Pre-IPO restructuring qualifies on key D-reorganization issues, including a check-the-box deemed liquidation as the required distribution

Plain-English summary

A family-owned foreign holding company held most of the stock of an operating company that was preparing for an initial public offering. To set an appropriate share value for the IPO and satisfy foreign-law requirements, the holding company planned to contribute its operating-company stock and other assets to the operating company for new shares, then elect (via "check-the-box") to be treated as a partnership, which for tax purposes is a deemed liquidation. The taxpayer asked the IRS to rule on a few significant issues under the § 368(a)(1)(D) reorganization rules rather than the whole transaction. The IRS ruled favorably on each: the contribution counts as a transfer of assets for D-reorganization purposes, the check-the-box deemed liquidation counts as the distribution that a D reorganization requires, and the transaction meets the continuity-of-business-enterprise requirement. This is a "significant issue" ruling, so the IRS expressed no opinion on the overall tax consequences of the transaction.

Ruling snapshot

• Question: Do key steps of the pre-IPO restructuring satisfy the § 368(a)(1)(D) reorganization requirements, including whether a check-the-box deemed liquidation is the required distribution?
• Outcome: Approved (favorable rulings on the three significant issues presented)
• Key authorities: IRC §§ 368(a)(1)(D), 354(b)(1)(B); Treas. Reg. §§ 301.7701-3, 1.368-1(d)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202203002 Third Party Communication: None
Release Date: 1/21/2022 Date of Communication: Not Applicable
Index Number: 368.04-00
Person To Contact:
------------------------ ------------------------, ID No. -----------------
-------------------------------------------- Telephone Number:
-------------- --------------------
---------------------------------------------------------- Refer Reply To:
------------------------------------------ CC:CORP:3
--------------------------- PLR-109797-21
Date:
October 25, 2021

Legend

HoldCo1 = ---------------------------------------------------------------------------
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HoldCo2 = ---------------------------------------------------------------------------
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OpCo = ---------------------------------------------------------------------------
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Other Assets = ---------------------------------------------------------------------------
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Country A = ------------
Country B = ------
Business C = ---------------------------------------------------------------------------
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Currency D = -----------------
a = ---
b = ------
c = --------
d = ---
e = ------
f = ------
g = --
h = --
PLR-109797-21 2

i = --

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

This letter is in response to your letter dated April 23, 2021, and supplemented by
additional letters requesting rulings on certain federal income tax consequences of a
proposed transaction described below (the “Proposed Transaction”). The information
submitted in that request and in later correspondence is summarized below.

This letter is issued pursuant to section 6.03(2) of Rev. Proc. 2021-1, 2021-1 I.R.B. 1,
regarding one or more significant issues under section 368. The rulings contained in this
letter related to section 368 address only one or more significant 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.

The rulings contained in this letter are 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 materials submitted
in support of the request for rulings, it is subject to verification on examination.

                                      Facts

HoldCo1 is a Country A company, classified as a corporation for US federal income tax
purposes, owned by members of a family of US individuals (each a “family member”).
HoldCo1 owns stock in HoldCo2 representing a% of the voting power and b% of the
value of all stock of HoldCo2.

HoldCo2 is a Country A company, classified as a corporation for US federal income tax
purposes. Aside from the stock held by HoldCo1, the remainder of HoldCo2’s stock is
held directly by family members. HoldCo2’s principal asset is c% of the single class of
stock of OpCo; the OpCo stock represents more than d% of both the gross and net
assets of HoldCo2. HoldCo2 also holds Other Assets and cash. HoldCo2 has no
significant liabilities.

OpCo is a Country B corporation engaged in Business C. Aside from the c% of its
shares held by HoldCo2, e% of its shares are held by its employees, and the remaining
f% of its shares are held directly by family members.

OpCo is preparing for its initial public offering. In order to ensure an appropriate stock
value for the offering and satisfy certain requirements under the laws of Country A and
Country B, HoldCo2 has proposed the following transaction.
PLR-109797-21 3

                            Proposed Transaction

To achieve the business purpose described above, HoldCo2 proposes the following
steps (collectively, the “Proposed Transaction”):

1. HoldCo2 and the other OpCo shareholders will transfer each of their OpCo
  shares (par value g of Currency D) to OpCo in exchange for h newly issued
  shares of OpCo (par value i of Currency D).

2. HoldCo2 will transfer its cash and Other Assets to OpCo in exchange for newly
  issued shares of OpCo (par value i of Currency D). (Steps 1-2 are collectively the
  “Exchange.”)

3. Immediately after the Exchange, Holdco2 will elect under Treas. Reg.
  § 301.7701-3(c) to be treated as a partnership for US federal income tax
  purposes. (Steps 1-3 are collectively the “Reorganization.”)

4. OpCo will convert to the Country B entity type suitable for a publicly traded
  corporation.

                                Representation

HoldCo2 has made the following representation:

  Aside from the issues addressed by the rulings below, the Reorganization will
  qualify as a reorganization under section 368(a)(1)(D).

                                    Rulings

Based solely on the information submitted and the representation made above, we rule
as follows:

1. The Exchange will constitute a transfer of assets from HoldCo2 to OpCo for
  purposes of section 368(a)(1)(D).

2. HoldCo2’s deemed liquidation under Treas. Reg. § 301.7701-3(g)(1)(i) will
  constitute a distribution for purposes of sections 368(a)(1)(D) and 354(b)(1)(B).

3. The Reorganization will satisfy the continuity of business enterprise requirement
  of Treas. Reg. § 1.368-1(d)(1).

                                    Caveats

PLR-109797-21 4

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax treatment of the Proposed Transaction under other provisions of the Internal
Revenue Code or regulations thereunder that is not specifically addressed in this letter.

                             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.

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

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 (PLR-
109797-21) of the letter ruling.

                                   Sincerely,



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

cc: