Private Letter Ruling
201931005
Released August 2, 2019
Approved
Four-way S corporation split-up qualified for nonrecognition treatment
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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
Four sibling shareholders disagreed over management of an S corporation's business and proposed dividing it into four independently operated segments. The corporation would contribute each segment's assets to a new controlled corporation, distribute one controlled corporation to each sibling in redemption of that sibling's stock, and then dissolve. The IRS ruled that each contribution and distribution would qualify as a section 368(a)(1)(D) reorganization and a section 355 split-up, with no gain or loss to the corporations or shareholders. Basis and holding periods would carry over, and earnings, profits, and the accumulated adjustments account would be allocated among the corporations. Each new corporation could elect S status for its first taxable year if it otherwise qualified and made the election effective immediately after its stock distribution.
Ruling snapshot
- Question: Could an S corporation divide four business segments among four shareholders through separate controlled corporations without current gain or loss?
- Outcome: approved, subject to the representations and stated caveats
- Key authorities: IRC §§ 355, 357, 358, 361, 362, 368(a)(1)(D), 1032, 1223, 1361-1362, 1368; Treas. Reg. §§ 1.312-10, 1.358-2, 1.1368-2
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 201931005 Third Party Communication: None
Release Date: 8/2/2019 Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-02,
368.00-00, 368.04-00 Person To Contact:
---------------------, ID No. -------------
---------------- Telephone Number:
-------------- ----------------------
---------------------------------- Refer Reply To:
------------------------------ CC:CORP:B02
-------------------------------- PLR-131889-18
Date:
May 07, 2019
Legend
Distributing = ---------------------------------------------------------------------------------
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Shareholder A = ---------------------------------------------------------------------------------
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Shareholder B = ---------------------------------------------------------------------------------
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Shareholder C = ---------------------------------------------------------------------------------
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Shareholder D = ---------------------------------------------------------------------------------
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a = ------------
b = ------------
c = ------------
d = ------------
State A = --------------
Date 1 = -----------------
PLR-131889-18 2
Business A = ---------------------------------------------------------------------------------
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Controlled 1 = ---------------------------------------------------------------------------------
Assets ---------------------------------------------------------------------------------
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Controlled 2 = ---------------------------------------------------------------------------------
Assets ---------------------------------------------------------------------------------
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Controlled 3 = ---------------------------------------------------------------------------------
Assets ---------------------------------------------------------------------------------
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PLR-131889-18 3
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Controlled 4 = ---------------------------------------------------------------------------------
Assets ---------------------------------------------------------------------------------
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Segment 1 of = ---------------------------------------------------------------------------------
Business A ----------------------------------------------------------
Segment 2 of = ---------------------------------------------------------------------------------
Business A ------------------------------------------------------------
Segment 3 of = ---------------------------------------------------------------------------------
Business A -----------------------------------------------------------
Segment 4 of = ---------------------------------------------------------------------------------
Business A ----------------------------------------------------------
Dear ------------:
PLR-131889-18 4
This letter responds to your letter dated October 5, 2018, submitted by your authorized
representative, requesting rulings on certain U.S. federal income tax consequences of a
proposed transaction (described below) (the “Proposed Transaction”). The information
provided in that request and in later correspondence is summarized below.
This letter is issued pursuant to Rev. Proc. 2017-52, 2017-42 I.R.B. 283, as amplified
and modified by Rev. Proc. 2018-53, 2018-43 I.R.B. 667, regarding one or more
“Covered Transactions” under § 355 of the Internal Revenue Code (the “Code”). This
Office expresses no opinion as to any issue not specifically addressed by the rulings
below.
The rulings contained in this letter are based on 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 rulings. Verification of the information, representations, and other
data may be required as part of the audit process.
This office has made no determination regarding whether any of the Distributions (as
defined below): (i) satisfies the business purpose requirement of Treas. Reg. § 1.355-
2(b); (ii) is used principally as a device for the distribution of the earnings and profits of
the distributing corporation or the controlled corporation or both (see § 355(a)(1)(B) and
Treas. Reg. § 1.355-2(d)); or (iii) is part of a plan (or series of related transactions)
pursuant to which one or more persons will acquire directly or indirectly stock
representing a 50-percent or greater interest in the distributing corporation or the
controlled corporation, or any predecessor or successor of the distributing corporation
or the controlled corporation, within the meaning of Treas. Reg. § 1.355-8T (see
§ 355(e)(2)(A)(ii) and Treas. Reg. § 1.355-7).
