Menu
Tax Notes logo
HOMETax Notes ResearchFederalIRS Private Rulings And Adviceletter rulings technical advice

RESTRUCTURING IS TAX-FREE.

SEP. 6, 2001

LTR 200150009

DATED SEP. 6, 2001
DOCUMENT ATTRIBUTES
Citations: LTR 200150009

Index Number: 351.00-00, 381.00-00, 1361.00-00, 1374.00-00

 

Release Date: 12/14/2001

 

 

                                             Date: September 6, 2001

 

 

               Refer Reply To: CC:PSI:3 PLR-116826-00

 

 

LEGEND:

 

DT = * * *

 

TC = * * *

 

Sub1 = * * *

 

Sub2 = * * *

 

Sub3 = * * *

 

Sub4 = * * *

 

FSC = * * *

 

Newco = * * *

 

State1 = * * *

 

State2 = * * *

 

Foreign = * * *

 

D = * * *

 

G = * * *

 

K = * * *

 

T = * * *

 

Son1 = * * *

 

Son2 = * * *

 

Son3 = * * *

 

Date 1 = * * *

 

Date 2 = * * *

 

Date 3 = * * *

 

 

Dear * * *

[1] This letter is in response to a letter dated August 29, 2000, and subsequent correspondence, written on behalf of DT requesting rulings under §§ 351, 381, 1371 and 1374 of the Internal Revenue Code.

FACTS

[2] DT, a State1 corporation, was incorporated on Date 1, and is the common parent of a consolidated group of corporations. DT currently has five subsidiaries: FSC, a Foreign corporation; Sub1, a State1 corporation; Sub2, a State1 corporation; Sub3, a State2 corporation; Sub4, a State2 corporation. DT, Sub1, Sub2, and Sub3 each have one class of stock authorized and outstanding. DT's shareholders are D, an individual, and TC.

[3] TC is a State1 corporation. In Date 2, TC contributed all its assets to DT in return for common stock in DT in a § 351 exchange. TC is a former C corporation that elected S corporation status under § 1361 effective Date 3. TC currently has voting and non-voting stock authorized and outstanding. The voting and non-voting stock is identical in every way except for the voting rights granted to the voting stock. The shareholders of TC are T, Son1. Son2 and Son3, all of whom are individuals.

[4] DT proposes the following transactions: (1) DT will contribute the stock of FSC to Sub 2; (2) the shareholders of DT and TC will create a new corporation, Newco, which will elect S corporation status under § 1361 upon its formation; (3) the shareholders of DT and TC will contribute their stock in DT and TC to Newco in exchange for Newco's stock; (4) Newco will elect qualified subchapter S subsidiary (QSub) status for TC; (5) Newco will elect QSub status for DT; (6) Newco will elect QSub status for Sub1; and (7) Newco will elect QSub status for Sub3.

[5] Following the proposed transactions, Newco will be owned by D, T, Son1, Son2, and Son3, all of whom are individuals and U.S. citizens. Newco will be authorized to issue and will issue voting and non-voting common stock. Except for voting rights granted to the voting stock, the voting and non- voting common stock will be identical.

[6] DT requests the following rulings:

1. D, T, Son1, Son2, Son3, Sub2 and DT will recognize no gain on the transfer of the FSC stock to Sub2 and the transfer will constitute a transaction described in § 351.

2. Newco, TC, DT, Sub1 and Sub3 will recognize no gain or loss as a result of the deemed transfer of assets from TC, DT, Sub1 and Sub3, respectively to Newco pursuant to Newco's QSub elections with respect to TC, DT, Sub1 and Sub3. The deemed liquidations of TC, DT, Sub1 and Sub3 will be treated as a § 1374(d)(8) transaction, and § 1374 will apply accordingly.

3. Newco is subject to the built-in gains tax of § 1374 with respect to the assets it is deemed to receive from TC, DT, Sub1 and Sub3 pursuant to the QSub elections for TC, DT, Sub1 and Sub3.

