SPLIT OFF OF BUSINESS IS TAX-FREE.
LTR 200140033
- Institutional AuthorsInternal Revenue Service
- Code Sections
- Subject Area/Tax Topics
- Index Termsreorganizations, controlled firm stock
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2001-25523 (9 original pages)
- Tax Analysts Electronic Citation2001 TNT 195-61
Index Number: 355.00-00
Release Date: 10/5/2001
Date: July 3, 2001
Refer Reply To: CC:CORP:B05-PLR-106844-01
LEGEND:
Distributing = * * *
Intermediate = * * *
Controlled = * * *
Subsidiary = * * *
Family Group A = * * *
Family Group B = * * *
Business A = * * *
State X = * * *
State Y = * * *
Amount Z = * * *
Reason M = * * *
[1] This responds to your letter dated January 22, 2001, requesting rulings in connection with a proposed corporate separation pursuant to section 355 of the Internal Revenue Code. These rulings were requested for Distributing, Intermediate, and Controlled. Additional information was received in letters dated April 9, 2001, and June 19, 2001. The material information submitted is summarized below.
[2] Distributing is a State X corporation and is the parent of an affiliated group of corporations consisting of Distributing, Intermediate, Controlled, and Subsidiary. The affiliated group files its federal income tax returns on a consolidated basis. Family Group A and Family Group B own a significant portion of Distributing stock. The remainder of the stock is held by less than five percent shareholders.
[3] Distributing is a first-tier holding company that has owned 100% of the stock of outstanding. Intermediate is a second-tier holding company, incorporated in State Y, that has owned 100% of the stock of both Controlled and Subsidiary continuously for over five years. Both Controlled and Subsidiary have only common stock outstanding. Both Controlled and Subsidiary are State X corporations that have been directly engaged in Business A for over five years. Distributing and Intermediate are both indirectly engaged in Business A through their direct and indirect ownership of Controlled and Subsidiary.
[4] Subsidiary conducts Business A primarily in urban and suburban locations. Controlled conducts Business A primarily in rural locations. Subsidiary's business is expected to grow significantly faster than Controlled's business. Distributing's management plans a stock offering in the approximate amount of Amount Z to meet the requirements of this faster growth, to meet Reason M, and to reduce outstanding debt. Members of Family Group A and Family Group B will not acquire additional stock in the offering.
[5] Taxpayer has presented data indicating that this planned stock offering would attract significantly more funds per share if Controlled were separated from Subsidiary.
[6] To accomplish the separation of Subsidiary from Controlled, Distributing proposes the following transaction ("Split- off"):
(A) Intermediate will distribute all the shares of Controlled
common stock to Distributing ("First Distribution").
(B) Distributing will distribute all the shares of Controlled
common stock to electing shareholders in exchange for shares
of Distributing common stock ("Second Distribution").
(C) Distributing will make an offering of its common stock
within one year of the above distributions.
[7] The following representations have been made in connection with the above distributions:
(1) No part of the consideration to be distributed by
Distributing in the Split-off is being received by an
electing shareholder as a creditor, employee or in any
capacity other than that of a shareholder of Distributing.
(2) The five years of financial information submitted on behalf
of Distributing is representative of Distributing's present
operations, and with regard to Distributing, there have
been no substantial operational changes since the date of
the last financial statements submitted.
(3) The five years of financial information submitted on behalf
of Intermediate is representative of Intermediate's present
operations, and with regard to Intermediate, there have
been no substantial operational changes since the date of
the last financial statements submitted.
(4) The five years of financial information submitted on behalf
of Subsidiary is representative of Subsidiary's present
operations, and with regard to Subsidiary, there have been
no substantial operational changes since the date of the
last financial statements submitted.
(5) The five years of financial information provided on behalf
of Controlled is representative of Controlled's present
operations, and with regard to Controlled, there have been
no substantial operational changes since the date of the
last financial statements submitted.
(6) Following the Split-off, Distributing, Intermediate, and
Subsidiary on the one hand, and Controlled on the other
hand, will each continue the active conduct of their
respective trades or businesses, independently and with
their separate employees.
(7) Distributing, Intermediate, Controlled and their respective
shareholders will each pay their own expenses, if any,
incurred in connection with the Split-off.
(8) The distribution of Controlled common stock by Distributing
will be non-pro rata with respect to holders of
Distributing common stock. The electing shareholders will
surrender only their Distributing common stock in the
Split-off and will not receive any consideration other than
Controlled common stock in exchange for the Distributing
common stock surrendered therefor pursuant to the Split-
off.
(9) The fair market value of the Controlled common stock
received by each electing shareholder will be approximately
equal to the fair market value of the Distributing common
stock surrendered by the electing shareholder in the
exchange.
