Private Letter Ruling
202010003
Released March 6, 2020
Approved
S corporation split-up qualifies for tax-free reorganization treatment
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This page covers one taxpayer's ruling from 2020, 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 closely held S corporation proposed forming five controlled S corporations, transferring portions of its assets to them, and distributing each subsidiary's stock to designated shareholder groups in exchange for all of their parent-company stock. The parent would then liquidate, leaving the business divided among the five corporations and the ten shareholders. The IRS ruled that each contribution and related distribution would qualify as a section 368(a)(1)(D) reorganization and that the stock distributions would receive nonrecognition treatment under sections 355 and 361. Asset and stock bases and holding periods would generally carry over, and the parent’s brief ownership of the subsidiaries would not itself prevent their first-year S elections. The IRS did not rule on the business-purpose, device, or 50-percent acquisition-plan requirements.
Ruling snapshot
- Question: Will the five-way split-up of an S corporation qualify for tax-free divisive-reorganization treatment?
- Outcome: approved
- Key authorities: IRC §§ 355, 357, 358, 361, 362, 368(a)(1)(D), 1032, 1223, and 1361
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 202010003 Third Party Communication: None
Release Date: 3/6/2020 Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-02,
368.04-00 Person To Contact:
-------------------, ID No. -----------------
-------------------- Telephone Number:
------------- --------------------
----------------------------------- Refer Reply To:
------------------------------ CC:CORP:04
-------------------------------- PLR-113780-19
Date:
December 04, 2019
Legend
Distributing = ------------------------------------
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Controlled A = --------------------------------
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Controlled B = --------------------------
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Controlled C = -------------------------
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Controlled D = --------------------------
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Controlled E = -----------------------------
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Shareholder 1 = ---------------------
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Shareholder 2 = ------------------------
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Shareholder 3 = ------------------------------
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Shareholder 4 = ------------------------------
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PLR-113780-19 2
Shareholder 5 = ---------------------------------
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Shareholder 6 = --------------------------
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Shareholder 7 = ---------------------
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Shareholder 8 = ---------------------------
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Shareholder 9 = --------------------------
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Shareholder 10 = -------------------------------
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State = --------
Business = ---------------------------
a% = --------------
b% = -----------------
c% = ----------------
d% = ----------------
e% = --------------
Date 1 = ----------------------
PLR-113780-19 3
Dear ----------------:
This letter responds to your letter dated June 7, 2019, as supplemented by subsequent
information and documentation, requesting rulings on certain federal income tax
consequences of the proposed transaction steps described below. The information
submitted in that letter and in subsequent correspondence is summarized below.
This letter is issued pursuant to Rev. Proc. 2017-52, 2017-41 I.R.B. 283, as amplified
and modified by Rev. Proc. 2018-53, 2018-43 I.R.B. 667, regarding one or more
"Covered Transactions" under section 355 and/or section 368 of the Internal Revenue
Code (the "Code"). This Office expresses no opinion as to any issue not specifically
addressed by the rulings below.
This office has made no determination regarding whether any of the distributions (as
described below): (i) satisfies 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
one or more of the six corporations (defined below) (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 the distributing corporation or the
controlled corporations, or any predecessor or successor of the distributing corporation
or the controlled corporations 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 closely held State A corporation that operates Business. Distributing
has made an election under section 1362(a) to be treated as a subchapter S
corporation (within the meaning of section 1361(a)) as of Date 1. Distributing has one
class of common stock outstanding that is owned by ten shareholders ("Shareholder 1",
"Shareholder 2", "Shareholder 3", "Shareholder 4", "Shareholder 5", "Shareholder 6",
"Shareholder 7", "Shareholder 8", "Shareholder 9", and "Shareholder 10"). Shareholder
1 serves as Distributing's manager.
Financial information has been submitted in accordance with Rev. Proc. 2017-52
indicating that Business has had gross receipts and operating expenses representing
the active conduct of a trade or business for each of the past five years.
Proposed Transaction
For what are represented to be valid business purposes, Distributing proposes to
engage in the following transaction (the "Proposed Transaction"):
PLR-113780-19 4
1. Distributing will form five separate controlled corporations: Controlled A,
Controlled B, Controlled C, Controlled D, and Controlled E (collectively with
Distributing, the "six corporations"). Each controlled corporation will make an
election under section 1362(a) to be treated as a subchapter S corporation
(within the meaning of section 1361(a)). Each controlled corporation will have
one class of stock outstanding, all of which will be owned directly by Distributing.
2. Distributing will transfer a% of its assets to Controlled A in exchange for all of the
stock of Controlled A ("Contribution A").
3. Distributing will transfer b% of its assets to Controlled B in exchange for all of the
stock of Controlled B ("Contribution B").
4. Distributing will transfer c% of its assets to Controlled C in exchange for all of the
stock of Controlled C ("Contribution C").
5. Distributing will transfer d% of its assets to Controlled D in exchange for all of the
stock of Controlled D ("Contribution D").
6. Distributing will transfer e% of its assets to Controlled E in exchange for all of the
stock of Controlled E ("Contribution E").
