Private Letter Ruling
201848016
Released November 30, 2018
Approved
Corporate split-up among disputing shareholders qualifies under section 355
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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.
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
Serious disputes among a corporation's seven shareholders were harming business operations. The corporation proposed distributing four controlled subsidiaries to different shareholder groups in exchange for all of their parent-company stock, followed by liquidation of the parent. The IRS ruled that the shareholders and distributing corporation would recognize no gain or loss on the four distributions under section 355. The ruling also addressed stock basis, holding periods, earnings and profits, and recognition of deferred intercompany gain, while expressly declining to decide the business-purpose, device, and acquisition-plan requirements.
Ruling snapshot
- Question: Would the four-way split-up of the corporation among its shareholders qualify for nonrecognition under section 355?
- Outcome: Approved, subject to the submitted facts, representations, and stated caveats.
- Key authorities: IRC §§ 355, 358, 312(h), and 1223(1); Treas. Reg. §§ 1.358-2, 1.312-10, 1.1502-13, and 1.1502-33
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 201848016 Third Party Communication: None
Release Date: 11/30/2018 Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-02
Person To Contact:
----------------------- -------------------------, ID No. -----------------
------------ ----------------------------------------------------
---------------------------------- Telephone Number:
--------------------------------- -------------------
-------------------------- Refer Reply To:
CC:CORP:B05
PLR-136863-17
Date:
June 04, 2018
Legend
Distributing = -------------------------------------------
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Controlled 1 = -----------------------------------------------
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Controlled 2 = -------------------------------
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Controlled 3 = ------------------------------------------------------------
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Controlled 4 = -------------------------------------------
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Shareholder A = --------------------------------------------------------------------------------
-----------
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Shareholder B = ---------------------------------
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Shareholder C = --------------------------------
PLR-136863-17 2
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Shareholder D = ------------------------------
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Shareholder E = ---------------------------------
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Shareholder F = ------------------------------
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Shareholder G = ---------------------------------
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a = -----
b = -----
c = --------
d = -------
e = -----
f = -----
g = ---
State A = --------
Business A = --------------------------------------------------------------------------------
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Business B = --------------------------------------------------------------------------------
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Business C = --------------------------------------------------------------------------------
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PLR-136863-17 3
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Business D = --------------------------------------------------------------------------------
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Date 1 = -----------------
Year 1 = ------
Dear ---------------:
This letter ruling responds to your letter dated December 5, 2017, submitted by your
authorized representative, requesting rulings on certain U.S. federal income tax
consequences of a proposed transaction (described below) (the “Proposed
Transaction”). The information provided in that request and in later correspondence is
summarized below.
This letter ruling is issued pursuant to Rev. Proc. 2017-52, 2017-41 I.R.B. 283 regarding
one or more “Covered Transactions” under section 355 of the Internal Revenue Code
(the “Code”). This Office expresses no opinion as to any issue not specifically
addressed by the rulings below.
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 an
appropriate party. This Office has not verified any of the materials submitted in support
of the request for rulings. Verification on the information, representations, and other
data may be required as part of the audit process.
This Office has made no determination regarding whether any of the Distributions (as
defined below): (i) satisfy the business purpose requirement of Treas. Reg. § 1.355-
2(b); (ii) is used principally as a device for the distribution of the earnings and profits of
the distributing corporation or the controlled corporation or both (see section
355(a)(1)(B) and Treas. Reg. § 1.355-2(d)); or (iii) is part of a plan (or series of related
transactions) pursuant to which one or more persons will acquire directly or indirectly
stock representing a 50-percent or greater interest in any of the controlled corporations,
or any successor of a controlled corporation, within the meaning of Treas. Reg. § 1.355-
8T (see section 355(e)(2)(A)(ii) and Treas. Reg. § 1.355-7).
Summary of Facts
Distributing is a State A corporation. Distributing’s single class of common stock is
owned as follows: Shareholder A owns a%; Shareholder B owns b%; Shareholder C
PLR-136863-17 4
owns b%; Shareholder D owns c%; Shareholder E owns c%; Shareholder F owns d%;
and Shareholder G owns d%. Collectively, Shareholder A, Shareholder B, Shareholder
C, Shareholder D, Shareholder E, Shareholder F, and Shareholder G are referred to as
the “Shareholders”.
Shareholder B and Shareholder C are siblings. Shareholder D, Shareholder E,
Shareholder F, and Shareholder G are siblings. Shareholder B, Shareholder C,
Shareholder D, and Shareholder E are the four members of Distributing’s board of
directors.
Prior to the transaction at issue, Distributing formed Controlled 1, Controlled 2, and
Controlled 3, each a State A corporation, and contributed a portion of its assets to each
controlled corporation. Distributing owns all of the single class of common stock of each
of Controlled 1, Controlled 2, and Controlled 3.
Distributing filed a consolidated tax return for Year 1 and all subsequent years as the
common parent of an affiliated group of corporations that includes Controlled 1,
Controlled 2, and Controlled 3 (the “Distributing Group”).
