SPLIT-OFF IS TAX-FREE.
SEP. 19, 2001
LTR 200150023
DOCUMENT ATTRIBUTES
- Institutional AuthorsInternal Revenue Service
- Code Sections
- Subject Area/Tax Topics
- Index Termsreorganizations, controlled firm stockreorganizations, D
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2001-30803 (6 original pages)
- Tax Analysts Electronic Citation2001 TNT 242-41
Citations: LTR 200150023
Index Number: 0355.01-00
Release Date: 12/14/2001
Date: September 19, 2001
Refer Reply To: CC:CORP:B05-PLR-125576-01
In re: * * *
LEGEND:
Distributing = * * *
Controlled = * * *
Shareholder A = * * *
Shareholder B = * * *
Business A = * * *
Business B = * * *
Business C = * * *
Date A = * * *
Dear * * *
[1] This is in response to a letter dated May 4, 2001, in which rulings are requested regarding the federal income tax consequences of a proposed transaction. The information submitted in the request and in subsequent correspondence is summarized below.
[2] Distributing is a domestic corporation that made a subchapter S election on Date A. Shareholder A and Shareholder B each own 50% of the outstanding stock of Distributing which has a single class of voting common stock outstanding. Distributing is engaged in Business A, Business B and Business C.
[3] Financial information received indicates that each of Business A, Business B and Business C had gross receipts and operating expenses representing the active conduct of a trade or business for each of the last five years.
[4] A separation of Distributing is proposed to resolve irreconcilable shareholder disagreements over the management and direction of Business A, Business B and Business C. Parting ways and operating independently of each other will allow Distributing and Controlled to operate without management strife or conflict and, thus, more efficiently and effectively. It is intended that, after the distribution, Shareholder A will own 100 percent of the outstanding stock of Distributing and Shareholder B will own 100 percent of the outstanding stock of Controlled. Accordingly, Distributing proposes the following transaction:
(i) Distributing will form Controlled as a wholly owned
subsidiary. Distributing will transfer a portion of the
assets of Business A and Business B to Controlled solely in
exchange for shares of Controlled voting common stock and
the assumption of Controlled liabilities.
(ii) Distributing will retain the assets and operations of
Business C.
(iii) Distributing will distribute all of its Controlled stock to
Shareholder B in exchange for all of Shareholder B's
Distributing stock.
[5] The taxpayer has made the following representations with respect to the proposed transaction:
(a) The fair market value of the Controlled stock and other
consideration to be received by Shareholder B will be
approximately equal to the fair market value of the
Distributing stock surrendered by Shareholder B 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 Distributing.
(c) The 5 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.
(d) Following the transaction, Distributing and Controlled will
each continue, independently and with separate employees,
the active conduct of its share of all of the integrated
activities of the business conducted by Distributing prior
to the consummation of the transaction.
(e) The distribution of the stock of Controlled is carried out
for the following corporate business purpose: disagreements
between the existing shareholders adversely affect the
business. Parting ways and operating independently of each
other will allow Distributing and Controlled to operate
without management strife or conflict and, thus more
efficiently and effectively. The distribution of the stock
of Controlled is motivated, in whole or substantial part, by
these business purposes.
(f) 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
transaction.
(g) There is no plan or intention by either Distributing or
Controlled, directly or through any subsidiary, to purchase
any of its outstanding stock after the transaction, other
than through stock purchases meeting the requirements of
§ 4.05(1)(b) of Rev. Proc. 96-30.
(h) There is no plan or intention to liquidate 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 values of the
assets transferred to Controlled by Distributing each equals
or exceeds the sum of the liabilities assumed (as determined
under § 357(d)) by Controlled.
(j) The liabilities assumed (as determined under § 357(d))
in the transaction were incurred in the ordinary course of
business and are associated with the assets being
transferred.
(k) No intercorporate debt will exist between Distributing and
Controlled at the time of, or subsequent to, the
distribution of the stock of Controlled.
(l) Payments made in connection with all continuing
transactions, if any, between Distributing and Controlled
will be for fair market value based on the terms and
conditions arrived at by the parties bargaining at arm's
length.
(m) No two parties to the transaction are investment companies
as defined in § 368(a)(2)(F)(iii) and (iv).