7. Distributing will distribute all of its Controlled A stock to Shareholder 1,
Shareholder 2, and Shareholder 3 in exchange for all of their Distributing stock
("Distribution 1").
8. Distributing will distribute all of its Controlled B stock to Shareholder 4 in
exchange for all of Shareholder 4's Distributing stock ("Distribution 2").
9. Distributing will distribute all of its Controlled C stock to Shareholder 5 in
exchange for all of Shareholder 5's Distributing stock ("Distribution 3").
10. Distributing will distribute all of its Controlled D stock to Shareholder 6 in
exchange for all of Shareholder 6's Distributing stock ("Distribution 4").
11. Distributing will distribute all of its Controlled E stock to Shareholder 7,
Shareholder 8, Shareholder 9, and Shareholder 10 in exchange for all of their
Distributing stock ("Distribution 5").
12. Distributing will be liquidated as part of the reorganization.
PLR-113780-19 5
Representations
Except as set forth below, Distributing makes all the representations in section 3 of the
Appendix to Rev. Proc. 2017-52 in the form set forth therein.
1. Distributing has not made the following representations, which do not apply to the
Proposed Transaction: 5, 6, 17, 19, 20, 36, 37, 38, 36, 37, 38, 39, and 40.
2. Distributing has made the following alternative representations set forth in section
3 of the Appendix to Rev. Proc. 2017-52: 3(a), 8(a), 11(a), 15(a), 22(a), 31(a) and
41(b).
3. Distributing has made the following representation concerning Rev. Proc. 2018-
53: Distributing does not currently have, and will not have at the time of the
Proposed Transaction, any Distributing Debt within the meaning of section 3.01
of Rev. Proc. 2018-53.
Rulings
Based solely on the information submitted and the representations made, we rule as
follows with respect to the Proposed Transaction:
1. Each of Contribution A, Contribution B, Contribution C, Contribution D, and
Contribution E, together with Distribution 1, Distribution 2, Distribution 3,
Distribution 4, and Distribution 5 followed by the liquidation of Distributing, will be
a reorganization within the meaning of section 368(a)(1)(D). The six corporations
will each be "a party to a reorganization" within the meaning of section 368(b).
2. No gain or loss will be recognized by Distributing on Contribution A, Contribution
B, Contribution C, Contribution D, or Contribution E. Sections 357(a) and 361(a).
3. No gain or loss will be recognized by Controlled A, Controlled B, Controlled C,
Controlled D or Controlled E on Contribution A, Contribution B, Contribution C,
Contribution D, or Contribution E, respectively. Section 1032(a).
4. Controlled A's basis in each asset received from Distributing in Contribution A will
equal the basis of such asset in the hands of Distributing immediately before its
transfer. Section 362(b).
5. Controlled B's basis in each asset received from Distributing in Contribution B will
equal the basis of such asset in the hands of Distributing immediately before its
transfer. Section 362(b).
PLR-113780-19 6
6. Controlled C's basis in each asset received from Distributing in Contribution C
will equal the basis of such asset in the hands of Distributing immediately before
its transfer. Section 362(b).
7. Controlled D's basis in each asset received from Distributing in Contribution D
will equal the basis of such asset in the hands of Distributing immediately before
its transfer. Section 362(b).
8. Controlled E's basis in each asset received from Distributing in Contribution E will
equal the basis of such asset in the hands of Distributing immediately before its
transfer. Section 362(b).
9. The holding period for each asset received by Controlled A in Contribution A will
include the period during which such asset was held by Distributing. Section
1223(2).
10. The holding period for each asset received by Controlled B in Contribution B will
include the period during which such asset was held by Distributing. Section
1223(2).
11. The holding period for each asset received by Controlled C in Contribution C will
include the period during which such asset was held by Distributing. Section
1223(2).
12. The holding period for each asset received by Controlled D in Contribution D will
include the period during which such asset was held by Distributing. Section
1223(2).
13. The holding period for each asset received by Controlled E in Contribution E will
include the period during which such asset was held by Distributing. Section
1223(2).
14. No gain or loss will be recognized by Distributing on Distribution 1, Distribution 2,
Distribution 3, Distribution 4, or Distribution 5. Section 361(c)(1).
15. No gain or loss will be recognized by (and no amount will be included in the
income of) Shareholder 1, Shareholder 2, or Shareholder 3 upon receipt of
Controlled A stock in Distribution 1. Section 355(a)(1).
16. No gain or loss will be recognized by (and no amount will be included in the
income of) Shareholder 4 upon receipt of Controlled B stock in Distribution 2.
Section 355(a)(1).
PLR-113780-19 7
17. No gain or loss will be recognized by (and no amount will be included in the
income of) Shareholder 5 upon receipt of Controlled C stock in Distribution 3.
Section 355(a)(1).
18. No gain or loss will be recognized by (and no amount will be included in the
income of) Shareholder 6 upon receipt of Controlled D stock in Distribution 4.
Section 355(a)(1).
