DIVISION OF BUSINESSES BETWEEN TWO SHAREHOLDERS IS TAX-FREE.
LTR 200039021
- Institutional AuthorsInternal Revenue Service
- Code Sections
- Subject Area/Tax Topics
- Index Termsreorganizations, controlled firm stockreorganizations, DS corporations, elections
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2000-25021 (5 original pages)
- Tax Analysts Electronic Citation2000 TNT 191-15
Index Number: 355.01-01, 368.04-00, 1362.00-00
Release Date: 9/29/2000
Date: June 27, 2000
Refer Reply To: CC:DOM:CORP:3-PLR-106771-00
Re: * * *
LEGEND:
Distributing = * * *
Controlled = * * *
business m = * * *
State X = * * *
Date a = * * *
Shareholder A = * * *
Shareholder B = * * *
aa = * * *
bb = * * *
Dear * * *
[1] This is in response to a letter dated March 7, 2000, for rulings concerning the federal income tax consequences of a proposed transaction. Additional information was submitted May 18, 2000 and May 26, 2000. The material information submitted for consideration is summarized below.
[2] Distributing, a State X corporation, is currently engaged in business m and uses the cash method of accounting. Distributing made an election to be treated as an S Corporation effective on Date a. Distributing has two shareholders, Shareholder A and Shareholder B, who own aa% and bb% interests, respectively. Controlled will be a separate and independent State X corporation also engaged in business m, using the cash method of accounting, and plans to elect to be treated as an S corporation.
[3] We have received financial information indicating that business m of Distributing has had gross receipts and operating expenses representative of the active conduct of a trade or business for each of the past five years.
[4] Significant disagreements between Shareholder A and Shareholder B have taken place which have adversely effected the management and operations of Distributing. Accordingly, the directors of Distributing propose the following transaction.
(1) Distributing will form Controlled as a wholly owned
subsidiary.
(2) Distributing will transfer certain assets and liabilities to
Controlled, constituting aa% of all assets and associated
liabilities that Distributing owns.
(3) Distributing will distribute all of the Controlled stock to
Shareholder A in exchange for all of Shareholder A's
Distributing stock.
[5] Following the transaction Controlled will be wholly owned by Shareholder A and Distributing will be wholly owned by Shareholder B.
[6] The taxpayers have made the following representations in connection with the transaction:
(a) The fair market value of the Controlled stock to be received
by Shareholder A will be approximately equal to the fair market
value of the Distributing stock surrendered in the exchange.
(b) 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.
(c) The 5 years of financial information submitted on behalf of
Distributing is representative of Distributing's present
operations, and with regard to such corporation, there have been
no substantial operational changes since the date of the last
financial statements submitted concerning business m.
(d) Following the transaction, Distributing and Controlled will
each continue independently and with its separate employees, the
active conduct of its share of all the integrated activities of
business m.
(e) The distribution of the stock of Controlled is carried out
for the following corporate business purpose: to resolve
management deadlock and alleviate associated inefficiencies. The
distribution of the stock of Controlled is motivated, in whole
or substantial part, by the above corporate business purpose.
(f) There is no plan or intention by the shareholders of
Distributing to sell, exchange, transfer by gift, or otherwise
dispose of any of their stock in either Distributing or
Controlled after the transaction.
(g) 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, 1996-1 C.B. 696.
(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) The total adjusted bases and fair market value of the assets
transferred to Controlled by Distributing equals or exceeds the
sum of the liabilities assumed by Controlled plus any
liabilities to which the transferred assets are subject.
(j) No property being transferred by Distributing to Controlled
has had or will have a section 46 investment credit.
(k) The liabilities assumed in the transaction and the
liabilities to which the transferred assets are subject were
incurred in the ordinary course of business and are associated
with the assets being transferred.
(l) Distributing neither accumulated its receivables nor made
extraordinary payment of its payables in anticipation of the
transaction.
(m) No intercorporate debt will exist between Distributing and
Controlled at the time of, or subsequent to, the distribution of
Controlled stock.
(n) 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.
(o) No two parties to this transaction are investment companies
as defined in sections 368(a)(2)(F)(iii) and (iv).
(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 Distributing or Controlled.
(q) Distributing is currently an S corporation (within the
meaning of section 1361(a)). Controlled will elect to be an S
corporation pursuant to section 1362(a) on the first available
date after the distribution and there is no plan or intent to
revoke or otherwise terminate the S corporation election of
either Distributing or Controlled.
[7] Based solely on the information submitted and the representations as set forth above it is held as follows:
(1) The transfer by Distributing of certain assets and
liabilities to Controlled solely in exchange for all of the
stock of Controlled and the assumption by Controlled of certain
liabilities of Distributing followed by the distribution of the
Controlled stock to Shareholder A in exchange for all
Shareholder A's Distributing stock, as described above, will be
a reorganization within the meaning of section 368(a)(1)(D).
Distributing and Controlled will each be a "party to a
reorganization" within the meaning of section 368(b).
(2) Distributing will recognize no gain or loss upon the
transfer of its assets and liabilities to Controlled in exchange
for Controlled stock and the assumption by Controlled of certain
liabilities (sections 361(a) and 357(a)).
(3) Controlled will recognize no gain or loss on the receipt of
the Distributing assets received in exchange for Controlled
stock (section 1032(a)).
(4) Controlled's basis in each asset received from Distributing
will equal the basis of such asset in the hands of Distributing
immediately prior to the transaction (section 362(b)).
(5) Controlled's holding period for each asset received from
Distributing will include the period during which Distributing
held such asset (section 1223(2)).
(6) Distributing will recognize no gain or loss on the
distribution of the Controlled stock to Shareholder A (section
361(c)(1)).
(7) Shareholder A will recognize no gain or loss (and no amount
will be included in Shareholder A's income) upon receipt of
Controlled stock in exchange for Shareholder A's Distributing
stock (section 355(a)(1)).
(8) The basis of the Controlled stock received by Shareholder A
in the transaction will equal the basis of the Distributing
stock surrendered in exchange therefor (section 358(a)(1)).
(9) The holding period of the Controlled stock received by
Shareholder A in the transaction will include the holding period
of the Distributing stock surrendered in exchange therefor,
provided Shareholder A held the Distributing stock as a capital
asset on the date of the distribution (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) of the Income Tax Regulations.
(11) Distributing's momentary ownership of stock of Controlled
as part of a reorganization under section 368(a)(1)(D) will not
cause Controlled to have an ineligible shareholder for any
portion of its first taxable year under section 1361(b)(1)(B).
Therefore, assuming Controlled will otherwise meet the
requirements of a small business corporation under section 1361
of the Code, Controlled will be eligible to make an S
corporation election under section 1362(a) for its first
taxable year.
[8] Except as specifically set forth above, no opinion is expressed concerning the federal tax consequences of the proposed transaction under any other provision of the Code and Regulations, or about the tax treatment of any conditions existing at the time of, or effects resulting from the proposed transaction. Specifically, no opinion is expressed concerning whether Distributing or Controlled is otherwise eligible to be an S corporation.
[9] 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 ruling letter is consummated.
[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] Pursuant to a power of attorney on file in this office, a copy of this letter has been sent to the taxpayer.
Sincerely yours,
Assistant Chief Counsel
(Corporate)
By: Ken Cohen
Senior Technical Reviewer,
Branch 3
- Institutional AuthorsInternal Revenue Service
- Code Sections
- Subject Area/Tax Topics
- Index Termsreorganizations, controlled firm stockreorganizations, DS corporations, elections
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2000-25021 (5 original pages)
- Tax Analysts Electronic Citation2000 TNT 191-15