(10) The distributions of Controlled common stock are carried
out for the corporate business purposes of: (a)
facilitating a stock offering of Distributing common stock;
(b) facilitating the issuance of stock options to key
employees of Subsidiary; and (c) resolving Controlled's
competitive disadvantage because Controlled is controlled
by a holding company that is not located in Controlled's
rural community. The distributions of Controlled common
stock are motivated, in whole or substantial part, by this
corporate business purpose.
(11) Immediately after the distributions, at least 90 percent of
the fair market value of the gross assets of Intermediate
will consist of stock of controlled corporations that are
engaged in the active conduct of a trade or business as
defined in section 355(b)(2).
(12) Immediately after the distributions, at least 90 percent of
the fair market value of the gross assets of Distributing
will consist of stock of corporations at least 90 percent
of the fair market value of whose gross assets will consist
of stock of controlled corporations that are engaged in the
active conduct of a trade or business as defined in section
355(b)(2).
(13) Distributing is not an S corporation (within the meaning of
section 1361(a)), and there is no plan or intention by
Distributing or Controlled to make an S corporation
election pursuant to section 1362(a).
(14) There is no plan or intention by the shareholders or
security holders of Distributing to sell, exchange,
transfer by gift, or otherwise dispose of any of their
stock in, or securities of, either Distributing or
Controlled after the Split-off.
(15) 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.
(16) There is no plan or intention to liquidate Distributing,
Intermediate, Subsidiary or Controlled, to merge
Distributing, Intermediate, Subsidiary or Controlled with
any other corporation, or to sell or otherwise dispose of
the assets of Distributing, Intermediate, Subsidiary or
Controlled after the Split-off, except in the ordinary
course of business.
(17) The distributions are 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 shares of all classes of either
Distributing or Controlled.
(18) Neither Distributing nor any of its subsidiaries have
accumulated their receivables or made extraordinary payment
of their payables in anticipation of the transaction.
(19) No income items, including accounts receivable or any items
resulting from a sale, exchange or disposition of property,
that would have resulted in income to Distributing and no
items of expense will be transferred to Controlled, if
Distributing has earned the right to receive the income or
could claim a deduction for the expense under the accrual
or similar method of accounting.
(20) Except for deposits in the ordinary course of business, no
intercorporate debt will exist between Distributing and
Controlled or between Intermediate and Controlled at the
time of, or subsequent to, the distributions.
(21) Immediately before the distributions, items of income,
gain, loss, deduction and credit will be taken into account
as required by the applicable intercompany transaction
regulations under Treasury Regulation sections 1.1502-13
and 1.1502-14 as in effect at the time of the
distributions. Further, Distributing and Intermediate will
not have an excess loss account with respect to the stock
of Controlled.
(22) Payments made in connection with all continuing
transactions, if any, between Distributing or its
subsidiaries and Controlled will be for fair market value
based on terms and conditions arrived at by the parties
bargaining at arm's length.
(23) No two parties to the transactions are investment companies
as defined in section 368(a)(2)(F)(iii) and (iv).
(24) For purposes of section 355(d), immediately after the First
Distribution, no person (determined after applying section
355(d)(7)) will hold stock possessing 50 percent or more of
the total combined voting power or 50 percent or more of
the total value of shares of all classes of Intermediate
stock, that was acquired by purchase (as defined in section
355(d)(5) and (8)) during the five year period (determined
after applying section 355(d)(6)) ending on the date of the
First Distribution.
(25) For purposes of section 355(d), immediately after the First
Distribution, no person (determined after applying section
355(d)(7)) will hold stock possessing 50 percent or more of
the total combined voting power or 50 percent or more of
the total value of shares of all classes of Controlled
stock, that was acquired by purchase (as defined in section
355(d)(5) and (8)) during the five year period (determined
after applying section 355(d)(6)) ending on the date of the
First Distribution.
(26) For purposes of section 355(d), immediately after the
Second Distribution, no person (determined after applying
section 355(d)(7)) will hold stock possessing 50 percent or
more of the total combined voting power or 50 percent or
more of the total value of shares of all classes of
Distributing stock, that was acquired by purchase (as
defined in section 355(d)(5) and (8)) during the five year
period (determined after applying section 355(d)(6)) ending
on the date of the Second Distribution.
(27) For purposes of section 355(d), immediately after the
Second Distribution, no person (determined after applying
section 355(d)(7)) will hold stock possessing 50 percent or
more of the total combined voting power or 50 percent or
more of the total value of shares of all classes of
Controlled stock, that was acquired by purchase (as defined
in section 355(d)(5) and (8)) during the five year period
(determined after applying section 355(d)(6)) ending on the
date of the Second Distribution.
