SERVICE RULES ON INSURANCE COMPANY MERGER.

Index Nos.: 0809.04-00

September 15, 1981

Refer Reply to: T:C:C:2:3

Parent is a publicly held State B corporation and is a holding company which through its subsidiaries is engaged primarily in a. S - 1, a State A corporation, is a wholly-owned subsidiary of Parent.

Target is a State A life insurance company within the meaning of section 801(a) of the Internal Revenue Code and is engaged primarily in b. As is described more fully below, S - 1 acquired on October 31, 1979 all of the stock of Target, and S - 1 presently owns all of the issued and outstanding stock of Target.

On June 20, 1979, Parent and Target jointly announced that an agreement in principle had been reached for the acquisition of Target by Parent which would result in all shareholders of Target receiving x per share. In order to carry out the acquisition, Parent caused the formation of S - 1 and S - 2 and transferred the stock of S - 2 to S - 1 as a contribution to capital. Thereafter, in accordance with rulings issued by the IRS dated September 27, 1979, S - 2 was merged into Target on October 31, 1979 as a result of which Target became a wholly-owned subsidiary of S - 1.

The September 27, 1979 letter ruling provided that the creation of S - 2 and its later merger into Target would be disregarded and S - 1 would be treated as having acquired the stock of Target for cash, with basis determined under section 1012.

It is now anticipated that S - 1 will generally be able to be duly licensed to do business in the various states where Target is now licensed to do business. Consequently, it is now proposed that pursuant to a plan of complete liquidation ("the Agreement and Plan of Merger") to be executed by S - 1 and Target, Target will be merged "upstream" with and into S - 1, with S - 1 as the surviving corporation, under the applicable laws of state A. As a result of the statutory merger of Target into S - 1, Target will cease to exist, S - 1 will by operation of law succeed to all of the assets of Target and will become liable for all of the liabilities of Target, and the business of Target will thereafter be continued by S - 1. As a statutory merger of two insurance companies under the laws of State A, the merger will not be accompanied by an assumption reinsurance agreement between S - 1 and Target.

Target has in effect an election pursuant to section 818(c) to revalue its life insurance reserves computed on a preliminary term basis. Since S - 1 has not yet commenced business as a life insurance company, it has not yet had an occasion to make an election under section 818(c); however, in the first return it files as a life insurance company under Part I of Subchapter L, S - 1 will elect under section 818(c) to revalue its life insurance reserves computed on a preliminary term basis.

Based upon the information submitted it is concluded that:

(1) Provided that the distribution in complete liquidation of Target was pursuant to a plan of complete liquidation (the "Agreement and Plan of Merger") adopted not more than 2 years after S - 1's purchase of Target's stock, the basis of the assets of Target received by S - 1 will be S - 1's adjusted basis in Target's stock with respect to which the assets are distributed, adjusted in the manner required by section 334(b)(2) and the regulations applicable thereto. Provided that Target's section 810(c) reserves are unsecured liabilities for federal income tax purposes, such reserves will increase the adjusted basis of Target's stock under section 1.334 - 1(c)(4)(v)(a)(1) of the regulations.

(2) Except as provided in sections 47, 341(f), 453(d), 617(d), 815, 1245, 1248, 1250, 1251, 1252, and 1254, and the tax benefit rule, no gain or loss will be recognized to Target upon the distribution of its property in complete liquidation (section 336). Neither the tax benefit rule nor Rev. Rul. 74-396, 1974 - 2 C.B. 106, will require Target or S - 1 to include any amount in income in the year of the liquidation because of federal income tax deductions taken by Target prior to its liquidation for increases in insurance reserves or for any expenses relating to the issuance or renewal of insurance policies, including commissions and salaries to agents, brokers, and employees, expense allowances to agents, costs of medical examinations and credit checks, premium taxes, home office expenses, or other similar expenses.

(3) The portion of the aggregate basis of the property received by S - 1 from Target in the merger of Target into S - 1, which is properly allocable to the value of the insurance in force passed from target To S - 1 in the merger, is amortizable over the reasonably estimated useful life of the insurance contracts.

No opinion is expressed as to the tax treatment of the transactions under the provisions of any of the other sections of the Code and regulations which may also be applicable thereto or to the tax treatment of any conditions not specifically covered by the above rulings.

This ruling is directed only to the taxpayer who requested it. Section 6110(j)(3) of the Internal Revenue Code of 1954 provides that it may not be used or cited as precedent. A copy of this letter should be attached to your federal income tax return.

Pursuant to a power of attorney on file in this office, a copy of this letter is being sent to your authorized representative.

Sincerely yours,