PURCHASE OF HOLDING COMPANY'S OUT-OF-STATE INSURANCE SUBSIDIARY BY FOREIGN CORPORATION CONSTITUTES QUALIFIED STOCK PURCHASE.

UIL Number(s) 0338.05-00, 0951.00-00, 1248.00-00

                                             Date: June 27, 1989

This letter is responding to a letter dated November 1, 1988 requesting rulings as to a proposed transaction. We have received additional information in letters dated February 24, March 22, April 4, April 24, and May 5, 12, and 22, 1989. The information submitted for consideration is summarized below.

Parent is a State T holding company that owns stock in various companies engaged in a diverse range of activities. The stock of Parent is publicly traded. Parent is the common parent of an affiliated group (including Target, Sub 1, and Sub 2, described below) filing a consolidated return.

Target is a State U corporation engaged in the property and casualty insurance business. Parent holds all of the outstanding stock of Target. Target owns no foreign subsidiaries other than TF1 and TF2, described below.

Sub 1 is a State V corporation engaged through subsidiaries in the consumer credit business. Target owns all of Sub 1's outstanding common stock. Parent owns all of Sub 1's outstanding preferred stock.

Sub 2 is a State W corporation conducting a casualty insurance business. Target owns all of Sub 2's outstanding stock.

TF1 is a Country X corporation formed for purposes of stop loss reinsurance on auto warranties in October 1987. All of the stock of TF1 is owned by Target. TF1 has been a controlled foreign corporation within the meaning of section 957(a), and all of its earnings and profits were treated as Subpart F income within the meaning of section 953(a) by Target. TF1 has paid no foreign taxes.

TF2 is a Country Y corporation all of the stock of which is owned by Target. TF2 is an inactive company.

Parent has entered into an agreement dated February 16, 1989 ("Agreement") for the sale of all the stock of Target to PF1, a Country Z corporation (hereinafter, PF1 and PF1 subsidiaries which would be considered a part of PF1's affiliated group, as defined by section 338(h)(5) of the Code, will be referred to collectively as "Buyer"). The Agreement provides:

(i) PF1 will promptly assign its rights and obligations under the Agreement to one or more of its United States affiliates, which are subject to taxation as domestic corporations and are otherwise eligible to make the election provided for in section 338(h)(10) of the Code.

(ii) Target will distribute all its stock of Sub 1 and Sub 2 to Parent. This distribution ("Pre-Sale Distribution") will be simultaneous with the closing of the sale of the Target stock to Buyer.

(iii) Parent will sell the stock of Target to Buyer.

(iv) Buyer will make an election under section 338(g) of the Internal Revenue Code, as amended, by the 15th day of the 9th month beginning after the month in which this purchase occurred, and Buyer and Parent will make a joint election under section 338(h)(10) of the Code by the 15th day of the 9th month beginning after the month in which the purchase occurred.

Target has adopted a plan of complete liquidation ("Plan of Liquidation") prior to the Pre-Sale Distribution.

Prior to the sale of the Target stock, Target will sell an amount of portfolio securities held by it ("Portfolio Sales"). Approximately 85 percent of these securities will be sold to members of the affiliated group filing consolidated returns of which Target is a member. Additional assets will be sold to Sub 3, a wholly owned, indirect life insurance subsidiary of Parent. Any remaining portfolio securities will be sold on the open market.

The taxpayers understand that, on May 1, 1989, PF1 assigned the right to purchase approximately 82 percent of the Target stock to P2, a wholly owned State T corporation. It is expected that the remaining Target stock will be purchased by a U.S. branch of PF1.

The taxpayers have made the following representations with respect to the proposed transaction:

(a) Buyer will not purchase any stock of Parent.

(b) At least 80 percent of the Target stock will be acquired by Buyer at the closing of the proposed transaction.

(c) Target is a member of the selling consolidated group of Parent as defined in section 338(h)(10)(B) of the Code, for the taxable period that includes the acquisition date.

(d) Prior to the closing of the proposed transaction, Buyer will not actually own, or be deemed to own pursuant to section 318(a) of the Code, any stock of Target.

(e) Neither Parent nor any of its subsidiaries, separately or in the aggregate, actually or constructively, control both Target and Buyer. For the purpose of this representation, control is defined by section 304(c) of the Code.

