Recognized income and gain do not defeat active-business requirement

Plain-English summary

A corporate group planned to separate one business into a newly formed controlled corporation and distribute that corporation's stock to the parent's shareholders. As part of the restructuring, a partnership could recognize gain under IRC § 751 and take income into account under Rev. Proc. 2004-34 through a § 481 adjustment. The taxpayer asked whether those tax consequences would prevent the controlled corporation from satisfying the five-year active trade or business requirement for a distribution under IRC § 355(b). Based on the submitted facts and representations, the IRS ruled that they would not. The ruling addressed only that discrete active-business issue and did not approve the transaction's other federal tax consequences.

Ruling snapshot

• Question: Would partnership gain under IRC § 751 or income taken into account under Rev. Proc. 2004-34 prevent the controlled corporation from satisfying IRC § 355(b)?
• Outcome: Approved
• Key authorities: IRC §§ 355(b), 481, and 751; Rev. Proc. 2004-34

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201551009 Third Party Communication: None
Release Date: 12/18/2015 Date of Communication: Not Applicable
Index Number: 355.03-00
Person To Contact:
----------------- -----------------------------, ID No. -------------
------------------------------ -----------------
---------------------------------------- Telephone Number:
----------------------------------------------------- ---------------------
------------------ Refer Reply To:
-------------------------------------------- CC:CORP:B04
PLR-146798-14
Date:
June 23, 2015

Legend

Distributing = -------------------------------------------------------

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

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

Subsidiary 1 = ---------------------------------
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Subsidiary 2 = ---------------------------------
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LLC 1 = ----------------------------------------
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LP = -----------------------------

Business A = ---------------------------------------------------------------------------------
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PLR-146798-14 2

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                        ---------

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

a = ------

b = --------

c = ---------------

Date = -------------------

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

   This letter responds to your December 22, 2014, letter requesting a ruling on

certain federal income tax consequences of a proposed transaction (the “Proposed
Transaction”). Additional information was submitted in letters dated April 20, 2015, May
11, 2015, May 21, 2015, June 3, 2015, and June 23, 2015. The information provided in
the request and subsequent correspondence is summarized below.

   The ruling contained in this letter is based on facts and representations submitted

by the taxpayer and accompanied by a penalties of perjury statement executed by the
appropriate party. While this office has not verified any of the materials 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. 2015-1, 2015-1 I.R.B.

1, regarding one or more significant issues under §§ 332, 351, 355, 368, or 1036. The
ruling contained in this letter only addresses one discrete legal issue 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.

                                   Summary of Facts

   Distributing is the common parent of a consolidated group (the “Distributing

Group”). The authorized and outstanding capital stock of Distributing consists of two
classes of common stock (the “Distributing Class A Stock” and the “Distributing Class B
Stock,” and collectively, the “Distributing Common Stock”).

  Distributing wholly owns Subsidiary 1 and LLC 1. Subsidiary 1 wholly owns

Subsidiary 2. Each of Distributing, Subsidiary 1, and Subsidiary 2 is classified as a

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member of the Distributing Group. LLC 1 is an entity disregarded as separate from its
owner for federal income tax purposes under § 301.7701-3 (a “disregarded entity”).
Prior to the Proposed Transaction, Subsidiary 2 and LLC 1 own approximately a and b
percent of LP, respectively. LP is classified as a partnership for federal income tax
purposes under § 301.7701-3. LP owns, directly or indirectly, all of the interests in
various limited liability companies, foreign corporations, or partnerships, each of which
is a disregarded entity (the “LP DEs”). LP and the LP DEs operate Business A and other
businesses.

                              Proposed Transaction

    Distributing is entering into the Proposed Transaction in order to facilitate the

distribution of Business A to its shareholders.

   (1)    LP formed Controlled, a State corporation, on Date.

   (2)   Subsidiary 2 will convert to a limited liability company that will be classified

as a disregarded entity for federal income tax purposes under § 301.7701-3.

   (3)   Prior to the date of the Distribution (defined below), LP will borrow up to $c

(the “Borrowing Proceeds”).

    (4)   LP will restructure the assets and liabilities of the LP DEs so that they are

separated and either (A) will be held directly by LP or owned by disregarded entities that
will remain with LP (Retained DEs) or (B) will be held directly by Controlled or owned by
disregarded entities that will be transferred to Controlled (Controlled DEs) .

   (5)    LP will contribute the Controlled DEs, all or substantially all of the directly

held assets relating to Business A, and a portion of the Borrowing Proceeds, to
Controlled in exchange for all the issued and outstanding stock of Controlled and the
assumption of various liabilities in a transaction intended to qualify under § 351 and in
which amounts may be taken into the gross income of LP pursuant to Rev. Proc. 2004-
34, 2004-1 C.B. 991 (the “Partnership Contribution”).

    (6)    LP will distribute all of the stock of Controlled to LLC 1 in a distribution in

partial redemption of LLC 1’s interest in LP in which gain may be recognized under
§ 751, (the “Partnership Distribution”). LLC 1 will distribute all of the stock of Controlled
to Distributing.

   (7)    In a transaction intended to qualify under § 368(a)(1)(E), Controlled will file

an amended and restated certificate of incorporation, pursuant to which Controlled’s
outstanding common stock will be recapitalized as Controlled Class A Common Stock
(the “Controlled Class A Stock”) and Controlled Class B Common Stock (the “Controlled
Class B Stock,” and collectively with the Controlled Class A Stock, the “Controlled

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Stock”) and Controlled will issue to Distributing a sufficient number of shares of each
class necessary to effect the Distribution described in step (8).

    (8)    After steps (1) through (7), Distributing will distribute all of the Controlled

Class A Stock pro rata to holders of Distributing Class A Stock with respect to such
stock and all of the Controlled Class B Stock pro rata to holders of Distributing Class B
Stock with respect to such stock in a transaction intended to qualify under § 355 (the
“Distribution”).

                                  Representations

  The following representations have been made regarding the Proposed

Transaction:

    (a)    For the entire five-year period ending on the date of the Distribution,

(i) members of Distributing’s separate affiliated group within the meaning of
§ 355(b)(3)(B) have owned all of the interests in LP and (ii) LP has conducted a portion
of Business A qualifying as an active trade or business within the meaning of § 355(b)
directly or through the LP DEs.

  (b)    Except with respect to the acceleration of income under § 481 pursuant to

Rev. Proc. 2004-34, no income or gain will be recognized in connection with the
Partnership Contribution.

  (c)    Except with respect to the possible recognition of gain under § 751, no

income or gain will be recognized in connection with the Partnership Distribution.

                                        Ruling

  Based solely on the information submitted and the representations set forth

above, we rule as follows regarding the Proposed Transaction:

   The fact that gain or loss may be recognized under § 751 or that income may be

taken into account by LP under Rev. Proc. 2004-34 as a result of the Proposed
Transaction will not prevent Controlled from satisfying the active trade or business
requirement of § 355(b).

                                       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 Transaction that are not specifically covered by the above rulings.

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                             Procedural Statements

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

provides that it may not be used or cited as precedent.

   A copy of this letter ruling 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.

    In accordance with the Power of Attorney on file with this office, a copy of this

letter ruling is being sent to your authorized representative.

                                   Sincerely,


                                   _Ken Cohen_________________
                                   Ken Cohen
                                   Senior Technician Reviewer, Branch 3
                                   Office of Associate Chief Counsel (Corporate)