Life insurers preserve consolidated status through a holding-company reorganization and spin-off

Plain-English summary

A partnership placed several life insurance companies and a service company
under a new holding company, then one insurer distributed the stock of another
insurer to that holding company. The parties sought rulings on the life-nonlife
consolidated-return rules and the tax treatment of the restructuring and
distribution. The IRS ruled that the existing consolidated group continued
with the new holding company as common parent and that its life-nonlife
election remained effective. It also ruled that the relevant insurers remained
eligible group members and that the holding-company contribution was a group
structure change with specified basis and earnings-and-profits consequences.
The capital contributions and stock distribution qualified for nonrecognition
under §§ 355 and 368(a)(1)(D), with related basis, holding-period, and
earnings-and-profits rules. The ruling included 21 conclusions but did not
decide several general § 355 requirements, including business purpose, device,
and acquisition-plan issues.

Ruling snapshot

• Question: What are the consolidated-return and reorganization
  consequences of placing the insurance group under a new holding company and
  distributing a controlled insurer?
• Outcome: Approved, with 21 specified rulings
• Key authorities: IRC §§ 355, 361, 368(a)(1)(D), 1502, and 1504(c)(2);
  Treas. Reg. §§ 1.1502-47, 1.1502-75(d)(3), 1.1502-31, and 1.1502-33

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202045003 Third Party Communication: None
Release Date: 11/6/2020 Date of Communication: Not Applicable
Index Number: 355.00-00, 368.04-00,
1502.50-00, 1504.02-00 Person to Contact:
----------------------------
------------------ ID No. ---------------
----------------------------------------------------- Telephone Number:
---------------------------- --------------------
---------------------------------------- Refer Reply To:
CC:CORP:B05
PLR-104630-20
Date:
August 13, 2020

LEGEND

Partnership = --------------

LLC 1 = ---------------------------------------------------

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

Controlled = --------------------------------------------------

Sub 1 = ---------------------------------------------------

LLC 2 = ------------------------------------------

New Holdco = ----------------------------------------------

Country X = ------------

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

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

State C = ----------
PLR-104630-20 2

State D = ----------

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

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

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

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

Date 3 = ------------------------

Date 4 = -------------------

Date 5 = ---------------------

Date 6 = ---------------------

Date 7 = -----------------

Date 8 = ------------------

Date 9 = ------------------

Date 10 = ----------------

$a = -----------------

$b = ---------------

$c = -----------------

$d = ---------------

$e = ---------------

$f = -----------------

Period A = -----------------------

Year X = -------

Year Y = -------
PLR-104630-20 3

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

This letter responds to your letter dated January 17, 2020, requesting rulings on certain
federal income tax consequences of a series of completed transactions (the “Completed
Transactions,” as defined below). The information provided in that letter and in
subsequent correspondence is summarized below.

This letter is issued in part pursuant to Rev. Proc. 2017-52, 2017-41 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 section 355 and/or section 368 of the Internal
Revenue Code (the “Code”) and pursuant to section 6.03(2) of Rev. Proc. 2020-1,
2020-1 I.R.B. 1, regarding one or more significant issues under sections 355 and 368 of
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 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 office has made no determination regarding whether the distribution in the
Completed Transactions: (i) satisfies the business purpose requirement of Treas. Reg.
§ 1.355-2(b); (ii) is used primarily as a device for the distribution of the earnings and
profits of the distributing corporation or the controlled corporation or both (see
section 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.
§ 1.355-8 (see section 355(e)(2)(A)(ii) and Treas. Reg. § 1.355-7).

                              SUMMARY OF FACTS

Partnership is a Country X limited partnership that is treated as a partnership for U.S.
federal tax purposes. Partnership is the sole member of LLC 1, a State A limited liability
company that is disregarded as an entity separate from Partnership for U.S. federal tax
purposes. LLC 1 operates as a holding company for a group of domestic entities
engaged in Business A (the “LLC 1 Group”). The following describes the relevant
corporate structure of the LLC 1 Group immediately prior to the Completed Transactions
(described below).

LLC 1 owned all the stock in Distributing and Sub 1 and all the membership interests in
LLC 2. Distributing owned all the stock in Controlled. Distributing and Controlled joined
in filing a life-nonlife consolidated federal income tax return in accordance with the
PLR-104630-20 4

provisions of sections 1501, 1502, and 1504(c)(2) and the Treasury regulations
promulgated thereunder (the “Distributing Consolidated Group”).

