SEPARATION OF BUSINESSES WILL BE TAX-FREE.
LTR 200107008
- Institutional AuthorsInternal Revenue Service
- Code Sections
- Subject Area/Tax Topics
- Index Termsreorganizations, controlled firm stockreorganizations, D
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2001-4788 (7 original pages)
- Tax Analysts Electronic Citation2001 TNT 34-22
Index Number: 355.00-00
Release Date: 2/16/2001
Date: November 9, 2000
Refer Reply To: CC:CORP:1 PLR-107562-00
LEGEND:
Distributing = * * *
Controlled = * * *
State X = * * *
State Y = * * *
Business 1 = * * *
Business 2 = * * *
Investor 1 = * * *
Investor 2 = * * *
Investor 3 = * * *
Investor 4 = * * *
Corporation A = * * *
Corporation B = * * *
Corporation C = * * *
Corporation D = * * *
Corporation E = * * *
Corporation F = * * *
Corporation G = * * *
Subsidiary 1 = * * *
Subsidiary 2 = * * *
Purchaser 1 = * * *
Purchaser 2 = * * *
Purchaser 3 = * * *
Partnership 1 = * * *
LLC 1 = * * *
$X = * * *
$Y = * * *
a = * * *
b = * * *
c = * * *
d = * * *
e = * * *
f = * * *
g = * * *
Year 1 = * * *
Date 1 = * * *
Dear * * *
[1] This is in response to your letter dated March 30, 2000, in which you requested rulings on the federal income tax treatment of the transactions described below. Specifically, you requested rulings under section 355 of the Internal Revenue Code and other related Code sections. Additional information regarding your request has been submitted in subsequent letters. The information submitted for our review is summarized below.
[2] Distributing, a publicly-traded State Y corporation, has been engaged for more than five years in two businesses, Business 1 and Business 2. Investors 1, 2, 3 and 4, all institutional investors, own 5% or more of Distributing. Distributing, a holding company, indirectly conducts Business 2 through four wholly-owned domestic corporations, Corporations A, B, C and D. Corporations A, B and C directly engage in Business 2. Corporation D indirectly engages in Business 2 through two partnerships, Partnership 1 and LLC 1. LLC 1, a limited liability company for state purposes, has elected to be treated as a partnership for federal income tax purposes. The current structure of the business conducted by Corporation D was created in Year 1 when Distributing transferred Business 2 assets to Corporation D which then transferred the assets to the partnerships in transactions in which no gain was recognized.
[3] Partnership 1 owns LLC 1, which directly engages in Business 2. Corporation D is a limited partner in Partnership 1 and owns a% (more than 80%) of the partnership. Subsidiary 1, a wholly- owned subsidiary of Corporation A, owns b% of Partnership 1. Distributing owns the remaining interest in Partnership 1, c%, and is the sole general partner of the partnership. The taxpayer has provided information that Distributing has been engaged in active and substantial management functions of Partnership 1 for more than five years.
[4] Partnership 1 also currently owns d% (more than 90%) of LLC 1. Corporation E, a wholly-owned subsidiary of Distributing, owns e% of LLC 1. Corporation F, a corporation unrelated to Distributing and its subsidiaries, own f%, the remaining interest in LLC 1.
[5] LLC 1 is managed through an operating agreement which provides that the management of the partnership is vested in its members through a board of four directors, three of whom are appointed by Partnership 1 and one by Corporation F. The three members appointed by Partnership 1 are employees of Distributing. The taxpayer has provided information that Distributing, through its employees, has been engaged in active and substantial management functions of LLC 1 for more than five years.
[6] Distributing now wants to separate its Business 2 from Business 1 because Distributing has concluded that the two businesses are no longer compatible and the separation will facilitate and promote greater management focus and resolve disputes in setting corporate objectives and allocations and in satisfying customer demands for pure play businesses. The taxpayer has supplied internal memos detailing these conflicts as well as analysis from a third- party investment banker on those issues. Distributing intends to separate the two businesses in the following transactions:
(1) Distributing sold Subsidiary 2 to Purchaser 1 and Purchaser
2 for $X. Distributing also sold certain assets related to
Business 1 to Purchaser 3 for $Y.
