Upstream merger satisfied business-continuity requirement

Plain-English summary

A holding company owned several classes of stock in an operating company, and the operating company itself held an interest in the holding company. The parties proposed a two-step merger in which an operating-company merger subsidiary would merge into the holding company, followed by the holding company’s merger into a disregarded LLC owned by the operating company. The IRS ruled that the continuity-of-business-enterprise requirement would be satisfied because the operating company would continue its historic business. Assuming the transaction otherwise qualified as a section 368(a)(1)(A) reorganization, the two-step form would be disregarded and treated as the holding company transferring all assets, including operating-company stock, for newly issued stock distributed to its shareholders. The IRS expressly did not rule that the overall transaction qualified as a reorganization.

Ruling snapshot

• Question: How would the proposed upstream merger be treated, and would it satisfy continuity of business enterprise?
• Outcome: the continuity requirement was satisfied and the merger form would be recast as an asset transfer and stock distribution, assuming reorganization status
• Key authorities: IRC § 368(a)(1)(A); Treas. Reg. §§ 1.368-1(d), 1.368-2(b); Rev. Rul. 85-197; Rev. Rul. 67-274; Rev. Rul. 2001-46

Full text (IRS public release)

Internal Revenue Service                                         Department of the Treasury
                                                                 Washington, DC 20224

Number: 201918015                                                Third Party Communication: None
Release Date: 5/3/2019                                           Date of Communication: Not Applicable
Index Number: 368.01-00, 368.08-06
                                                                 Person To Contact:
---------------------------                                      -------------------, ID No. ----------------
--------------------------------------------                     Telephone Number:
----------------------                                           --------------------
-------------------                                              Refer Reply To:
---------------------                                            CC:CORP:B05
                                                                 PLR-126636-18
                                                                 Date:
                                                                 January 30, 2019




Legend

HoldCo                     =         --------------------------
------------------------------------------------------------------------
----------------------------------------------------------

OpCo                       =         --------------------------
------------------------------------------------------------------------
----------------------------------------------------------

Class 1                    =        --------------------------------

Class 2                    =        --------------------------------------

Class 3                    =        ------------------------------------------

Class A                    =        ---------------------------------

Class B                    =        --------------------------------------

Class C                    =        --------------------------

a                          =        -----

b                          =        ------

c                          =        ------

d                          =        ------
PLR-126636-18                                             2

e                          =        ------

f                          =        ------

g                          =        ---

h                          =        ---

i                          =        --

State A Law                =        ----------------------------------------

State B Act                =        ----------------------------------------------------

State A                    =        -----------------

State B                    =        -------------

Shareholder 1              =         --------------------------------------------
------------------------------------------------------------------------------
----------------------------------------------------------

Shareholder 2              =        -----------------------------------

Shareholder 3              =        ---------------------------------------

Shareholder 4              =        ----------------------------------------------

Shareholder 5              =        ----------------------------------------------

Shareholder A              =        ---------------------------------------------------------------

Shareholder B              =        ---------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------


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

This letter responds to your letter dated August 31, 2018, requesting rulings on certain
federal income tax consequences of a proposed transaction. The information
submitted in that letter and 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
PLR-126636-18                                3

executed by an 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. 2018-1, 2018-1, I.R.B. 1,
regarding one or more significant issues under section 368 of the Internal Revenue
Code (the “Code”). 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

OpCo has three classes of stock issued and outstanding: Class 1, Class 2 and Class 3.
HoldCo owns a percent of Class 1. In addition, HoldCo owns approximately b percent
of Class 2 and approximately d percent of Class 3. The remaining approximate c
percent of Class 2 is owned by directors, management, OpCo’s savings plan and other
shareholders, and the remaining approximate e percent of Class 3 is owned by OpCo’s
savings plan.

HoldCo has three classes of stock issued and outstanding: Class A, Class B, and Class
C. Shareholder 1 owns a percent of Class A. Shareholder 2, Shareholder 3,
Shareholder 4 and Shareholder 5 each owns approximately g percent of Class B.
Shareholder 2, Shareholder 3, Shareholder 4, Shareholder 5 and OpCo each owns
approximately h percent of Class C.

Prior to the Proposed Transaction (defined below), Holdco will issue new Class A
Shares to Shareholder A. Immediately thereafter Holdco will reacquire all of its Class A
Shares owned by Shareholder 1, and Shareholder 1 will dissolve such that Shareholder
A will own a percent of the HoldCo Class A shares. Thereafter, each of Shareholder A,
Shareholder 2, Shareholder 3, Shareholder 4 and Shareholder 5 will transfer all of its
HoldCo stock to Shareholder B in exchange for interests in Shareholder B. All of the
assets other than the OpCo stock held by HoldCo will be distributed by HoldCo, such
that at the time of the Proposed Transaction HoldCo will own only OpCo stock (except
for an amount of cash reasonably necessary to settle its liabilities).

                                Proposed Transaction

For what have been represented to be valid business purposes, the following steps
have been proposed (the “Proposed Transaction”):

(i) OpCo will form a State A corporation, 100 percent owned by OpCo (“Merger Sub”).
Prior to the First Merger (defined below), Merger Sub will engage in no activities and
hold no assets (other than minimum capital required by state law).
PLR-126636-18                                4


(ii) OpCo will form a State B limited liability company, 100 percent owned by OpCo, that
is disregarded for U.S. federal tax purposes (“Acquiror LLC”, together with OpCo, the
“OpCo Transferee Unit”).

