Insurance joint venture restructuring qualifies for tax-free transfers

Plain-English summary

An insurance joint venture proposed moving an insurance business, related liabilities, assets, contracts, and employees into a newly acquired insurance corporation in exchange for its stock. The contributors would then transfer that stock to a new partnership in exchange for partnership units. Based on the submitted facts and representations, the IRS ruled that the first exchange qualified under IRC § 351 and would not produce gain or loss to either the contributors or the new corporation. The ruling also provided carryover basis and holding-period treatment, and held that the later contribution of the corporation's stock to the partnership would not prevent the first exchange from qualifying under § 351.

Ruling snapshot

• Question: Will the proposed transfers of an insurance business to a controlled corporation, followed by a contribution of its stock to a partnership, qualify for nonrecognition treatment?
• Outcome: Approved
• Key authorities: IRC §§ 351, 358, 362, 721, 1032, and 1223

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201506008 Third Party Communication: None
Release Date: 2/6/2015 Date of Communication: Not Applicable
Index Number: 351.00-00, 351.01-00,
351.02-00, 351.05-00 Person To Contact:
-----------------------, ID No. ------------
---------------------------------- Telephone Number:
--------------- --------------------
------------------------------ Refer Reply To:
------------ CC:CORP:B05
----------------------------------- PLR-127202-12
Date:
October 21, 2014

Legend

Corporation A = ---------------

Partnership A = -------------------------------------------

Branded Insurers = -------------------------------------------------------

Partnership B = ---------------------

Corporation C = --------------------------------

Specified Line of Business = -----------------------------------

State A = ------------

State B = ------------

Branded = ------------------------------------------------------------------------
---------------------------------------

X = -------

Y = ------------------------------------------------------------------------
---------

PLR-127202-12 2

Date X = --------------------------

Date Y = ---------------------

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

This letter responds to your June 21, 2012 letter requesting rulings on certain U.S.
federal income tax consequences of a series of proposed restructuring transactions
(collectively, the “Proposed Transactions”). The information provided in that request
and in subsequent correspondence on September 27, 2012, December 20, 2012,
February 8, 2013, August 22, 2014 and October 7, 2014 is summarized below.

The rulings contained in this letter are based upon facts and representations submitted
by the taxpayer and accompanied by penalties of perjury statements 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 other data
may be required as part of the audit process.

SUMMARY OF FACTS

Partnership A was formed on Date X and various Branded Insurers and their
subsidiaries became partners on Date Y. Partnership A is a State B limited liability
company (“LLC”) registered to do business in State A and treated as a partnership for
U.S. federal income tax purposes. The purpose of the formation of Partnership A was
to provide a joint venture for Branded Insurers and their subsidiaries to combine certain
components of their dental, life and health business. Focusing on the Specified Line of
Business, the joint venture allows Partnership A and its subsidiaries to provide
customers with Branded Specified Line of Business coverage while also allowing the
Branded Insurers to pool their collective risks to take advantage of economies of scale,
to increase operating efficiencies and to provide a broader array of product offerings to
their policyholders. Partnership A serves as a holding partnership for the joint venture
operation and has minimal operations of its own.

Corporation A is wholly-owned by Partnership A. Corporation A is a State A domiciled
insurance company which is regulated as a life and health insurer and is treated as an
insurance company for U.S. federal income tax purposes pursuant to Subchapter L of
the Internal Revenue Code. Corporation A operates as a direct writer and reinsurer of
dental, life and health insurance contracts in most states. In addition, Corporation A
reinsures the Branded Specified Line of Business contracts of some Branded Insurers
and their subsidiaries who are partners in the Partnership A joint venture.

PLR-127202-12 3

The current owners of Partnership A would like to add additional Branded Insurers to a
new corporate joint venture. The Proposed Transactions are intended to facilitate the
growth of the Partnership A joint venture operations and allow the addition of new
Branded Insurers (“New Investors”) with similar blocks of the Specified Line of Business
to that of Corporation A.

PROPOSED TRANSACTIONS

For what are represented to be valid business reasons, the parties will engage in the
following steps.