Distributing is organized as a stock life insurance company under State B law and
qualifies as a life insurance company under section 816(a). Throughout every day of the
five-year base period defined in Treas. Reg. § 1.1502-47(d)(12)(ii), Distributing has
conducted Business A with the assistance of (i) employees of LLC 2 (or, prior to Date 1,
employees of LLC 1) pursuant to a services agreement, (ii) an unrelated service
provider pursuant to an investment management agreement, and (iii) independent
insurance agents pursuant to separate agency agreements. Managerial oversight of
Distributing’s Business A is undertaken on a regular and continuous basis by
Distributing’s corporate officers. Distributing has submitted financial information
indicating that its Business A had gross receipts and operating expenses representing
the active conduct of a trade or business for each of the past five years.

Controlled is organized as a stock life insurance company under State C law and
qualifies as a life insurance company under section 816(a). Throughout every day of the
five-year base period defined in Treas. Reg. § 1.1502-47(d)(12)(ii), Controlled has
conducted Business A with the assistance of (i) employees of LLC 2 (or, prior to Date 1,
employees of LLC 1) pursuant to a services agreement, (ii) an unrelated service
provider pursuant to an investment management agreement, and (iii) independent
insurance agents pursuant to separate agency agreements. Managerial oversight of
Controlled’s Business A is undertaken on a regular and continuous basis by
Controlled’s corporate officers. Controlled has submitted financial information indicating
that its Business A had gross receipts and operating expenses representing the active
conduct of a trade or business for each of the past five years.

Sub 1 is organized as a stock life insurance company under State D law and qualifies
as a life insurance company under section 816(a). Sub 1 conducts Business A with the
assistance of (i) employees of LLC 2 pursuant to a services agreement, (ii) an unrelated
service provider pursuant to an investment management agreement, and (iii)
independent insurance agents pursuant to separate agency agreements. Managerial
oversight of Sub 1’s Business A is undertaken on a regular and continuous basis by
Sub 1’s corporate officers.

LLC 2, a State A limited liability company that elected to be treated as an association
taxable as a corporation for U.S. federal tax purposes, operates as a service company
whose employees provide services to Distributing, Controlled, and Sub 1. It is
anticipated that, after the Completed Transactions, Distributing, Controlled, and Sub 1
will continue, for the foreseeable future, their conduct of Business A with the employees
of LLC 2 pursuant to their respective services agreements in the manner described
above.
PLR-104630-20 5

                        COMPLETED TRANSACTIONS

For what are represented to be valid business reasons, the LLC 1 Group undertook the
following Completed Transactions with a view towards (i) filing a life-nonlife
consolidated return that includes Distributing, Controlled, Sub 1, and LLC 2, and
(ii) completing the Distribution (as defined below).

1. On Date 2, Sub 1 distributed a normal course dividend of $a to Partnership (via
   LLC 1).

2. On Date 3, Partnership (via LLC 1) contributed $b of cash to Distributing (the
   “First Distributing Capital Contribution”). Immediately thereafter, Distributing
   contributed the $b of cash that it received in the First Distributing Capital
   Contribution to Controlled (the “First Controlled Capital Contribution”).

3. On Date 4, LLC 1 organized New Holdco with a nominal amount of cash capital.

4. On Date 5, LLC 1 contributed all the stock in Sub 1 and Distributing to New
   Holdco in exchange for shares in New Holdco of equal fair market value (the
   “New Holdco Contribution”).

5. On Date 6, Partnership (via LLC 1) contributed $c of cash to New Holdco (the
   “New Holdco Capital Contribution”), which, in turn, contributed the $c of cash to
   Distributing (the “Second Distributing Capital Contribution” and, together with the
   First Distributing Capital Contribution, the “Distributing Capital Contributions”).
   Immediately thereafter, Distributing contributed $d of cash that it received in the
   Second Distributing Capital Contribution to Controlled (the “Second Controlled
   Capital Contribution” and, together with the First Controlled Capital Contribution,
   the “Controlled Capital Contributions”).

6. By way of a letter dated Date 7 (the “State B Regulator Approval Letter”),
   Distributing received approval from the State B Regulator to complete the
   Distribution (as defined below).

7. On Date 8, in order to conform the Distribution to the amount of the distribution
   contemplated by the State B Regulator Approval Letter, Controlled distributed to
   Distributing $e of the $f of cash that Distributing had contributed to Controlled in
   the Controlled Capital Contributions.

8. On Date 9, LLC 1 contributed all the membership interests in LLC 2 to New
   Holdco (the “LLC 2 Contribution”).

9. On Date 9, Distributing distributed all the stock in Controlled to New Holdco (the
   “Distribution”).

10. On Date 10, Partnership (via LLC 1) contributed $e of cash to New Holdco,
    which, in turn, contributed that same amount of cash to Controlled.
    PLR-104630-20 6

In keeping with Distributing’s prior dividend history, Distributing generally intends to
continue making annual distributions to its shareholder following the New Holdco
Contribution (i.e., New Holdco), taking into account all pertinent Business A regulatory
considerations, including those associated with the projected growth of its sales and the
corresponding capital strain that such new business tends to cause. Assuming the
surrounding business exigencies afford Distributing the opportunity to do so, Distributing
intends to distribute a cash dividend to New Holdco during Period A of Year X (the
“Year X Distributing Distribution”).

