Private Letter Ruling
201607003
Released February 12, 2016
Approved
Corporate separation receives five specified tax rulings
Apply this to your situation
This page covers one taxpayer's ruling from 2016, which can't be cited as precedent. Ezel answers your situation under the current Code and IRS guidance, with citations.
Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.
About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.
View official IRS release (PDF)
Plain-English summary
A public company proposed separating two businesses into a controlled corporation that would later elect REIT status. The IRS ruled that specified asset contributions would not prevent an internal subsidiary conversion from qualifying as a complete liquidation under section 332. It also ruled that the relative size of one business would not keep that business from satisfying section 355's active-business requirement, and that specified uses of a cash distribution would be treated as part of the reorganization plan under section 361. Two reincorporations would not prevent related conversions from qualifying as section 368 reorganizations. Mixed cash and stock distributions by the controlled corporation would be treated as property distributions under sections 301 and 305, with stock valued at the cash shareholders could have chosen. These rulings were conditional and did not address the transaction's overall tax consequences or whether the controlled corporation qualified as a REIT.
Ruling snapshot
- Question: How do five discrete corporate tax issues affect the proposed separation and later REIT distributions?
- Outcome: The IRS issued favorable rulings on all five specified issues, subject to stated qualifications and caveats.
- Key authorities: IRC §§ 301, 305, 332, 355, 361, and 368
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 201607003 Third Party Communication: None
Release Date: 2/12/2016 Date of Communication: Not Applicable
Index Number: 355.03-00, 355.01-00,
332.00-00, 361.02-00, Person To Contact:
305.03-00, 368.04-00 -----------------------------------, ID No. -------
-----------------
----------------------- Telephone Number:
-------------------------- -------------------
---------------------------------- Refer Reply To:
----------------------------------- CC:CORP:B05
------------------------------ PLR-116717-15
Date:
November 05, 2015
Distributing = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
-----------------
Controlled = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
-----------------------------
Sub 1 = -----------------------------------------------------------------------------------------
------------------------------------------------------------------------------
Sub 2 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
-------------------------------
Sub 3 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
---------
Sub 4 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
-------------------------------
Sub 5 = -----------------------------------------------------------------------------------------
--------------------------------------------------------------
=
Sub 6 = -----------------------------------------------------------------------------------------
PLR-116717-15 2
-----------------------------------------------------------------------------------------
---
Sub 7 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
---
Sub 8 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
---
Sub 9 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
---
LLC 1 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
---
LLC 2 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
--
LLC 3 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
---
LLC 4 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
---
LLC 5 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
---
LLC 6 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
---
LLC 7 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
---
LLC 8 = -----------------------------------------------------------------------------------------
PLR-116717-15 3
-----------------------------------------------------------------------------------------
---
LLC 9 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
---
LLC 10 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
---
LLC 11 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
---
LLC 12 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
---
LP = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
---
Business A = ---------------------------------
Business B = ----------------------------------
Business C = -------------------------------------------------
State A = ---------
State B = -------------
State C = -------------
Exchange = --------
Leases = -----------------------------------------------------------------------------------------
---------------------------------------------------------------------
Franchise = -----------------------------------------------------------------------------------------
Agreements -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
PLR-116717-15 4
---------
Date 1 = ----------------
Date 2 = ----------------
Date 3 = ------------------
Date 4 = ----------------------
a = ---
b = --
c = ---
d = ---
Dear -------------------:
This letter responds to your authorized representatives’ letter dated May 12,
2015, requesting rulings on certain Federal income tax consequences of a proposed
transaction (the “Proposed Transaction”). The material information provided in that
request and in subsequent 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. 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 letter and the rulings contained herein are issued pursuant to section 6.03 of
Rev. Proc. 2015-1, 2015-1 I.R.B. 1, 17, regarding one or more significant issues under
sections 332, 351, 355, and 368, and only address one or more discrete legal issues
involved in the transaction. This Office expresses no opinion as to the overall tax
consequences of the Proposed Transaction described in this letter or as to any issue
not specifically addressed by the rulings below.
