Partnership segment counts as expansion of an existing active business

Plain-English summary

A corporate group had conducted an active business for more than five years and later bought a significant economic and voting interest in a partnership operating a segment of that business. The partnership's board controlled management and day-to-day operations, while the founders handled delegated responsibilities under board oversight. The group planned to place the partnership business in a corporation, distribute that corporation through several ownership tiers to the parent's shareholders, and pursue an initial public offering. For section 355's active-business requirement, the IRS ruled that acquiring the partnership interest and its segment expanded the distributor's existing business rather than adding a new or different business. The letter addressed only that discrete issue and did not approve the overall tax treatment of the proposed distributions.

Ruling snapshot

• Question: Does acquiring a significant partnership interest in a segment of an existing business count as an expansion rather than a new business for section 355?
• Outcome: Approved
• Key authorities: IRC § 355(b); Treas. Reg. § 1.355-3(b)(3)(ii); Rev. Ruls. 2007-42, 2003-38, 2003-18

Full text (IRS public release)

Internal Revenue Service                                            Department of the Treasury
                                                                    Washington, DC 20224

Number: 201528016                                                   Third Party Communication: None
Release Date: 7/10/2015                                             Date of Communication: Not Applicable
Index Number: 355.03-01
                                                                    Person To Contact:
--------------------------------------------                        -----------------------, ID No. ----------------
----------------                                                    Telephone Number:
-----------------------------------------                           ------------------
-----------------------------------------                           Refer Reply To:
-------------------------------                                     CC:CORP:BR:2
                                                                    PLR-136182-14
                                                                    Date:
                                                                    March 25, 2015




Legend

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

Distributing 2             =                 ------------------------------------------------------------
                                              ------------------------------
-------------------------------------------------------------------

Distributing 1             =                 ------------------------------
                                    -------------------------------
                                             ----------------------

Controlled                 =                   ------------------

Disregarded Entity =                         ---------------------------------------------
                                              -----------------------------------------------
-------------------------------------------------------------------

Partnership                =                   ---------------------------------
                                               -----------------------------------------------
                                               ----------------------

Partner A                  =                   ---------------------

Partner B                  =                   ------------

Business 1                 =                 ------------------------------------------------------------------------
                           ---------------------------------------------------------------------------------------
PLR-136182-14                                       2

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

Segment A            =                 ------------------------------------------------------------------------
                     -----------------------------------------------------------------------------------
                                       --------------------------------------------------------

Year 1               =                 ------

Date 1               =                 --------------------

Date 2               =                 ------------------

p                    =                 ---

q                    =                 ---

r                    =                 ---

s                    =                 -----------------------------


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

This letter responds to your September 26, 2014 request, submitted by your authorized
representatives, for a ruling under section 355(b). The information provided in that letter
and in later correspondence is summarized below.

The ruling contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by penalties of perjury statements
executed by an appropriate party. While this office has not verified any of the material
submitted in support of the request for ruling, it is subject to verification on examination.

This letter is issued pursuant to section 6.03 of Rev. Proc. 2014-1, 2014-1 I.R.B. 15,
regarding one or more significant issues under sections 332, 351, 355, 368, or 1036.
The ruling contained in this letter only addresses one or more discrete legal issues
involved in the transaction. This Office expresses no opinion as to the overall tax
consequences of the transactions described in this letter or as to any issue not
specifically addressed by the ruling below.

FACTS
PLR-136182-14                                   3

Parent is a privately held domestic corporation and is the common parent of an affiliated
group of corporations that file a consolidated federal income tax return (the “Parent
Group”). Parent owns all of the membership interests in Disregarded Entity, a limited
liability company that is disregarded as separate from Parent for federal income tax
purposes. Disregarded Entity owns all of the stock of Distributing 2, which owns all of
the stock of Distributing 1. Distributing 1 and Distributing 2 are members of the Parent
Group.