4. For federal tax purposes, including the built-in gains tax of § 1374, TC,DT, Sub1 and Sub3 shall not be treated as separate corporations, and all assets (other than the stock of TC, DT, Sub1 and Sub3), liabilities, and items of income, deduction, and credit of TC, DT, Sub1 and Sub3 shall be treated as assets, liabilities, and such items (as the case may be) of Newco.

5. The taxable year of TC, DT, Sub1 and Sub3, respectively, will end at the close of the day before their QSub elections become effective, and Newco will succeed to and take into account those attributes of TC, DT, Sub1 and Sub3 described in § 381(c).

6. The step transaction doctrine will not be applied to the transaction to disregard any transaction and each separate transaction will be recognized in its stated order as specified in §§ 1.1361-4(a)(5)(i) and 1.1361-4(b).

[7] DT has made the following representations with respect to the proposed transactions:

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

 

         to or for the benefit of Sub2 in connection with the

 

         transactions and no stock or securities will be issued for

 

         indebtedness of Sub2 or for interest on indebtedness

 

         of Sub2.

 

 

     (b) DT neither accumulated receivables nor made

 

         extraordinary payment of payables in anticipation of the

 

         transaction, and Sub2 will report items which, but

 

         for the transfer, would have resulted in income or deduction

 

         to DT in a period subsequent to the transfer and such

 

         items will constitute income or deductions to Sub2

 

         when received or paid by it. The proceeds received in

 

         collection of the income items will be included as ordinary

 

         income in computing the taxable income of Sub2.

 

 

     (c) None of the stock to be transferred is "section 306 stock"

 

         within the meaning of § 306(c).

 

 

     (d) The transactions are not the result of a solicitation by a

 

         promoter, broker, or investment house.

 

 

     (e) DT will not retain any rights in the FSC stock that

 

         is transferred to Sub2.

 

 

     (f) The value of the stock received in exchange for accounts

 

         receivable will be equal to the net value of the accounts

 

         transferred, i.e. the face amount of the accounts receivable

 

         previously included in income less the amount of the reserve

 

         for bad debts.

 

 

     (g) Any debt relating to the stock being transferred that is

 

         being assumed (or to which such 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 for which the acquisition indebtedness being

 

         assumed (or to which such stock is subject) was incurred.

 

 

     (h) The adjusted basis and the fair market value of the stock to

 

         be transferred by DT to Sub2 will be equal to

 

         or exceed the sum of the liabilities to be assumed by

 

         Sub2 plus any liabilities to which the transferred

 

         stock is subject.

 

 

     (i) The liabilities to be assumed by Sub2 were incurred

 

         in the ordinary course of business and are associated with

 

         the stock to be transferred.

 

 

     (j) There is no indebtedness between Sub2 and DT

 

         and there will be no indebtedness created in favor of

 

         DT as a result of the transaction.

 

 

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

 

         upon before the transaction in which the rights of the

 

         parties are defined.

 

 

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

 

 

     (m) There is no plan or intention on the part of Sub2 to

 

         redeem or otherwise reacquire any stock or indebtedness to

 

         be issued in the transaction.

 

 

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

 

         Sub2 stock, any issuance of stock for services; the

 

         exercise of any Sub2 stock rights, warrants, options,

 

         preferential rights, or subscriptions; a public offering of

 

         Sub2 stock; and the sale, exchange, transfer by gift,

 

         or other disposition of any of the stock of Sub2

 

         received in the exchange, DT will be in "control" of

 

         Sub2 within the meaning of § 368(c).

 

 

     (o) There is no plan or intention by Sub2 to dispose of

 

         the transferred property other than in the normal course of

 

         business.

 

 

     (p) Each of the parties to the transactions will pay its own

 

         expenses, if any, incurred in connection with the proposed

 

         transactions.

 

 

     (q) Sub2 will not be an "investment company" within the

 

         meaning of § 351(e)(1) and § 1.351-1(c)(1)(ii).

 

 

     (r) DT is not under the jurisdiction of a court in a

 

         Title 11 or similar case (within the meaning of

 

         § 368(a)(3)(A)) and the stock or securities received in

 

         the exchange will not be used to satisfy the indebtedness of

 

         such debtor.

 

 

     (s) Sub2 will not be a "personal service corporation"

 

         within the meaning of § 269A.

