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TRANSFER OF STOCK TO S CORPORATION WILL BE TAX-FREE.

DEC. 7, 1999

LTR 200010039

DATED DEC. 7, 1999
DOCUMENT ATTRIBUTES
  • Institutional Authors
    Internal Revenue Service
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    S corporations
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2000-7139 (9 original pages)
  • Tax Analysts Electronic Citation
    2000 TNT 49-40
Citations: LTR 200010039

Index Number: 1361-05-00

 

Release Date: 3/10/2000

 

 

                                             Date: December 7, 1999

 

 

             Refer Reply To: CC:DOM:CORP:1-PLR-113361-99

 

 

LEGEND:

 

Newco = * * *

 

S1 = * * *

 

S2 = * * *

 

LLC = * * *

 

Grantor

 

Trust = * * *

 

Shareholder A = * * *

 

Shareholder B = * * *

 

Shareholder C = * * *

 

Shareholder D = * * *

 

Shareholder E = * * *

 

State X = * * *

 

Business W = * * *

 

Business Y = * * *

 

Business Z = * * *

 

Source A = * * *

 

Source B = * * *

 

 

Dear * * *

[1] We respond to your August 3, 1999 request for rulings as to the federal income tax consequences of a proposed transaction. Additional information was received on September 22, 1999 and September 29, 1999. The information submitted is substantially as set forth below.

[2] S1, an S corporation incorporated in State X, conducts Business Y. S1 wholly owns LLC, which conducts Business W. S2, an S corporation incorporated in State X, conducts Business Z. S1 is owned by Grantor Trust and eighteen individual shareholders. S2 is owned by the same eighteen individual shareholders. Shareholders A, B, D, and E are individuals who were shareholders of S1 and S2. Shareholder C remains a shareholder of S1 and S2. During the three years prior to the proposed transaction below, S1 and S2 redeemed stock of Shareholders A, B, C, D, and E. Each redemption was made pursuant to a redemption agreement with an employee.

[3] Pursuant to what the taxpayer represents are valid business reasons, the taxpayers propose the following transaction:

     (i) The shareholders of S1 and S2 will form Newco, and will

 

     elect to treat Newco as an S corporation effective as of the

 

     first day of its taxable year. The shareholders of S1 will

 

     transfer to Newco, in exchange for Newco stock, all their stock

 

     in S1. The shareholders of S2 will transfer to Newco, in

 

     exchange for Newco stock, all their stock in S2.

 

 

[4] The taxpayers represent to the best of their knowledge and belief, that the proposed stock transfers qualify under section 351.

     (ii) Newco will elect under section 1361(b)(3)(B) of the Code

 

     to treat S1 and S2 as Qualified Subchapter S Subsidiaries

 

     ("QSubs").

 

 

[5] The taxpayers have made the following representations with respect to the proposed transfers:

     (a) No stock or securities will be issued for services rendered

 

         to or for the benefit of Newco in connection with the

 

         proposed transaction, and no stock or securities will be

 

         issued for indebtedness of Newco or for interest on

 

         indebtedness of Newco.

 

 

     (b) No liabilities of the shareholders of S1 and S2 will be

 

         assumed by Newco in connection with the transfer of such

 

         stock.

 

 

     (c) The transfers are not the result of the solicitation by a

 

         promoter, broker, or investment house.

 

 

     (d) The transferors will not retain any rights in the property

 

         transferred to Newco.

 

 

     (e) Any debt to which the S1 stock is subject was incurred to

 

         acquire such stock and was incurred when such stock was

 

         acquired, and each transferor is transferring all of the

 

         stock to which such debt was incurred.

 

 

     (f) The adjusted basis and fair market value of the assets to be

 

         transferred by the transferors to Newco will, in each

 

         instance, be equal to or exceed the sum of the liabilities

 

         to be assumed by Newco plus any liabilities to which the

 

         transferred assets are subject.

 

 

     (g) There is no indebtedness between Newco and the transferors

 

         and there will be no indebtedness created in favor of the

 

         transferors as a result of the transaction.

 

 

     (h) The transfers and exchanges will occur under a plan agreed

 

         upon before the transaction in which the rights of the

 

         parties are defined.

 

 

     (i) All exchanges will occur on approximately the same date.

 

 

     (j) There is no plan on the part of Newco to redeem or otherwise

 

         reacquire any stock or indebtedness issued in the transfer.

 

         However, certain stock of both S1 and S2 held by employees

 

         is subject to redemption agreements. These redemption

 

         agreements will be amended to apply to Newco stock. If an

 

         employee should retire or otherwise terminate his employment

 

         from either company, his stock would be redeemed at book

 

         value per share.

 

 

     (k) Taking into account any issuance of additional shares of

 

         Newco stock; any issuance of stock for services; the

 

         exercise of any Newco stock rights, warrants, or

 

         subscriptions; a public offering of Newco stock; and the

 

         sale, exchange, transfer by gift, or other disposition of

 

         any of the stock of Newco to be received in the exchange,

 

         the transferors will be in control of Newco within the

 

         meaning of section 368(c).

 

 

     (l) Newco will remain in existence and will retain and use the

 

         property transferred to it in a trade or business.

 

 

     (m) There is no plan or intention by Newco to dispose of

 

         transferred property other than in the normal course of

 

         business operations.

 

 

     (n) Each of the parties to the transaction will pay his or her

 

         own expenses, if any, incurred in connection with the

 

         proposed transaction.

 

 

     (o) Newco will not be an investment company within the meaning

 

         of section 351(e)(1) and section 1.351-1(c)(1)(ii) of the

 

         Income Tax Regulations.

 

 

     (p) None of the transferors are under the jurisdiction of a

 

         court in a title 11 case or similar case (within the

 

         meaning of section 368(a)(3)(A)) and the stock or securities

 

         received in the exchange will not be used to satisfy the

 

         indebtedness of such debtor.

 

 

     (q) Newco will not be a personal service corporation within the

 

         meaning of section 269A.

 

 

[6] With respect to the QSub elections, the taxpayers have made the following representations:

     (r) Newco, on the date of filing the QSub elections, will be the

 

         owner of 100% of the single outstanding class of both S1 and

 

         S2 stock.

 

 

     (s) The fair market value of the assets of each S1 and S2 will

 

         exceed their respective liabilities at the time of the QSub

 

         elections.

 

 

     (t) Newco will not be an organization that is exempt from

 

         federal income tax under section 501 or any other provision

 

         of the Code.

 

 

     (u) The fair market value of the Newco stock received by the S1

 

         shareholders will be approximately equal to the fair market

 

         value of the S1 stock surrendered in the exchange.

 

 

     (v) The fair market value of the Newco stock received by the S2

 

         shareholders will be approximately equal to the fair market

 

         value of the S2 stock surrendered in the exchange.

 

 

     (w) Newco will acquire at least ninety percent of the fair

 

         market value of the net assets and at least seventy percent

 

         of the fair market value of the gross assets held by S1

 

         immediately prior to the transaction. For purposes of this

 

         representation, amounts used by S1 to pay its reorganization

 

         expenses, and any redemptions and distributions (excluding

 

         regular, normal dividends) made by S1 immediately preceding

 

         the transfer will be included as assets of S1 held

 

         immediately before the transaction.

 

 

     (x) Newco will acquire at least ninety percent of the fair

 

         market value of the net assets and at least seventy percent

 

         of the fair market value of the gross assets held by S2

 

         immediately prior to the transaction. For purposes of this

 

         representation, amounts used by S2 to pay its reorganization

 

         expenses, and any redemptions and distributions (excluding

 

         regular, normal dividends) made by S2 immediately preceding

 

         the transfer will be included as assets of S2 immediately

 

         before the transaction.

 

 

     (y) After the transaction, the former shareholders of S1 and S2

 

         will be in control of Newco within the meaning of section

 

         368(a)(2)(H).

 

 

     (z) Newco has no intention to reacquire any of its stock issued

 

         in the proposed transactions.

 

 

    (aa) Newco has no plan or intention to sell or otherwise dispose

 

         of any of the assets of S1 acquired in the proposed

 

         transactions, except for dispositions made in the ordinary

 

         course of business.

 

 

    (bb) Newco has no plan or intention to sell or otherwise dispose

 

         of any of the assets of S2 acquired in the proposed

 

         transactions, except for dispositions made in the ordinary

 

         course of business.

 

 

    (cc) The liabilities of S1 and S2 assumed by Newco in the

 

         proposed transactions and the liabilities to which the

 

         transferred assets are subject were incurred in the ordinary

 

         course of their businesses.

 

 

    (dd) Following the proposed transactions, Newco will continue the

 

         historic business of S1 or use a significant portion of S1's

 

         historic business assets in a business.

 

 

    (ee) Following the proposed transactions, Newco will continue the

 

         historic business of S2 or use a significant portion of S2's

 

         historic business assets in a business.

 

 

    (ff) At the time of the proposed transactions, Newco will not

 

         have outstanding any warrants, options, convertible

 

         securities, or any other type of right pursuant to which any

 

         person could acquire stock in Newco that, if exercised or

 

         converted, could affect the acquisition of "control" of

 

         Newco by the former shareholders of S1 and S2 within the

 

         meaning of section 368(a)(2)(H).

 

 

    (gg) Newco, S1, and S2 will pay their respective expenses, if

 

         any, incurred in connection with the transactions.

 

 

    (hh) No two parties to the transaction are investment companies

 

         within the meaning of section 368(a)(2)(F)(iii) and (iv).

 

 

    (ii) Except with respect to the redemption of stock of S1 held by

 

         Shareholder A, Shareholder B, Shareholder C, Shareholder D,

 

         and Shareholder E, no shares of S1 will have been redeemed

 

         during the three years preceding the adoption of the plan of

 

         liquidation of S1.

 

 

    (jj) Except with respect to the redemption of stock of S2 held by

 

         Shareholder A, Shareholder B, Shareholder C, Shareholder D,

 

         and Shareholder E, no shares of S2 will have been redeemed

 

         during the three years preceding the adoption of the plan of

 

         liquidation of S2.