(f) The terms of the sale agreement were determined in good faith negotiations between unrelated parties. The purchase price of the Target stock is approximately equal to fair market value.

(g) Each party to the proposed transaction will pay its own expenses.

(h) There will not have been a redemption of Target stock within the three-year period preceding the effective date of the purchase of the Target stock by Buyer.

(i) Parent has no plan or intention to dispose of the assets Target distributed to it in the Pre-Sale Distribution.

(j) The fair market value of Target's assets will exceed its liabilities (including any amount owed to Parent) at the closing of the proposed transaction.

(k) Buyer has not acquired, and prior to the filing of an election under section 338(g) of the Code will not acquire, any assets of Target or any assets or stock (excluding Target stock) of a corporation which is a member of an affiliated group (as defined in section 338(h)(5)) which has the same common parent as Target.

(l) Taking into consideration stock owned directly and indirectly (by means of attribution according to the provisions of section 958(a)(2) and (b)), Target owns stock in two controlled foreign corporations, TF1, a Country X corporation, and TF2, a Country Y corporation.

(m) To the best of the knowledge of the management of Parent, Buyer will not make a regular exclusion election within the meaning of section 1.338-5T(c)(2) of the Temporary Income Tax Regulations with respect to TF1 or TF2.

Based solely on the information submitted and on the representations set forth above, and provided that (1) no regular exclusion election under section 1.338-5T(c)(2) of the temporary regulations is made with respect to TF1 or TF2; and (2) on the "Acquisition Date" (as defined in Ruling 3, below) Target did not own, directly or indirectly, within the meaning of section 955, stock in a controlled foreign corporation other than TF1 and TF2, it is held as follows:

(1) Buyer's purchase of all of the stock of Target will be a "qualified stock purchase" ("QSP") within the meaning if section 338(d)(3) of the Code. Accordingly, Buyer will be entitled to make the election provided by section 338(g) and Parent and Buyer will be entitled to make the election provided by section 338(h)(10).

(2) If buyer makes the election provided by section 338(g), Parent and Buyer make the election provided by section 338(h)(10), and Target has any subsidiaries that would be a member of Target's "affiliated group," Parent and Buyer will be deemed to make the section 338(h)(10) election for Target's subsidiaries, subject to all of the effects thereof (section 1.338(h)(10)-1T(h)(1) and (h)(2), Example (2)). Therefore, for purposes of these rulings, references to the term "Target" will also refer to those subsidiaries of Target (except for Sub 1 and Sub 2) for which a section 338(h)(10) election would be deemed to be made.

(3) Provided (i) Buyer makes a timely election under section 338(g) of the Code and (ii) Parent and Buyer make a timely election under section 338(h)(10) of the Code, Parent will not be treated as having sold Target stock, but Target will be treated as if, while a member of the Parent affiliated group, it sold all its assets (except the assets distributed in the Pre-Sale Distribution) in a single transaction ("Deemed Sale") as of the first day on which there is a QSP of Target ("Acquisition Date") and as if, at the close of the Acquisition Date but after the Deemed Sale, it distributed all its assets (including the assets distributed in the Pre-Sale Distribution) in a complete liquidation to which 332 applied (section 338(h)(10), section 1.338(h)(10)- 1T(a) and 1.338(h)(10)-1T(e)(1) and (3) of the temporary regulations). Accordingly, gain (including any items of recapture) and loss from the Deemed Sale of Target's assets will be included in the consolidated federal income tax return of the Parent group for the taxable period that includes the acquisition date and neither gain nor lose from the sale of Target stock will be included in income of any member of the Parent group (sections 332(a), 335(d)(3), 337(a), 337(b), 338(h)(10); section 1.338(h)(10)-1T(e)(1), (2) and (7) of the temporary regulations).

(4) Buyer's express election for Target will cause a deemed election for TF1 and TF2 under section 338(f)(1) (section 1.338-4T(c)(3), Answer 1). Therefore, the assets of TF1 and TF2 will be deemed to be sold on the Acquisition Date.

(5) Upon Target's deemed sale of the stock of TF1 and TF2, as described in ruling (3), all or part of any gain on the deemed sale of the stock will be recharacterized as ordinary income under the rules of section 1248 of the Code, to the extent of historic and current earnings and profits, as well as the earnings and profits created upon the deemed sale of the assets' of TF1 and TF2, under the rules of section 1.338-5T(g) of the temporary regulations and section 1248 of the Code. The section 1248 amount will be reported in Parent and Target's consolidated short tax year return.

