Partnership acquisition cleared section 351 investment-company test

Plain-English summary

A publicly traded partnership planned to acquire an unrelated public corporation for partnership units and cash, after which the acquired corporation would contribute its assets to a lower-tier publicly traded partnership. The taxpayer would continue to own at least half of the lower-tier partnership by value. The IRS ruled that the taxpayer could look through its lower-tier partnership interest and be treated as owning its proportionate share of that partnership's assets for the section 351(e) investment-company test. If no more than 80 percent of the combined assets were section 351(e) investment assets after applying that rule, the taxpayer would not be an investment company for section 721(b). The ruling addressed only this significant issue, not the transaction's overall tax consequences.

Ruling snapshot

• Question: May the acquiring partnership look through a majority-owned lower-tier partnership when applying the section 351(e) investment-company test under section 721(b)?
• Outcome: approved
• Key authorities: IRC §§ 351(e), 704(b), 721(b), 7704(b); Treas. Reg. § 1.351-1(c)(4)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 202016013                                              Third Party Communication: None
Release Date: 4/17/2020                                        Date of Communication: Not Applicable
Index Number: 721.00-00, 351.13-00
                                                               Person To Contact:
-------------------------------                                --------------------------, ID No. ----------------
-------------------------------------------                    -----------------
--------------------------                                     Telephone Number:
--------------------------------                               --------------------
----------------------------                                   Refer Reply To:
                                                               CC:CORP:B01
                                                               PLR-121328-19
                                                               Date:
                                                               January 08, 2020

                                                     Legend

X                 =         --------------------------
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GP                =         ----------------
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MLP               =         -------------------------------------------
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Target            =         --------------------------------------------
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New LLC           =         -----------------------------------
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Business A        =         ------------------------------------------------------------------------------------------
                            ------------------------------------------------------------------------------------------
                            ------------------------------------------------------------------------------------------
                            ------------------------------------------------------------------------------------------
                            ------------------------------------------------------------------------------------------
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PLR-121328-19                                          2

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

M                 =       --------

N                 =       ------------------

O                 =       --------------------

P                 =       --

Q                 =       --

R                 =       --

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

This letter responds to your September 9, 2019, letter requesting a significant issue
ruling with regard to a proposed transaction (the "Proposed Transaction"). The material
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 penalty of perjury statements executed
by an appropriate party. This office has not verified any of the materials submitted in
support of this request for rulings. Verification of the information, representations, and
other data may be required as part of an examination.

This letter is issued pursuant to § 6.03(2) of Rev. Proc. 2019-1, 2019-1 I.R.B. 1,
regarding one or more significant issues under section 332, 351, 355, 368, or 1036. The
ruling contained in this letter only addresses one or more significant issues involved in
the transaction. This Office expresses no opinion as to the overall tax consequences of
the transactions described in this letter or as to any issue not specifically addressed by
the ruling below.

                                             Summary of Facts

X is a publicly-traded partnership within the meaning of section 7704(b) of the Internal
Revenue Code (Code) that is classified as a partnership for federal income tax
purposes. GP, a limited liability company, that is classified as a partnership for federal
income tax purposes, is X's general partner. As the general partner of X and owner of X
common units, GP has an M% interest in X. Two individuals own all the interests in GP.

PLR-121328-19                                3

X owns the general partner interest and a portion of the limited partner interests in MLP.
MLP is a publicly-traded partnership within the meaning of section 7704(b) that is
classified as a partnership for federal income tax purposes. MLP is engaged directly
and indirectly through various operating subsidiaries and disregarded entities, in
Business A.

X has been engaged in acquisition discussions and has entered into an agreement with
Target, an unrelated publicly-traded corporation engaged in Business B. Target’s
Business B assets, which are similar to those in one or more of MLP’s existing lines of
business, will expand or complement X’s existing business and operations. The
Proposed Transaction will result in Target becoming a wholly-owned subsidiary of X.
Immediately prior to X’s public announcement of this acquisition, X’s equity market
capitalization was approximately $N and Target’s equity market capitalization was
approximately $O. Also as a result of the Proposed Transaction, (1) Target is expected
to own between P% and Q% of MLP common units, and (2) Target’s assets are
expected to make up between approximately P% and R% of MLP’s assets by fair
market value.

                                       Transaction

X proposes, in part, to undertake the following transactions (“Transactions”):

      (i)     X will form a new limited liability company ("New LLC"), which will be
              disregarded as an entity separate from its owner, X, for federal income tax
              purposes.

      (ii)    New LLC will merge into Target with Target surviving the merger. In the
              merger, each outstanding share of Target’s stock will be exchanged for
              common units in X and cash (with respect to the common units received in
              X).

      (iii)   Target will contribute all of its assets to MLP in exchange for units of MLP.

                                    Representations

X makes the following representations:

      (a)     Immediately following the Transactions, X’s direct ownership interests in
              MLP will represent more than 50 percent of the value (based on section
              704(b) capital accounts) of all equity interests in MLP.

      (b)     At the time of the Transactions, there would be no plan in existence
              pursuant to which the total value of X’s direct ownership interests in MLP

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              will become less than 50 percent of the total value of all equity interests in
              MLP.

       (c) Immediately after the Transactions after applying the look-through rule of
           Treas. Reg. § 1.351-1(c)(4), not more than 80% of (1) the fair market value of
           X’s assets (excluding its direct interests in MLP) plus (2) X’s ratable share
           (determined by reference to section 704(b) capital accounts) of the fair market
           value of MLP’s assets will be attributable to assets described in
           section 351(e).

                                          Ruling

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

       (1)    Provided that immediately after the Transactions, X's direct equity
              ownership interests in MLP will represent 50 percent or more of the value
              of all interests in MLP, X's direct equity interests in MLP will be
              disregarded and X will be deemed to own its ratable share (determined by
              reference to section 704(b) capital accounts) of MLP's assets for purposes
              of determining whether X would be an investment company under section
              351(e) if X were incorporated.

       (2)    Provided that immediately after the Transactions after applying the look-
              through rule of Treas. Reg. § 1.351-1(c)(4), not more than 80% of (1) the
              fair market value of X’s assets (excluding its direct interests in MLP) plus
              (2) X’s ratable share (determined by reference to section 704(b) capital
              accounts) of the fair market value of MLP’s assets is attributable to assets
              described in section 351(e), X will not be treated as an investment
              company (within the meaning of section 351(e)) for purposes of applying
              section 721(b).

                                         Caveats

Except as expressly provided herein, no opinion is expressed or implied concerning the
federal tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. Further, no opinion is expressed with respect to any transaction
other than the transfers described herein. For example, no opinion is expressed with
respect to the federal tax consequences of any other transfer of property to X, including
whether the control requirement in section 351(a) would be satisfied, or whether any
further transfer to a lower-tier entity of X would be integrated with the transfer to X.

PLR-121328-19                                  5

                                 Procedural Statements

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that this letter may not be used or cited as precedent.

A copy of this letter must be attached to any federal information and 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 Powers of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.

                                       Sincerely,

                                       _Richard M. Heinecke_________
                                       Richard M. Heinecke
                                       Branch Chief, Branch 5
                                       Associate Chief Counsel (Corporate)