(2) Distributing will transfer the stock of Corporations A, B, C
and D and its general partnership interest in Partnership 1 (the
Business 2 assets) to Controlled, a State X corporation formed
to facilitate this transaction, in exchange for all of
Controlled stock.
(3) Controlled will acquire (at fair market value) from
Corporation E the interest in LLC 1 owned by Corporation E and
will transfer that interest to Corporation D. Controlled will
also transfer its general partnership interest in Partnership 1
to Corporation D.
(4) The stock of Controlled will then be transferred pro rata to
Distributing's shareholders. No fractional shares will be issued
in the transaction; instead, cash will be issued in exchange for
fractional share interests.
(5) Following the distribution of Controlled, Controlled intends
to acquire certain assets of Corporation G in exchange for g% of
its stock.
[7] The following additional representations have been made in connection with the transaction:
(a) No part of the consideration to be distributed by
Distributing will be received by a shareholder as a
creditor, employee, or in any capacity other than that of a
shareholder of the corporation.
(b) The five years of financial information submitted on behalf
of Distributing is representative of the present operations
of the business, and with regard to such business, there
have been no substantial operational changes since the date
of the last financial statements submitted.
(c) The five years of financial information submitted on behalf
of Corporation A and Corporation D (the Controlled active
business) is representative of the business' present
operations, and with regard to that business, there have
been no substantial operational changes since the date of
the last financial statements submitted.
(d) Immediately after the distribution of Controlled, at least
90 percent of the fair market value of the gross assets of
Controlled will consist of the stock or securities of
Controlled corporations that are engaged in the active
conduct of a trade or business as defined in section
355(b)(2) of the Code.
(e) Following the distribution, Distributing and Controlled
(through Corporations A and D) will each continue the active
conduct of its business independently and with its separate
employees.
(f) The distribution of the stock of Controlled is carried out
for the purpose of enhancing management focus on both
Distributing and Controlled and alleviating systemic
problems that have arisen due to the disparity of the two
businesses. The distribution is motivated, in whole or
substantial part, by this corporate business purpose.
(g) There will be no common directors, officers, employees, or
common property between Controlled and Distributing (and
neither Distributing nor Controlled will provide goods or
services to the other) after the distribution, except that
the Chairman of the Board of Distributing will serve as the
Chairman of Controlled's board of directors until Date 1.
(h) There is no plan or intention by either Distributing or
Controlled, directly or through any subsidiary corporation,
to purchase any of its outstanding stock after the
transaction, other than through stock purchases meeting the
requirements of section 4.05(1)(b) of Rev. Proc. 96-30.
(i) Except for the sale of Subsidiary 2 and certain assets
related to Business 1, as described in step 1 above, there
is no plan or intention to liquidate either Distributing or
Controlled, to merge either corporation with any other
corporation, or to sell or otherwise dispose of the assets
of either corporation subsequent to the distribution, except
in the ordinary course of business.
(j) No intercorporate debt will exist between Distributing and
Controlled at the time of, or subsequent to, the
distribution of Controlled.
(k) Immediately before the distribution, items of income, gain,
loss, deduction and credit will be taken into account as
required by the applicable intercompany transaction
regulations. Further, if Distributing had an excess loss
account with respect to its Controlled stock immediately
before the distribution, the excess loss account will be
taken into account at that time.
(l) Payments made in connection with all continuing
transactions, if any, between Distributing and Controlled,
will be for fair market value based on terms and conditions
arrived at by the parties bargaining at arm's length.
(m) No two parties to the transaction are investment companies
as defined in section 368(a)(2)(F)(iii) and (iv).
(n) The gross assets of the trades or businesses that will be
relied upon by Distributing and Controlled to satisfy the
active trade or business requirement of section 355(b) will,
in aggregate, have a fair market value that is not less than
five percent of the total fair market value of the gross
assets of the company directly operating such trades or
businesses.
(o) The distribution will not be a disqualified distribution
within the meaning of section 355(d)(2) because, during the
five-year period ending on the date of the distribution and
immediately after the distribution, no person has held, nor
will hold, disqualified stock of either Distributing or
Controlled which constitutes a 50% or greater interest in
either corporation.
