Nonprofit business separation clears three section 355 issues

Plain-English summary

A tax-exempt parent planned to separate one business from a non-stock subsidiary by contributing its assets and remaining employees to a new controlled corporation, distributing that corporation to the parent, and merging it into another parent-owned corporation. Some employees of the separated business had already moved to the acquiring corporation before the proposed transaction. The IRS ruled that the parent's membership interest in the non-stock subsidiary would be treated as stock for section 355. It also ruled that the earlier employee transfer would not prevent the separated business from meeting the active trade or business requirement. Finally, because the parent was tax-exempt and the subsidiary's sole owner, the distribution did not present evidence of a prohibited device.

Ruling snapshot

• Question: Did the proposed internal separation satisfy the discrete section 355 issues involving stock status, active business, and device?
• Outcome: approved
• Key authorities: IRC § 355(a), (b); Treas. Reg. § 1.355-2(d)

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 201734004                                            Third Party Communication: None
Release Date: 8/25/2017                                      Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-00,
              355.06-00                                      Person To Contact:
                                                             -----------------------------,
--------------------                                         ID No. ------------------
--------------                                               Telephone Number:
--------------------                                         ----------------------
--------------------------------                             Refer Reply To:
----------------------------------                           CC:CORP:B02
                                                             PLR-117791-16
                                                             Date:
                                                             May 30, 2017




                                                  LEGEND

Parent           = ----------------------------------------------------------------------------------------------
                   ----------------------------------------------------------------------------------------------
                   -----------------------

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

Controlled       = ----------------------------------------------------------------------------------------------
                   ----------------------------------------------------------------------------------------------
                   --
Acquiring        = ----------------------------------------------------------------------------------------------
                   ----------------------------------------------------------------------------------------------
                   -----------------------

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

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

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

Product          = ----------------------------------------------------------------------------------------------
                   ----------------------------------------------------------------------------------------------
                   ----------------------------------------------------------------------------------------------
PLR-117791-16                                           2

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

Guarantee       = ----------------------------------------------------------------------------------------------
                  ----------------------------------------------------------------------------------------------
                  ----------------------------------------------------------------------------------------------
                  ----------------------------------------------------------------------------------------------
                  ----------------------------------------------------------------------------------------------
                  ----------------------------------------------------------------------------------------------
                  --

Month 1         = -------

Year 1          = -------

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

       This letter responds to your authorized representatives’ letter dated September
26, 2016, which replaced a letter dated June 2, 2016, requesting rulings on certain
federal income tax consequences of a proposed transaction described below (the
“Proposed Transaction”). The 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 penalties 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 is issued pursuant to section 6.03 of Rev. Proc. 2016-1, 2016-1
I.R.B. 1, regarding rulings on one or more significant issues under sections 332, 351,
355, 368, or 1036 of the Internal Revenue Code, and pursuant to section 3.02 of Rev.
Proc. 2016-45, 2016-37 I.R.B. 344, on significant legal issues under section 355(a)(1)(B)
and Treas. Reg. § 1.355-2(d) pertaining to device. The rulings contained in this letter
only address one or more discrete legal issues involved in the Proposed Transaction.
This Office expresses no opinion as to the overall tax consequences of the Proposed
Transaction or as to any issue not specifically addressed by the rulings below.

                                                   FACTS

      Parent is a State A entity that is exempt from federal income tax under section
501(c)(3). Parent is the parent entity to a group of corporations (collectively, the “Parent
Group”). Parent owns all of the stock in Acquiring, a State A corporation. Parent also
owns the sole membership interest in Distributing, a State A non-stock corporation.
PLR-117791-16                                     3

Distributing is engaged in Business A and Business B. Distributing is an “existing Blue
Cross or Blue Shield organization” within the meaning of section 833(c)(2).

       In Month 1, Year 1, certain management and operational employees of Business
B were transferred from Distributing to Acquiring (the “Employee Transfer”). Other
management and operational employees of Business B remain employed by
Distributing. Prior to the Employee Transfer, Business B was operated entirely by
Distributing and had been providing Business B services to members of the Parent
Group and to third-party customers.

                                  PROPOSED TRANSACTION

           The Proposed Transaction steps are as follows:

   (i)        Distributing will form a new, wholly-owned State A corporation (“Controlled”)
              and contribute all of the assets (including Product) and the remaining
              employees of Business B to Controlled (the “Contribution”).

   (ii)       Distributing will distribute all the stock of Controlled to Parent (the
              “Distribution”).

   (iii)      Controlled will merge with and into Acquiring, with Acquiring surviving.

        Following the Proposed Transaction, Distributing will own the Business A assets
and Acquiring will own the Business B assets (including Product). For purposes of
satisfying the active trade or business requirement of section 355(b), Distributing
intends to rely on Business A, and Controlled intends to rely on Business B.

       Following the Proposed Transaction, Distributing may provide a Guarantee to
third-party customers of Business B if a third-party customer of Business B requests a
Guarantee.

                                        REPRESENTATIONS

      The taxpayer has made the following representations with respect to the
Proposed Transaction:

   a) Parent has no plan or intention to cease to be exempt from federal income tax
      under section 501(c)(3).

   b) Parent has no plan or intention to sell or to otherwise dispose of any portion of
      the stock of Distributing, Controlled, or Acquiring.
PLR-117791-16                                 4

   c) If section 355 did not apply to the Distribution, the receipt of the stock of
      Controlled would not be taxable to Parent.

                                          RULINGS

       Based on the information provided and the representations set forth above, we
rule as follows:

   (1) The membership interest Parent holds in Distributing will be treated as stock for
       purposes of section 355(a)(1)(A).

   (2) The Employee Transfer will not prevent Controlled from satisfying the active
       trade or business requirement of section 355(b) with respect to the Distribution.

   (3) Because Parent is exempt from federal income tax under section 501(c)(3) and
       because Parent is the sole shareholder of Distributing, the Distribution does not
       present evidence of device. Treas. Reg. § 1.355-2(d).

                                          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. No opinion was requested, and no opinion is expressed or
implied, concerning whether the Proposed Transaction involves a material change in
the taxpayer's operation or its structure under section 833(c)(2)(C).

                            PROCEDURAL STATEMENTS

      This ruling 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 ruling 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 this letter ruling.
PLR-117791-16                                  5

         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,

                                       William W. Burhop
                                       Assistant to the Branch Chief, Branch 2
                                       Office of Associate Chief Counsel
                                       (Corporate)