TRANSFER OF STOCK TO S CORPORATION WILL BE TAX-FREE.
LTR 200010039
- Institutional AuthorsInternal Revenue Service
- Code Sections
- Subject Area/Tax Topics
- Index TermsS corporations
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2000-7139 (9 original pages)
- Tax Analysts Electronic Citation2000 TNT 49-40
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
- Institutional AuthorsInternal Revenue Service
- Code Sections
- Subject Area/Tax Topics
- Index TermsS corporations
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2000-7139 (9 original pages)
- Tax Analysts Electronic Citation2000 TNT 49-40