Private Letter Ruling
201625012
Released June 17, 2016
Approved
A split-off and related merger cleared five discrete tax issues
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This page covers one taxpayer's ruling from 2016, which can't be cited as precedent. Ezel answers your situation under the current Code and IRS guidance, with citations.
Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.
About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.
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Plain-English summary
A corporate group proposed placing cash and interests in operating entities into a new subsidiary, then distributing all of that subsidiary's stock to one shareholder in exchange for the shareholder's stock in the parent. The IRS ruled that section 355(g)'s investment-asset limitation would not apply to the exchange. It also treated the group's acquisition and integration of a subsidiary business as an expansion of its existing business, allowing the separated company to rely on indirectly conducted activities for section 355's active-business requirement. The remaining shareholder's increased proportionate interest would not count as an acquisition of parent stock under section 355(e). A related merger would not lose its section 368(a)(1)(A) status or be recharacterized because of the specified contributions. The letter addressed only these discrete issues and did not rule that the exchange or merger satisfied every requirement of sections 355 and 368.
Ruling snapshot
- Question: Would the proposed split-off and related merger clear the specified section 355 and section 368 issues?
- Outcome: Approved on five discrete issues, subject to the transactions otherwise qualifying
- Key authorities: IRC §§ 355(b), 355(e), 355(g), and 368(a)(1)(A); Treas. Reg. §§ 1.355-3(b)(3)(ii) and 1.368-2(k)
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 201625012 Third Party Communication: None
Release Date: 6/17/2016 Date of Communication: Not Applicable
Index Number: 355.01-01, 355.02-00,
355.03-00, 368.01-00, Person To Contact:
368.08-08 ---------------------------,
ID No. ----------------
----------------------- Telephone Number:
--------------------------------------------------------- --------------------
--------- Refer Reply To:
---------------------------------- CC:CORP:B02
----------------------- PLR-129759-15
----------------- Date:
--------------------------------------- March 08, 2016
LEGEND
Distributing = ---------------------------------------
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Shareholder A = ---------------------------------
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Shareholder B = --------------------------------------------
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SplitCo = --------------------------
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Sub = ------------------------------------------------------
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PRS = -----------------------------------------------
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Party 1 = -------------------------------------------
PLR-129759-15 2
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Party 2 = ---------------------------------------
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Business = --------------------------------------------------------------------------------
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Business Adjunct = --------------------------------------------------------------------------------
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Sub Business = --------------------------------------------------------------------------------
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PRS Assets and = ---------------------------------------------------------------------------------
Activities ---------------------------------------------------------------------------------
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State = ------------
Governing = --------------------------------------------------------------
Documents ---------------------------------------------------------------------------------
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PLR-129759-15 3
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a = ---
b = ---
c = -------
d = ------
e = -------
f = --
g = ------
h = ------
i = ---
j = --
k = ------
l = -------
m = ---
Year 1 = ------
Year 2 = ------
Year 3 = ------
Date = ----------------------
Dear --------------:
This letter responds to your letter dated September 8, 2015, requesting rulings
on certain U.S. federal (“Federal”) income tax consequences of the Proposed
Transaction (defined below). The information provided in that letter and in later
correspondence is summarized below.
PLR-129759-15 4
The rulings contained in this letter are based on facts and representations
submitted by the taxpayer and accompanied by a penalties of perjury statement
executed by the 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 letter is issued pursuant to section 6.03 of Rev. Proc. 2016-1, 2016-1 I.R.B.
1, 18-19, regarding one or more significant issues under sections 355 and 368. The
rulings contained in this letter only address one or more discrete legal 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 rulings below.
Summary of Facts
Distributing has been engaged directly and through members of its separate
affiliated group within the meaning of Section 355(b) (a “SAG,” and Distributing’s SAG,
the “DSAG”) in the active conduct of Business throughout the five-year period ending on
the date of the Exchange (defined below, and such period, the “Five-Year Period”).
Shareholder A and Shareholder B directly own a percent and b percent, respectively, of
the issued and outstanding Distributing common stock (representing a and b percent,
respectively, of the total value and voting power of all Distributing stock outstanding).
No other classes or shares of Distributing stock are authorized or outstanding.