SUMMARY OF FACTS
Distributing, a State A corporation, is a widely held public company that is the
common parent of an affiliated group that files a consolidated Federal income tax return
(the “Distributing Group”). Distributing owns all of the stock of Sub 1 and Sub 5. Sub 1
owns all of the stock of Sub 2. Sub 2 owns all of the stock of Sub 3. Sub 3 owns all of
the stock of Sub 4 and all of the interests of LLC 1, a State C limited liability company
PLR-116717-15 5
that is treated as a disregarded entity for Federal income tax purposes (a “DRE”). Sub 5
owns all of the stock of Sub 6.
The Distributing Group is engaged through its direct and indirect subsidiaries in
Business A, Business B, and Business C.
PROPOSED TRANSACTION
In the Proposed Transaction, which has been partially consummated, Distributing
will distribute Business B and Business C to its public shareholders. The relevant steps
of the Proposed Transaction are set forth below:
(i) On Date 1, Sub 2 formed Controlled, a State B corporation.
(ii) On Date 2, Sub 2 formed LLC 2, a DRE.
(iii) On Date 3, LLC 2 formed LLC 3, a DRE.
(iv) Sub 5 will convert under the laws of State A into a single-member limited
liability corporation (“LLC 4”) that will be treated as a DRE (a “Conversion”).
(v) Sub 6 will convert under the laws of State A into a single-member limited
liability company (“LLC 5”) that will be treated as a DRE (a “Conversion”;
together with the Conversion in step (iv), the “Conversions”).
(vi) Sub 3 will convert under the laws of State C into a single-member limited
liability company (“LLC 6”) that will be treated as a DRE (the “Liquidation”).
(vii) LLC 1 will form LLC 7, a DRE.
(viii) LLC 6 will form LLC 8, a DRE.
(ix) Sub 2 will form LLC 9, a DRE.
(x) Sub 1 will form LLC 10, a DRE.
(xi) LLC 5 will form LLC 11, a DRE, and distribute the interest in LLC 11 to LLC 4.
(xii) LLC 1 will contribute certain assets related to Business B to LLC 7.
(xiii) LLC 6 will contribute certain assets related to Business B to LLC 8.
(xiv) Sub 2 will contribute certain assets related to Business B to LLC 9, including
assets used in Business C.
(xv) Sub 1 will contribute certain assets related to Business B to LLC 10.
PLR-116717-15 6
(xvi) LLC 4 will contribute certain assets related to Business B to LLC 11.
(xvii) LLC 1 will distribute all of its interests in LLC 7 to LLC 6.
(xviii) LLC 6 will distribute all of its interest in LLC 7 and LLC 8 to Sub 2.
(xix) Sub 2 will contribute assets used in Business C to LLC 2, which will further
contribute those Business C assets to LLC 3.
(xx) Controlled will form LP, a DRE, and LLC 12, a DRE that will be the general
partner of LP. Controlled will contribute all of its assets (other than its 100%
interest in LLC 12) directly and through LLC 12 to LP.
(xxi) Sub 2 will contribute all of its interests in LLC 2, LLC 7, LLC 8, and LLC 9 to
Controlled in exchange for Controlled common stock (the “Controlled Common
Stock”) (“Contribution 1”).
(xxii) LP will borrow cash from third-party lenders (the “Borrowing”).
(xxiii) LP will distribute a portion of the proceeds of the Borrowing to Controlled.
(xxiv) Sub 2 will distribute all of its Controlled stock to Sub 1 (“Internal Distribution 1”).
(xxv) Sub 1 will contribute all of its interests in LLC 10 and certain other subsidiaries
to Controlled in exchange for Controlled Common Stock and the Cash
Distribution (as defined below) (“Contribution 2”).
(xxvi) Controlled will distribute a portion of the proceeds of the Borrowing to Sub 1
(the “Cash Distribution”).
(xxvii) Sub 1 will distribute all its Controlled stock to Distributing (“Internal Distribution
2”).