                              REPRESENTATIONS

The following representations have been made with respect to the Completed
Transactions:

1. At all times relevant to the matters discussed herein, each of Distributing,
   Controlled, and Sub 1 has qualified as a life insurance company under section
   816(a) that is subject to tax under section 801.

2. For the five taxable years of Distributing preceding the Year Y taxable year, and
   at all other times relevant to the matters discussed herein, Distributing (i) will
   have been in existence and will have been a member of the Distributing
   Consolidated Group; (ii) will not have experienced a change in tax character
   within the meaning of Treas. Reg. § 1.1502-47(d)(12)(vii); and (iii) will not have
   undergone a disproportionate asset acquisition within the meaning of Treas. Reg.
   § 1.1502-47(d)(12)(viii).

3. For the five taxable years of Distributing preceding the Year Y taxable year, and
   at all other times relevant to the matters discussed herein, Controlled (i) will have
   been in existence and will have been a member of the Distributing Consolidated
   Group; (ii) will not have experienced a change in tax character within the
   meaning of Treas. Reg. § 1.1502-47(d)(12)(vii); and (iii) will not have undergone
   a disproportionate asset acquisition within the meaning of Treas. Reg. § 1.1502-
   47(d)(12)(viii).

4. Notwithstanding (i) the Controlled Capital Contributions and (ii) the timing of the
   New Holdco Contribution in relation to the LLC 2 Contribution, the fair market
   value of the shares of Distributing stock exceeded more than 50 percent of the
   aggregate fair market value of the assets contributed to New Holdco in these
   transactions. Therefore, solely as a result of owning all the stock in Distributing,
   Partnership (via LLC 1) owned more than 50 percent of the fair market value of
   the outstanding stock in New Holdco immediately after each of the New Holdco
   Contribution and the LLC 2 Contribution.

5. Although Sub 1 distributed a normal course dividend to Partnership (via LLC 1)
   on Date 2, that dividend distribution (i) would have occurred at such time
   notwithstanding the contemplated completion of the New Holdco Contribution,
   PLR-104630-20 7

   (ii) did not have a material impact on the determination that, at all times relevant
   to the rulings requested herein, the fair market value of the shares of Distributing
   stock exceeds the aggregate fair market value of the shares of Sub 1 stock, the
   LLC 2 interests, and the New Holdco Capital Contribution, and (iii) was not the
   source of the New Holdco Capital Contribution.

6. Even if Controlled were not taken into account in determining the fair market
   value of the shares of Distributing stock, the shares of Distributing stock still
   would exceed the aggregate fair market value of the shares of Sub 1 stock, the
   LLC 2 interests, the New Holdco Capital Contribution, and the shares of
   Controlled stock at all times relevant to the rulings requested herein.

7. Apart from the New Holdco Capital Contribution, no assets other than the shares
   of Sub 1 stock, the shares of Distributing stock, and the LLC 2 interests were
   contributed by Partnership (or LLC 1) to New Holdco in connection with the New
   Holdco Contribution or the LLC 2 Contribution, and no liabilities were assumed
   by New Holdco in connection with those transactions.

8. Both the New Holdco Contribution and the LLC 2 Contribution satisfied the
   requirements for tax-free treatment under section 351.

With respect to the Distribution, except as otherwise set forth below, Distributing has
made all the representations in section 3 of the Appendix to Rev. Proc. 2017-52, as of
immediately prior to the Distribution.

Distributing has made the following alternative representations:

  Representations 3(a), 8(a), 15(a), 22(a), 31(a), and 41(a).

Distributing has not made the following representations, which do not apply to the
Distribution:

  Representations 7, 17, 19, 20, 22, 24, 25, 35, and 39.

Distributing has made the following modified representation:

  Representation 11: Following the Distribution, Distributing and Controlled each
  will continue, independently and with its separate employees (or with the
  operational employees of LLC 2), the active conduct of the business on which it
  relies to meet the active trade or business requirement of section 355(b).

                                   RULINGS

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

1. Each of Distributing and Controlled has been engaged in the active conduct of a
   trade or business within the meaning of Treas. Reg. § 1.1502-47(d)(12)(i)(B)
   PLR-104630-20 8

   throughout every day of the base period defined in Treas. Reg. § 1.1502-
   47(d)(12)(ii).

2. The Distributing Consolidated Group will remain in existence, immediately after
   the New Holdco Contribution, with New Holdco as the new common parent.
   Treas. Reg. § 1.1502-75(d)(3).

3. The Distributing Consolidated Group’s election to file a life-nonlife consolidated
   return will remain in effect and otherwise will not be affected by the New Holdco
   Contribution.

4. New Holdco will be an eligible corporation (within the meaning of Treas. Reg.
   § 1.1502-47(d)(12)) with respect to the Distributing Consolidated Group
   immediately upon becoming the new common parent of that consolidated group.

5. The status of each of Distributing and Controlled as an eligible corporation (within
   the meaning of Treas. Reg. § 1.1502-47(d)(12)) with respect to the Distributing
   Consolidated Group will not be affected by the New Holdco Contribution.

6. For purposes of Treas. Reg. §§ 1.1502-31 and 1.1502-33, the New Holdco
   Contribution will qualify as a “group structure change” with respect to the
   Distributing Consolidated Group. Treas. Reg. § 1.1502-33(f)(1).

7. New Holdco’s basis in stock of Distributing immediately after the group structure
   change will be Distributing’s net asset basis as determined under Treas. Reg.
   § 1.1502-31(c), subject to the adjustments described in Treas. Reg. § 1.1502-
   31(d). Treas. Reg. § 1.1502-31(b)(2).

8. The earnings and profits of New Holdco will be adjusted immediately after New
   Holdco became the new common parent of the Distributing Consolidated Group
   to reflect the earnings and profits of Distributing immediately before Distributing
   ceased to be the common parent of the Distributing Consolidated Group. Treas.
   Reg. § 1.1502-33(f)(1).

9. Sub 1 will not be treated as having a separate return limitation year with respect
   to the Distributing Consolidated Group for any taxable year during which it is a
   member of that group (as determined without regard to section 1504(b)(2)) for
   each day of such year. Treas. Reg. § 1.1502-47(d)(11).

10. Section 818(e)(2) will not impact the application of Treas. Reg. § 1.1502-13(f)(2)
    with respect to the Year X Distributing Distribution.

11. The Distributing Capital Contributions will not affect the Distribution from
    otherwise qualifying under section 355.

12. The Controlled Capital Contributions, together with the Distribution, will be a
    reorganization within the meaning of section 368(a)(1)(D). Distributing and
    PLR-104630-20 9

    Controlled will each be a “party to the reorganization” within the meaning of
    section 368(b).

13. Distributing will not recognize gain or loss on the Controlled Capital
    Contributions. Section 361(a).

14. Controlled will not recognize gain or loss on the Controlled Capital Contributions.
    Section 1032(a).

15. The basis in each asset received by Controlled in the Controlled Capital
    Contributions will equal the basis of that asset in the hands of Distributing
    immediately before the relevant contribution. Section 362(b).

16. Controlled’s holding period in each asset received from Distributing in the
    Controlled Capital Contributions will include the holding period during which
    Distributing held that asset. Section 1223(2).

17. No gain or loss will be recognized by (and no amount will be included in the
    income of) New Holdco on the receipt of Controlled’s stock in the Distribution.
    Section 355(a).

18. No gain or loss will be recognized by Distributing on the distribution of
    Controlled’s stock in the Distribution. Section 361(c).

19. The aggregate basis of the Distributing stock and the Controlled stock in the
    hands of New Holdco immediately after the Distribution will be the same as New
    Holdco’s basis in the Distributing stock immediately before the Distribution,
    allocated between the Distributing stock and the Controlled stock in proportion to
    the fair market value of each immediately following the Distribution in accordance
    with Treas. Reg. § 1.358-2(a)(2). Section 358(a)(1) and (b).

20. The holding period of the Controlled stock received by New Holdco in the
    Distribution will include the holding period of the Distributing stock held by New
    Holdco with respect to which the Distribution was made, provided that such
    Distributing stock was held as a capital asset on the date of the Distribution.
    Section 1223(1).

21. Earnings and profits, if any, will be allocated between Distributing and Controlled
    in accordance with section 312(h), Treas. Reg. § 1.312-10(a), and Treas. Reg.
    § 1.1502-33(f)(2).

                                    CAVEATS
    

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax treatment of the Completed Transactions under other provisions of the Code or
regulations or the tax treatment of any condition existing at the time of, or effects
PLR-104630-20 10

resulting from, the Completed Transactions that is not specifically addressed by this
letter.

                          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.

A copy of this letter must be attached to any federal 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 (PLR-104630-20) 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 representative.

                                   Sincerely,



                                   Gerald B. Fleming
                                   Senior Technician Reviewer, Branch 2
                                   Associate Chief Counsel (Corporate)

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