IRS blesses a nonprofit health insurer's "unstacking" into a holding-company structure, ruling its membership interests count as stock and it stays a Section 833 organization

Plain-English summary

A nonprofit, non-stock health insurance company (the kind taxed under Sections 501(m) and
833, which covers Blue Cross Blue Shield-type organizations) wanted to reorganize its corporate
family under a new holding company. Because it has no stock or shareholders, the question was
whether the tax-free reorganization rules, which are written around stock, could apply. The plan
had a new parent holding company (Holdco) become the sole "member" of the existing insurer
(Parent), Parent recapitalize itself to issue a single membership interest to Holdco, and Parent
then move two subsidiaries and a cash dividend up to Holdco. The IRS ruled favorably on the
core steps: the proprietary and membership interests are treated as stock, so the exchange
qualifies as tax-free under Sections 351(a) and 1032(a) and the recapitalization qualifies as an
"E" reorganization under Section 368(a)(1)(E); the existing consolidated tax group survives with
Holdco as the new common parent (citing Rev. Rul. 82-152); and the restructuring is not a
"material change" in the insurer's operations or structure under Section 833(c)(2)(C), so it keeps
its special status. The IRS expressly did not rule on the tax treatment of the later subsidiary
distributions and the cash dividend (steps vi and vii). This lets a mutual-style health insurer
modernize into a holding-company structure without triggering tax on the reorganization itself.

Ruling snapshot

• Question: Can a nonprofit, non-stock Section 833 health insurer reorganize under a new holding company on a tax-free basis, keeping its consolidated group and its Section 833 status, when its interests are membership interests rather than stock?
• Outcome: approved (favorable rulings; no opinion on the subsequent distributions and dividend)
• Key authorities: IRC §§ 351(a), 368(a)(1)(E), 1032(a), 833(c)(2)(C); §§ 501(m), 1502; Rev. Rul. 82-152

Full text (IRS public release)

Internal Revenue Service                                        Department of the Treasury
                                                                Washington, DC 20224

Number: 202309002                                               Third Party Communication: None
Release Date: 3/3/2023                                          Date of Communication: Not Applicable
Index Number: 351.00-00, 354.00-00,
              368.00-00, 833.00-00,                             Person To Contact:
              833.01-00, 1032.00-00,                            ------------------------
              1502.75-00, 1502.75-10                            ID No. ---------------
                                                                Telephone Number:
---------------------------                                     --------------------
---------------------------------------                         Refer Reply To:
----------------------------------------------------            CC:CORP:3
---------------------                                           PLR-105932-22
------------------------------                                  Date:
                                                                September 15, 2022




                                                       Legend

Parent                   =        ----------------------------------------------------
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Holdco                   =        ------------------
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Sub 1                    =        ----------------------------------
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Sub 2                    =        ---------------------------------------------
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Sub 3                    =        ----------------------------------------
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Sub 4                    =        ------------------
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Sub 5                    =        ---------------------------------------------------------------------------------
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Sub 6                      =        ---------------------------------------------------------------------------------
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Sub 7                      =        ------------------------------------
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Sub 8                      =        -------------------------------------------
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Foundation                 =        ---------------------------------------------------------------------------------
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a                          =        ---

b                          =        ---------------

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

Field                      =        --------------

State Y                    =        ----------

State Y Act                =        ---------------------------------------------------------------------------------
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                                    ---------------

State Y Code               =        -------------------------------------------------------------------

Committee                  =        ------------------------------------------------------

Organization               =        ---------------------------------------------------

State Regulator            =        ---------------------------------------------------------------------------------
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Dear ----------------:

This letter responds to a letter dated March 11, 2022, and subsequent information,
submitted by your authorized representatives, requesting rulings on the federal income
tax consequences of certain parts of a series of transactions. The material information
submitted in that request and subsequent correspondence is summarized below.

The rulings contained in this letter are based upon 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 letter is issued pursuant to § 6.03(2) of Rev. Proc. 2022-1, 2022-1 I.R.B. 1,
regarding one or more significant issues under sections 351 and 368 of the Internal
Revenue Code (the "Code") and the application of sections 833 and 1502. This office
expresses no opinion as to any issue not specifically addressed by the rulings below.

                                           Facts

Parent is organized as a non-profit, non-stock, non-member corporation pursuant to the
State Y Act and is licensed as a Business A corporation pursuant to the State Y Code.
Parent is governed by a board of directors (the "Parent Board") with general corporate
authority to elect and terminate officers, make key decisions as to corporate matters,
and otherwise perform the fundamental governance role of the board of directors of a
for-profit, stock corporation. The Parent Board is self-perpetuating (that is, members of
the Parent Board elect their successors). The current bylaws of Parent provide for a
Parent Board of a directors recommended by the Committee of the Parent Board and
selected by the existing Parent Board. The Parent Board is made up of community and
national leaders who are recognized experts in their respective fields and who are
committed to monitoring the effectiveness of policy and decision-making, both at the
Parent Board and management levels. The Parent Board must be comprised of at least
a majority basis of "public" and "independent" directors. Under Parent's articles of
incorporation, in the event of the dissolution or liquidation of Parent, any proceeds
thereof will be distributed in the manner required by the laws of State Y, or in the
absence of such requirement, to Foundation or another tax-exempt entity.

Parent is an Organization subject to tax under sections 501(m) and 833. Parent is also
the common parent of an affiliated group of corporations (the "Parent Group") that join in
the filing of a consolidated federal income tax return. Parent wholly owns all the stock in
Sub 1, Sub 2, and Sub 3, and all the membership interests in Sub 4, a limited liability
company taxable as a corporation for federal tax purposes. Sub 4 wholly owns all the
stock in Sub 5, Sub 6, Sub 7, and Sub 8. Parent and certain of its subsidiaries are
regulated by the State Regulator.

In addition, Parent controls Foundation, an affiliated private foundation organized as a
non-profit corporation that operates for the interest of the general public and focuses on
promoting Field-related research, education, and engagement activities. Foundation's
bylaws provide that Parent is entitled to appoint a simple majority of Foundation's board
of directors, with the remainder of the directors self-appointed by the Foundation's
board of directors.

                                       Restructuring

Parent desires to simplify and streamline its entity organizational structure by
"unstacking" certain of its operating subsidiaries (the "Restructuring"). A key aim of the
Restructuring is to simplify and streamline Parent's structure for purposes of the State
Regulator's review and oversight by making Parent's structure more transparent in
terms of capitalization, intercompany transactions, and financial reporting. The
Restructuring is also the first step towards the implementation of Parent's modernization
goal for its organizational structure pursuant to which Parent would like to evolve into a
broader Field company under a holding company structure with subsidiary chains (or
"verticals") organized on the basis of business line/function and with regulated entities in
separate verticals from non-regulated entities. In furtherance of the Restructuring, the
following steps have been implemented or will be implemented.

   (i)    Holdco was newly organized outside of the Parent Group as a State Y non-
          profit, non-stock, non-member corporation and is intended, after the
          Restructuring, to serve as a pure holding company for Parent and its direct
          and indirect subsidiaries as well as future (as yet to be formed) subsidiaries.
          Holdco will be governed by a board of directors (the "Holdco Board") with
          authority to perform the functions typically performed by a board of directors
          of a for-profit, stock corporation. Holdco's organizational documents provide
          for a self-perpetuating board of directors that must be comprised of at least a
          majority basis "independent" and "public" directors. Immediately following the
          consummation of the Restructuring, the members of the Holdco Board will be
          comprised of the same members as the Parent Board immediately prior to the
          consummation of the Restructuring. Holdco's organizational documents also
          provide that Holdco may not pay any dividends and any proceeds of any
          dissolution or liquidation of Holdco will be distributed in the manner required
          by the laws of State Y, or in the absence of such requirement, to Foundation
          or another tax-exempt entity.

   (ii)   Parent will amend and restate its articles of incorporation to recapitalize
          Parent as a membership non-profit corporation as allowed by the State Y Act
          with the governance and liquidating distribution provisions of Parent's articles
          of incorporation revised to reflect a single Parent membership interest (the
          "Membership Interest") as permitted by the State Y Act. The Membership
          Interest will provide its holder with: (a) the sole right to elect, retain, and/or
          dismiss members of the Parent Board; (b) control of dissolution/capital
          transaction decisions and amendments to Parent's articles of incorporation
          and bylaws; and (c) all rights to any dissolution or sale proceeds of Parent, as
          long as the holder is a State Y non-profit corporation. If no such holder of the
          Membership Interest exists, any dissolution or sale proceeds go first to
          Foundation, and if the Foundation does not still exist, to another tax-exempt
          corporation.

   (iii)  Parent will amend and restate its bylaws to reflect the creation of the
          Membership Interest.

   (iv)   Holdco will be admitted as the sole member of Parent in accordance with
          Parent's adoption of its amended and restated bylaws and the terms included
          therein for the issuance of the Membership Interest to Holdco.

   (v)    Foundation will amend and restate its bylaws to provide that (a) the Chief
          Executive Officer of Holdco will appoint a simple majority of board members
          to serve on Foundation's board of directors and (b) the remaining directors of
          Foundation will be self-selected by Foundation's board of directors.

   (vi)   Subject to receipt of any required approval by the State Regulator, Parent will
          transfer, assign, and covey all the outstanding shares in Sub 1 and Sub 2 to
          Holdco in accordance with State Y law (the "Distributions").

   (vii)  Subject to receipt of any required approval by the State Regulator, Parent will
          declare and pay a dividend of b in cash on the Membership Interest to Holdco
          in accordance with State Y law (the "Dividend").

Consummation of the Restructuring is subject to the State Regulator's approval.
Although the Restructuring will be implemented largely through formless steps from a
state law perspective, the plan of reorganization entered into by and among Parent and
Holdco (the "Plan of Reorganization") sets forth a detailed and ordered set of steps that
the affected members of the Parent Group intend the Restructuring to consist of for
federal income tax, and applicable state and local income tax, purposes. The Plan of
Reorganization requires all members of the Parent Group (and their affiliates) to
prepare all books, records, and filings in a manner consistent with such intent.
Specifically, the Plan of Reorganization provides that the consummation of the
Restructuring will be treated to consist of the following sequential steps:

   1) All the proprietary interests in Parent ("Parent Interests") will be transferred to
      Holdco in exchange for all the proprietary interests in Holdco ("Holdco Interests")
      in an exchange intended to qualify as a nontaxable exchange under sections
      351(a) and 1032(a) (the "Exchange").

   2) Parent will issue the Membership Interest to Holdco in exchange for all the
      Parent Interests held by Holdco in an exchange intended to qualify as a
      reorganization as described in section 368(a)(1)(E) (the "Recapitalization").

   3) Following the Recapitalization and the establishment of the reconstituted Parent
      Group with Holdco as the common parent, Parent will make the Distributions and
      the Dividend to Holdco with respect to the Membership Interest.

                                     Representations

The following representations are made with respect to the Restructuring:

   1) The Restructuring, and each transaction step thereto, will occur under a plan
      formulated and approved before the Restructuring takes place.

   2) The Restructuring, and each step thereto, will be implemented for valid business
      reasons.

   3) Holdco will not seek to be classified as an organization exempt from federal
      income tax pursuant to section 501(a) but, instead, will be subject to federal
      income tax as a holding company for one or more organizations described in
      sections 501(m) and 833.

   4) Holdco will receive all rights with respect to the Parent Interests deemed to be
      transferred in the Exchange.

   5) Holdco will treat its interests in Parent as stock for all purposes of the Code and
      the Treasury regulations thereunder.

   6) Immediately following the Recapitalization, the Membership Interest will provide
      Holdco with: (i) the sole right to elect, retain, and/or dismiss members of Parent
      Board; (ii) control of dissolution/capital transaction decisions and amendments to
      Parent's articles of incorporation and bylaws; and (iii) all rights to any dissolution
      or sale proceeds of Parent, as long as Holdco is a State Y non-profit corporation.

   7) Following the Restructuring, and each transaction step thereto, Holdco and its
      direct and indirect subsidiaries (which will include Parent) will continue to own
      substantially all the assets and liabilities that were held by Parent and its direct
      and indirect subsidiaries prior to the Restructuring, and each transaction step
      thereto.

   8) As of the date of this letter ruling submission, Parent was an existing
      Organization under section 833(c)(1)(A).

   9) For purposes of State Y law, Parent will be the same legal entity both before and
      after the Restructuring.

   10) Holdco and Parent expect to remain State Y non-profit corporations and have no
       current plans to legally change to State Y for-profit corporations.

   11) Following the Restructuring, and each transaction step thereto, Holdco and its
       direct and indirect subsidiaries (which will include Parent) will continue to conduct
       the business operations that Parent and its direct and indirect subsidiaries
       conducted prior to the Restructuring, and each transaction step thereto.

   12) The Restructuring will not result in any change to the high-risk coverage offered
       by members of the Parent Group.

   13) Post-Restructuring, the members of the Parent Group will continue their business
       in a substantially unchanged manner, with the same personnel and assets as
       existed pre-Restructuring, subject to any changes that occur in the ordinary
       course of business or as a result of the Distributions and the Dividend.

   14) To the best knowledge and belief of Parent, and assuming a favorable letter
       ruling is issued, none of Holdco, Parent, any other member of the Parent Group,
       or any related entity will take into account currently taxable gain, income,
       deduction, or loss as a result of the Distributions or the Dividend (as described in
       steps vi and vii, respectively).

                                         Rulings

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

(1) For purposes of determining the federal income tax consequences of the
    Restructuring:

   (a) The Parent Interests, the Holdco Interests, and the Membership Interest will be
       considered stock of the applicable corporation,
   (b) The holders (and relative holdings) of the Holdco Interests immediately following
       the Exchange will be deemed identical to the holders (and relative holdings) of
       the Parent Interests immediately preceding the Exchange, and
   (c) Holdco will be deemed the sole owner of the Membership Interest immediately
       after the Recapitalization.

(2) The Parent Group will be treated as remaining in existence immediately following the
    Exchange, with Holdco as the new common parent of the continuing group. Cf. Rev.
    Rul. 82-152, 1982-2 C.B. 205.

(3) The Restructuring will not represent a "material change" in the "operations" or
    "structure" of Parent within the meaning of section 833(c)(2)(C).

                                         Caveats

No opinion is expressed about the tax treatment of the Restructuring under other
provisions of the Code or regulations or the tax treatment of any conditions at the time
of, or effects resulting from, the Restructuring that are not specifically covered by the
above rulings. In particular, this office has not reviewed any information pertaining to,
and has made no determinations regarding, the federal income tax treatment of steps
(vi) and (vii) of the Restructuring.

                                         Procedural Statements

This ruling is directed only to the taxpayer who requested 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 income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement that provides the date and control number of the letter ruling.

Pursuant to the power of attorney on file with this office, a copy of this letter is being
sent to your authorized representative.

                                          Sincerely,


                                          _____________________________
                                          Jonathan R. Neuville
                                          Senior Technician Reviewer, Branch 4
                                          Office of Associate Chief Counsel (Corporate)




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