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SPIN-OFF TO PROTECT ASSETS IS TAX-FREE.

FEB. 17, 1999

LTR 199920024

DATED FEB. 17, 1999
DOCUMENT ATTRIBUTES
  • Institutional Authors
    Internal Revenue Service
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    reorganizations, controlled firm stock
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 1999-18344 (4 original pages)
  • Tax Analysts Electronic Citation
    1999 TNT 99-32
Citations: LTR 199920024

Index number: 355.04-00

 

Release Date: 5/21/1999

 

 

                                             Date: February 17, 1999

 

 

                     CC:DOM:CORP:3 PLR-120308-98

 

 

LEGEND:

 

Distributing = * * *

 

Controlled = * * *

 

IndividualA = * * *

 

Business1 = * * *

 

Business2 = * * *

 

Year1 = * * *

 

Year2 = * * *

 

StateX = * * *

 

 

Dear * * *

[1] This letter replies to your letter dated October 21, 1998, requesting rulings on behalf of the above referenced taxpayer. Additional information was provided in letters dated December 16, 1998, and January 21 and February 1, 1999. The facts submitted for consideration are summarized below.

[2] IndividualA owns all the stock of Distributing, a StateX corporation engaged in Business1. Distributing became engaged in Business2 in Year1. In Year2, Distributing formed Controlled as a StateX corporation, transferring Business2 to Controlled in exchange for all the stock of Controlled. Distributing has owned all the Controlled stock since that time. Distributing and Controlled are both calendar year, cash basis taxpayers. They do not file a consolidated return. Distributing and Controlled are both C corporations. Financial information has been received indicating that Distributing (and, since its inception, Controlled) had gross receipts and operating expenses for Business1 and for Business2 that are representative of the active conduct of a trade or business for each of the past five years.

[3] Distributing has submitted information evidencing that both Business1 and Business2 present substantial risk of loss. Although Distributing and Controlled have insurance, they cannot reasonably obtain adequate insurance and the potential loss (beyond that for which they can obtain insurance) far exceeds the combined value of Distributing and Controlled. Distributing has also submitted information indicating that, under StateX law, the likelihood of claimants against one corporation reaching assets of the other corporation is significantly lessened if the corporations are held separately by an individual. Accordingly, to protect the assets of each corporation from claims against the other, Distributing proposes to distribute all the stock of Controlled to its sole shareholder, IndividualA.

[4] Distributing has made the following representations in connection with the proposed transaction:

     (a) Indebtedness owed by Controlled to Distributing after the

 

         distribution of the Controlled stock will not constitute

 

         stock or securities.

 

 

     (b) No part of the consideration to be distributed by

 

         Distributing will be received by IndividualA as a creditor,

 

         employee, or in any capacity other than that of a

 

         shareholder of the corporation.

 

 

     (c) The five years of financial information submitted on behalf

 

         of Distributing and Controlled is representative of the

 

         corporations' present operation and, with regard to such

 

         corporations, there have been no substantial operational

 

         changes (other than BusinessB being transferred to

 

         Controlled in Year2) since the date of the last financial

 

         statements submitted.

 

 

     (d) Following the transaction, Distributing and Controlled will

 

         each continue the active conduct of its business,

 

         independently and with its separate employees.

 

 

     (e) The distribution of the stock of Controlled is carried out

 

         in order to shield both Distributing and Controlled from the

 

         risks of the other corporation. The distribution of the

 

         stock of Controlled is motivated, in whole or substantial

 

         part, by this corporate business purpose.

 

 

     (f) IndividualA has no plan or intention to sell, exchange,

 

         transfer by gift, or otherwise dispose of any of the stock

 

         or securities of either Distributing or Controlled after the

 

         transaction.

 

 

     (g) Neither Distributing nor Controlled has any plan or

 

         intention, 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.

 

 

     (h) 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 after the transaction,

 

         except in the ordinary course of business.

 

 

     (i) Distributing neither accumulated its receivables nor made

 

         extraordinary payment of its payables in anticipation of the

 

         transaction.

 

 

     (j) Other than current rent and other accounts payable resulting

 

         from the ordinary course of the trade or business, there

 

         will be no intercorporate debt existing between Distributing

 

         and Controlled at the time of, or subsequent to, the

 

         distribution of the Controlled stock.

 

 

     (k) 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.

 

 

     (l) Neither Distributing nor Controlled intend to elect to be

 

         treated as an S corporation under section 1362(a) after the

 

         distribution.

 

 

     (m) 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 percent or more of the total

 

         combined voting power of all classes of stock of either

 

         Distributing or Controlled, or stock possessing 50 percent

 

         or more of the total value of all classes of stock of either

 

         Distributing or Controlled.

 

 

[5] Based solely on the information submitted and on the representations set forth above, we hold as follows:

     (1) Distributing will recognize no gain or loss upon the

 

         distribution to IndividualA of all of the Controlled stock

 

         (section 355(c)).

 

 

     (2) No gain or loss will be recognized by, and no amount will be

 

         included in the income of, IndividualA upon receipt of the

 

         Controlled stock (section 355(a)(1)).

 

 

     (3) The basis of the stock of Distributing and of Controlled in

 

         the hands of IndividualA after the distribution will be the

 

         same as the aggregate basis of the 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) of the regulations (sections 358(a), (b) and

 

         (c)).

 

 

     (4) The holding period of the Controlled stock received by

 

         IndividualA will include the holding period of the

 

         Distributing stock with respect to which the distribution

 

         will be made, provided that IndividualA holds the

 

         Distributing stock as a capital asset on the date of the

 

         distribution (section 1223(1)).

 

 

     (5) As provided in section 312(h), proper allocation of earnings

 

         and profits between Distributing and Controlled will be made

 

         in accordance with section 1.312-10(b).

 

 

[6] We express no opinion 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 transaction that are not specifically covered by the above rulings.

[7] This ruling has no effect on any earlier documents and is directed only to the taxpayer on whose behalf it was requested. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

[8] 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.

[9] In accordance with the power of attorney on file in this office, we are sending a copy of this letter to the taxpayer.

                                   Sincerely yours,

 

 

                                   Assistant Chief Counsel

 

                                     (Corporate)

 

 

                               By: Ken Cohen

 

                                   Senior Technician Reviewer,

 

                                     Branch 3
DOCUMENT ATTRIBUTES
  • Institutional Authors
    Internal Revenue Service
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    reorganizations, controlled firm stock
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 1999-18344 (4 original pages)
  • Tax Analysts Electronic Citation
    1999 TNT 99-32
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