(28) To the best knowledge of Distributing and the
representatives of Distributing, there is no plan or
intention by the continuing shareholders to sell or
exchange any of their stock in Distributing subsequent to
the distribution date and there is no plan or intention by
the continuing shareholders to sell, exchange, transfer by
gift or otherwise dispose of a number of shares of
Distributing common stock that would reduce their ownership
of Distributing common stock to a number of shares having a
value, immediately after the Split-off, of less than 50% of
the value of all formerly outstanding shares of
Distributing common stock as of such time.
(29) To the best knowledge of Distributing and the
representatives of Distributing, there is no plan or
intention by the electing shareholders to sell or exchange
any of their stock in Controlled subsequent to the
distribution date and there is no plan or intention by the
electing shareholders to sell, exchange, transfer by gift
or otherwise dispose of a number of shares of Controlled
common stock that would reduce their ownership of
Controlled common stock to a number of shares having a
value, immediately after the Split-off, of less than 50% of
the value of all formerly outstanding shares of Controlled
common stock as of the same date.
[8] Based on the information submitted and the representations set forth above, we hold as follows:
(a) Intermediate will recognize no gain or loss upon the
distribution of the Controlled common stock to Distributing
in the First Distribution. Section 355(c).
(b) Distributing will recognize no gain or loss (and no amount
will be included in the income of Distributing) upon the
receipt of the Controlled common stock from Intermediate in
the First Distribution. Section 355(a)(1); Rev. Rul. 62-138,
1962-2 C.B. 95.
(c) The aggregate basis of the Intermediate common stock and the
Controlled common stock in the hands of Distributing after
the First Distribution will equal the basis of the
Intermediate common stock held by Distributing immediately
before the First Distribution, allocated in proportion to
their relative fair market values in accordance with
Treasury Regulation section 1.358-2(a)(2). Sections
358(b) and 358(c).
(d) The holding period of the Controlled common stock received
by Distributing will include Distributing's holding period
of the Intermediate common stock on which the distribution
of the Controlled common stock by Intermediate will be made,
provided that such Intermediate common stock is held as a
capital asset on the date of the First Distribution. Section
1223(1); Treasury Regulation section 1.1223-1(a).
(e) The current and accumulated earnings and profits of
Intermediate shall be adjusted as required under section
312(h) and Treasury Regulation sections 1.312-10(b)
and 1.1502-33.
(f) Distributing will recognize no gain or loss on the
distribution of Controlled Common Stock to the electing
shareholders in the Second Distribution. Section 355(c).
(g) The electing shareholders of Distributing will recognize no
gain or loss (and no amount will be included in the income
of any electing shareholder of Distributing) on the receipt
of Controlled common stock from Distributing in exchange for
their shares of Distributing common stock in the Second
Distribution. Section 355(a)(1).
(h) The aggregate basis, immediately after the Second
Distribution, of the Controlled common stock and the
Distributing common stock in the hands of an electing
shareholder that does not exchange all of its Distributing
common stock for shares of Controlled common stock will be
the same as the aggregate basis of the Distributing common
stock held by such electing shareholder immediately prior to
the distribution, allocated between the Distributing common
stock and the Controlled common stock in proportion to the
fair market value of each, in accordance with section
358(b), Treasury Regulation section 1.358-1(a) and Treasury
Regulation section 1.358-2(a)(2).
(i) The basis of the Controlled stock in the hands of
Distributing's shareholders that exchange all of their
Distributing common stock for shares of Controlled common
stock will be the same as the basis of the Distributing
stock surrendered in exchange therefor. Section 358(a)(1).
(j) The holding period of Controlled common stock received by an
electing shareholder of Distributing in the Second
Distribution will include the holding period of the
Distributing common stock on which the distribution of the
Controlled common stock by Distributing will be made,
provided that such Distributing common stock is held as a
capital asset on the date of the Second Distribution.
Section 1223(1); Treasury Regulation section 1.1223-1(a).
(k) The current and accumulated earnings and profits of
Distributing shall be adjusted as required under section
312(h) and Treasury Regulation sections 1.312-10(b)
and 1.1502-33.
[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] Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter.
[11] 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.
[12] In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to the taxpayer.
[13] A copy of this letter must be attached to any income tax return to which it is relevant.
Sincerely yours,
Associate Chief Counsel
(Corporate)
By: Charles Whedbee
Senior Technician Reviewer
Branch 5
- Institutional AuthorsInternal Revenue Service
- Code Sections
- Subject Area/Tax Topics
- Index Termsreorganizations, controlled firm stock
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2001-25523 (9 original pages)
- Tax Analysts Electronic Citation2001 TNT 195-61