(6) For purposes of sections 901-908 of the Code, the source and characteristics of that portion of the gain on the deemed sale of the stock of TF1 and TF2 that is recharacterized by deemed sale earnings and profits of TF1 and TF2 under sections 951 and 1248 will be determined under section 338(h)(16) of the Code. The order in which the earnings and profits will recharacterize Target's deemed sale stock gain on TF1 and TF2, for purposes of section 338(h)(16) will be: (1) first, historic and current earnings and profits; (2) second, deemed sale earnings and profits.

(7) Any amounts included in gross income under section 951 with respect to TF1 and TF2 in the taxable year ending on the Acquisition Date, to the extent of historic, current or deemed sale earnings and profits, will be included in Parent's consolidated return. Target will be deemed to own the stock of TF1 and TF2 on the entire Acquisition Date for purposes of sections 951-964 of the Code (section 1.951-1(f) of the Income Tax Regulations). Target's basis in the stock of TF1 and TF2 will be increased under section 961(a) by any amount required to be included in Parent's consolidated return under section 951. Such increase will occur prior to determining Target's deemed sale gain on the stock of TF1 and TF2.

(8) Subject to the limitations provided in the Code and the consolidated return regulations, the tax attributes of the Parent group will be available to offset any gain recognized from the Deemed Sale of the Target's assets, described in the above rulings (section 1.338(h)(10)-1T(e)(7) of the temporary regulations).

(9) As described above, Target will be treated as having liquidated into Parent, under section 332(a) of the Code. Accordingly, no gain or loss will be recognized by either Target or Parent on the deemed liquidating distribution or the actual liquidating distribution (i.e., the stock of Sub 1 and Sub 2 distributed in the Pre-Sale Distribution) (sections 332(a), 336(d)(3), and 337(a) and (b)).

(10) Pursuant to section 381(a) of the code and section 1.381(a)- 1 of the regulations, Parent will succeed to and take into account the items of Target described in section 381(c) and the regulations thereunder, subject to the conditions and limitations specified in section 381(b) and (c) (section 1.338(h)(10)-1T(e)(3)(C)).

(11) Except as set forth in Ruling (13), the basis of the Target assets in the hand of New Target after the elections referred to in Ruling (1) will be determined under section 338(b) of the Code.

(12) Under section 1.1502-13(c)(6) of the regulations, the transferee inherits the entire remaining balance of the deferred gain or loss of the transferor in an acquisition to which section 381 applies and therefore, the member or members of the Parent consolidated group that would be subject to section 1.1502-13(d), (e), and (f) (relating to restoration of deferred gain or loss) with respect to Target's entire remaining balance of the deferred gain or loss as of the close of the Acquisition Date are subject to such provisions as a result of the deemed liquidation of Target section 1.338(h)(10)-1T(e)(7)(ii)(A)). Deferred gain or loss is taken into account under section 1.1502- 13(f) as of the close of the Acquisition Date by selling members of the Parent group with respect to any items that Target (as the owning member) is deemed to have sold.

(13) The basis of the assets distributed in the Pre-Sale Distribution in the hands of Parent will be the same as the basis of these assets in the hands of Target immediately preceding their distribution (section 334(b)(1) and section 1.1502-31(b)(2)(i) of the regulations).

(14) The holding period of the assets distributed by Target in the Pre-Sale Distribution to Parent will include the period during which the assets were held by Target (section 1223(2)).

We express no opinion about: (i) the characterization of the Pre-Sale Distribution if Parent conveys the stock of Sub 1 and Sub 2 to a related corporation, (ii) the effect of any of the provisions of Subchapter L on the transaction, (iii) the tax effect of the Portfolio Sales, and (iv) the tax treatment of the proposed transaction under other provisions of the Code and regulations or the tax treatment of any conditions existing at the time of, or effects resulting from, the transactions that are not specifically covered by the above rulings.

This ruling letter is directed only to the taxpayer who requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent.

The affected taxpayers must attach a copy of this letter to their federal income tax returns for the tax year in which the transaction covered by this ruling letter is consummated.

Pursuant to a power of attorney on file in this office, we have sent the original of this letter to the taxpayer's authorized representative.

                                   Sincerely yours,