Sub is engaged directly in the active conduct of Sub Business. Historically,
Distributing, Party 1, and Party 2 owned c percent, d percent, and e percent,
respectively, of the issued and outstanding stock of Sub. In Year 1, Distributing
purchased all of Party 2’s stock of Sub (representing e percent of the outstanding stock
of Sub) and f-percent of the outstanding stock of Sub from Party 1. On Date, the
Governing Documents of Sub were amended to provide Distributing with the right to
elect m percent of Sub’s directors. Currently, Distributing owns g percent, and Party 1
owns the remaining h percent, of the issued and outstanding stock of Sub.
PRS, which is classified as a partnership for Federal tax purposes, was formed in
Year 2 and has owned and has been engaged in the PRS Assets and Activities
(together with Sub Business, “Business Adjunct”) since Year 3. Historically,
Distributing, Party 1, and Party 2 owned c percent, d percent, and e percent,
respectively, of the outstanding membership interests in PRS. In Year 1, Distributing
and one of its wholly owned corporate subsidiaries purchased Party 1’s and Party 2’s
entire membership interests in PRS. Currently, Distributing owns i percent, and its
wholly owned subsidiary owns the remaining j percent, of the membership interests in
PRS.
PLR-129759-15 5
Proposed Transaction
Distributing has undertaken or proposes to undertake the following steps (each a
“Step” and, collectively, the “Proposed Transaction”). To the extent the ordering of the
steps is neither (i) relevant to any of the requested rulings, nor (ii) otherwise explicitly
stated as between specific steps or a series of steps, steps may occur in a different
order vis-à-vis one another than the order set forth below.
(i) Distributing incorporated SplitCo.
(ii) Sub will contribute to a newly formed corporation (“Corp 1”) cash in an
amount equal to h percent of the agreed equity value of Sub (determined
without regard to the cash distributed by Sub in Step (iv) and by Sub LLC
in Step (vii)).
(iii) Corp 1 will contribute the cash received in Step (ii) to a newly formed
limited liability company (“LLC 1”), which will be disregarded as an entity
separate from its sole owner, Corp 1, for Federal tax purposes (a
“disregarded entity”).
(iv) Sub will redeem all of Party 1’s Sub stock in exchange for all of the stock
of Corp 1 and Party 1’s share of Sub’s cash in excess of the reasonable
needs of its business, including reasonable reserves for contingencies
relating to pending and potential litigation or otherwise (the “Redemption”).
(v) Distributing will contribute all of the issued and outstanding stock of Sub to
a newly formed corporation (“New Sub”) in exchange for stock of New
Sub.
(vi) Sub will convert under State law to a limited liability company (“Sub LLC”),
after which it will be a disregarded entity.
(vii) Sub LLC will distribute all of its remaining cash in excess of the
reasonable needs of its business, including reasonable reserves for
contingencies relating to pending and potential litigation or otherwise, to
New Sub.
(viii) New Sub will merge with and into a newly formed limited liability company
wholly owned by Distributing that is a disregarded entity (“New Sub LLC”),
with New Sub LLC surviving (the “Merger”).
(ix) New Sub LLC will distribute the cash received by New Sub in Step (vii)
and by New Sub LLC in Step (viii) to Distributing.
PLR-129759-15 6
(x) PRS will distribute its cash in excess of the reasonable needs of its
business, including reasonable reserves for contingencies relating to
pending and potential litigation or otherwise, pro rata to its members,
including Distributing.
(xi) Distributing will borrow cash from third party lenders based on its
independent debt capacity (the “Distributing Borrowing”).
(xii) Distributing will contribute to SplitCo (i) the proceeds of the Distributing
Borrowing; (ii) the cash received from New Sub LLC and PRS in Steps (ix)
and (x), respectively; (iii) an a-percent interest in New Sub LLC; and (iv) a
k-percent interest in PRS in exchange for actual or constructively issued
shares of SplitCo stock (the “SplitCo Contribution”).
(xiii) New Sub LLC will contribute all of the interests in Sub LLC to LLC 1 in
exchange for a g-percent interest in LLC 1 (the “LLC 1 Contribution”),
reducing Party 1’s interest in LLC 1 to h percent.
