Policyholders in a mutual-to-stock insurance conversion are treated as receiving and then selling the stock (companion ruling)

Plain-English summary

This is the companion ruling to a related request, issued the same day to the mutual insurance company (Corp B) rather than the acquirer (Corp A). A publicly traded company wanted to acquire the mutual insurer by having it convert into a stock insurance company. Under the actual steps, the new stock would go straight to the acquirer's disregarded subsidiary, and the mutual's members (policyholders) would receive a cash payment instead of holding any stock. The IRS ruled that, for federal tax purposes, the deal will be treated as if the stock was issued directly to the policyholders in exchange for their membership interests, followed by the policyholders selling that stock to the subsidiary for the cash payment. This is a single-issue "significant issue" ruling; the IRS expressly gave no opinion on whether the conversion is a tax-free reorganization or on the deal's other tax consequences.

Ruling snapshot

• Question: How is a mutual-to-stock insurance conversion characterized when the stock goes to the acquirer's subsidiary and members receive cash instead of stock?
• Outcome: Approved; members are treated as receiving the stock and then selling it to the subsidiary for the cash payment
• Key authorities: IRC § 368(a)(1)(E), (F) (referenced); substance-over-form; Rev. Proc. 2023-3 § 3.01(60)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202429002 Third Party Communication: None
Release Date: 7/19/2024 Date of Communication: Not Applicable
Index Number: 9999.02-00, 368.05-00,
368.06-00 Person To Contact:
--------------------, ID No. -----------------
---------------- Telephone Number:
--------------------------------------------- --------------------
------------------------------------------------------------ Refer Reply To:
------------- CC:CORP:B04
------------------------------------------------------------ PLR-102518-23
------------- Date:
------------------------- August 08, 2023

Legend

Corp A = ------------------------------

Corp B = --------------------------------------------------------------------------------

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Sub 1 = ----------------------------------------
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Foundation = -----------------
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State A = ----------

State B = -------------

State C = -------------
PLR-102518-23 2

Members = --------------------------------------------------------------------------------

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

Business B = ---------------------------------------------------------------

Eligible Member
Payment = ----------------------------------------------------------------

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

This letter responds to a letter from your authorized representative dated January 26,
2023, submitted on behalf of Corp B (or “Taxpayer”), requesting a ruling on certain
federal income tax consequences of a proposed transaction. Additional information was
submitted in letters dated March 22, 2023, April 26, 2023, July 31, 2023, and August 7,
2023. The material information provided in the initial letter and in later correspondence
is summarized below.

This letter and the ruling contained herein are issued pursuant to section 3.01(60) of
Rev. Proc. 2023-3, 2023-1 I.R.B. 144, regarding significant issues. The ruling contained
in this letter only addresses one discrete legal issue involved in the proposed
transaction. This Office expresses no opinion as to the overall tax consequences of the
proposed transaction described in this letter or as to any issue not specifically
addressed by the ruling below.

The ruling contained in this letter is based upon 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 material submitted in support of
this request for a ruling. Verification of the information, representations, and other data
may be required as part of the audit process.

                                         Summary of Facts

Corp A is a publicly traded and widely held company organized under the laws of State
A and treated as a corporation for U.S. federal tax purposes. Corp A is engaged in
Business A.
PLR-102518-23 3

Corp A directly owns 100 percent of the issued and outstanding membership interests
of Sub 1, which is treated as a disregarded entity for U.S. federal income tax purposes.

Corp B is a mutual insurance company organized under the laws of State B; has
Members who hold membership interests and contractual rights under insurance
policies; and is, directly and through its subsidiaries, engaged in Business B. A
membership interest in Corp B entitles the Member to vote at annual and special
meetings of Corp B but does not provide the right to receive dividends. The rights
inherent in each membership interest are created by operation of the laws of State B
and the articles of incorporation of Corp B solely as the result of the Member’s
acquisition of the underlying contract of Corp B and cannot be transferred separately
from the contract.

Corp B is controlled by its Board of Directors. These Directors are elected by the voting
Members at the annual meeting of the voting Members and hold office for a term of one
year.

                          The Proposed Transaction

For what are represented to be valid business purposes, Corp A and Corp B propose to
engage in the following steps (collectively, the “Proposed Transaction”), of which
steps 3 through 6 will occur contemporaneously:

1. Foundation, a section 501(c)(4) organization is formed under State C law and is
   registered to do business in State B.
2. Corp B makes a payment to Foundation, funded partially from its excess cash
   surplus and partially via the issuance of a note to Foundation.
3. Corp B undertakes a conversion (the “Conversion”) from a mutual insurance
   company to a stock insurance company in accordance with State B law, and, as
   provided in the plan of reorganization, one hundred percent of its newly issued
   shares of capital stock are transferred to Sub 1.
4. Sub 1 makes a payment to a third-party paying agent equal to the Eligible
   Member Payment, which is an amount deemed fair and equitable under the
   statutes of State B and approved by the State B Commissioner of Insurance.
5. The third-party paying agent pays to each Member its share of the Eligible
   Member Payment.
6. Corp A contributes cash down-the-chain to Corp B, which uses it to repay and
   satisfy the obligations of the note issued to Foundation.
   PLR-102518-23 4

                                Representations
   

In its submissions, Taxpayer has made the following representations:

1. Other than the issue of the stock of the newly converted Corp B being transferred
   to Sub 1, the Conversion otherwise should qualify as a tax-free reorganization
   under sections 368(a)(1)(E) and 368(a)(1)(F).
2. The Proposed Transaction comports with applicable state and federal law.

                                      Ruling
   

Based solely upon the information submitted and the representations made, we rule as
follows on the Proposed Transaction:

   Although the stock of the newly-converted Corp B will be issued directly to Sub 1
   and holders of the membership interests of Corp B will not at any point actually
   receive stock of Corp B in connection with the Proposed Transaction, solely for
   U.S. federal income tax purposes, the Conversion and Eligible Member Payment
   received by the Corp B policyholders will be treated as if the stock of Corp B is
   deemed to have been issued directly to the Corp B policyholders in exchange for
   the pre-existing membership interests of Corp B, followed by a sale of such stock
   by the Corp B policyholders to Sub 1 in exchange for the Eligible Member
   Payment received by the Corp B policyholders.

                                      Caveats

No opinion is expressed regarding whether Foundation will qualify as an exempt
organization under section 501(c)(4).

No opinion is expressed regarding whether the Conversion constitutes a reorganization
under sections 368(a)(1)(E) or 368(a)(1)(F).

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 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 ruling
letter is being sent to your authorized representatives.
PLR-102518-23 5

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 this
letter ruling.

                                          Sincerely,




                                          Douglas C. Bates
                                          Chief, Branch 4
                                          Office of Associate Chief Counsel (Corporate)

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