IRS approves tax-free split-offs separating three sibling shareholders

Plain-English summary

Three siblings inherited equal shares of a corporation holding several income-producing assets and later disagreed over business strategy. The corporation planned to form two controlled corporations, contribute different assets to them, and exchange each new corporation's stock for all shares held by one sibling. The third sibling would retain the original corporation and its remaining assets. The IRS ruled that each contribution followed by its split-off would qualify as a reorganization under IRC § 368(a)(1)(D). It also ruled that the contributions and split-offs would not trigger gain or loss, that carryover basis and holding-period rules would apply, and that earnings and profits would be allocated under the regulations. The ruling did not determine the business-purpose, device, or 50-percent acquisition-plan requirements under IRC § 355.

Ruling snapshot

• Question: Would two asset contributions and sibling split-offs qualify as tax-free reorganizations and related nonrecognition transactions?
• Outcome: approved (the IRS issued 19 favorable reorganization, nonrecognition, basis, holding-period, and earnings rulings)
• Key authorities: IRC §§ 312(h), 355, 357, 358, 361, 362, 368(a)(1)(D), 1032, 1223; Rev. Proc. 2017-52

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202031006 Third Party Communication: None
Release Date: 7/31/2020 Date of Communication: Not Applicable
Index Number: 355.01-01
Person To Contact:
--------------------- ------------------------, ID No. -----------------
------------- Telephone Number:
------------------------------ --------------------
-------------------- Refer Reply To:
----------------------------------- CC:CORP:1
In Re: PLR-126603-19
------------------------------ Date:
April 29, 2020

Legend

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

Controlled 1 = ------------------------------------------

Controlled 2 = ------------------------------------------

Business D = --------------------------------------

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

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

Shareholder C = ---------------------

Year 1 = -------

Asset 1 = ---------------------------------------------------------------------------------

Asset 2 = ----------------------------------------------------------------------------------

Asset 3 = ----------------------------------------------------------------------------------

Asset 4 = ----------------------------------------------------------------------------------
-------------------------

PLR-126603-19 2

Asset 5 = ----------------------------------------------------------------------

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

   This letter replies to your letter dated October 25, 2019 that requested rulings on

certain federal income tax consequences of a proposed transaction. Additional
information was submitted in subsequent letters.

   This letter is issued pursuant to Rev. Proc. 2017-52, 2017-41 I.R.B 283, regarding

one or more “Covered Transactions” under Section 355 and section 368 of the Internal
Revenue 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 of 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); are used principally as a device to distribute the earnings and profits of any or all of
the distributing corporation or either controlled corporation (see sections 355(a)(1)(B)
and Treas. Reg. § 1.355-2(d)); or (iii) are part of a plan or 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 corporation, or
any predecessor or successor of the distributing corporation or the controlled
corporation, within the meaning of Treas. Reg. § 1.355-8 (see sections 355(e)(2)(A)(ii)
and Treas. Reg. § 1.355-7)).

                                   Summary of the Facts

    Distributing is a State X corporation engaged in Business D. Distributing has a

single class of stock owned in equal shares by shareholders A, B, and C, who are
siblings. The shareholders inherited the stock of Distributing after the death of their
father in Year 1. Distributing owns Asset 1, Asset 2, Asset 3, Asset 4, and Asset 5 (the
“Assets”), all of which are income-producing assets.

  Since Year 1, Shareholder C has served as President of Distributing, Shareholder

B as Treasurer and Secretary, and Shareholder A as Vice President. All three have
served on Distributing’s Board of Directors. Since Year 1 all three have performed active
and substantial management and operational functions with respect to the Assets, and

PLR-126603-19 3

each shareholder has managed a specific Asset or Assets, subject to oversight by the
Board of Directors.

   As a result of disagreements over business strategy and future plans for

Distributing’s business, shareholders A, B, and C have decided to divide Distributing into
three separately owned corporations and go their separate ways. In order to achieve
this separation, the following transactions are proposed:

        (i)     Two new corporations, Controlled 1 and Controlled 2, will be formed.

        (ii)    Distributing will contribute Asset 1 to Controlled 1 in exchange for all
                the outstanding stock of Controlled 1 (the Controlled 1 Contribution).

        (iii)   Distributing will transfer Asset 2 and Asset 3 to Controlled 2 in
                exchange for all the outstanding stock of Controlled 2 (the Controlled
                2 Contribution).

        (iv)    Distributing will distribute all the stock of Controlled 1 to Shareholder
                A in exchange for all the Distributing stock owned by Shareholder A
                (the Controlled 1 Split-Off).

        (v)     Distributing will distribute all the stock of Controlled 2 to Shareholder
                B in exchange for all the Distributing stock owned by Shareholder B
                (the Controlled 2 Split-Off).

  After the proposed transactions, all the stock of Distributing will be owned by

Shareholder C. Distributing will retain ownership of Asset 4 and Asset 5.