(xxviii) Sub 1 will use the Cash Distribution to repay intercompany debt owed to
Distributing or other members of the Distributing Group and/or make a
distribution to Distributing. Other Distributing Group members will distribute any
proceeds of the Cash Distribution to Distributing or use it to repay intercompany
debt owed to Distributing. Distributing will use all of the proceeds of the Cash
Distribution to repay or repurchase Distributing debt, whether long-term or
ordinary course indebtedness, owed to unrelated persons, and whether existing
at the time of the External Distribution (as defined below) or subsequently
incurred in the ordinary course of business (which payments could include
premium, interest and associated fees (such as consent fees), as well as
principal), to pay dividends to holders of Distributing Common Stock, and/or to
repurchase Distributing Common Stock, in all cases within c months of
Contribution 3 (as defined below).
PLR-116717-15 7
(xxix) LLC 4 will distribute all of its interests in LLC 11 to Distributing.
(xxx) LLC 4 and LLC 5 will each incorporate in State C as Sub 8 and Sub 9,
respectively (the “Reincorporations”).
(xxxi) Distributing will contribute all of its interests in LLC 11 to Controlled in exchange
for Controlled Common Stock (“Contribution 3”).
(xxxii) LP will enter into Leases with Distributing with respect to assets constituting
Business B (other than the Business C assets).
(xxxiii) Distributing and LLC 3 will enter into the Franchise Agreements for each
property of Business C.
(xxxiv) Distributing will distribute all of its Controlled stock to its shareholders in a pro
rata distribution (the “External Distribution”).
(xxxv) LLC 6 will distribute its interest in LLC 1 to Sub 2, which will contribute such
interests to a newly formed entity that will be treated as a corporation (“Sub 7”)
(“Contribution 4”).
(xxxvi) Sub 2 will distribute all of its Sub 7 stock to Sub 1.
(xxxvii) LLC 6 will contribute a portion of its assets to Sub 4 (“Contribution 5”).
(xxxviii) LLC 6 will distribute all of its Sub 4 stock to Sub 2 and Sub 2 will distribute the
Sub 4 stock to Sub 1.
(xxxix) Controlled will elect to be subject to tax as a REIT as of the first day of its
taxable year beginning Date 4 (the “REIT election”).
(xl) LLC 2 will elect to be treated as a corporation for federal income tax purposes
and will jointly elect with Controlled to be treated as a taxable REIT subsidiary
of Controlled, both effective Date 4.
(xli) Pursuant to its REIT election, Controlled will declare a dividend in an amount
equal to its accumulated earnings and profits (“E&P”), as determined for federal
income tax purposes, within the last three months of its first taxable year
following the External Distribution, and distribute such amount to its
shareholders no later than January 31st of the following year (the “Purging
Distribution”). Controlled intends to make the Purging Distribution with a
combination of cash and Controlled Common Stock. Controlled also currently
intends to make other cash and stock distributions in the two years following
the effective date of the REIT election (the “Other Distributions”; together with
the Purging Distribution, the “REIT Distributions”) in order to comply with the
distribution requirement of section 857(a)(1).
PLR-116717-15 8
When Controlled makes the REIT Distributions, it intends to allow each
Controlled shareholder to elect to receive such shareholder’s distribution in
either cash (the “Cash Option”) or Controlled Common Stock of equivalent
value (the “Stock Option”), subject to a limitation on the amount of cash to be
distributed in the aggregate to all shareholders (the “Cash Limitation”). If a
shareholder fails to make a valid election by the election deadline, that
shareholder will be deemed to have made an election to be determined by
Controlled at Controlled’s sole discretion. To the extent necessary, Controlled
will issue cash in lieu of fractional shares of stock. Although Controlled has not
yet determined the amount of the Cash Limitation, it will not be less than a% of
each REIT Distribution declaration (without regard to any cash that may be paid
in lieu of fractional shares).
If the total number of shares for which an election is made to receive a
distribution in cash would result in the payment of cash in an aggregate amount
that is less than or equal to the Cash Limitation, then all shareholders electing
to receive cash will receive cash on all such shares. On the other hand, if too
many shareholders elect to receive cash, each shareholder electing to receive
cash will receive a pro rata amount of cash corresponding to the shareholder’s
respective entitlement under the REIT Distribution declaration, but in no event
will any shareholder electing to receive cash receives less than a% of the
shareholder’s distribution amount in cash.
The calculation of the number of shares to be received by any shareholder will
be determined over a period of up to b weeks ending as close as practicable to
the payment date of the relevant REIT Distribution, based on a formula using
market prices that is designed to equate the value of the number of shares to
be received with the amount of cash that could be received instead. The charter
for Controlled will contain ownership limitations, and the stock distributed to a
shareholder pursuant to each REIT Distribution will be subject to such
ownership limitations.
REPRESENTATIONS
(a) At least d% of the assets of each of Sub 5 and Sub 6 will be held by Sub 8 and
Sub 9, respectively, immediately after the Reincorporations.
(b) Controlled intends to qualify as a REIT under the Code.
(c) Controlled will regularly distribute its E&P as required by section 857(a)(1).
(d) The Controlled Common Stock will be publically traded on Exchange, an
established U.S. securities market.
PLR-116717-15 9
(e) Each REIT Distribution will be made by Controlled to its shareholders with
respect to the Controlled Common Stock.
(f) Controlled will report each REIT Distribution as a taxable dividend on all Forms
1099 that are distributed to holders of the Controlled Common Stock to the
extent that the REIT Distributions are made out of Controlled’s E&P or to the
extent the REIT Distributions are otherwise subject to section 857(d)(2).
Controlled will withhold any required portion of such dividend in accordance
with applicable law. Each Form 1099 will reflect either distributions as capital
gain dividends designated by Controlled or as a taxable dividend described
above. Each such Form 1099 will reflect that the shareholder received an
amount in the REIT Distribution equal to such shareholder’s pro rata share of
the REIT Distribution, in addition to other amounts distributed with respect to
the relevant year.
RULINGS
Based solely on the information submitted and the representations set forth
above, and provided the relevant transactions otherwise qualify under sections
368(a)(1)(D) and 355, we rule as follows:
(1) Contribution 1 (described in Step (xxi)), Contribution 4 (described in Step
(xxxv)), and Contribution 5 (described in Step (xxxvii)) will not preclude the
Liquidation (described in Step (vi)) from qualifying as a complete liquidation
within the meaning of section 332.
(2) The relative fair market value of the gross assets of Business C as compared to
the fair market value of the gross assets of Controlled will not prevent Business
C from qualifying as an active trade or business for purposes of section 355(b)
with respect to Internal Distribution 1, Internal Distribution 2, and the External
Distribution.
(3) The use of the Cash Distribution in the manner described in Step (xxviii) will be
treated as being distributed pursuant to the Internal Distribution 2 plan of
reorganization under sections 361(b)(1) and 361(b)(3).
(4) The Reincorporations will not preclude any of the Conversions from qualifying
as reorganizations under section 368(a)(1)(C).
(5) The distribution of cash and stock by Controlled to its shareholders (as
described in Step (xli)) to effect a distribution of all of Controlled’s E&P
accumulated in taxable years prior to its REIT election, as well as cash and
stock distributions in its first two taxable years as a REIT, will be treated as
distributions of property with respect to Controlled’s stock under section 301 by
reason of section 305(b). The amount of any distribution of stock received by
PLR-116717-15 10
any shareholder as part of the distributions will be considered to equal the
amount of cash that the shareholder could have elected to receive instead.
CAVEATS
Except as expressly provided 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. In addition no opinion is expressed or implied concerning
whether Controlled otherwise qualifies as a REIT under part II of Subchapter M of
Chapter 1 of the Code. Furthermore, this letter does not provide any rulings under
sections 856 or 857. No opinion is expressed or implied as to whether any REIT
Distribution will satisfy the distribution requirements of section 857(a)(1). Finally, no
opinion is expressed or implied as to whether the Purging Distribution or any Other
Distribution is to be considered preferential under section 562(c).
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.
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,
Mark J. Weiss
Chief, Branch 2
Office of Associate Chief Counsel (Corporate)
Get today's answer for your situation
You just read what the IRS ruled for one taxpayer in 2016, and it can't be cited as precedent. Ezel checks the current Internal Revenue Code and IRS guidance and answers your specific situation, with citations.
Opens in Ezel Pro. Every answer cites the authority it relies on.