  1. Partnership A will form Partnership B, a limited liability company (“LLC”), with
     nominal cash.

  2. New Investors will contribute cash to Partnership A in exchange for
     Partnership A units.

  3. Partnership B will acquire a dormant shell insurance corporation to be
     renamed Corporation C.

  4. Amongst other assets, Partnership A will contribute cash, and Corporation A
     and New Investors will contribute X percent of their Specified Line of
     Business to Corporation C solely in exchange for stock (the “Corporation C
     Contribution” and Partnership A, Corporation A and New Investors are
     collectively referred to as the “Corporation C Shareholders”). The contribution
     by Corporation A and New Investors will consist of the following: (i) insurance
     in force, via reinsurance contracts; and (ii) a contract transferring the rights to
     provide administrative services contract (“ASC”) to the ASC business
     currently managed by the New Investors (the “New ASC Agreements”).

  5. In exchange for stock, as part of the Corporation C Contribution, Corporation
     A and New Investors will contribute to Corporation C all existing unpaid
     Specified Line of Business liabilities (i.e., claims and Incurred but not
     Reported ("IBNR”) liabilities) and the assets related to those liabilities. The
     assets will include cash, investment assets, and premium receivables, as well
     as the right to the future results of the future insurance policies for existing
     and future customers of Corporation A and the New Investors.

PLR-127202-12 4

  6. Corporation A will also transfer Y employees to Corporation C to perform the
     following functions of the business: product development, sales, provider
     relations, claims management, and customer service.

  7. Pursuant to a pre-existing binding plan. Partnership A, Corporation A and
     New Investors will contribute their Corporation C stock received in Steps 4
     and 5 to Partnership B solely in exchange for Partnership B units (the
     “Partnership B Contribution”).

The transfer of the respective Specified Line of Business of Corporation A and New
Investors to Corporation C in the Corporation C Contribution will be effected by a 100
percent coinsurance agreement written on an indemnity basis, with automatic
reinsurance on new policies directly written on a going forward basis. The reinsurance
agreement will only be in exchange for a transfer of Corporation C shares, which
represent a long-term continuing interest in Corporation C. There will be no experience
rated refunds or profit sharing provisions to the reinsurance agreement. Should
Corporation A or New Investors decide to withdraw from the joint venture, they would be
required to purchase the Specified Line of Business it contributed back from
Corporation C at fair market value including a gross up for taxes. As a result, it is
anticipated that the transfer under the reinsurance agreement will be permanent.

After the formation, Corporation C will have employees, and assets and liabilities,
including the insurance in-force and the rights to the ASC business. The New Investors
will retain the actual subscriber, provider and underlying ASC contracts and will operate
on a fronting basis via the indemnity reinsurance and ASC contracts. Corporation C
expects to operate via a transitional services agreement with the New Investors to
continue to administer the insurance business until Corporation C has the infrastructure
to manage the administration of the insurance business. Partnership B will have cash
and the stock of Corporation C.

REPRESENTATIONS

The following representations are made by Partnership A and Corporation A with regard
to the Proposed Transactions.

1. In connection with the Corporation C Contribution, no stock or securities will be
   issued for services rendered to or for the benefit of Corporation C and no stock or
   securities will be issued for the indebtedness of Corporation C.

2. The Corporation C Contribution is not the result of the solicitation by a promoter,
   broker, or investment house.

PLR-127202-12 5

3. In connection with the Corporation C Contribution, no rights in the property
   transferred to Corporation C will be retained.

4. The adjusted basis and the fair market value of the assets to be transferred to
   Corporation C will, in each instance, be equal to or exceed the sum of the
   liabilities to be assumed by Corporation C, if any, plus any liabilities to which the
   transferred assets are subject. See section 357(c).

5. Any liabilities to be assumed (within the meaning of section 357(d)) by
   Corporation C were incurred in the ordinary course of business and are
   associated with the assets to be transferred.

6. There is no indebtedness between Corporation C and its shareholders and there
   will be no indebtedness created in favor of Corporation C’s shareholders as a
   result of the Corporation C Contribution.

7. Corporation C will be solvent (i.e., the fair market value of assets will exceed
   liabilities) immediately after the Corporation C Contribution.

8. The Corporation C Contribution will occur pursuant to a plan agreed upon before
   the transaction in which the rights of the parties are defined.

9. There is no plan or intention on the part of Corporation C to redeem or otherwise
   reacquire any stock or indebtedness, if any, to be issued in the Proposed
   Transactions.

10. All exchanges in connection with the Corporation C Contribution will occur on
    approximately the same date.

11. Taking into account any issuance of additional shares of Corporation C’s stock;
    any issuance of stock for services; the exercise of any Corporation C stock
    rights, warrants, or subscriptions; a public offering of Corporation C’s stock; and
    the sale, exchange, transfer by gift, or other disposition of any of the stock of
    Corporation C to be received in the exchange, other than the disposition of
    Corporation C’s stock transferred to Partnership B, the Corporation C
    Shareholders will collectively be in “control” of Corporation C within the
    meaning of section 368(c). See Rev. Rul. 59-259, 1959-2 C.B. 115, and
    section 1.351-1(a)(1) of the regulations.