Distributing 1 owns a p% economic interest and a q% voting interest (subject to special
majority provisions relating to certain significant actions) in Partnership, a limited liability
company that is treated as a partnership for federal income tax purposes. Distributing
1’s economic and voting interest in Partnership is, in each case, at least a one-third
interest. Distributing 1 also owns several subsidiaries (the “Distributing 1 Subsidiaries”),
all of which are members of the Parent Group. Distributing 1, directly and through the
Distributing 1 Subsidiaries, has been engaged in the active conduct of Business 1 for
more than five years.

On Date 1, Partner A and Partner B (collectively, the “Founders”) formed Partnership
and contributed to it, assets used in the conduct of Segment A (a segment of Business
1) since Year 1 in exchange for all of the membership interests (then comprised of
Classes A-1, A-2, and B) in Partnership. On Date 2, the Founders sold all of their Class
B membership interests in Partnership to Distributing 1 in a taxable transaction. At the
time, the Class B membership interests represented an economic interest in Partnership
of r% and a voting interest in Partnership of s% (in each case, at least a one-third
interest).

The management of Partnership is vested exclusively in Partnership’s Board of
Managers (the “Board”). The Founders have been delegated certain responsibilities
with respect to the conduct of Segment A, subject to the general oversight of the Board.
Notwithstanding such delegation, the Board generally has the authority to make
management decisions and control the day-to-day conduct of Segment A.

In order to enable the long-term growth and expansion of Segment A as an independent
business, the Parent Group intends to raise capital through an initial public offering of
stock of a newly-formed corporation that will be directly engaged in Segment A. To
facilitate this initial public offering, the following transactions have been proposed
(collectively, the “Proposed Transaction”).

       (i)    Partnership will acquire a portion of the Founders’ interests in Partnership,
              after which Partnership will either make an election under § 301.7701-3 to
              be classified as a corporation (Controlled) for federal tax purposes or a
              new corporation (Controlled) will be formed, into which Distributing 1 and
              the Founders will contribute all of their Partnership interests.
PLR-136182-14                                    4

       (ii)    Distributing 1 will distribute all of its stock of Controlled to Distributing 2;

       (iii)   Distributing 2 will distribute all of its stock of Controlled to Disregarded
               Entity;

       (iv)    Disregarded Entity will distribute all of its stock of Controlled to Parent;
               and

       (v)     Parent will distribute all of its stock of Controlled to its shareholders.

It is anticipated that the initial public offering of Controlled stock will occur within one
year of these distributions.

REPRESENTATIONS

The Parent Group makes the following representations:

       (a)     Distributing 1 owns, and has owned since its acquisition of Partnership on
               Date 2, a “significant interest” (within the meaning of Rev. Rul. 2007-42,
               2007-28 I.R.B. 44) in Partnership.

       (b)     Partnership has been engaged in the active conduct of Segment A
               throughout the period following Distributing 1’s acquisition of its interest in
               Partnership on Date 2.

RULING

Based upon the facts and information submitted and the representations made, we rule
that Distributing 1’s acquisition of Segment A through its acquisition of the interest in
Partnership constitutes an expansion of Distributing 1’s Business 1 (within the meaning
of Treas. Reg. §1.355-3(b)(3)(ii)) and does not constitute the acquisition of a new or
different business. Treas. Reg. §1.355-3(b)(3)(ii) and Rev. Rul. 2007-42, 2007-28 I.R.B.
44, Rev. Rul. 2003-38, 2003-17 I.R.B. 811, and Rev. Rul. 2003-18, 2003-7 I.R.B. 467.

CAVEATS

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax treatment of the Proposed Transaction under any provision of the Code and
regulations or the tax treatment of any condition existing at the time of, or effects
resulting from the Proposed Transaction that is not specifically covered by the above
rulings.

PROCEDURAL STATEMENTS
PLR-136182-14                                  5


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.

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

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,


                                       Frances L. Kelly
                                       Senior Counsel
                                       Office of Associate Chief Counsel
                                       (Corporate)




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