Guaranty funds qualify as creditors in bankruptcy stock issuance

Plain-English summary

A bankrupt parent planned to end its existence while an insolvent subsidiary continued a court-supervised liquidation. State guaranty funds had paid claims against the subsidiary and, under state law, acquired the claimants' rights. The proposed transaction would redeem the parent's shares and issue new subsidiary shares to participating funds in cancellation of debt they held. The IRS ruled that the subsidiary was under court jurisdiction in a title 11 or similar case for purposes of IRC § 382(l)(5). It also ruled that the claim transfers were qualified transfers and that the participating funds would receive the new stock as creditors, with the stock meeting the stated section 1504 ownership requirements.

Ruling snapshot

• Question: Would the insolvent subsidiary and participating guaranty funds satisfy the stated creditor and ownership requirements of IRC § 382(l)(5)?
• Outcome: approved
• Key authorities: IRC §§ 382(l)(5), 368(a)(3)(A), and 1504(a)(2); Treas. Reg. § 1.382-9

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 201648004                                            Third Party Communication: None
Release Date: 11/25/2016                                     Date of Communication: Not Applicable
Index Number: 382.01-00, 382.12-08
                                                             Person To Contact:
----------------------------                                 -------------------, ID No. ------------------
--------------                                               Telephone Number:
------------------------------------------                   ----------------------
------------------------------------                         Refer Reply To:
------------------------------------                         CC:CORP:B01
                                                             PLR-107142-16
                                                             Date:
                                                             August 23, 2016


Legend

Parent                  = ---------------------------------------------------------------------------------------
                          ---------------------------------------------------------------------------------------
                          --------------------------------

LossCo                  = ---------------------------------------------------------------------------------------
                          ---------------------------------------------------------------------------------------
                          --------------------------------------

Court                   = ----------------------------------------------------

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

Fund                    = ---------------------------------------------------------------------------------------
                          ----------------------

Claims                  = ---------------------------------------------------------------------------------------
                          -----------------------------

Participating           = ---------------------------------------------------------------------------------------
Funds                     ---------------------------------------------------------------------------------------
                          ------------------------------------------------------

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

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

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

Date 4                  = ----------------------------
PLR-107142-16                               2

a                      = --------------

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

c                      = --------------

d                      = -----

e                      = --

f                      = ----

g                      = --------


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

This letter responds to your March 2, 2016 request, submitted by your authorized
representatives, for rulings on certain U.S. federal income tax consequences of a
proposed transaction (the “Proposed Transaction,” as described below). The material
information submitted in that request and in subsequent correspondence is summarized
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. 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.


                                          FACTS

Parent Corporation (the “Parent”) is a holding company that wholly owns LossCo, which
is engaged in Business A. Parent and LossCo are members of an affiliated group of
corporations (the “Group”) that file a consolidated federal income tax return. Parent
filed for title 11 bankruptcy on Date 1, and on Date 3, pursuant to the bankruptcy
reorganization, Parent became the common parent of the Group. On Date 2, LossCo
was placed under the Order of Liquidation by Court.

Fund, established under state law (by all states), provides the means for payment on
Claims against insolvent entities engaged in certain specified businesses, including
Business A. Since Date 2, pursuant to the laws of each state in which LossCo
operates, the Funds have been paying certain LossCo claims. Under state law, the
claimants receiving payments from the Funds are treated as assigning their claims
PLR-107142-16                                  3

against LossCo to the paying Funds. In other words, the paying Funds become
subrogated to the rights of such claimant.

Since filing for bankruptcy, Parent continued in existence pending resolution of certain
matters that have now been resolved. Consequently, Parent plans to wind-down its
operations and terminate its existence. However, LossCo still has significant ongoing
activities in connection with its plan of liquidation. As of Date 4, LossCo has estimated
assets of $a, including estimated invested assets of $b, and estimated liabilities of $c;
LossCo’s liabilities exceeds the value of its assets.


                               PROPOSED TRANSACTION

The taxpayer proposed the following transaction to allow Parent to terminate its
existence while LossCo continues to wind down its business under its plan of
liquidation.

(i)     LossCo will recapitalize to reduce the total number of LossCo shares to d, all of
        which will be common stock and will be held by Parent.

(ii)    LossCo will redeem all of its outstanding shares from Parent for $e.

(iii)   LossCo will issue f new shares to each of the Participating Funds in cancellation
        of $g of indebtedness held by each of the Participating Funds (collectively, the
        “Cancelled Debt”). LossCo will issue d new shares in total to the Participating
        Funds.

Steps (ii) and (iii) will occur on the same day.


                                   REPRESENTATIONS

(a)     LossCo will not make an election under § 382(l)(5)(G) to preclude the application
        of § 382(l)(5).

(b)     LossCo has no knowledge that Parent has undergone an ownership change
        under § 382 since the effective date of the bankruptcy restructuring on Date 3.

(c)     LossCo has no knowledge of any beneficial owner of LossCo indebtedness that
        is a corporation or other entity that had an ownership change on any day during
        the applicable period where the indebtedness represents more than 25 percent
        of the fair market value of the total gross assets (excluding cash or cash
        equivalents) of such beneficial owner on its change date and the beneficial owner
PLR-107142-16                                4

      is a five-percent entity immediately after the ownership change of the loss
      corporation (determined by applying the rules of § 1.382-9(d)(4)).

(d)   LossCo will be under the jurisdiction of the Court immediately prior to the
      effective date of the Proposed Transaction and the Proposed Transaction will
      occur pursuant to an order of the Court approving the Proposed Transaction.

(e)   The Cancelled Debt is indebtedness which arose in the ordinary course of the
      trade or business of LossCo as described in § 382(l)(5)(E)(ii) and § 1.382-
      9(d)(2)(iv).

(f)   The Proposed Transaction will result in an ownership change as defined under
      § 382(g).

(g)   Upon completion of LossCo’s plan of liquidation, LossCo will terminate its
      existence and no entity will succeed to any of LossCo’s tax attributes.


                                        RULINGS

Based solely on the information submitted and the representations set forth above, and
assuming the requirements of section 382(l)(5) is otherwise met, we rule as follows:

1.    LossCo is under the jurisdiction of a court in a title 11 or similar case within the
      meaning of §§ 382(l)(5) and 368(a)(3)(A).

2.    The transfer of the Cancelled Debt from the claimholders to the Participating
      Funds as a result of payments on such claims by the Participating Funds is a
      “qualified transfer” under § 1.382-9(d)(5)(ii)(G).

3.    For purposes of § 382(l)(5)(A)(ii) and § 1.382-9(b)(2), the Participating Funds will
      be treated as receiving the new LossCo stock in their capacity as creditors of
      LossCo.

4.    On the effective date of the Proposed Transaction, the Participating Funds will be
      treated as owning LossCo stock which meets the requirements of § 1504(a)(2),
      under § 382(l)(5)(A)(ii).


                                        CAVEATS

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax treatment of the proposed transaction under any provision of the Code and
regulations or the tax treatment of any condition existing at the time of, or effects
PLR-107142-16                                  5

resulting from the proposed transaction that is not specifically covered by the above
rulings.


                              PROCEDURAL STATEMENTS

This letter is directed only to the taxpayer who requested 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 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.

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



                                        Sincerely,

                                        _Mark S. Jennings______________
                                        Mark S. Jennings
                                        Senior Technician Reviewer, Branch 1
                                        (Corporate)




cc: