Stock unification uses shareholder-level net voting shifts

Plain-English summary

A corporation planned to eliminate distinctions between high-vote and low-vote common stock immediately before spinning off a controlled subsidiary. The unification would shift more than 50 percent of aggregate voting power toward the low-vote class, but no identified shareholder or shareholder group would have a voting shift of 50 percent or more when analyzed individually. The IRS ruled that each class's voting power should be measured by its relative ability to elect directors. For the IRC § 355(e) acquisition test, an increase in a shareholder's percentage ownership caused by the unification would be disregarded to the extent offset by that shareholder's decrease in ownership before the unification. The ruling did not decide whether the stock unification qualified as an E reorganization or whether the distribution otherwise qualified under § 355.

Ruling snapshot

• Question: How should a dual-class stock unification be measured for the acquisition rules of IRC § 355(e)?
• Outcome: Approved on the two discrete voting-power and net-shift issues
• Key authorities: IRC §§ 355(d)(4) and 355(e); Treas. Reg. § 1.355-7; Rev. Rul. 69-126

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201505007 Third Party Communication: None
Release Date: 1/30/2015 Date of Communication: Not Applicable
Index Number: 355.01-00, 355.10-00
Person To Contact:
------------------------------- -----------------------, ID No. --------------
---------------------------- Telephone Number:
---------------------------------------------------------- ----------------------
----------------------------------- Refer Reply To:
-------------------------------------- CC:CORP:B04
PLR-116285-14
Date:
October 10, 2014

Legend

Distributing = -------------------------------------------------------------------------------
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Controlled = -------------------------------------------------------------------------------
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Business A = --------------------

Business B = ----------------------------------------------

Shareholder Group A = -------------------------------------------------------------------------------
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Shareholder Group B = -------------------------------------------------------------------------------
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Remaining Class A = -------------------------------------------------------------------------------
Shareholders -------------------------------------------------------------------------------
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PLR-116285-14 2

Five-Percent = -------------------------------------------------------------------------------
Shareholders -------------------------------------------------------------------------------
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Company = -------------------------------------------------------------------------------
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Remaining Class B = -------------------------------------------------------------------------------
Shareholders -------------------------------------------------------------------------------
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Shareholder 1 = -------------------------------------------------------------------------------
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Shareholder 2 = -------------------------------------------------------------------------------
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Shareholder 3 = -------------------------------------------------------------------------------
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Shareholder 4 = -------------------------------------------------------------------------------
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Year 1 = -------

Year 2 = -------

Year 3 = -------

Date 4 = --------------------

Date 5 = ------------------------

a =

b =

c = --

d = ----

PLR-116285-14 3

e = --------------

f = ------

g = ------

h = ----

i = ------

j = ----

k = ----

l = ------

m = ------------------------------

n = ---------------------------------

o = ------

p = ------

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

We respond to your April 4, 2014, letter requesting rulings under section 355(e) of the
Internal Revenue Code of 1986, as amended (the Code). The information submitted in
that letter and in later correspondence is summarized below.

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. This Office has not verified any of the material submitted in
support of the request for rulings. Verification of the information, representations, and
any other data may be required as part of the audit process.

This Office expresses no opinion concerning the tax consequences of any aspect of any
transaction or item discussed or referenced in this letter, except as expressly provided
herein. Specifically, this Office expresses no opinion whether the Stock Unification,
defined below, qualifies under section 368(a)(1)(E) of the Code, the Distribution, defined
below, qualifies under section 355, or regarding any issue or step not specifically

PLR-116285-14 4

addressed by this letter. Rather, the rulings contained in this letter only address one or
more discrete legal issues involved in the Stock Unification and Distribution.

                                        Facts

Distributing is the common parent of a consolidated group of corporations and has two
classes of common stock issued and outstanding, Class A and Class B. The Class A
stock is high-vote stock that is not publicly traded, and the Class B stock is low-vote
stock that is publicly traded. The Class B stock is entitled to an $e-per-share annual
dividend preference over any dividends on the Class A stock.

Each share of Class A stock is convertible into a share of Class B stock, on a share-for-
share basis, upon the election of the holder thereof. Under Distributing’s current
arrangement, owners of the Class A stock can participate in public trading only if they
elect to convert their stock from Class A to Class B. This structure was put into place
when Distributing’s stock became publicly traded in Year 1. Distributing’s Articles of
Incorporation provide that, if the percentage of issued and outstanding shares of Class
A falls below h percent of the aggregate amount of all of the issued and outstanding
stock of Distributing, all of the rights, preferences, limitations and restrictions relating to
the Class B stock automatically become the same as the rights, preferences, limitations
and restrictions of the Class A stock, such that all distinctions between the two classes
are eliminated. Thus, if and when the percentage of Class A shares outstanding falls
below h percent, every class and share of Distributing stock automatically becomes
entitled to the same voting rights, including with respect to the election of directors to
the Board (the Stock Unification).

Distributing provides a variety of products from two business segments, Business A
and, through its wholly-owned subsidiary Controlled, Business B. In Year 3, for what
have been represented to be valid business purposes, Distributing’s Board of Directors
authorized and approved the distribution of all of the issued and outstanding stock of
Controlled to Distributing’s shareholders (the Distribution). In contemplation of the
Distribution, Distributing’s Board also determined that the dual-class stock structure is
no longer desirable and has conditioned the Distribution upon the prior occurrence of
the Stock Unification.