Summary of Facts
Distributing is a State A corporation that was formed on Date 1 and made an election
under § 1362(a) to be an S corporation effective as of Date 1. Distributing has a single
class of common stock that is owned as follows: Shareholder A owns a%; Shareholder
B owns b%; Shareholder C owns c%; and Shareholder D owns d%. Collectively,
Shareholder A, Shareholder B, Shareholder C, and Shareholder D are referred to as the
“Shareholders.”
Shareholder A, Shareholder B, Shareholder C, and Shareholder D are siblings.
Shareholder A is the President of Distributing. Shareholder B is the Treasurer and a
Director of Distributing. The Shareholders manage Distributing.
Distributing is a calendar year taxpayer and uses the cash method of accounting.
Distributing is directly engaged in Business A. The financial information submitted by
PLR-131889-18 5
Distributing indicates that Distributing has had gross receipts and operating expenses
representing the active conduct of a trade or business for each of the past five years.
Proposed Transaction
The Shareholders have serious disagreements about how to best manage Business A
and desire to split the assets and operate separate portions of Business A
independently. Therefore, Distributing has proposed the following transactions:
(i) Distributing will form Controlled 1, Controlled 2, Controlled 3, and Controlled 4
(each, a “Controlled”) as State A corporations. Each Controlled will have one
class of stock outstanding, voting common stock.
(ii) Distributing will transfer the Controlled 1 Assets, which include assets used to
conduct Segment 1 of Business A, to Controlled 1 in exchange for all of the
Controlled 1 stock and the assumption by Controlled 1 of the liabilities
associated with the transferred assets (“Contribution 1”).
(iii) Distributing will transfer the Controlled 2 Assets, which include assets used to
conduct Segment 2 of Business A, to Controlled 2 in exchange for all of the
Controlled 2 stock and the assumption by Controlled 2 of the liabilities
associated with the transferred assets (“Contribution 2”).
(iv) Distributing will transfer the Controlled 3 Assets, which include assets used to
conduct Segment 3 of Business A, to Controlled 3 in exchange for all of the
Controlled 3 stock and the assumption by Controlled 3 of the liabilities
associated with the transferred assets (“Contribution 3”).
(v) Distributing will transfer the Controlled 4 Assets, the remaining portion of its
Business A assets, which include assets used to conduct Segment 4 of
Business A, to Controlled 4 in exchange for all of the Controlled 4 stock and
the assumption by Controlled 4 of the liabilities associated with the
transferred assets (“Contribution 4”) (Contribution 1, Contribution 2,
Contribution 3, and Contribution 4 are collectively described as the
“Contributions.”)
(vi) Immediately after the Contributions, Distributing will liquidate by making the
following distributions in redemption of all of the Distributing stock held by the
Shareholders (the “Distributions”):
(A) Distributing will distribute all of the stock of Controlled 1 to Shareholder A
in exchange for all of Shareholder A’s stock in Distributing
(“Distribution 1”).
PLR-131889-18 6
(B) Distributing will distribute all of the stock of Controlled 2 to Shareholder B
in exchange for all of Shareholder B’s stock in Distributing stock
(“Distribution 2”).
(C) Distributing will distribute all of the stock of Controlled 3 to Shareholder C
in exchange for all of Shareholder C’s stock in Distributing
(“Distribution 3”).
(D) Distributing will distribute all of the stock of Controlled 4 to Shareholder D
in exchange for all of Shareholder D’s stock in Distributing
(“Distribution 4”). (Distribution 1, Distribution 2, Distribution 3, and
Distribution 4 are collectively described as the “Distributions.”)
Immediately after the Distributions, Distributing will dissolve.
(vii) Immediately after the Distributions, Controlled 1, Controlled 2, Controlled 3,
and Controlled 4 will each make an election under § 1362(a) to be treated as
a subchapter S corporation and will have one class of stock outstanding,
voting common stock. Each Controlled will use the cash method of
accounting.
Representations
With respect to each of the Contributions and Distributions, Distributing has made all of
the representations in section 3 of the Appendix to Rev. Proc. 2017-52, except as set
forth below:
(1) Distributing has made the following alternative representations set forth in
section 3 of the Appendix to Rev. Proc. 2015-52:
Representations 3(a); 8(a); 11(a); 15(b); 31(a); 41(b).
(2) Distributing has not made the following representations, which do not apply to the
Proposed Transaction:
Representations 4; 5; 6; 19; 20; 25; 35; 36; 37; 38; 39; 40.