                                     Representations

   Except as otherwise set forth below, Distributing makes all the representations in

section 3 of the Appendix to Rev. Proc. 2017-52, 2017-41 I.R.B 283, in the form set forth
therein. For purposes of these representations, references to “Controlled” refer to
Controlled 1 regarding the Controlled 1 Split-off and Controlled 2 regarding the
Controlled 2 Split-Off.

   Distributing makes 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), 22(a), 31(a), 41(b)

                                          Rulings

   Based on the information submitted and the representations set forth above, we

rule as follows regarding the Covered Transactions:

PLR-126603-19 4

 Reorganizations

 1.     The Controlled 1 Contribution, followed by the Controlled 1 Split-Off; and
        the Controlled 2 Contribution, followed by the Controlled 2 Split-Off, will
        each qualify as a reorganization within the meaning of Section 368(a)(1)(D)
        of the Code. Distributing, Controlled 1, and Controlled 2 will each be a
        “party to a reorganization” within the meaning of section 368(b).

 Controlled 1 Split-Off

  2.    No gain or loss will be recognized by Distributing on the Controlled 1
        Contribution (sections 357(a) and 361(a)).

  3.    No gain or loss will be recognized by Controlled 1 on the Controlled 1
        Contribution (section 1032(a).

  4.    The basis of each asset received by Controlled 1 in the Controlled 1
        Contribution will equal the basis of the asset in the hands of Distributing
        immediately before the Controlled 1 Contribution (section 362(b)).

  5.    The holding period in each asset received by Controlled 1 in the
        Controlled 1 Contribution will include the period in which Distributing held
        that asset (section 1223(2)).

  6.    No gain or loss will be recognized by Distributing on the Controlled 1 Split-
        Off (Section 361(c)).

  7.    No gain or loss will be recognized by (and no income will otherwise be
        included in the income of) Shareholder A in the Controlled 1 Split-Off
        (section 355(a)(1)).

  8.    Shareholder A’s basis in the Controlled 1 shares received in the Controlled
        1 Split-Off will equal the basis of the Distributing shares exchanged for the
        Controlled 1 stock in the Controlled 1 Split-Off (section 358 and Treas. Reg
        § 1.358-2(a)(2)).

  9.    Shareholder A’s holding period in the Controlled 1 shares received in the
        Controlled 1 Split-Off will include the holding period of the Distributing
        shares surrendered in the Controlled 1 Split-Off (section 1223(1)).

  10.   As provided in section 312(h), proper allocation of earnings and profits
        between Distributing and Controlled 1 will be made under Treas. Reg.
        § 1.312-10(a).

PLR-126603-19 5

 Controlled 2 Split-Off

  11.   No gain or loss will be recognized by Distributing on the Controlled 2
        Contribution (sections 357(a) and 361(a)).

  12.   No gain or loss will be recognized by Controlled 2 on the Controlled 2
        Contribution (section 1032(a).

  13.   The basis of each asset received by Controlled 2 in the Controlled 2
        Contribution will equal the basis of the asset in the hands of Distributing
        immediately before the Controlled 2 Contribution (section 362(b)).

  14.   The holding period in each asset received by Controlled 2 in the
        Controlled 2 Contribution will include the period in which Distributing held
        that asset (section 1223(2)).

  15.   No gain or loss will be recognized by Distributing on the Controlled 2 Split-
        Off (Section 361(c)).

  16.   No gain or loss will be recognized by (and no income will otherwise be
        included in the income of) Shareholder B in the Controlled 2 Split-Off
        (section 355(a)(1)).

 17.    Shareholder B’s basis in the Controlled 2 shares received in the Controlled
        2 Split-Off will equal the basis of the Distributing shares exchanged for the
        Controlled 2 stock in the Controlled 2 Split-Off (section 358 and Treas. Reg
        § 1.358-2(a)(2).

 18.    Shareholder B’s holding period in the Controlled 2 shares received in the
        Controlled 2 Split-Off will include the holding period of the Distributing
        shares surrendered in the Controlled 2 Split-Off (section 1223(1)).

  19.   As provided in section 312(h), proper allocation of earnings and profits
        between Distributing and Controlled 2 will be made under Treas. Reg.
        § 1.312-10(a).

                                   Caveats

        Except as expressly provided herein, no opinion is expressed or implied
 concerning the tax treatment of the proposed transactions under any provision of
 the Code or 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.

                            Procedural Statements

PLR-126603-19 6

        This ruling is directed only to the taxpayer who requested it. Section
  6110(k)(3) provides that it cannot be used or cited as precedent.

          A copy of this ruling 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 (PLR-126603-19) of this letter
  ruling.

          In accordance with a power of attorney on file with this office, a copy of this
  letter is being sent to your authorized representative.


                                              Sincerely,



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

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