Thus, as part of the proposed Distribution, several Class A shareholders, representing
approximately f percent of the issued and outstanding Class A stock (Shareholder
Group B), have entered into an agreement with Distributing pursuant to which each
shareholder will convert his or her Class A stock into Class B stock immediately before
the Distribution. Distributing has represented that this conversion will be sufficient to
trigger the Stock Unification, though Distributing anticipates that there will be some
residual Class A shareholders who do not convert and who will hold stock constituting
approximately m percent of the total issued and outstanding stock of Distributing
immediately after the Stock Unification.

PLR-116285-14 5

Historically, the Class A shareholders were entitled to elect a out of b members of the
Board of Directors, and the Class B shareholders were entitled to elect the remaining c
out of b members of the Board. In anticipation of the Distribution, Distributing added
new members to the Board in Year 2 and Year 3 for a total of d directors; however, due
to retirements and decisions to not run for re-election, the number of Board members
will return to the historical level of b directors effective on or before Date 5, which is a
date before the Stock Unification and Distribution. Distributing has represented that it
does not intend or have any current plans to fill the unoccupied board seats such that
Distributing will continue to have b directors going forward consistent with historical
practices.

As of Date 4, three groups of Distributing shareholders own all of the issued and
outstanding shares of Class A stock: Shareholder Group A, Shareholder Group B and
the Remaining Class A Shareholders. Shareholder Group A represents shareholders
who own both Class A and Class B stock, totaling i percent of the issued and
outstanding Class A stock and j percent of the issued and outstanding Class B stock.
Shareholder 4 owns more than five percent of the Class A stock and is included in
Shareholder Group A. Shareholder Group B (the converting Class A shareholders)
owns f percent of the Class A stock, and Shareholder 1, Shareholder 2, and
Shareholder 3, who each own more than five percent of the Class A stock, are included
in Shareholder Group B. The Remaining Class A Shareholders own l percent of the
Class A stock. In addition to Shareholder Group A, three groups of Distributing
shareholders own the Class B stock: the Five-Percent Shareholders (p percent of the
Class B shares), Company (k percent of the Class B shares), and the Remaining Class
B Shareholders (g percent of the Class B shares).

Distributing represents that there is an overlap in identity among the shareholders of
Distributing before and after the Stock Unification because no additional shares of
Distributing stock will be issued in the transaction. Persons who were direct and indirect
owners of Distributing shares before the Stock Unification will continue to own, directly
and indirectly, shares in Distributing after the Stock Unification, although the amounts
they own and are deemed to own may result in a shift in voting power (or value)
between the owners of the Class A stock and the owners of the Class B stock after the
Stock Unification.

Distributing has applied the “net decrease” methodology of the example in the 1998
legislative history of section 355(e)(3)(A)(iv) for purposes of testing whether one or more
persons will acquire a 50 percent or greater interest in Distributing (and Controlled)
under section 355(e) as a result of the Stock Unification and Distribution.

Distributing has provided percentage ownership figures that demonstrate that the Stock
Unification results in a shift of approximately n percent (more than 50 percent) in the
aggregate voting power of the Class B shareholders as a result of the Stock Unification

PLR-116285-14 6

but that, when analyzed on a shareholder-by-shareholder basis as identified above, the
largest shift in voting power will occur within the Remaining Class B Shareholders and
will result in a shift of o percent (less than 50 percent) in its voting power as a result of
the Stock Unification (the Indirect Voting Shift).

                                 Representations

   (a)    The fair market value of the Distributing Class A common stock and the

Distributing Class B common stock before the Stock Unification will be approximately
equal to the fair market value of the Distributing Class A common stock and the
Distributing Class B common stock after the Stock Unification.

   (b)   Distributing has no plan or intention to issue additional shares of its stock

in connection with the Stock Unification.

    (c)   Excluding any acquisitions of stock that result from or are deemed to

result from the Stock Unification, the Distribution is not part of a plan or series of related
transactions (within the meaning of section 1.355-7 of the Income Tax Regulations)
pursuant to which one or more persons will acquire, directly or indirectly, stock
representing a 50 percent or greater interest (within the meaning of section 355(d)(4)) in
Distributing or Controlled (including any predecessor or successor of any such
corporation).

                                      Rulings

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

    (1)     For purposes of determining the “voting power” (within the meaning of

section 355(d)(4)) of the Distributing Class A common stock and Distributing Class B
common stock, the voting power of such stock will be measured by reference to its
relative ability to elect members to Distributing’s Board of Directors (Rev. Rul. 69-126,
1969-1 C.B. 218).

    (2)    For purposes of testing whether the Stock Unification and Distribution will

result in a direct or indirect acquisition of Distributing stock for purposes of section
355(e)(2)(A)(ii), any increase in the percentage, by vote or value, of Distributing stock
owned by any shareholder that may result from the Stock Unification will be disregarded
(and not be treated as an acquisition within the meaning of section 355(e)(2)(A)(ii)) to
the extent of any decrease in that shareholder’s percentage ownership, by vote or
value, of Distributing stock prior to the Stock Unification.

PLR-116285-14 7

                                      Caveats

No opinion is expressed or implied about the federal income tax consequences of any
other aspect of any transaction or item discussed or referenced in this letter, or the
federal income tax treatment of any conditions existing at the time of, or effects resulting
from, the Stock Unification or the Distribution that are not specifically covered by the
above rulings.
Procedural Statements

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 rulings, it is subject to verification on examination.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
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 the
letter ruling.

                                       Sincerely,




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