 

 

    (kk) Other than the formation of new subsidiary entities, to the

 

         best of the knowledge of S1's and S2's management, neither

 

         S1 nor S2 will have acquired assets in any nontaxable

 

         transactions except for acquisitions occurring more than

 

         three years prior to the date that Newco makes QSub

 

         elections for S1 and S2, respectively.

 

 

    (ll) No assets of S1 or S2 have been, or will be, disposed of by

 

         either S1 or S2 except for dispositions in the ordinary

 

         course of business and dispositions occurring more than

 

         three years prior to Newco's QSub elections with respect to

 

         S1 and S2 respectively.

 

 

    (mm) The deemed liquidations of S1 and S2 will not be preceded

 

         by, nor will they be followed by, reincorporation in, or

 

         transfer or sale to, a recipient corporation ("Recipient")

 

         of any of the businesses or assets of S1 or S1, if persons

 

         holding, directly or indirectly, more than 20% in value of

 

         the stock of S1 or S2 also held, directly or indirectly,

 

         more than 20% in value of the stock in Recipient. For

 

         purposes of this representation, ownership is determined by

 

         application of the constructive ownership rules of section

 

         318(a) as modified by section 304(c).

 

 

    (nn) Prior to making the QSub elections with respect to S1 and

 

         S2, no assets of S1 or S2 will be distributed in kind,

 

         transferred, or sold to Newco except for (i) transactions

 

         occurring in the normal course of business and (ii)

 

         transactions occurring more than three years prior to making

 

         the QSub elections with respect to S1 and S2.

 

 

[7] Based solely on the facts submitted and the representations made, we rule as follows:

     (1) Newco, S1, S2, Grantor Trust, and the Individual

 

         Shareholders recognize no gain or loss as a result of the

 

         deemed transfer of assets from S1 and S2, respectively, to

 

         Newco pursuant to Newco's QSub elections with respect to S1

 

         and S2.

 

 

     (2) The tax years of S1 and S2, respectively, will end at the

 

         close of the day before their QSub elections become

 

         effective (section 1.381(b)-1(a)) and as provided in section

 

         381(a) and section 1.381(a)-(1), Newco will succeed to and

 

         take into account those attributes of S1 and S2 described in

 

         section 381(c), subject to the provisions and limitations

 

         specified in sections 381, 382, 383, and 384, if applicable,

 

         and the regulations thereunder.

 

 

     (4) The basis of the assets of S1 and S2 in the hands of Newco

 

         will be the same as the basis of such assets in the hands of

 

         S1 and S2 immediately prior to transaction.

 

 

     (5) The holding period of the assets of S1 and S2 in the hands

 

         of Newco will include the period during which S1 and S2,

 

         respectively, held the assets.

 

 

     (6) Newco will succeed to the Accumulated Adjustments Accounts

 

         of S1 and S2.

 

 

     (7) Neither S1 nor S2 will be treated as a C corporation for any

 

         period solely because of the transfer of their respective

 

         stock to Newco.

 

 

     (8) The inventories of S1 deemed transferred to Newco under the

 

         proposed transaction will be taken into account by Newco on

 

         the same basis and methods on which such inventories were

 

         taken into account by S1. Newco will not be required to

 

         treat the inventory received in the proposed transaction as

 

         separate from otherwise identical inventory subsequently

 

         acquired or produced.

 

 

     (9) Section 1363(d) will not require S1 to include in its gross

 

         income any LIFO recapture amount for the inventory deemed

 

         transferred to Newco.

 

 

    (10) Section 1374(d)(8) will not subject any assets that are

 

         transferred from S1 or S2 to Newco in the proposed

 

         transaction to the built-in gain provisions of section 1374,

 

         to the extent that the assets are not presently subject to

 

         the built-in gain provisions.

 

 

    (11) Rental income received by S2 from Business Y will not be

 

         considered passive investment income for purposes of section

 

         1362(d)(3)(C) or section 1375.

 

 

    (12) Income received by LLC from Source A will not be considered

 

         passive investment income for purposes of section

 

         1362(d)(3)(C) or section 1375. We express no opinion on

 

         income from Source B.

 

 

[8] No opinion is expressed concerning the federal income tax treatment of the transactions under other provisions of the Code or Income Tax Regulations or about the tax treatment of any conditions existing at the time of, or effects resulting from, the transactions that are not covered by the above rulings.

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

[10] 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 transaction covered by this letter ruling is consummated.

[11] In accordance with the Power of Attorney on file with this office, copies of this letter are being sent to your authorized representatives.

                                   Sincerely yours,

 

 

                                   Assistant Chief Counsel

 

                                     (Corporate)

 

 

                               By: Christopher W. Schoen

 

                                   Assistant to the Chief, Branch 1
DOCUMENT ATTRIBUTES
  • Institutional Authors
    Internal Revenue Service
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    S corporations
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2000-7139 (9 original pages)
  • Tax Analysts Electronic Citation
    2000 TNT 49-40
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