PLR-127202-12 6

12. Stock approximately equal to the fair market value of the property transferred to
    Corporation C will be received in exchange for the Corporation C Contribution.

13. A portion of the fair market value of the stock to be issued by Corporation C is
    allocable to the value of the insurance in force.

14. Corporation C will remain in existence and will retain and use the property
    transferred in the Corporation C Contribution in a trade or business.

15. There is no plan or intention by Corporation C to dispose of the property
    transferred in the Corporation C Contribution other than in the normal course of
    business operations.

16. Each of the parties to the Proposed Transactions will pay its own expenses, if
    any, incurred in connection with the Corporation C Contribution.

17. Neither Corporation C nor its shareholders are 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 received in the exchange will not be used to satisfy the indebtedness of
    such debtor.

18. Corporation C will not be a “personal service corporation” within the meaning of
    section 269A.

19. Corporation C will not be an investment company within the meaning of section
    351(e)(1) and section 1.351-1(c)(1)(ii) of the regulations.

20. None of the stock to be issued by Corporation C is “section 306” stock within
    the meaning of section 306(c).

21. The total fair market value of the assets transferred to Corporation C will
    exceed the amount of any liabilities assumed, if any, (within the meaning of
    section 357(d) and taking into account the applications of Rev. Rul. 80-323,
    1980-2 C.B. 124) by Corporation C in connection with the exchange. The fair
    market value of the assets of Corporation C will exceed the amount of its
    liabilities immediately after the exchange.

22. The Partnership B Contribution will qualify as a non-taxable contribution to a
    partnership under section 721(a).

PLR-127202-12 7

23. At the time Corporation A enters into its respective reinsurance and New ASC
    Agreements with Corporation C, it intends that the agreements will renew
    automatically pursuant to the agreements’ terms and no party has a plan or
    intention to terminate any of the agreements.

24. Any transitional services agreement entered into between Corporation C and
    New Investors will be on arm’s length terms.

RULINGS

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

1. The transfer of assets by the Corporation C Shareholders, including reinsurance
   contracts and New ASC Agreements, in exchange for Corporation C stock, will
   constitute a transfer of property to a controlled corporation meeting the
   requirements of section 351.

2. No gain or loss will be recognized by Corporation C Shareholders on the transfer
   of the assets, including the Specified Line of Business, to Corporation C solely in
   exchange for Corporation C stock. Section 351(a).

3. The tax basis of the Corporation C stock received by the Corporation C
   Shareholders will be equal to the basis of the assets transferred in the exchange,
   reduced by the amount of liabilities, if any, deemed assumed by Corporation C in
   the Corporation C Contribution. Section 358(a)(1) and (d).

4. No gain or loss will be recognized by Corporation C on its receipt of assets from
   the Corporation C Shareholders in exchange for the Corporation C stock.
   Section 1032(a).

5. The basis of the assets received by Corporation C in the Corporation C
   Contribution will equal the tax basis of such assets in the hands of the
   Corporation C Shareholders immediately before the Corporation C Contribution.
   Section 362(a).

6. The holding period of each asset received by Corporation C in the Corporation C
   Contribution will include the holding period of such asses in the hands of the
   Corporation C Shareholders. Section 1223(2).

PLR-127202-12 8

  7. The subsequent transfer of the Corporation C stock received in the exchange by
     the Corporation C Shareholders to Partnership B will not cause the Corporation
     C Contribution to fail to qualify as a nontaxable transfer to a controlled
     corporation under section 351(a).

CAVEATS

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax treatment of the Proposed Transactions under other provisions of the Internal
Revenue Code or the regulations, or the tax treatment of any conditions existing at the
time of, or effects resulting from, the Proposed Transactions that is not specifically
covered by the above rulings.

PROCEDURAL STATEMENTS

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 this
letter ruling.

In accordance with the power of attorney on file with this office, a copy of this ruling
letter is being sent to your authorized representatives.

                                   Sincerely,


                                   _Gerald B. Fleming_________________
                                   Gerald B. Fleming
                                   Senior Technician Reviewer, Branch 2
                                   Office of Associate Chief Counsel
                                   (Corporate)

cc: