Cash used in acquisition does not defeat active-business rule

Plain-English summary

A public corporation acquired an unrelated target in a reorganization using its own stock and cash. The target owned a subsidiary that planned to separate three businesses into newly formed controlled corporations and distribute their stock up to the acquirer's disregarded subsidiary. Because the proposed distributions would occur within five years of the acquisition, the taxpayer requested a ruling on a discrete part of the active trade or business rule in IRC § 355(b)(2)(D). Assuming the provision's other requirements were met, the IRS ruled that the acquirer's use of cash in the earlier acquisition would not prevent it from being a qualifying distributee corporation. The IRS expressed no opinion on the overall tax consequences of the proposed transactions.

Ruling snapshot

• Question: Did the cash used in the prior acquisition prevent the parent from qualifying as a distributee corporation under IRC § 355(b)(2)(D)(ii)?
• Outcome: Approved, assuming the other requirements of IRC § 355(b)(2)(D) were met
• Key authorities: IRC §§ 355(b)(2)(D), 356, 362(b), 368(a)(1)(A); Rev. Proc. 2015-1

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201551005 Third Party Communication: None
Release Date: 12/18/2015 Date of Communication: Not Applicable
Index Number: 355.03-00
Person To Contact:
---------------------------------- -------------------------, ID No. -------------
----------------------------- Telephone Number:
-------------------- ---------------------
---------------------- Refer Reply To:
CC:CORP:B04
------------------------------------------------------------ PLR-111191-15
----------------------- Date:
September 16, 2015

LEGEND

Parent = ---------------------------------------------------------------------------------------------------
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Distributing = ---------------------------------------------------------------------------------------------------
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Controlled 1 = ---------------------------------------------------------------------------------------------------
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Controlled 2 = ---------------------------------------------------------------------------------------------------
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Controlled 3 = ---------------------------------------------------------------------------------------------------
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DRE 1 = ---------------------------------------------------------------------------------------------------
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Target = ---------------------------------------------------------------------------------------------------
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Business A = ---------------------------------------------------------------------------------------------------
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Business B = ---------------------------------------------------------------------------------------------------
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PLR-111191-15 2

Business C = ---------------------------------------------------------------------------------------------------
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State D = -------------

State E = ----------------

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

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

   This letter responds to your letter dated March 26, 2015, requesting a ruling under

section 355 of the Internal Revenue Code (the “Code”) with respect to the proposed
transactions described below (the “Proposed Transactions”). The information submitted 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 ruling, it is subject to verification on examination.

   This letter and the ruling contained herein are issued pursuant to section 6.03 of Rev.

Proc. 2015-1, 2015-1 I.R.B. 1, 17, regarding a significant issue under section 355, and only
addresses a discrete legal issue involved in the Proposed Transactions. This Office expresses
no opinion as to the overall tax consequences of any the transactions described in this letter,
or as to any issues not specifically addressed by the ruling below.

                                                   FACTS

   Parent, a publicly traded State D corporation, is the common parent of an affiliated

group that files a consolidated federal income tax return, and the common parent of a
worldwide group (the “Parent Group”). Parent owns 100 percent of the equity interests of DRE
1, a State D limited liability company, which since its formation has been disregarded as
separate from Parent for federal income tax purposes under Treas. Reg. § 301.7701-3.

   On Date 1, Target, an unrelated State D corporation, owned 100 percent of the equity

interests of Distributing, a State E corporation. Pursuant to a Date 1 agreement by and among
Target, Distributing, Parent, DRE 1, and certain other parties (the “Merger Agreement”), Target
merged with and into DRE 1, with DRE 1 surviving and continuing as a wholly owned
subsidiary that is disregarded as separate from Parent for federal income tax purposes under
section 301.7701-3. Pursuant to the Merger Agreement, each share of Target stock issued
and outstanding immediately prior to the effective date of the merger was exchanged for a
specified amount of Parent stock and cash (the “Acquisition”).
PLR-111191-15 3

                            PROPOSED TRANSACTIONS

    For what are represented as valid business purposes, the parties propose to undertake

the following Proposed Transactions within five years of Date 1, pursuant to an overall plan
and in the order set forth below:

  1)     Distributing will form domestic corporations Controlled 1, Controlled 2, and
         Controlled 3.

  2)     Distributing will transfer the assets related to Business A to Controlled 1 in
         exchange solely for all of the stock of Controlled 1 and Controlled 1’s assumption
         of liabilities associated with such assets.

  3)     Distributing will transfer the assets related to Business B to Controlled 2 in
         exchange solely for all of the stock of Controlled 2 and Controlled 2’s assumption
         of liabilities associated with such assets.

  4)     Distributing will transfer the assets related to Business C to Controlled 3 in
         exchange solely for all of the stock of Controlled 3 and Controlled 3’s assumption
         of liabilities associated with such assets.

  5)     Distributing will distribute all of the stock of Controlled 1, Controlled 2, and
         Controlled 3 to DRE 1.

                                     REPRESENTATIONS

  a)     The Acquisition qualified as a reorganization under section 368(a)(1)(A) of the
         Code, whereby:

         1. Target recognized no gain or loss on the transfer of all its assets to DRE 1 in
            exchange for Parent stock, cash, and DRE 1’s assumption of, or taking
            property subject to, Target’s liabilities;

         2. Target recognized no gain or loss on the distribution of Parent stock and cash
            to Target’s shareholders;

         3. Immediately after the Acquisition, Parent’s basis in Target’s assets, including
            the stock of Distributing, was equal to (and determined in whole by reference
            to) Target’s basis in such assets immediately before the Acquisition pursuant
            to section 362(b) of the Code; and

         4. As part of the Acquisition, Target distributed all of the cash and Parent stock
            received to its shareholders, and each Target shareholder recognized gain,

PLR-111191-15 4

              but not loss, to the extent of the cash received in the Acquisition pursuant to
              section 356 of the Code.

   b)     Parent has no plan or intention to distribute to its shareholders any of the stock of
          Distributing, Controlled 1, Controlled 2, or Controlled 3, or any successor to such
          entities.

                                             RULING

   Assuming section 355(b)(2)(D) would otherwise be satisfied, the use of cash by Parent

in the Acquisition will not prevent Parent from being a distributee corporation described in
section 355(b)(2)(D)(ii).

                                            CAVEATS

   Except as expressly stated in the ruling section herein, no opinion is expressed or

implied concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in 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.

   In accordance with the Power of Attorney on file with this office, a copy of this letter is

being sent to your authorized representative.

    Temporary or final regulations pertaining to the issue addressed in this ruling have not

yet been adopted. Therefore, this ruling will be modified or revoked by the adoption of
temporary or final regulations, to the extent the regulations are inconsistent with any
conclusion in the letter ruling. See section 11.04 of Rev. Proc. 2015-1, 2015-1 I.R.B. 1, 59.
However, when the criteria in section 11.06 of Rev. Proc. 2015-1, 2015-1 I.R.B. 1, 60, are
satisfied, a ruling is not revoked or modified retroactively except in rare or unusual
circumstances. See section 11.07 of Rev. Proc. 2015-1, 2015-1 I.R.B. 1, 61.
PLR-111191-15 5

    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 (PLR-111191-
15) of the letter ruling.

                                  Sincerely,


                                  _______________________________
                                  Kevin M. Jacobs
                                  Senior Technician Reviewer, Branch 4
                                  (Corporate)