 

 

     (t) The stock transfers to Newco qualify under § 351.

 

 

     (u) No shares of stock of TC, DT, or Sub1 and

 

         Sub3 have been redeemed during the 3 years preceding

 

         the QSub elections made with respect to TC, DT, and

 

         Sub1 and Sub3.

 

 

     (v) TC, DT, and Sub1 and Sub3 will not

 

         acquire assets in any nontaxable transactions at any time

 

         after the date of their respective acquisitions by

 

         Newco, and, except as set forth herein, TC,

 

         DT, and Sub1 and Sub3 did not acquire

 

         assets in any nontaxable transactions except for

 

         acquisitions occurring more than three years prior to the

 

         date that Newco makes the QSub elections for

 

         TC, DT, and Sub1 and Sub3,

 

         respectively.

 

 

     (w) No assets of TC, DT and Sub1 and

 

         Sub3 have been or will be disposed of by

 

         Newco, TC, DT, Sub1 or Sub3

 

         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 TC,

 

         DT, Sub1, and Sub3.

 

 

     (x) Except as provided herein, the deemed liquidations of

 

         TC, DT, and Sub1 and Sub3 will

 

         not be preceded by, nor will they be followed by, the

 

         reincorporation in, or transfer or sale to, a recipient

 

         corporation ("Recipient") of any of the business or assets

 

         of TC, DT, Sub1 and Sub3, if

 

         persons holding, directly or indirectly, more than 20

 

         percent in value of the stock of TC, DT,

 

         Sub1 and Sub3 also hold, directly or

 

         indirectly, more than 20 percent in value of

 

         Recipient. For purposes of this representation, ownership is

 

         determined by application of the constructive ownership

 

         rules of § 318(a) as modified by § 304(c).

 

 

     (y) Prior to making the QSub elections with respect to

 

         TC, DT, Sub1 and Sub3, no assets

 

         of TC, DT, Sub1 and Sub3 will

 

         have been 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 3 years prior to Newco's QSub elections

 

         with respect to TC, DT, Sub1 and

 

         Sub3.

 

 

     (z) TC, DT, Sub1 and Sub3 will

 

         report all earned income represented by any assets that will

 

         be distributed to their shareholders, such as receivables

 

         being reported on a cash basis, unfinished construction

 

         contracts, commissions due, etc.

 

 

    (aa) The fair market value of the assets of TC, DT,

 

         Sub1 and Sub3 will exceed their liabilities on

 

         the date that the QSub elections are made.

 

 

    (bb) There is no intercorporate debt existing between Newco,

 

         TC, DT, Sub1 and Sub3 and none

 

         has been canceled, forgiven, or discounted, except for

 

         transactions occurring prior to the date Newco initially

 

         acquired the stock of TC, DT, Sub1 and Sub3.

 

 

    (cc) Newco is not an organization that is exempt from

 

         federal income tax under § 501 or any other provision of

 

         the Code.

 

 

    (dd) All other transactions undertaken contemporaneously with, in

 

         anticipation of, in conjunction with, or in any way related

 

         to, the QSub elections for TC, DT, Sub1

 

         and Sub3 have been fully disclosed.

 

 

[8] Based solely on the facts submitted, the representations made, and provided the QSub elections are effective before January 1, 2001, we rule as follows:

     1. No gain or loss will be recognized by DT on the

 

        transfer of the FSC stock to Sub2

 

        (§ 351(a));

 

 

        No gain or loss will be recognized by Sub2 on the

 

        receipt of the FSC stock in exchange for Sub2

 

        stock (§ 1032(a));

 

 

        DT's basis in its Sub2 stock will be increased by

 

        DT's basis in the FSC stock immediately before the

 

        transfer (§ 358(a));

 

 

        The basis of the FSC stock received by Sub2 in

 

        the transfer will equal the basis of the FSC stock in

 

        the hands of DT immediately before the transfer

 

        (§ 362(a)(1));

 

 

        The holding period of the FSC stock received by

 

        Sub2 in the transfer will include the holding period

 

        of the FSC stock in the hands of DT (§

 

        1223(2)); and

 

 

        The QSub elections with respect to TC, DT,

 

        Sub1 and Sub3 will be considered, for federal

 

        tax purposes, as complete liquidations of TC, DT, Sub1

 

        and Sub3, respectively, pursuant to § 332.