(3) Distributing makes no modified representations, other than to the extent
necessary to take into account the definitions in sections 2.02 and 2.11 of the
Appendix to Rev. Proc. 2017-52.
Additionally, with respect to each of the Contributions and Distributions, Distributing has
made each of the representations under section 3.04 of Rev. Proc. 2018-53, except for
the following representations, which do not apply to the Proposed Transaction: the
standard representations in (6) and in (7), and the additional representation in (3).
PLR-131889-18 7
Rulings
Based solely on the information and representations submitted, we rule as follows on
each of the Contributions and Distributions:
(1) Each Contribution, followed by its respective Distribution, will qualify as a
reorganization within the meaning of § 368(a)(1)(D). Distributing, Controlled 1,
Controlled 2, Controlled 3, and Controlled 4 each will be a “party to a
reorganization” within the meaning of § 368(b).
(2) Distributing will not recognize gain or loss on the Contributions. §§ 361(a) and
357(a).
(3) No Controlled will recognize gain or loss on its respective Contribution.
§ 1032(a).
(4) The basis in each asset received from Distributing by the Controlleds in the
Contributions will equal the basis of that asset in the hands of Distributing
immediately before the respective Contribution. § 362(b).
(5) Each Controlled’s holding period in each asset received from Distributing in the
respective Contribution will include the period during which Distributing held that
asset. § 1223(2).
(6) Distributing will not recognize any gain or loss on the Distributions. § 361(c)(1).
(7) The Shareholders will not recognize gain or loss (and no amount will be
otherwise included in income) upon the receipt of the Controlled stock.
§ 355(a)(1).
(8) The aggregate basis of the Controlled stock received by each Shareholder
immediately after the distribution will equal the Shareholder’s aggregate basis in
the Distributing stock surrendered in the distribution, allocated in the manner
described in Treas. Reg. § 1.358-2. See § 358(a) and (b).
(9) The holding period of the Controlled stock received by each Shareholder will
include the holding period of the Distributing stock with respect to which the
distribution of the Controlled stock is made, provided that the Distributing stock is
held as a capital asset on the date of the distribution. § 1223(1).
(10) Earnings and profits, if any, will be allocated between Distributing and
each Controlled in accordance with § 312(h) and Treas. Reg. § 1.312-10(a).
PLR-131889-18 8
(11) Distributing’s accumulated adjustment account immediately before the
transaction will be allocated between Distributing and each Controlled in a
manner similar to the manner in which earnings and profits are allocated under
§ 312(h) in accordance with Treas. Reg. § 1.1368-2(d)(3) (§§ 1.312-10(a) and
1.1368-2(d)(3)).
(12) Distributing’s momentary ownership of the stock of each Controlled, as
part of a reorganization under § 368(a)(1)(D), will not cause such Controlled to
have an ineligible shareholder for any portion of its first taxable year under
§ 1361(b)(1)(B). If a Controlled meets the requirements of § 1361(b)(1), it will be
eligible to make an election under § 1362(a) to be treated as an S corporation for
its first taxable year, provided such election is made effective immediately after
the distribution of the stock of the Controlled.
Caveats
Except as expressly provided herein, no opinion is expressed or implied concerning the
tax treatment of the proposed transactions under any provision of the Code and
regulations or the tax treatment of any condition existing at the time of, or effects
resulting from, the proposed transactions that are not specifically addressed by this
letter. In particular, no opinion is expressed regarding:
(i) Whether the Distribution satisfies the business purpose requirement of
§ 1.355-2(b);
(ii) Whether the Distribution is used principally as a device for the distribution of
earnings and profits of Distributing or Controlled or both;
(iii) Whether the Distribution and an acquisition or acquisitions are part of a plan
(or a series of related transactions) under § 355(e)(2)(A)(ii);
(iv) Whether Distributing is a valid S Corporation; and
(v) Whether any of the Controlleds is otherwise eligible to be an S Corporation.
Procedural Matters
This ruling is directed only to the taxpayers who requested 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 the federal income tax return of each
party involved in the Proposed Transaction for the taxable year in which the Proposed
Transaction is completed. Alternatively, taxpayers filing their returns electronically may
PLR-131889-18 9
satisfy this requirement by attaching a statement to their returns that provides the date
and control number (PLR-131889-18) of this 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 representatives.
Sincerely,
J.P. Stemwedel
Assistant to the Branch Chief (Branch 4)
Office of Associate Chief Counsel (Corporate)
cc:
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