On Date 1, Distributing formed Controlled 4, a State A corporation (together with
Controlled 1, Controlled 2, and Controlled 3, the “Controlled Corporations”). As part of
the formation of Controlled 4, Distributing caused Controlled 1 to transfer assets used in
Business D to Controlled 4. In exchange, Controlled 4 issued all of its single class of
common stock to Distributing. Controlled 4 has been a member of the Distributing
Group since its formation.
The transfer of Business D assets from Controlled 1 to Controlled 4 caused Controlled 1
to recognize gain under § 311(b) that was deferred under Treas. Reg. § 1.1502-13 (the
“Deferred Gain”).
Controlled 1 is engaged in Business A and was engaged in Business D prior to Date 1.
Controlled 2 is engaged in Business B. Controlled 3 is engaged in Business C.
Controlled 4 is engaged in Business D.
Distributing has submitted financial information indicating that Business A, Business B,
Business C, and Business D have had gross receipts and operating expenses
representing the active conduct of a trade or business for each of the past five years.
Distributing has no assets other than stock in each of the Controlled Corporations.
Distributing and each of the Controlled Corporations use the cash method of
accounting.
PLR-136863-17 5
Proposed Transaction
Serious disputes arose among the Shareholders, which adversely affected the business
operations of Distributing. To eliminate the Shareholder disputes, Distributing has
proposed the following transactions (the “Distributions”):
(i) Distributing will distribute all of the stock of Controlled 1 to Shareholder A,
Shareholder B, and Shareholder C, in exchange for all of their stock in
Distributing (“Distribution 1”).
(ii) Distributing will distribute all of the stock of Controlled 4 to Shareholder D, in
exchange for all of Shareholder D’s stock in Distributing (“Distribution 2”).
(iii) Distributing will distribute all of the stock of Controlled 2 to Shareholder E, in
exchange for all of Shareholder E’s stock in Distributing (“Distribution 3”).
(iv) Distributing will distribute all of the stock of Controlled 3 to Shareholder F and
Shareholder G, in exchange for all of their stock in Distributing (“Distribution 4”).
(v) Immediately after the Distributions, Distributing will liquidate.
Immediately after the Distributions, Shareholder A will own approximately e% of the
stock of Controlled 1, Shareholder B will own approximately f% of the stock of
Controlled 1, and Shareholder C will own approximately f% of the stock of Controlled 1.
Shareholder D will own all of the stock of Controlled 4. Shareholder E will own all of the
stock of Controlled 2. Shareholder F will own g% of the stock of Controlled 3, and
Shareholder G will own g% of the stock of Controlled 3.
Representations
With respect to each of the Distributions, except as set forth below, Distributing
has made all of the representations in section 3 of the Appendix to Rev. Proc. 2017-52,
2017-41 I.R.B. 283.
(1) Distributing has made the following alternative representations set forth in
section 3 of the Appendix to Rev. Proc. 2017-52:
Representations 3(a); 8(a); 11(a); 15(a); 31(a); 41(a).
(2) Distributing has not made the following representations, which do not apply to
the Proposed Transaction:
Representations 4; 5; 6; 17; 18; 19; 20; 21; 22; 25; 26; 39; 40; 46.
PLR-136863-17 6
(3) Distributing has made the following modified representation:
Representation 36: Immediately before the Distribution, items of income,
gain, loss, deduction, and credit will be taken into account as required by
the applicable intercompany transaction regulations. Specifically,
Controlled 1 will recognize the Deferred Gain when either Controlled 1 or
Controlled 4 ceases to be a member of the Distributing Group.
Rulings
Based solely on the information and representations submitted, we rule as follows on
each of the Distributions:
(1) The Shareholders will not recognize gain or loss (and no amount will be
otherwise included in income) upon the receipt of the Controlled stock. § 355(a).
(2) Distributing will not recognize gain or loss upon the distribution of the Controlled
stock to the Shareholders. § 355(c)(1).
(3) The aggregate basis of the Controlled stock received by each Shareholder
immediately after the distribution will equal the Shareholder’s aggregate basis in
the Distributing stock surrendered in the distribution, allocated in the manner
described in Treas. Reg. § 1.358-2. See § 358(a) and (b).
(4) The holding period of the Controlled stock received by each Shareholder will
include the holding period of the Distributing stock with respect to which the
distribution of the Controlled stock is made, provided that the Distributing stock is
held as a capital asset on the date of the distribution. § 1223(1).
(5) Earnings and profits, if any, will be allocated between Distributing and each of
Controlled in accordance with § 312(h), Treas. Reg. §§ 1.312-10(b) and 1.1502-
33(e).
(6) The Deferred Gain will be taken into account as a result of the Distributions.
Treas. Reg. § 1.1502-13(d).
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
resulting from, the Proposed Transaction that is not specifically addressed by this letter.
PLR-136863-17 7
Procedural Statements
This ruling letter 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.
A copy of this letter should be attached to the federal income tax return of each
taxpayer involved for the taxable year in which the transaction covered by this ruling
letter is consummated. 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 this letter ruling.
In accordance with the power of attorney on file with this Office, a copy of this letter is
being sent to your authorized representative.
Sincerely,
_William W. Burhop____
William W. Burhop
Senior Technician Reviewer, Branch 5
Office of Associate Chief Counsel (Corporate)
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