 

 

     2. No gain or loss will be recognized by Newco on the

 

        deemed liquidations of TC, DT, Sub1 and

 

        Sub3 pursuant to Newco's QSub elections with

 

        respect to TC, DT, Sub1 and Sub3,

 

        respectively (§ 332(a));

 

 

        TC, DT, Sub1 and Sub3 will

 

        recognize no gain or loss on their deemed liquidations,

 

        pursuant to the QSub elections of TC, DT,

 

        Sub1 and Sub3, respectively (§ 337(a));

 

 

        Newco's basis in each asset received in the deemed

 

        liquidations as a result of the QSub elections will equal

 

        the basis of that asset in the hands of TC, DT,

 

        Sub1 and Sub3 immediately before the elections

 

        (§ 334(b)(1)); and

 

 

        Newco's holding period in each asset received in the

 

        deemed liquidations as a result of the QSub elections will

 

        include the period during which that asset was held by TC,

 

        DT, Sub1 and Sub3 (§ 1223(2)).

 

 

     3. Newco is subject to the built-in gains tax of §

 

         1374 with respect to the assets it is deemed to receive from

 

         TC, DT, Sub1 and Sub3 pursuant

 

         to the QSub elections for TC, DT,

 

         Sub1 and Sub3 (§ 1374(d)(8)). A separate

 

         determination of tax is made with respect to the assets of

 

         TC, DT, Sub1 and Sub3 that Newco

 

         acquires in one § 1374(d)(8) transaction from the assets

 

         Newco acquires in another § 1374(d)(8)

 

         transaction and from the assets Newco held when it

 

         became an S corporation. See § 1.1374-8(b).

 

 

     4. For federal tax purposes, including the built-in gains tax of

 

        § 1374, TC, DT, Sub1 and Sub3

 

        shall not be treated as separate corporations, and all assets

 

        (other than the stock of TC, DT, Sub1

 

        and Sub3), liabilities, and items of income,

 

        deduction, and credit of TC, DT, Sub1 and Sub3

 

        shall be treated as assets, liabilities, and such items (as

 

        the case may be) of Newco.

 

 

     5. Pursuant to § 381(a) and § 1.381(a)-1, Newco

 

        will succeed to and take into account the items of TC,

 

        DT, Sub1 and Sub3 described in §

 

        381(c), subject to the conditions and limitations specified

 

        in §§ 381, 382, 383, and 384 and the regulations

 

        thereunder; and

 

 

        The taxable years of TC, DT, Sub1 and

 

        Sub3 will end at the close of the day before their

 

        QSub elections become effective (§§ 1.381(b)-1(a)(1)

 

        and 1.1361-4(b)).

 

 

     6. The step transaction doctrine will not be applied to

 

        disregard the transfer of TC, DT, Sub1

 

        and Sub3 to Newco and the deemed liquidations

 

        of TC, DT, Sub1 and Sub3 will be

 

        recognized in their stated order (§§

 

        1.1361-4(a)(5)(i) and 1.1361-4(b)).

 

 

[9] We express or imply no opinion as to the tax treatment of the transactions under other provisions of the Code or regulations or about the tax treatment of any conditions existing at the time of, or effects resulting from, the transactions that are not specifically covered by the above rulings. In particular, we express or imply no opinion as to whether the S corporation election for Newco is valid or whether the Qsub elections that Newco made for TC, DT, Sub1, and Sub 3 are valid. Furthermore, other than the above rulings, we express or imply no opinion with respect to the transfer of stock of FSC to Sub 2.

[10] This ruling is directed only to the taxpayer 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 with this office, we are sending the original of this letter to you and a copy to the taxpayer.

                                   Sincerely,

 

 

                                   Christine Ellison

 

                                   Chief, Branch 3

 

                                   Office of the Associate Chief

 

                                     Counsel

 

                                   (Passthroughs and Special

 

                                     Industries)
DOCUMENT ATTRIBUTES
Copy RID