LLC stays disregarded and special shareholder rights do not block an F reorganization

Plain-English summary

A publicly traded parent company reorganized to separate its core business from old legacy liabilities. It formed a new holding corporation, which formed a wholly owned LLC, then merged the old parent into that LLC, with shareholders swapping their old stock for new-holding-company stock. The taxpayer wanted to confirm the deal still worked as a tax-free "Type F" reorganization (a mere change in form) under IRC § 368(a)(1)(F). The IRS ruled that the LLC was a disregarded entity (ignored as separate from its owner) under Treas. Reg. § 301.7701-3, and that certain special "Shareholder Rights" built into the LLC agreement would not disqualify the transaction from F-reorganization treatment. The letter addressed only these two discrete issues and expressed no view on the overall tax consequences of the deal.

Ruling snapshot

• Question: Was the merger LLC a disregarded entity, and do the special shareholder rights prevent the transaction from qualifying as an F reorganization under § 368(a)(1)(F)?
• Outcome: Approved (both rulings favorable)
• Key authorities: IRC § 368(a)(1)(F); Treas. Reg. § 301.7701-3(b)(1)(ii); Rev. Proc. 2020-1

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202102007 Third Party Communication: None
Release Date: 1/15/2021 Date of Communication: Not Applicable
Index Number: 368.06-00
Person To Contact:
---------------- -----------------------------,
------------------- ID No. -----------------
------------------- Telephone Number:
---------------------------------- --------------------
---------------------------------- Refer Reply To:
CC:CORP:B01
PLR-112874-20
Date:
October 22, 2020

                                                Legend

Oldco = ----------------------------------------------------------------------------------------
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Newco = ----------------------------------------------------------------------------------------
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Sub 1 = ----------------------------------------------------------------------------------------
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LLC = ----------------------------------------------------------------------------------------
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State A = -------------

Historic = ----------------------------------------------------------------------------------------
Liabilities --------------------------------------------------------------------------

Date 1 = --------------------------

Date 2 = --------------------------

Date 3 = --------------------------

Date 4 = --------------------------
PLR-112874-20 2

Shareholder = ----------------------------------------------------------------------------------------
Rights ----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
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------
LLC = ----------------------------------------------------------------------------------------
Agreement --------------------------

Support = ----------------------------------------------------------------------------------------
Agreement ----------------------------------------------------------------------------------------
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------------------------

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

This letter responds to your authorized representatives’ letter dated May 29, 2020,
requesting rulings on certain federal income tax consequences of a series of completed
transactions described below (the “Completed Transaction”). The material information
provided in that request and in 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
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. 2020-1, 2020-1 I.R.B. 1,
regarding rulings on one or more significant issues under sections 332, 351, 355, 368,
or 1036 of the Internal Revenue Code (the “Code”). The rulings contained in this letter
only address one or more discrete legal issues involved in the Completed Transaction.
This Office expresses no opinion as to the overall tax consequences of the Completed
Transaction or as to any issue not specifically addressed by the rulings below.

                                         Summary of Facts

Oldco, prior to the Completed Transaction, was a publicly traded State A corporation
and the common parent of an affiliated group of corporations that filed a consolidated
federal income tax return (the “Oldco Group”). Oldco owned all the stock of Sub 1,
which in turn held substantially all of the assets and operations of the Oldco Group.

Oldco formerly operated a business that generated Historic Liabilities. Prior to the
Completed Transaction, the Historic Liabilities were obligations of Oldco for state law
PLR-112874-20 3

purposes. Oldco undertook the Completed Transaction (described below) in order to
separate its core business operations from the Historic Liabilities and to better manage
the Historic Liabilities.

                             Completed Transaction

The Completed Transaction has been completed as of the date of this ruling, but either
the tax return has not yet been filed for the year in which the transaction was completed
or the tax return was filed for the year in which the transaction was completed, but this
ruling request was filed prior to the filing of the tax return.

The steps of the Completed Transaction are set forth below:

(i) On Date 1, Oldco formed Newco, a State A corporation.

(ii) On Date 2, Newco formed LLC, a State A limited liability company that will be
treated as a disregarded entity for federal income tax purposes.

(iii) On Date 3, Oldco merged with and into LLC, with LLC as the surviving entity.
In the merger, the Oldco shareholders exchanged their shares of Oldco stock
for shares of Newco stock. Steps (i) through (iii), collectively, are referred to
as the “Potential Reorganization.”

       Newco shareholders held no economic interest in LLC following the Potential
       Reorganization, except by reason of their ownership of Newco stock. At all
       times before and following the Potential Reorganization, Newco had the sole
       authority to appoint LLC’s board of directors.

(iv) On Date 4, Newco and LLC entered into the Support Agreement, whereby
Newco agreed to contribute funds to LLC in order to ensure LLC’s ongoing
solvency.

(v) On Date 4, LLC distributed the stock of Sub 1 to Newco.

                                 Representations

The taxpayer makes the following representations with respect to the Completed
Transaction:

a) LLC is a domestic eligible entity under Treas. Reg. § 301.7701-3(a).

b) For all tax, accounting, financial statement, books, records, and corporate
purposes, Newco and LLC have reported and will consistently report and treat
PLR-112874-20 4

   Newco as the sole member and sole owner of LLC immediately before and
   immediately after the Potential Reorganization.

c) Except for the issue of the Shareholder Rights included in the LLC Agreement,
the Potential Reorganization will qualify as a reorganization under section
368(a)(1)(F).

                                      Rulings

Based solely on the information provided and the representations set forth above, we rule
as follows regarding the Completed Transaction:

1) At the time of and immediately after the Potential Reorganization, LLC was an
entity disregarded as separate from Newco under Treas. Reg. § 301.7701-
3(b)(1)(ii) for federal income tax purposes.

2) The Shareholder Rights included in the LLC Agreement will not preclude the
Potential Reorganization from otherwise qualifying as a reorganization under
section 368(a)(1)(F).

                                        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.

                               Procedural Information

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

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.

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 returns that provides the date
and control number of this letter ruling.
PLR-112874-20 5

A copy of this letter must be attached to any income tax return to which it is relevant.

                                  Sincerely,


                                  ____________________________
                                  Mark J. Weiss
                                  Chief, Branch 2
                                  (Office of Associate Chief Counsel (Corporate)

cc: