S corporation restructuring preserves F reorganization treatment

Plain-English summary

Family trusts indirectly owned an S corporation with qualified subchapter S subsidiaries and a separate corporate group. They proposed forming a new S corporation, exchanging the old corporation's shares for new shares, and electing qualified-subsidiary treatment for the old corporation. The old corporation would then transfer two subsidiary holdings to the new parent, after which the new parent would transfer the old corporation beneath the corporate group. Assuming the initial steps qualified as an F reorganization, the IRS ruled that the final transfer would not defeat that treatment. It also ruled that the intermediate transfers of the subsidiary holdings would be disregarded for federal income-tax purposes.

Ruling snapshot

• Question: Would the proposed restructuring preserve F reorganization treatment, and would transfers by the resulting qualified subsidiary be disregarded?
• Outcome: Approved on the discrete issues presented.
• Key authorities: IRC §§ 1361(b)(3)(A) and 368(a)(1)(F); Treas. Reg. § 1.368-2(m).

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201635001                                              Third Party Communication: None
Release Date: 8/26/2016                                        Date of Communication: Not Applicable
Index Number: 368.06-00, 1361.05-00
                                                               Person To Contact:
---------------------                                          ----------------------------------, ID No. --------
------------------------------------------------------------   -----------------
-----------                                                    Telephone Number:
---------------------------                                    --------------------
-------------------------                                      Refer Reply To:
----------------------------------                             CC:CORP:B05
--------------------------------------                         PLR-104796-16
                                                               Date:
                                                               May 26, 2016

Oldco       = ---------------------------
              ------------------------------------
              ----------------------

Newco       = -------------------

Holdco      = ------------------------------------------------
              -------------------------------
              ----------------------

QSub 1 = -----------------------------------------------------
         -------------------------------
         ----------------------

Family      = ------------------------------------------

State A     = ------------------

State B     = -------------

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

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

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

PLR-104796-16                                2

       This letter responds to authorized representatives’ letter dated February 10,
2016, requesting a ruling on certain federal income tax consequences of a proposed
transaction (the “Proposed Transaction”). The material information provided in that letter
and in later 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. 2016-1, 2016-1 I.R.B. 1 regarding a significant issue under section 368. The
rulings contained in this letter only address a discrete legal issue involved in the
Proposed 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 rulings below.

                                          Facts

        Oldco is a State A corporation formed on Date 1. Oldco has one class of stock,
all of which is owned, indirectly through a chain of entities disregarded as separate from
their owners for U.S. federal income tax purposes, by a group of trusts whose primary
beneficiaries are members of Family (the “Family Trusts”). The Family Trusts are
permitted shareholders under section 1361(b)(1). Oldco elected to be treated as a
subchapter S corporation effective Date 2, and has had a valid subchapter S election in
effect at all times thereafter.

       Oldco owns all of the single class of stock of QSub 1, a State B corporation.
Oldco has elected to treat QSub 1 as a qualified subchapter S subsidiary (“QSub”)
within the meaning of section 1361(b)(3)(B). QSub 1 owns all of the stock of a number
of corporations, each of which Oldco has elected to treat as a QSub, and these QSubs
own all of the interests in another QSub and in two limited liability companies that are
disregarded as separate from Oldco for federal income tax purposes (the direct and
indirect disregarded entities owned by QSub1 are collectively referred to as the “QSub 1
Entities”). Oldco also owns all of the stock of Holdco, a State B corporation, which is the
common parent of an affiliated group of corporations that files a consolidated federal
income tax return (the “Holdco Group”).

                                 Proposed Transaction

       Oldco intends to engage in the Proposed Transaction in order to facilitate the
transfer of certain of its business operations and related assets and liabilities to the
Holdco Group. The relevant steps of the Proposed Transaction are set forth below.

PLR-104796-16                                3

(1)    The Family Trusts, through their respective chains of disregarded entities, will
       form Newco under the laws of State B. Newco will have a single class of stock
       which will be wholly owned by the Family Trusts through their respective chains
       of disregarded entities.

(2)    The Family Trusts, through their respective chains of disregarded entities, will
       transfer all of the stock of Oldco to Newco in exchange for stock of Newco on a
       share-for-share basis.

(3)    Newco will elect to treat Oldco as a QSub and the election will be effective as of
       the date Newco acquires the stock of Oldco (the “QSub Election”).

(4)    Oldco will transfer all of the stock of Holdco and all of the stock of QSub 1 to
       Newco (the “Transfers”).

(5)    Newco will transfer the stock of Oldco to Holdco.

       Following the Proposed Transaction, Newco will own all of the stock of Holdco
and of QSub 1, which will in turn continue to own, directly or indirectly, all of the equity
interests of the QSub 1 Entities, and Holdco will own all of the stock of Oldco.

                                     Representation

      Oldco represents that, without taking into account Steps (4) and (5), Steps (1)
through (3) will qualify as a reorganization within the meaning of section 368(a)(1)(F).

                                         Rulings

       Based solely on the information submitted and representations made, we rule as
follows:

(1)    Step (5) of the Proposed Transaction will not cause Steps (1) through (3) to fail to
       qualify as a reorganization within the meaning of section 368(a)(1)(F). Treas.
       Reg. §1.368-2(m).

(2)    The Transfers (described in Step (4)) will be disregarded for federal income tax
       purposes. Section 1361(b)(3)(A).

                                         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

PLR-104796-16                                4

referenced in this letter. In particular, no opinion is expressed or implied concerning the
qualification of any entity as a subchapter S corporation or as a QSub.

                                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 representative.

       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
                                      Frances L. Kelly
                                      Senior Counsel, Branch 2
                                      Office of Associate Chief Counsel (Corporate)