(p) The distribution is not part of a plan or series of related
transactions (within the meaning of section 355(e)) pursuant
to which one or more persons will acquire directly or
indirectly stock possessing 50% or more of the total
combined voting power of all classes of stock of either
Distributing or Controlled, or stock possessing 50% or more
of the total value of all classes of stock of either
Distributing or Controlled.
(q) Any payment of cash in lieu of fractional shares of
Distributing and Controlled is solely for the purposes of
avoiding the expense and inconvenience to Distributing and
Controlled of issuing fractional shares and does not
represent separately bargained for consideration. The share
interests of each shareholder of Distributing and Controlled
will be aggregated and no shareholder will receive cash in
an amount equal to or greater than the value of one full
share of either Distributing or Controlled stock. The total
amount of cash paid in lieu of fractional shares will not
exceed one percent of the fair market value of either
Distributing or Controlled stock.
[8] Based solely on the information submitted and the representations made, we rule as follows:
(1) The transfer by Distributing to Controlled of the stock of
Corporations A through D, and of Distributing's partnership
interest in Partnership 1 in exchange for all the stock of
Controlled, followed by the distribution of the Controlled
stock pro rata to Distributing's shareholders will be a
reorganization within the meaning of section 368(a)(1)(D) of
the Code. Distributing and Controlled each will be a "party
to the reorganization" within the meaning of section 368(b)
of the Code.
(2) No gain or loss will be recognized by Distributing as a
result of the transfer of the Business 2 assets to
Controlled in exchange for the stock of Controlled. Section
361(a).
(3) No gain or loss will be recognized by Controlled upon the
receipt of the Business 2 assets from Distributing in
exchange for the stock of Controlled. Section 1032(a).
(4) The basis of each of the Business 2 assets received by
Controlled in the transaction will equal the basis of such
assets in the hands of Distributing immediately prior to
their transfer to Controlled. section 362(b).
(5) The holding period of each of the Business 2 assets to be
received by Controlled in the transaction will include the
period during which such assets were held by Distributing.
Section 1223(2).
(6) No gain or loss will be recognized by Distributing upon the
distribution of all of the stock of Controlled. section
361(c)(1).
(7) No gain or loss will be recognized by (and no amount will be
included in the income of) the participating shareholders of
Distributing upon the receipt of the stock of Controlled
from Distributing. Section 355(a)(1).
(8) The aggregate basis of the stock of Distributing and
Controlled in the hands of the shareholders of Distributing
immediately following the distribution will be the same as
the basis in their Distributing stock held immediately
before the distribution, allocated in proportion to the fair
market value of each in accordance with section
1.358-2(a)(2). Section 358(b)(2).
(9) The holding period of the Controlled stock received by the
shareholders of Distributing will include the holding period
of the Distributing stock on which the distribution is made
provided that such stock was held as a capital asset on the
date of the proposed transaction. Section 1223(1).
(10) As provided in section 312(h), proper allocation of earnings
and profits between Distributing and Controlled will be made
under section 1.312-10(a) and section 1.1502-33.
(11) Any payment of cash in lieu of a fractional share interest
in Controlled will be treated for federal income tax
purposes as if the fractional share interest had been issued
in the distribution and then redeemed by Controlled. The
cash payment will be treated as having been received in
exchange for the constructively redeemed fractional share
under section 302(a).
[9] No opinion is expressed about the tax treatment of the proposed transaction under other provisions of the Code and regulations or about the tax treatment of any conditions existing at the time of, or effects resulting from, the proposed transactions that are not specifically covered by the above rulings.
[10] This ruling is directed only to the taxpayer who requested it. Section 6610(k)(3) provides that it may not be used or cited as precedent.
[11] A copy of this letter should be attached to the federal income tax returns of the taxpayers involved for the taxable year in which the transactions covered by this ruling is consummated.
Sincerely Yours,
Associate Chief Counsel (Corporate)
By: Christopher W. Schoen
Assistant to the Chief, CC:CORP:1
- Institutional AuthorsInternal Revenue Service
- Code Sections
- Subject Area/Tax Topics
- Index Termsreorganizations, controlled firm stockreorganizations, D
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2001-4788 (7 original pages)
- Tax Analysts Electronic Citation2001 TNT 34-22
