ACQUISITION OF THREE RICs BY ANOTHER IS C REORG.
LTR 200039022
- Institutional AuthorsInternal Revenue Service
- Code Sections
- Subject Area/Tax Topics
- Index Termsreorganizations, C
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2000-25022 (7 original pages)
- Tax Analysts Electronic Citation2000 TNT 191-18
Index Number: 0368.03-01, 0368.13-00
Release Date: 9/29/2000
Date: June 27, 2000
Refer Reply To: CC:DOM:CORP:5-PLR-104466-00;
PLR-104468-00;PLR-104467-00
Re: * * *
LEGEND
Acquiring = * * *
Target 1 = * * *
Target 2 = * * *
Target 3 = * * *
State A = * * *
State B = * * *
Dear * * *
[1] We reply to a letter, dated February 22, 2000, from your representatives in which rulings are requested as to the federal income tax consequences of a proposed transaction. The information submitted for consideration is summarized below.
[2] Acquiring is organized under the laws of State A and registered under the Investment Company Act of 1940 (the 1940 Act) as a non-diversified open-end management investment company. Acquiring has elected to be taxed as a regulated investment company (RIC) under sections 851 through 855 of the Internal Revenue Code. Acquiring's investment objective is to provide shareholders with high total investment return by investing primarily in the securities of corporate and governmental issuers.
[3] Target 1 is organized under the laws of State B and registered under the 1940 Act as a non-diversified open-end management investment company. Target has elected to be taxed as a RIC under sections 851 through 855. Target's investment objective is to provide shareholders with high total investment return by investing a significant portion, or as much as all, of its total assets in equity securities. Target 1 also may invest a smaller portion of its assets in junk bonds and will not invest in debt securities rated CC or lower by S&P or Ca or lower by Moody's.
[4] Target 2 is organized under the laws of State B and registered under the 1940 Act as a non-diversified open-end management investment company. Target has elected to be taxed as a RIC under sections 851 through 855. Target's investment objective is to provide shareholders with a high level of current income by investing in U.S. and foreign debt, equity and money market securities and, secondarily, capital appreciation.
[5] Target 3 is organized under the laws of State B and registered under the 1940 Act as a non-diversified open-end management investment company. Target has elected to be taxed as a RIC under sections 851 through 855. Target's investment objective is to provide shareholders with a high total investment return through a fully managed investment policy utilizing U.S. and foreign equity, debt and money market securities, the combination of which will be varied from time to time both with respect to types of securities and markets in response to changing economic trends. Target 3 may invest up to 34 percent of its assets in junk bonds.
[6] Acquiring, Target 1, Target 2 and Target 3 each offers four classes of shares with substantially similar rights and fees. All file their income tax returns based on the accrual method of accounting.
[7] Acquiring and each of Target 1, Target 2 and Target 3 have approved a plan of reorganization for what are represented to be valid business reasons. Pursuant to the plan, the following transaction is proposed (the Transaction):
(i) Target 1, Target 2 and Target 3 (the Targets) will
transfer all of their assets and liabilities to Acquiring
in exchange for newly-issued Acquiring voting common stock
(the Transfer).
(ii) Each of Target 1, Target 2 and Target 3 will liquidate and
distribute to their respective shareholders all of the
Acquiring stock received in the exchange. Each shareholder
of a Target will receive, on a pro rata basis, shares of
the class of Acquiring stock with the same class
designation and respective rights as the Target stock held
by such shareholder immediately prior to the Transfer.
(iii) Each Target will dissolve in accordance with the laws of
State B and will terminate its registration under the 1940
Act.
(iv) Acquiring may sell up to 66 percent of the assets received
in the Transaction to unrelated purchasers and will
reinvest any proceeds consistent with its investment
objectives and policies.
The taxpayers have made the following representations in
connection with the Transaction:
(a) The fair market value of the Acquiring stock received by
each Target shareholder will be approximately equal to the
fair market value of the Target stock surrendered in the
exchange.
(b) Acquiring will acquire at least 90 percent of the fair
market value of the net assets and at least 70 percent of
the fair market value of the gross assets held by each of
the Targets immediately prior to the Transaction. For
purposes of this representation, amounts used by a Target to
pay its reorganization expenses, amounts paid by a Target to
shareholders who receive cash or other property, and all
redemptions and distributions (except for redemptions in the
ordinary course of a Target's business as an open-end
investment company as required by section 22(e) of the 1940
Act pursuant to a demand of a shareholder and regular,
normal dividends) made by a Target immediately preceding the
transfer will be included as assets of the Target held
immediately prior to the Transaction.
(c) Acquiring has no plan or intention to reacquire any of its
stock issued in the Transaction except in connection with
its legal obligations under section 22(e) of the 1940 Act.
(d) After the Transaction, Acquiring will use the assets
acquired from the Targets in its business, except that a
portion of these assets may be sold or otherwise disposed of
in the ordinary course of Acquiring's business. Any proceeds
will be invested in accordance with Acquiring's investment
objectives. Acquiring has no plan or intention to sell or
dispose of any of the assets of the Targets acquired in the
Transaction, except for dispositions made in the ordinary
course of business.
(e) Each Target will distribute to its shareholders the stock of
Acquiring it receives pursuant to the plan of
reorganization.
(f) The liabilities of each Target assumed by Acquiring and any
liabilities to which the transferred assets of a Target are
subject were incurred by the Target in the ordinary course
of its business.
(g) Following the Transaction, Acquiring will continue the
historic business of each Target or use a significant
portion of each Target's historic business assets in the
continuing business.
(h) Acquiring, each Target, and the shareholders of each Target
will pay their respective expenses, if any, incurred in
connection with the Transaction.
