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Ezel / IRS Rulings / 201820002
Private Letter Ruling 201820002 Released May 18, 2018 Approved

Post-merger stock contributions preserved parent-stock treatment

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This page covers one taxpayer's ruling from 2018, which can't be cited as precedent. Ezel answers your situation under the current Code and IRS guidance, with citations.

Currency note: this determination was released in 2018
Statutory amendments, regulation changes, court decisions, or later IRS guidance may have changed the analysis since then. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, threshold, or position mentioned here.
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.
View official IRS release (PDF)

Plain-English summary

A publicly traded parent acquired a target in a merger, paying parent stock and other consideration, with additional contingent earn-out consideration tied to milestones. The parent then planned to contribute the target stock through several entities in its affiliated group to integrate the target into the group. The IRS ruled that those post-merger contributions would not prevent earn-out consideration paid in parent voting stock from qualifying as stock of the corporation that controlled the merged corporation under Sections 368(a)(1)(A) and 368(a)(2)(E). The ruling did not decide whether the merger itself qualified as a reorganization or whether the earn-out provisions affected that qualification.

Ruling snapshot

  • Question: Would the proposed downstream contributions of target stock prevent parent voting stock used for the earn-out from receiving the required controlling-corporation stock treatment?
  • Outcome: Approved as to the discrete issue presented.
  • Key authorities: IRC §§ 368(a)(1)(A) and 368(a)(2)(E); Rev. Proc. 84-42; Rev. Proc. 77-37.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201820002 Third Party Communication: None
Release Date: 5/18/2018 Date of Communication: Not Applicable
Index Number: 368.01-00, 368.01-02
Person To Contact:
---------------------- -------------------------, ID No. -----------------
--------------------------- ----------------------------------------------------
----------------------------------------------- Telephone Number:
-------------------------------------- ----------------------
-------------------------------------- Refer Reply To:
CC:CORP:3
PLR-120991-17
Date:
February 22, 2018

Legend

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

Merger-Sub = ----------------------------

Target = ------------------------------

Corp 1 = -----------------------------------------------------------------------

-----------------------------------------------------------------------------

Corp 2 = --------------------------------------------------------------

Corp 3 = ------------------------------------------------

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

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PLR-120991-17 2

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

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Corp 4 = -----------------------------

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Country A = --------

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

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

a = --------

b = --------

c = -----

d = ---------------

e = ---------------

Agreement = -----------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------

Earn-Out Period = ------------------------------------------------------------------------
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---------------------------

Milestone A = ------------------------------------------------------------------------
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PLR-120991-17 3

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Milestone B = ------------------------------------------------------------------------
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Milestone C = ------------------------------------------------------------------------
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Milestone D = -----------------------------------------------------------------------
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-----------------

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

PLR-120991-17 4

This letter responds to your letter dated June 30, 2017, submitted by your authorized
representative, requesting a ruling under section 368(a)(1)(A) and section 368(a)(2)(E)
of the Internal Revenue Code (Code). The information provided in that request and in
subsequent correspondence 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.

                                 Summary of Facts

Parent is the publicly traded common parent of an affiliated group, the includible
corporations of which join in the filing of a consolidated Federal income tax return.
Parent owns all of the stock of Merger-Sub and Corp 1. Corp 1 owns all of the stock of
Corp 2. Corp 2 owns all of the stock of Corp 3. Corp 3 owns all of the interests in LLC
1 and LLC 2, and a percent of the stock of Corp 4. LLC 1 and LLC 2 are each
disregarded entities for Federal income tax purposes. LLC 1 owns b percent of Corp 4
and LLC 2 owns c percent of Corp 4.

Under an Agreement and Plan of Merger, entered into on Date 1 (the “Agreement”) by
Parent, Merger-Sub, and Target, pursuant to Country A law, Merger-Sub merged with
and into Target, with Target surviving (the “Merger”). On Date 2, Target’s shareholders
received Parent stock and additional consideration in exchange for their Target stock
worth $d. The Agreement provides for additional contingent consideration (“Earn-Out
Consideration”) not to exceed $e upon the achievement of Milestone A, Milestone B,
Milestone C, or Milestone D during the Earn-Out Period.

                               Proposed Transaction

Parent is entering into the Proposed Transaction in order to integrate Target within other
members of its affiliated group. The relevant steps of the Proposed Transaction are set
forth below:

(i) Parent will contribute all of the stock of Target to Corp 1.

(ii) Corp 1 will contribute all of the stock of Target to Corp 2.

(iii) Corp 2 will contribute all of the stock of Target to Corp 3.

(iv) Corp 3 will contribute a percent of the stock of Target to Corp 4, b percent to
LLC 1, and c percent to LLC 2. LLC 1 and LLC 2 will each contribute the stock of
Target that it received from Corp 3 to Corp 4.

PLR-120991-17 5

                                 Representations

Parent makes the following representations with respect to the Proposed Transaction:

1. Without taking into account the Proposed Transaction, the Merger satisfied all
  the statutory and regulatory requirements to qualify as a reorganization under
  section 368(a)(1)(A) by reason of section 368(a)(2)(E).

2. At all times during the Earn-Out Period, the portion of the Earn-Out Consideration
  that will be paid in the form of Parent voting stock will never be less than 80
  percent of the total Earn-Out Consideration.

                                       Ruling

The Proposed Transaction will not prevent the Earn-Out Consideration that is Parent
voting stock from qualifying under sections 368(a)(1)(A) and 368(a)(2)(E) as stock of a
corporation which before the merger was in control of the merged corporation.

                                      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, including whether the Merger qualifies as a reorganization under section
368(a) of the Code.

Specifically, no opinion is expressed concerning the effect of the Earn-Out
Consideration, and the provisions of the Agreement pertaining thereto, on the
qualification of the Merger as a reorganization, within the meaning of section 368(a). In
this regard, it is noted that these provisions do not meet certain requirements for private
letter rulings, as set forth in section 2.01 of Rev. Proc. 84-42, 1984-2 C.B. 521,
amplifying Rev. Proc. 77-37, 1977-2 C.B. 568.

                             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 representatives.

PLR-120991-17 6

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.

                                   Sincerely,



                                   Mark J. Weiss
                                   Chief, Branch 2
                                   Office of Associate Chief Counsel (Corporate)

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