Three businesses satisfy active-business test despite shared employee

Plain-English summary

A corporation owned equally by three shareholders proposed dividing one operating business into three equal companies. It would contribute one-third of the business to each of two newly formed corporations and split them off to two shareholders, leaving the third shareholder with the original corporation. Each company would independently continue its portion of the integrated business with separate employees, although all three would share one employee and pay that employee directly for services. Addressing only the significant section 355(b) issue, the IRS ruled that all three companies would be engaged in the active conduct of a trade or business immediately after the distributions.

Ruling snapshot

• Question: Would the distributing corporation and both controlled corporations satisfy the section 355(b) active-business requirement after the split-offs?
• Outcome: Approved on that significant issue; the ruling did not address the transaction's overall tax consequences.
• Key authorities: IRC §§ 355(b) and 368(a)(1)(D); Rev. Proc. 2017-52; Rev. Proc. 2018-53.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201949012
Third Party Communication: None
Release Date: 12/6/2019
Date of Communication: Not Applicable
Index Number: 355.03-00
Person To Contact:
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------------------------, ID No. ------------------
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Telephone Number:
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Refer Reply To:
CC:CORP:B05
PLR-105515-19
Date:
September 05, 2019

Legend

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

Shareholder 1 = --------------

Shareholder 2 = ----------------

Shareholder 3 = -------------------

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

Employee = ---------------

X Services = ---------------------------------------------------------------------------------
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Other Individuals = ----------------------

Y Services = -------------------------------------------------------

Z Services = ---------------------------------------------------------------------------------
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PLR-105515-19
2

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

This letter responds to your letter dated March 8, 2019, requesting a ruling on certain federal income tax consequences of the Proposed Transaction, defined below. The information submitted in that letter and in subsequent correspondence is summarized below.

The ruling contained in this letter is 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 the ruling, it is subject to verification on examination.

This letter is issued pursuant to section 4 of Rev. Proc. 2017-52, 2017-41 I.R.B.
283, amplified and modified by Rev. Proc. 2018-53, 2018-43 I.R.B. 667, and section 6.03(2) of Rev. Proc. 2018-1, 2018-1 I.R.B. 1, regarding a significant issue under section 355 of the Internal Revenue Code. The ruling contained in this letter only addresses a significant issue 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 ruling below.

Summary of Facts

Distributing, a State A corporation, is owned equally by Shareholder 1, Shareholder 2, and Shareholder 3 (the “Shareholders”). Distributing is directly engaged in Business A. The Shareholders and Employee, as employees of Distributing, perform X Services for Business A. Other Individuals, who are not employees of Distributing, perform Y Services and the majority of Z Services for Business A.

Proposed Transaction

For what are represented to be valid corporate business purposes, Distributing proposes to engage in the following transaction (the “Proposed Transaction”):

1. Distributing will form Controlled 1 and Controlled 2 as State A corporations.
   Distributing will contribute a portion of the assets of Business A to Controlled 1 in
   exchange for all of the stock of Controlled 1 and the assumption by Controlled 1
   of a portion of Distributing’s liabilities (“Contribution 1”), and a portion of the
   assets of Business A to Controlled 2 in exchange for all of the stock of Controlled
   2 and the assumption by Controlled 2 of a portion of Distributing’s liabilities
   (“Contribution 2”). Immediately after Contribution 1 and Contribution 2,
   Distributing (not including the value of the stock of Controlled 1 and Controlled 2),
   Controlled 1, and Controlled 2 each will have a fair market value (assets less its
   assumed liabilities) that is equal to one-third of Distributing’s fair market value
   immediately prior to Contribution 1 and Contribution 2.
   PLR-105515-19 3

   2. Distributing will distribute all of the stock of Controlled 1 to Shareholder 1 in
      exchange for all of Shareholder 1’s stock in Distributing (“Distribution 1”), and
      Distributing will distribute all of the stock of Controlled 2 to Shareholder 2 in
      exchange for all of Shareholder 2’s stock in Distributing (“Distribution 2, and
      together with Distribution 1, the “Distributions”).

      Following the Distributions, Shareholder 3 and Employee will perform X Services
      for the portion of Business A remaining in Distributing; Shareholder 1 and Employee will perform X Services for the portion of Business A contributed to Controlled 1; and Shareholder 2 and Employee will perform X Services for the portion of Business A contributed to Controlled 2.

   Distributing has submitted all of the information required by § 3.03(3) of Rev.
   Proc. 2017-52 for each of the Distributions.

                                 Representations
   

   With respect to each of the Distributions, Distributing has made the following
   representations in the Appendix to Rev. Proc. 2017-52: 9, 10, 12, and 15(a).

   Distributing also makes the following representations:
   

2. Following the Distributions, Distributing, Controlled 1, and Controlled 2 each will
   continue, independently and with its separate employees, the active conduct of
   its share of all the integrated activities of the business on which it relies to meet
   the active trade or business requirement of section 355(b), as conducted by
   Distributing prior to consummation of the transaction, except that Distributing,
   Controlled 1, and Controlled 2 will share the services of Employee. Distributing,
   Controlled 1, and Controlled 2 each will pay Employee directly for the value of his
   services.

3. Except for the issue of whether section 355(b) has been satisfied, Contribution 1
   and Distribution 1 will qualify as a transaction in which no gain or loss is
   recognized to Distributing, Controlled 1, or Distributing’s shareholders, and no
   amount is included in the income of Distributing’s shareholders, under section
   368(a)(1)(D) and section 355.

4. Except for the issue of whether section 355(b) has been satisfied, Contribution 2
   and Distribution 2 will qualify as a transaction in which no gain or loss is
   recognized to Distributing, Controlled 2, or Distributing’s shareholders, and no
   amount is included in the income of Distributing’s shareholders, under section
   368(a)(1)(D) and section 355.
   PLR-105515-19 4

                                      Ruling
   

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

   Distributing, Controlled 1, and Controlled 2 each is engaged immediately after
   the Distributions in the active conduct of a trade or business within the meaning
   of section 355(b).

                            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 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.

    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,
   
                                  _Russell P. Subin__________________
                                  Russell P. Subin
                                  Senior Counsel, Branch 3
                                  Office of Associate Chief Counsel (Corporate)
   

cc: