Two businesses satisfy active management requirement

Plain-English summary

A corporation operated two businesses and was owned equally by two individual shareholders. It proposed placing one business in a newly formed controlled corporation and distributing that corporation's stock to one shareholder in exchange for the shareholder's stock in the distributing corporation. The IRS ruled that the distributing and controlled corporations each performed active and substantial management and operational functions related to their respective businesses. This addressed a discrete active-business issue under section 355. The IRS expressed no opinion on the transaction's overall tax consequences or any issue outside the specific ruling.

Ruling snapshot

• Question: Do the two corporations perform active and substantial functions for their respective businesses?
• Outcome: Yes, for the discrete section 355 issue presented.
• Key authorities: IRC § 355; Treas. Reg. § 1.355-3(b)(2)(iii); Rev. Rul. 79-394

Full text (IRS public release)

Internal Revenue Service                                          Department of the Treasury
                                                                  Washington, DC 20224

Number: 201606014                                                 Third Party Communication: None
Release Date: 2/5/2016                                            Date of Communication: Not Applicable
Index Number: 355.03-00
                                                                  Person To Contact:
------------------------                                          -----------------------, ID No. ----------------
------------                                                      Telephone Number:
----------------------                                            ------------------
-----------------------------                                     Refer Reply To:
------------------------------                                    CC:CORP:BR:2
                                                                  PLR-125506-15
                                                                  Date:
                                                                  November 05, 2015


                  TY:------

Legend

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

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

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

Individual A               =        ----------------------------------
                           ----------------

Individual B               =        ---------------------------
                                    ----------------

Business A                 =        -----------------------------------------------------------------------
                                    --------

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


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

This letter responds to your July 20, 2015, request, and subsequent correspondence,
submitted by your authorized representatives, for a ruling on the Federal income tax
consequence of a series of transactions. The information provided in that letter and in
later correspondence is summarized below.
PLR-125506-15                                  2

The ruling contained in this letter is 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 a ruling, it is subject to verification on examination.

This letter and the ruling contained herein are issued pursuant to section 6.03 of Rev.
Proc. 2015-1, 2015-1 I.R.B. 1, 17, regarding a significant issue under section 355 and
only addresses a discrete legal issue involved in the transaction. This Office expresses
no opinion as to the overall tax consequences of the transaction described in this letter,
or as to any issue not specifically addressed by the ruling below.

                                           FACTS

Distributing, a State A corporation, is engaged in Business A and Business B.
Distributing is owned equally by two individual shareholders, Individual A and Individual
B. Information has been provided describing the activities undertaken by employees of
both Business A and Business B.

                               PROPOSED TRANSACTION

(i)    Distributing will form Controlled and contribute its Business A assets in exchange
       for all of the stock in Controlled.

(ii)   Distributing will distribute all of the stock of Controlled to Individual A in exchange
       for all of Individual A’s shares in Distributing.

                                          RULING

Based solely on the information submitted, we rule that Distributing and Controlled each
perform active and substantial management and operational functions related to
Business A and Business B. Treas. Reg. § 1.355-3(b)(2)(iii) and Rev. Rul. 79-394,
1979-2 C.B. 141.
                                      CAVEATS

Except as expressly stated in the ruling section herein, no opinion is expressed or
implied concerning the tax consequences of any aspect of any transaction or item
discussed or referenced in this letter.

                              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.
PLR-125506-15                                  3

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.

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

                                       Sincerely,



                                       ________________________
                                       Mark J. Weiss
                                       Chief, Branch 2
                                       Office of Associate Chief Counsel (Corporate)




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