(n) Distributing neither accumulated its receivables nor made
extraordinary payment of its payables in anticipation of the
transaction.
(o) The distribution is not part of a plan or series of related
transactions (within the meaning of § 355(e)) pursuant
to which one or more persons will acquire directly or
indirectly stock possessing 50 percent or more of the total
combined voting power of all classes of stock of
Distributing or Controlled or stock possessing 50 percent or
more of the total value of all classes of stock of
Distributing or Controlled.
(p) Distributing, Controlled and their respective shareholders
will each pay their own expenses, if any, incurred in
connection with the proposed transaction.
(q) Distributing is an S corporation (within the meaning of
§ 1361(a)). Controlled will elect to be an S
corporation pursuant to § 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.
[6] Based solely on the information submitted and on the representations set forth above, we hold as follows:
(1) The transfer by Distributing to Controlled of a portion of
the assets associated with Business A and Business B solely
in exchange for all of the outstanding Controlled stock, and
the assumption of liabilities associated with Business A and
Business B, followed by the distribution of all of the
Controlled stock to Shareholder B in exchange for the stock
in Distributing will be a reorganization within the meaning
of § 368(a)(1)(D). Distributing and Controlled will each
be "a party to a reorganization" within the meaning of §
368(b).
(2) No gain or loss will be recognized by Distributing upon its
transfer of the assets to Controlled in exchange for stock
and Controlled's assumption of liabilities (§§
361(a) and 357(a)).
(3) No gain or loss will be recognized by Controlled upon the
receipt of the assets of Distributing in exchange for the
stock of Controlled and the assumption of liabilities (§
1032(a)).
(4) The basis in the assets to be received by Controlled will be
the same as the basis of such assets in the hands of
Distributing immediately prior to the transaction (362(b)).
(5) The holding period of the Distributing assets to be received
by Controlled will include the period during which such
assets were held by Distributing (§ 1223(2)).
(6) No gain or loss will be recognized to (and no amount will be
included in the income of) Shareholder B upon the receipt of
the stock of Controlled in exchange for the Distributing
stock (§ 355(a)(1)).
(7) The holding period of the Controlled stock received by
Shareholder B will include the holding period of the
Distributing stock surrendered in the exchange, provided
that such Distributing stock is held as a capital asset on
the date of the distribution (§ 1223(1)).
(8) As provided in § 312(h), proper allocation of earnings
and profits between Distributing and Controlled will be made
under § 1.312-10(a) of the Income Tax Regulations.
(9) No gain or loss will be recognized to Distributing upon the
distribution of its stock in Controlled to Shareholder B
(§ 361(c)(1)).
(10) The basis of the Controlled stock in the hands of
Shareholder B will be the same as the basis of the
Distributing stock surrendered in exchange therefor (§
358(a)(1)).
(11) Distributing's momentary ownership of stock of Controlled as
a part of a reorganization under § 368(a)(1)(D) will not
cause Controlled to have an ineligible shareholder for any
portion of its taxable year under § 1361(b)(1)(B).
Therefore, assuming Controlled will otherwise meet the
requirements of a small business corporation under §
1361, Controlled will be eligible to make an S corporation
election under § 1362(a) for its taxable year.
[7] No opinion is expressed about the tax treatment of the transaction under other provisions of the Code and the regulations or about the tax treatment of any conditions existing at the time of, or effects resulting from, the transaction that are not specifically covered by the above rulings. Specifically, no opinion is expressed concerning whether Distributing or Controlled is otherwise eligible to be an S corporation.
[8] This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) provides that it may not be used or cited as precedent.
[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] In accordance with the power of attorney on file in this office, a copy of this letter is being sent to * * * President of * * * in * * * and to * * * of * * * in * * *.
Sincerely yours,
John Moriarty
Assistant to the Branch Chief,
Branch 5
Office of the Associate Chief
Counsel (Corporate)
DOCUMENT ATTRIBUTES
- Institutional AuthorsInternal Revenue Service
- Code Sections
- Subject Area/Tax Topics
- Index Termsreorganizations, controlled firm stockreorganizations, D
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2001-30803 (6 original pages)
- Tax Analysts Electronic Citation2001 TNT 242-41