(xiv) LLC 1 will contribute the cash received in Step (iii) to Sub LLC to be used
in the operations of Sub Business, including to provide reasonable
reserves for contingencies relating to pending and potential litigation or
otherwise.
(xv) Distributing will distribute all of the stock of SplitCo to Shareholder A in
complete redemption of Shareholder A’s stock of Distributing (the
“Exchange”).
(xvi) Following the Exchange, (i) as part of its efforts to realize some of the
synergies anticipated as a result of the Proposed Transaction,
Shareholder B (and/or any of its direct or indirect, wholly owned entities)
may contribute assets to Distributing in exchange for Distributing equity for
Federal income tax purposes, and (ii) Distributing may recapitalize its
capital structure.
Representations
(a) The common stock of Distributing held by Shareholder A and Shareholder
B is the only equity of Distributing for Federal income tax purposes that
will have been outstanding from the time immediately prior to the time the
Proposed Transaction was first contemplated until the time of the
Exchange.
PLR-129759-15 7
(b) The common stock of Distributing held by Shareholder B will be the only
equity of Distributing for Federal income tax purposes outstanding
immediately after the Exchange.
(c) There is no plan or intent for Distributing to issue any equity for Federal
income tax purposes to any person other than Shareholder B (or any of its
direct or indirect, wholly owned entities) following the Exchange.
(d) There is no plan or intent for SplitCo to own, directly or indirectly, less than
an l-percent interest, by capital and profits, in each of PRS, New Sub LLC,
LLC 1, and Sub LLC following the Exchange.
Rulings
Based solely on the information submitted and the representations set forth
above, and provided that (i) the Exchange otherwise satisfies the requirements of
Section 355 or (ii) the Merger otherwise qualifies as a reorganization described in
Section 368(a)(1)(A), as applicable, we rule as follows:
(1) Section 355(g) will not apply to the Exchange.
(2) The acquisition by the DSAG of Sub Business, and the integration of Sub
Business with PRS Assets and Activities in the DSAG, during the Five-
Year Period will constitute an expansion of Business (the “Business
Expansion”), and not the acquisition of a new or different business, for
purposes of the active trade or business requirement of Section 355(b)
(the “ATB Requirement”). Treas. Reg. § 1.355-3(b)(3)(ii); Rev. Rul. 2003-
38, 2003-1 C.B. 811; and Rev. Rul. 2003-18, 2003-1 C.B. 467.
(3) SplitCo will not be precluded from relying on Business Adjunct that will be
conducted by LLC 1 (through Sub LLC) and PRS to satisfy the ATB
Requirement with respect to the Exchange because of (i) SplitCo’s indirect
ownership interest in LLC 1, (ii) the relative value of SplitCo’s indirect
interest in the assets of Business Adjunct as compared to the value of all
of the assets of SplitCo, (iii) the Business Expansion, or (iv) Distributing’s
continuing interest in Business Adjunct through its indirect ownership
interest in LLC 1 and its direct ownership interest in PRS following the
Exchange.
(4) Shareholder B’s increased proportionate interest in Distributing resulting
from the Exchange will not be taken into account as an acquisition of
Distributing stock for purposes of applying Section 355(e)(2)(A)(ii).
PLR-129759-15 8
(5) The Merger will not be disqualified as a reorganization described in
Section 368(a)(1)(A) or recharacterized as a result of the SplitCo
Contribution or the LLC 1 Contribution. Treas. Reg. § 1.368-2(k).
Caveats
Except as expressly provided 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 letter is directed only to the taxpayers who requested 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.
Temporary or final regulations pertaining to one or more of the issues 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.
2016-1, 2016-1 I.R.B. 1, 59. However, when the criteria in section 11.06 of Rev. Proc.
2016-1, 2016-1 I.R.B. 1, 60 are satisfied, a ruling is not revoked or modified retroactively
except in rare or unusual circumstances.
In accordance with the Power of Attorney on file with this office, a copy of this
letter is being sent to your authorized representatives.
Sincerely,
Gerald B. Fleming
Senior Technician Reviewer
Branch 2
Office of Associate Chief Counsel (Corporate)
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