------------------------------- --------------------
------------------------------------- Refer Reply To:
----------------------------------------- CC:PSI:B02
PLR-105333-14
Date:
May 28, 2014

                                                    LEGEND

Corporation = -------------------------------------------
= ----------------------

Business = ------------------------------------------------------------

Continuing Shareholders = --------------------------------------------------

------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------

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Minority Shareholder = ---------------------------------------------------

State = ------------

a = -------

b = -------

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

PLR-105333-14 2

This responds to a letter dated January 29, 2014 submitted on behalf of Corporation by
its authorized representative, requesting a ruling as to the Federal income tax
consequences of a proposed transaction.

The information submitted for consideration is summarized below.

Corporation is a State corporation engaged in Business. Corporation is an S
corporation.

The Continuing Shareholders own a percent of the total shares of Corporation. The
Minority Shareholder owns the remaining b percent of the total shares of Corporation
stock.

In order to increase the operational flexibility of Corporation, and to reduce costs and
eliminate administrative burdens associated with Minority Shareholder, the Continuing
Shareholders and Corporation propose the following transaction:

(i) The Continuing Shareholders will form a new corporation (“Newco”) solely for the
purpose of effecting this transaction.

(ii) Each of the Continuing Shareholders will contribute all of their shares of Corporation
to Newco in exchange for shares of Newco in equal proportions (the “Contribution”).

(iii) Newco will merge into Corporation with Corporation surviving (the “Merger”). In
connection with the Merger, the Minority Shareholder will receive a specified cash
amount per share in exchange for the Minority Shareholder’s Corporation stock, and
such stock will be cancelled. If the Minority Shareholder objects to the proposed
transaction, the Minority Shareholder will have the right to exercise dissenter’s rights
and receive the fair value of Minority Shareholder’s shares. Also in connection with the
Merger, the Newco shares owned by the Continuing Shareholders will be cancelled and
each will receive shares of Corporation stock in the same proportions as the shares
they held in Newco in exchange for their previously held Newco stock (the “Share
Exchange”).

After the completion of the proposed transaction, each of the Continuing Shareholders
will hold a number of shares in Corporation equal to the proportions that those
Continuing Shareholders held immediately before the proposed transaction.

Based solely on the information submitted, we rule as follows:

(1) The creation of Newco followed by the merger of Newco into Corporation will be
disregarded for Federal income tax purposes. Rev. Rul. 78-250, 1978-1 C.B. 83.

PLR-105333-14 3

(2) The proposed transaction will be treated as if the Continuing Shareholders never
transferred their Corporation stock for Federal income tax purposes, and thus the
Continuing Shareholders will not recognize any gain or loss from the proposed
transaction. Rev. Rul. 78-250, 1978-1 C.B. 83.

(3) The transitory ownership of Corporation by Newco will not cause the termination of
Corporation’s S corporation election under § 1362(d)(2).

(4) The cash received by the Minority Shareholder in the proposed transaction will be
treated as a distribution in redemption of the Minority Shareholder’s stock, subject to the
provisions and limitations of § 302. Rev. Rul. 78-250, 1978-1 C.B. 83.

We express or imply 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 transaction that are not
specifically covered by the above rulings.

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.

                                   Sincerely,



                                   Melissa Liquerman
                                   Branch Chief, Branch 2
                                   Office of the Associate Chief Counsel
                                   (Passthroughs & Special Industries)

cc: