Private Letter Ruling
201624004
Released June 10, 2016
Approved
An acquired business segment counted as an existing-business expansion
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 foreign-parented group acquired a subsidiary chain containing an operating business through a transaction intended to qualify as a section 368(a)(1)(D) asset reorganization. One segment of that business was later contributed to a controlled company. The group proposed moving the controlled company through several internal distributions and a sale, transferring related employees and contracts, and then distributing the controlled company pro rata to the distributing company's owners. The group represented that it had conducted the broader business for more than five years and that the acquired segment was part of that business. The IRS ruled that acquiring the segment was an expansion of the distributing group's existing business under Treasury Regulation section 1.355-3(b)(3)(ii). The letter addressed only that discrete issue and did not rule on the proposed spin-off's overall tax consequences.
Ruling snapshot
- Question: Was the acquired segment an expansion of the group's existing business for section 355's active-business requirement?
- Outcome: Approved on the discrete expansion issue
- Key authorities: IRC §§ 355 and 368(a)(1)(D); Treas. Reg. § 1.355-3(b)(3)(ii)
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 201624004 Third Party Communication: None
Release Date: 6/10/2016 Date of Communication: Not Applicable
Index Number: 355.01-00, 355.03-00,
355.03-01 Person To Contact:
-----------------------, ID No. -------------------
-------------------- ---------------------------------------------------
-------------------------------------------------------- Telephone Number:
-------------------------------------------- ----------------------
----------------------------------- Refer Reply To:
------------------------------- CC:CORP:B04
PLR-128519-15
Date:
February 24, 2016
Distributing 1 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
---------------------------------------
Distributing 2 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
-------------------------------
Distributing 3 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
-------------------------------
Controlled = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
------------------------------------------------
Foreign Parent = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
----------------------------
FSub 1 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
----------------------------
FSub 2 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
----------------------------------------
PLR-128519-15 2
PS 1 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
------------------
Sub 1 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
--------------------------------
Sub 2 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
------------------------------------------------
Sub 3 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
--------------------------------
DE 1 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
------------------------------------------------
DE 2 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
----------------------------
DE 3 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
----------------------------
DE 4 = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
------------------------------------------------
Business A, = -----------------------------------------------------------------------------------------
which includes -----------------------------------------------------------------------------------------
Segment B -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
--------------------------------------------
PLR-128519-15 3
Date 1 = ------------------------
Date 2 = ----------------------
Date 3 = ---------------------------
Date 4 = ---------------------------
a = --------
b = --------
c = --------
d = --------
e = ----------
Dear ---------------:
This letter is in response to your representative’s August 26, 2015 letter
requesting a ruling on certain federal income tax consequences of a proposed
transaction. The information submitted in that letter and in subsequent correspondence
is summarized below.
The ruling contained in this letter is based upon facts and representations
submitted by the taxpayer and accompanied by a penalties of perjury statement
executed by an appropriate party. This office has not verified any of the materials
submitted in support of the request for a ruling. Verification of the facts,
representations, and other information may be required as part of the audit process.
This letter is issued pursuant to § 6.03 of Rev. Proc. 2016-1, 2016-1 I.R.B. 1,
regarding a significant issue under § 355 of the Internal Revenue Code (the “Code”).
The ruling contained in this letter only addresses a discrete legal issue involved in the
transaction described herein. This office expresses no opinion as to the overall tax
consequence of the transaction or as to any issue not specifically addressed by the
ruling below.
Facts
PLR-128519-15 4
Foreign Parent, through Distributing 3 and its subsidiaries (the "Distributing 3
SAG"), has actively conducted multiple lines of business, including Business A, but not
including Segment B.
On Date 4 (a date after Date 1), Foreign Parent wholly owned FSub 1 which
owned all of the issued and outstanding common shares in PS 1, an entity that is
treated as a partnership for federal income tax purposes.
PS 1 owned a percent of the vote and b percent of the value of Distributing 3, a
holding company and common parent of an affiliated group of corporations that filed a
consolidated federal income tax return. FSub 1 owned the remaining c percent of the
vote and d percent of the value of Distributing 3.
Distributing 3 wholly owned Sub 2, a single member limited liability company
("LLC") that is treated as a corporation for federal income tax purposes. Sub 2 wholly
owned DE 4, an LLC that is disregarded as a separate entity for federal income tax
purposes. DE 4 employs three employees (the "Employees") that are engaged in the
business of Segment B.
On Date 1, Foreign Parent, directly and through a disregarded entity, DE 3,
acquired FSub 2 from a third party in a taxable stock acquisition (the "FSub 2
Acquisition"). DE 3 was a member of a separate chain of corporations owned by
Foreign Parent and was not a member of the Distributing 3 SAG.
FSub 2 indirectly owned all of the common stock of Sub 1, a common parent of
an affiliated group of corporations that filed a consolidated federal income tax return.
Sub 1 wholly owned Distributing 2 and Distributing 2 wholly owned Distributing 1.
Distributing 1 wholly owned Sub 3. Distributing 1 conducted Business A, which includes
Segment B. Sub 3 held several contracts related to Segment B, including certain
related accounts receivable and deferred revenue (the "Contracts").
On Date 2, in exchange for a note, Distributing 3 through DE 2, an LLC that is
disregarded as a separate entity for federal income tax purposes, acquired Sub 1 from
an indirect subsidiary of FSub 2. Following the acquisition, Sub 1 converted into an LLC
and was re-named DE 1. The acquisition of Sub 1 and its subsequent conversion into
an LLC was intended to be an acquisitive asset reorganization under section
368(a)(1)(D) (the "Reorganization").
On Date 3, Distributing 1 formed Controlled. On Date 4, Distributing 1
contributed Segment B to Controlled.
PLR-128519-15 5
Proposed Transaction
For what have been represented to be valid business purposes, the taxpayer
proposes the following transaction (the “Proposed Transaction”)
(i) Distributing 1 will distribute all of the issued and outstanding membership interest
in Controlled to Distributing 2.
(ii) Distributing 2 will distribute all of the issued and outstanding membership interest
in Controlled to DE 1.
(iii) DE 1 will sell all of the issued and outstanding membership interest in Controlled
to Distributing 3.
(iv) DE 4 will terminate the employment of the Employees and Controlled will rehire
the Employees.
(v) Sub 3 will sell the Contracts to Controlled in a taxable transaction.
(vi) Distributing 3 will distribute all of the issued and outstanding membership interest
in Controlled, pro rata, to PS 1 and to FSub 1.
Representations
The taxpayer has made the following representations in connection with the Proposed
Transaction:
(a) For greater than e years, the Distributing 3 SAG has been engaged in the active
conduct of Business A.
(b) Distributing 1 has been engaged in the active conduct of Business A, including
Segment B, throughout the period following Distributing 3's acquisition of Sub 1
in the Reorganization.
(c) Controlled has been engaged in the active conduct of the Segment B business
since the contribution of Segment B by Distributing 1 to Controlled on Date 4.
(d) Sub 3 will recognize no gain or loss on the sale of the Contracts to Controlled.
Ruling
Based solely on the information provided and the representations set forth
PLR-128519-15 6
above, we rule as follows:
(1) Distributing 3's acquisition of Segment B in the Reorganization was an expansion
of Distributing 3's Business A within the meaning of § 1.355-3(b)(3)(ii).
Caveat
Except as expressly provided herein, no opinion is expressed or implied
concerning the tax consequences 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.
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.
Pursuant to the power of attorney on file in this matter, a copy of this letter is
being sent to your authorized representatives.
Sincerely,
___________________________
Richard K. Passales,
Senior Counsel, Branch 4
Office of Associate Chief Counsel (Corporate)
cc:
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.