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SPLIT OFF OF BUSINESS IS TAX-FREE.

JUL. 3, 2001

LTR 200140033

DATED JUL. 3, 2001
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 2001-25523 (9 original pages)
  • Tax Analysts Electronic Citation
    2001 TNT 195-61
Citations: LTR 200140033

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
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 2001-25523 (9 original pages)
  • Tax Analysts Electronic Citation
    2001 TNT 195-61
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