IRS finds both corporations meet the active-business test after a split-off

Plain-English summary

An S corporation proposed to transfer the assets of one state operation to a newly formed controlled corporation, then distribute that corporation's stock to one shareholder in exchange for the shareholder's stock in the distributing corporation. After the split-off, the distributing corporation's operation would receive specified services from a remaining shareholder or employees and a property manager, while the departing shareholder would perform those services for the controlled corporation. The IRS ruled that each corporation would be engaged immediately after the distribution in an active trade or business that had been actively conducted throughout the preceding five years, satisfying section 355(b)(2)(A) and (B). The ruling addressed only that significant section 355 issue. It expressed no opinion on whether the proposed transaction otherwise qualified for nonrecognition under sections 355 and 368.

Ruling snapshot

• Question: Would both corporations satisfy section 355's five-year active-trade-or-business requirement immediately after the proposed split-off?
• Outcome: approved (both corporations would satisfy section 355(b)(2)(A) and (B))
• Key authorities: IRC §§ 355(b)(2), 368(a)(1)(D), 1361, 1362; Rev. Proc. 2017-52

Full text (IRS public release)

 Internal Revenue Service                                         Department of the Treasury
                                                                  Washington, DC 20224

 Number: 202029003                                                Third Party Communication: None
 Release Date: 7/17/2020                                          Date of Communication: Not Applicable
 Index Number: 355.00-00, 355.03-00
                                                                  Person To Contact:
 --------------------                                             ------------------------, ID No. ---------------
 ------------------------------                                   Telephone Number:
 ---------------------------------------                          --------------------
 ----------------------------------------                         Refer Reply To:
                                                                  CC:CORP:3
                                                                  PLR-121643-19
                                                                  Date:
                                                                  March 16, 2020




Legend

Distributing               =         -------------------------------
-----------------------------------------------------------
---------------------------------------------------------------------

Controlled                 =         ------------------------------------
----------------------------------------------------------------
---------------------------------------------------------------------

QSub                       =         -------------------------------------
-----------------------------------------------------------
---------------------------------------------------------------------

State X                    =        ---------------

State Y                    =        -------------

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

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

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

Employees                  =         --------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
                                    --------------------------------------------------------------------

Property Manager =                   ----------------------------------
------------------------------------------------------------------------------------
PLR-121643-19                                             2

a                          =        --------------------------
b                          =         ----------------------------------------------------------------------

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

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

X Services                 =         --------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
----------------------------------------------------------




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

This letter responds to your September 12, 2019 request for a ruling on certain federal
income tax consequences of a Proposed Transaction defined below. The information
submitted 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 the ruling, it is subject to verification on examination.

This letter is issued pursuant to section 4 of Rev. Proc. 2017-52, 2017-41 I.R.B. 283,
amplified and modified by Rev. Proc. 2018-53, 2018-43 I.R.B. 667, and 6.03(2) of Rev.
Proc. 2019-1, 2019-1 I.R.B. 1, regarding a significant issue under section 355 of the
Internal Revenue Code. The ruling contained in this letter only addresses a significant
issue involved in the Proposed Transaction. This office expresses no opinion as to the
overall tax consequences of the Proposed Transaction or as to any issue not
specifically addressed by the ruling below.

                                             Summary of Facts

Distributing is a State X subchapter S corporation. Distributing is wholly owned by
Shareholder 1, Shareholder 2, and Shareholder 3. Shareholder 1 owns a shares,
Shareholder 2 owns b shares, and Shareholder 3 owns c shares in Distributing.
Distributing is directly engaged in Business A in State X and State Y. Distributing wholly
owns QSub, a State X corporation which has elected to be treated as a qualified
subchapter S subsidiary under section 1361.
PLR-121643-19                                 3

      Shareholder 1 is an employee of Distributing and performs X Services for
Business A. Additionally, Property Manager performs X Services for Business A.

                                 Proposed Transaction

For what are represented to be valid corporate business purposes, Distributing
proposes to engage in the following transaction (the “Proposed Transaction”):

    1. Distributing will form Controlled as a State X corporation. Distributing will
      contribute the State X assets associated with Business A to Controlled in
      exchange for Controlled stock and the assumption by Controlled of the liabilities
      associated with the State X Business A assets (the “Contribution”).

    2. Distributing will distribute the Controlled stock to Shareholder 3 in exchange for
      the Distributing stock held by Shareholder 3 (the “Distribution”). Following the
      Distribution, Controlled will elect under section 1362 to be treated as a
      subchapter S corporation.


Following the Distribution, either Shareholder 1 or Shareholder 2, and certain
Distributing Employees will perform X Services, and Property Manager will continue to
perform X Services for Distributing. Following the Distribution, Shareholder 3 will
perform X Services for Controlled.

Distributing has submitted the information required by section 4 of Rev. Proc. 2017-52
for the Distribution.

                                     Representations

With respect to the Proposed Transaction, taxpayer has made the following
representations in the Appendix of Rev. Proc. 2017-52: 9, 10, 11(a), and 12.

Distributing also makes the following representation:

Except for the issue of whether section 355(b)(2)(A) and (B) have been satisfied, the
Contribution and the Distribution will qualify as a transaction in which no gain or loss is
recognized to Distributing, Controlled, or Distributing’s shareholders, and no amount is
included in the income of Distributing’s shareholders, under section 368(a)(1)(D) and
section 355.

                                          Ruling

Based solely on the facts and information submitted and the representations made, we
rule as follows:
PLR-121643-19                                  4

Distributing and Controlled will each satisfy the requirement of section 355(b)(2)(A) and
(B) and will be engaged, immediately after the Distribution, in the active conduct of a
trade or business that has been actively conducted throughout the five-year period
ending on the date of the Distribution.

                                  Procedural Statements

The ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) 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,



                                        Richard K. Passales
                                        Senior Counsel, Branch 4
                                        Office of Associate Chief Counsel (Corporate)




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