19. No gain or loss will be recognized by (and no amount will be included in the
income of) Shareholder 7, Shareholder 8, Shareholder 9, or Shareholder 10 upon
receipt of Controlled E stock in Distribution 5. Section 355(a)(1).
20. The aggregate basis of the Controlled A stock received by Shareholder 1,
Shareholder 2, and Shareholder 3 immediately after Distribution 1 will be the
same as such shareholder's aggregate basis in the Distributing stock
surrendered in exchange therefor, allocated in the manner described in Treas.
Reg. Treas. Reg. § 1.358-2(a)(2). Section 358(a)(1) and (b).
21. The aggregate basis of the Controlled B stock received by Shareholder 4
immediately after Distribution 2 will be the same as Shareholder 4's aggregate
basis in the Distributing stock surrendered in exchange therefor, allocated in the
manner described in Treas. Reg. § 1.358-2(a)(2). Section 358(a)(1) and (b).
22. The aggregate basis of the Controlled C stock received by Shareholder 5
immediately after Distribution 3 will be the same as Shareholder 5's aggregate
basis in the Distributing stock surrendered in exchange therefor, allocated in the
manner described in Treas. Reg. § 1.358-2(a)(2). Section 358(a)(1) and (b).
23. The aggregate basis of the Controlled D stock received by Shareholder 6
immediately after Distribution 4 will be the same as Shareholder 6's aggregate
basis in the Distributing stock surrendered in exchange therefor, allocated in the
manner described in Treas. Reg. § 1.358-2(a)(2). Section 358(a)(1) and (b).
24. The aggregate basis of the Controlled E stock received by Shareholder 7,
Shareholder 8, Shareholder 9, and Shareholder 10 immediately after Distribution
5 will be the same as such shareholder's aggregate basis in the Distributing stock
surrendered in exchange therefor, allocated in the manner described in Treas.
Reg. § 1.358-2(a)(2). Section 358(a)(1) and (b).
25. The holding period of the Controlled A stock received by Shareholder 1,
Shareholder 2, and Shareholder 3 in Distribution 1 will include the holding period
of the Distributing stock exchanged therefor, provided that such Distributing stock
is held as a capital asset on the date of Distribution 1. Section 1223(1).
PLR-113780-19 8
26. The holding period of the Controlled B stock received by Shareholder 4 in
Distribution 2 will include the holding period of the Distributing stock exchanged
therefor, provided that such Distributing stock is held as a capital asset on the
date of Distribution 2. Section 1223(1).
27. The holding period of the Controlled C stock received by Shareholder 5 in
Distribution 3 will include the holding period of the Distributing stock exchanged
therefor, provided that such Distributing stock is held as a capital asset on the
date of Distribution 3. Section 1223(1).
28. The holding period of the Controlled D stock received by Shareholder 6 in
Distribution 4 will include the holding period of the Distributing stock exchanged
therefor, provided that such Distributing stock is held as a capital asset on the
date of Distribution 4. Section 1223(1).
29. The holding period of the Controlled E stock received by Shareholder 7,
Shareholder 8, Shareholder 9, and Shareholder 10 in Distribution 5 will include
the holding period of the Distributing stock exchanged therefor, provided that
such Distributing stock is held as a capital asset on the date of Distribution 5.
Section 1223(1).
30. Distributing's earnings and profits will be allocated between Controlled A,
Controlled B, Controlled C, Controlled D, and Controlled E in accordance with
section 312(h) and Treas. Reg. § 1.312-10(a).
31. Distributing's accumulated adjustments account will be allocated between
Controlled A, Controlled B, Controlled C, Controlled D, and Controlled E in a
manner similar to the manner in which the earnings and profits of Distributing will
be allocated under section 312(h) in accordance with Treas. Reg. § 1.1368-
2(d)(3).
32. Provided that Distribution 1, Distribution 2, Distribution 3, Distribution 4, and
Distribution 5 are undertaken immediately after Contribution A, Contribution B,
Contribution C, Contribution D, and Contribution E, Distributing's momentary
ownership of the stock of Controlled A, Controlled B, Controlled C, Controlled D,
and Controlled E, as part of the reorganization under section 368(a)(1)(D), will
not cause Controlled A, Controlled B, Controlled C, Controlled D, or Controlled E
to have an ineligible shareholder for any portion of their respective first taxable
year under section 1361(b)(1)(B) and will not, in itself, render Controlled A,
Controlled B, Controlled C, Controlled D, or Controlled E ineligible to elect to be a
subchapter S corporation for its respective first taxable year.
PLR-113780-19 9
Caveats
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 of the information, representations, and other data
may be required as part of the audit process.
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. Specifically, no opinion is expressed or implied as to whether Distributing
pays reasonable compensation to Shareholder 1, including for services rendered as an
employee. See section 1366(e), Treas. Reg. § 1.1366-3(a), and Rev. Rul. 74-44, 1974-
1 C.B. 287.
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.
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,
Justin O. Kellar
Assistant to Branch Chief, Branch 3
Office of Chief Counsel (Corporate)
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