(i) There is no intercorporate indebtedness existing between any
Target and Acquiring that was issued, acquired or will be
settled at a discount.
(j) Acquiring and each Target meet the requirements of a
regulated investment company as defined in section
368(a)(2)(F).
(k) The fair market value of the assets of each Target
transferred to Acquiring will equal or exceed the sum of the
liabilities assumed by Acquiring, plus the amount of
liabilities, if any, to which the transferred assets are
subject.
(l) The Targets are not under the jurisdiction of a court in a
Title 11 or similar case within the meaning of section
368(a)(3)(A).
(m) The Targets and Acquiring have elected to be taxed as RICs
under section 851 and, for all of their taxable periods
(including the last short taxable period ending on the date
of the Transaction, for the Targets), have qualified for the
special tax treatment afforded RICs under the Internal
Revenue Code, and after the Transaction, Acquiring intends
to continue to so qualify.
(n) There is no plan or intention for Acquiring (the issuing
corporation as defined in section 1.368-1(b) of the Income
Tax Regulations), or any person related (as defined in
section 1.368-1(e)(3)) to Acquiring, to acquire, during the
five year period beginning on the date of the Transaction,
with consideration other than Acquiring stock, Acquiring
stock furnished in exchange for a proprietary interest in a
Target in the Transaction, either directly or through any
transaction, agreement, or arrangement with any other
person, other than redemptions in the ordinary course of
Acquiring's business as an open-end investment company as
required by section 22(e) of the 1940 Act.
(o) During the five year period ending on the date of the
Transaction, (i) neither Acquiring, nor any person related
(as defined in section 1.368-1(e)(3)) to Acquiring, will
have acquired Target stock with consideration other than
Acquiring stock, (ii) no Target, nor any person related (as
defined in section 1.368-1(e)(3)) to a Target, will have
acquired such Target's stock with consideration other than
Acquiring stock or the Target's stock, except for stock
redeemed in the ordinary course of such Target's business as
an open-end investment company as required by section 22(e)
of the 1940 Act; and (iii) no distributions will have been
made with respect to a Target's stock (other than ordinary,
regular, normal dividend distributions made pursuant to the
Target's historic dividend paying practice), either directly
or through any transaction, agreement, or arrangement with
any other person, except for (a) cash paid to dissenters and
(b) distributions described in sections 852 and 4982, as
required for Target's tax treatment as a RIC.
(p) The aggregate value of the acquisitions, redemptions, and
distributions described in paragraphs (n) and (o) above will
not exceed 50 percent of the value (without giving effect to
the acquisitions, redemptions, and distributions) of the
proprietary interest in a Target on the effective date of
the Transaction.
Based solely on the information submitted and on the
representations set forth above, we hold as follows:
(1) The acquisition by Acquiring of substantially all of the
assets of each Target in exchange for voting stock of
Acquiring and Acquiring's assumption of Targets'
liabilities, followed by the distribution by a Target to its
shareholders of Acquiring stock and any remaining assets, in
complete liquidation, will qualify as a reorganization
within the meaning of section 368(a)(1)(C). Each Target and
Acquiring will be a "party to a reorganization" within the
meaning of section 368(b).
(2) Each Target will recognize no gain or loss upon the transfer
of substantially all of its assets to Acquiring in exchange
for voting stock of Acquiring and Acquiring's assumption of
each Target's liabilities or upon the distribution of the
Acquiring stock to each Target's shareholders (section 361
(a) and (c) and section 357(a)).
(3) Acquiring will recognize no gain or loss on the receipt of
the assets of each Target in exchange for voting stock of
Acquiring (section 1032(a)).
(4) The basis of each Target's assets in the hands of Acquiring
will be the same as the basis of those assets in the hands
of the Targets immediately prior to the Transaction (section
362(b)).
(5) Acquiring's holding period for the Targets' assets acquired
will include the period during which such assets were held
by each Target (section 1223(2)).
(6) The shareholders of each Target will recognize no gain or
loss on the receipt of voting stock of Acquiring solely in
exchange for their Target stock (including fractional shares
to which they may be entitled) (section 354(a)(1)).
(7) The basis of the Acquiring stock received by Target
shareholders will be the same as the basis of the Target
stock surrendered in exchange therefor (section 358(a)(1)).
(8) The holding period of the Acquiring stock received by Target
shareholders in exchange for their Target stock (including
fractional shares to which they may be entitled) will
include the period that the shareholder held the Target
stock exchanged therefor, provided that the shareholder held
such stock as a capital asset on the date of the exchange
(section 1223(1)).
(9) Pursuant to section 381(a) and section 1.381(a)-1, the tax
year of each Target will end on the effective date of the
Transaction and Acquiring will succeed to and take into
account the items of each Target described in section 381
(c), subject to the provisions and limitations specified in
sections 381, 382, 383, and 384, and the regulations
thereunder.
[8] No opinion is expressed about the tax treatment of the 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 transactions that are not specifically covered by the above rulings. Specifically, no opinion was requested, and none is expressed, about whether Acquiring or the Targets qualify as RICs that are taxable under Subchapter M, Part 1 of the Code.
[9] 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 material submitted in support of the request for rulings, it is subject to verification on examination.
[10] This ruling is directed only to the taxpayer(s) requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.
[11] A copy of this letter must be attached to any income tax return to which it is relevant.
[12] In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to the taxpayers.
Sincerely,
Assistant Chief Counsel
(Corporate)
By
Filiz A. Serbes
Assistant to the Chief, Branch 5
- Institutional AuthorsInternal Revenue Service
- Code Sections
- Subject Area/Tax Topics
- Index Termsreorganizations, C
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2000-25022 (7 original pages)
- Tax Analysts Electronic Citation2000 TNT 191-18