(iii) Pursuant to State A Law, Merger Sub will merge with and into HoldCo with HoldCo
surviving (the “First Merger”) and in the First Merger, all of the shares of HoldCo’s Class
A stock will be converted into i newly issued shares of OpCo Class 1 stock, and all of
the shares of HoldCo’s Class B and Class C stock (other than shares owned by OpCo)
will be converted into the right to receive a number of shares of OpCo Class 2 and
Class 3 stock, in each case, as would result in Shareholder B, after completing the First
Merger, having approximately the same economic interest in OpCo as immediately
before the First Merger.

(iv) Pursuant to State A Law and the State B Act, HoldCo will merge with and into
Acquiror LLC, at which time the separate existence of HoldCo will cease, and all of the
HoldCo stock will be converted into the right to receive Acquiror LLC member interests.

As a result of its ownership of HoldCo stock, Shareholder B will hold a percent of the
voting stock in OpCo and approximately f percent of the fair market value of the OpCo
stock outstanding immediately after the Proposed Transaction.

                                    Representations

(a) The fair market value of the OpCo stock received by Shareholder B in the First
Merger will be approximately equal to the fair market value of the OpCo stock
surrendered by Shareholder B in the First Merger.

(b) Each share of HoldCo stock surrendered by Shareholder B in the First Merger will
be exchanged solely for OpCo stock.

(c) Neither the OpCo Transferee Unit nor any person related to OpCo (within the
meaning of Treas. Reg. § 1.368-1(e)(3)) has any plan or intention to reacquire any of
the OpCo stock issued to Shareholder B in the First Merger.

(d) The OpCo Transferee Unit has no plan or intention to sell or otherwise dispose of
any of the assets of HoldCo acquired in the Proposed Transaction, except for
dispositions made in the ordinary course of business or transfers described in section
368(a)(2)(C) or Treas. Reg. § 1.368-2(k).

(e) The liabilities of HoldCo assumed by the OpCo Transferee Unit in the Proposed
Transaction and the liabilities to which the transferred assets of HoldCo are subject, if
any, were incurred by HoldCo in the ordinary course of its business.
PLR-126636-18                                  5

(f) Following the Proposed Transaction, OpCo will continue to conduct its historical
business.

(g) The OpCo Transferee Unit, HoldCo and Shareholder B will pay their respective
expenses, if any, incurred in connection with the Proposed Transaction.

(h) There is no intercorporate indebtedness existing between the OpCo Transferee Unit
and HoldCo that was issued, acquired, or will be settled at a discount.

(i) No two parties to the Proposed Transaction are investment companies as defined in
section 368(a)(2)(F)(iii) and (iv).

(j) HoldCo is not under the jurisdiction of a court in a title 11 or similar case within the
meaning of section 368(a)(3)(A).

(k) The fair market value of the assets of HoldCo transferred to the OpCo Transferee
Unit (including the OpCo Class 1, Class 2 and Class 3 stock held by HoldCo
immediately before the Proposed Transaction) will exceed the sum of the liabilities
assumed by the OpCo Transferee Unit, plus the amount of liabilities, if any, to which the
transferred assets are subject.

(l) HoldCo and the OpCo Transferee Unit will have adopted a plan of merger, and the
Proposed Transaction will occur pursuant to such plan.

                                           Rulings

Based solely on the information submitted and the representations set forth above, we
rule as follows:

1. For purposes of determining whether the Proposed Transaction is described in
section 368(a)(1)(A), the requirements under Treas. Reg. § 1.368-1(d) will be satisfied
as a result of the Proposed Transaction. See Rev. Rul. 85-197, 1985-2 C.B. 120.

2. Provided the Proposed Transaction qualifies as a reorganization under section
368(a)(1)(A), for federal income tax purposes, the form of the Proposed Transaction will
be disregarded, and instead, HoldCo will be treated as transferring all of its assets,
including all of its OpCo stock to OpCo, in exchange for newly issued OpCo stock, and
HoldCo will be treated as distributing that newly issued OpCo stock to its shareholders
in complete cancellation of their HoldCo stock; and the OpCo stock deemed transferred
by HoldCo will become the assets of OpCo (within the meaning of Treas. Reg. § 1.368-
2(b)(1)(ii)(A)). See Rev. Rul. 67-274, 1967-2 C.B. 141, and Rev. Rul. 2001-46, 2001-2
C.B. 321.
PLR-126636-18                                 6

                                          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. In particular, other than as provided above, no opinion is expressed about
the federal income tax consequences of Proposed Transaction. Furthermore, no
opinion is expressed regarding whether the Proposed Transaction constitutes a
reorganization under section 368(a).
                                    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.

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 in this matter, a copy of this letter is being sent
to your authorized representative.


                                       Sincerely,


                                       _Gerald B. Flemings___________________
                                       Gerald B. Fleming
                                       Senior Technician Reviewer, Branch 2
                                       Office of Associate Chief Counsel (Corporate)