INTERNAL REVENUE SERVICE Department of the Treasury
Washington, DC 20224
Index Numbers: 0332.00-00
0355.00-00
Contract Person:
Telephone Number:
In Reference to
CC:DOM:CORP:3 PLR-121669-97
Date:
Distributing 2 =
Controlled 2 =
Distributing 1 =
Controlled 1 = "THIS DOCUMENT MAY NOT BE USED
OR CITED AS PRECEDENT.
SECTION 6110(i)(3) OF THE
INTERNAL REVENUE CODE."
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Corporation X =
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State Z =
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Group B =
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Business D =
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Corporation J =
Partnership 1 =
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Corporation L =
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Corporation N =
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Partnership 2 =
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This letter responds to a request dated November 25, 1937, submitted on
your behalf by your authorized representative, for rulings on the federal
income tax consequences of a proposed transaction. Additional information
was submitted in letters dated February 9, 1998, February 26, 1998, and March
24, 1998. The information submitted for consideration is summarized below.
Distributing 2, a State A corporation, is the common parent of an
affiliated group of corporations that file a consolidated federal income tax
return on a calendar year basis using an accrual method of accounting.
Distributing 2 is a holding company and is not presently engaged directly in
its businesses. Distributing 2 has 15 wholly owned first-tier subsidiaries,
including, among others, Controlled 2, Distributing 1, Sub 33, Sub 36, Sub
37, Sub 38, Sub 39, Sub 40, and Sub 41. Distributing 2 conducts its
businesses through Group B and Group C.
The parent of Group B is Controlled 2, a holding company and wholly
owned subsidiary of Distributing 2. Controlled 2 has 9 wholly owned
subsidiaries, Sub 24 through Sub 32, and certain other second-tier
subsidiaries. Group B is actively engaged, primarily through Sub 24, in
Business D.
The parent of Group C is Distributing 1, a holding company and wholly
owned subsidiary of Distributing 2. Distributing 1 has 13 wholly owned
subsidiaries, Sub 1 through Sub 12 and Controlled 1. Controlled 1, a holding
company, holds all of the outstanding stock of Sub 13. Sub 13, a holding
company, is actively engaged in Business E through its wholly owned
subsidiaries, Sub 14 through Sub 23. Group C is also engaged in Business F,
primarily through Sub 7, and Business G, primarily through Sub 4.
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Distributing 2 stock is widely held and publicly traded on the New York
and Pacific Stock Exchanges. As of Date H, Distributing 2 had two classes of
common stock outstanding that reflect separately the performance of the
Business D of Group B (the "Distributing 2 Group B Common Stock) and the
Business E, Business F and Business G of Group C (the Distributing 2 Group C
Common Stock). Last, Distributing 2 had outstanding Series C Cumulative
Redeemable Preferred Stock, Series D Convertible Preferred Stock (convertible
into shares of Distributing 2 Group C Common Stock), and Series E Convertible
Preferred Stock (convertible into shares of Distributing 2 Group C Common
Stock). To the best knowledge of Distributing 2, no shareholder owns five
percent or more of the total outstanding shares in Distributing 2 measured by
vote or value.
In a transaction unrelated to the proposed transactions described below,
Distributing 2, its wholly owned subsidiary Distributing 1, and Distributing
1's wholly owned subsidiaries, Sub 9 and Sub 10, have entered into an
agreement with Corporation X, an unrelated third party, whereby, subject to
certain conditions, Sub 9 and Sub 10 will merge with and into Corporation X
(the "Sub 9 Merger" and the "Sub 10 Merger" and collectively referred to as
the "Mergers"). In the Mergers, Distributing 1 will receive Corporation X
Common and Preferred Stock, and Corporation X will assume intercompany
indebtedness of Sub 9 and Sub 10, aggregating $u, which indebtedness will be
repaid at the time of the Mergers. Each of the Sub 9 Merger and the Sub 10
Merger is intended to qualify as a reorganization under Section 368(a) (1)
(A) of the Code. It is presently intended that the Mergers will be completed
prior to the Distribution (the spin-off of New Controlled 2 by Distributing
2, described below).
Financial information has been received indicating that Controlled 2's
Business D, Sub 13's Business E, and Sub 7's Business F have each had gross
receipts and operating expenses representative of the active conduct of a
trade or business for each of the past five years.
Distributing 2 is proposing to split-off from Distributing 2 its Group B
(the "Separation"), to enable each of its Group B and Group C to compete more
effectively in the rapidly changing marketplace. Prior to the Separation,
Distributing 2 will undertake a restructuring (the "Restructuring"), the
principal purposes of which are to (i) transfer the five-year active Business
E to Controlled 1; (ii) align Business F with Group B; and (iii) eliminate
all intercompany payables and receivables between Distributing 2 and
Controlled 2 and their respective subsidiaries, as they exist immediately
prior to the Separation.
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The following transactions will result in the transfer of the five-year
active Business E conducted by Sub 13's wholly owned subsidiaries, Sub 14
through Sub 23, to Sub 13, and then to Controlled 1, 50 that Controlled 1
(i.e., the controlled corporation in the Controlled 1 Spin-Off) will be
directly conducting a five-year active trade or business.
(i) Sub 13 will cause Sub 14, a wholly owned subsidiary of Sub 13, to
be merged with and into Sub 13;
(ii) Sub 13 will cause Sub 15, a wholly owned subsidiary of Sub 13, to be
merged with and into Sub 13;
(iii) Sub 13 will cause Sub 16, a wholly owned subsidiary of Sub 13, to be
merged with and into Sub 13;
(iv) Sub 13 will cause Sub 17, a wholly owned subsidiary of Sub 13, to be
merged with and into Sub 13;
(v) Sub 13 will cause Sub 18, a wholly owned subsidiary of Sub 13, to be
merged with and into Sub 13;
(vi) Sub 13 will cause Sub 19, a wholly owned subsidiary of Sub 13, to be
merged with and into Sub 13;
(vii) Sub 13 will cause Sub 20, a wholly owned subsidiary of Sub 13, to be
merged with and into Sub 13;
(viii) Sub 13 will cause Sub 21, a wholly owned subsidiary of Sub 13, to be
merged with and into Sub 13;
(ix) Sub 13 will cause Sub 22, a wholly owned subsidiary of Sub 13, to be
merged with and into Sub 13;
(x) Sub 13 will cause Sub 23, a wholly owned subsidiary of Sub 13, to be
merged with and into Sub 13;
(xi) Controlled 1 will cause Sub 13 to be merged with and into Controlled
1;
The following transactions will adjust certain intercompany accounts, and
will result in the transfer of certain assets, including the stock of certain
subsidiaries of Distributing 1, to Controlled 1, as a preliminary step to the
Controlled 1 Spin-Off:
(xii) Distributing 1 will assume approximately $q of indebtedness of Sub
12, a wholly owned subsidiary of Distributing 1, payable to Sub 33,
a wholly owned subsidiary of Distributing 2;
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(xiii) Sub 6, a wholly owned subsidiary of Distributing 1, will assume
approximately $r of indebtedness of Sub 12 payable to Sub 33;
(xiv) Distributing 1 will contribute to the capital of Controlled 1 all of
the issued and outstanding capital stock of the following wholly
owned subsidiaries of Distributing 1: Sub 1, Sub 2, Sub 3, Sub 4,
Sub 5, Sub 6, Sub 8, Sub 11, Sub 12 and Corporation X (collectively,
the "Group C Subsidiaries.") (the transfers shall collectively be
referred to as the "Controlled 1 Contribution");
The following transactions will (i) enable Sub 33 to repay all
commercial paper issued by it, to repay its subordinated debt to certain
Trusts, and to tender for all of its long-term and medium-term debt
securities; (ii) enable Sub 34, an indirect wholly owned subsidiary of
Distributing 2, to tender for all of its medium-term debt securities; and
(iii) eliminate the intercompany debt between Distributing 2 and Controlled 2
and their respective subsidiaries as they exist immediately prior to the
Separation:
(xv) A newly formed State A subsidiary of Distributing 2, Sub 35, will
enter into a credit facility with a syndicate of banks for
approximately $s guaranteed by Distributing 2 (the "New Group C
Debt").
(xvi) Sub 35 will make intercompany loans to the following subsidiaries of
Controlled 1 (Sub 42 is a wholly owned subsidiary of Sub 5) in the
following approximate amounts:
Sub 4 $t
Sub 42 $v
Sub 3 $w
Sub 6 $x
(xvii) The subsidiaries listed in (xvi), above, will use some or all of the
amount loaned to each of them by Sub 35 to repay some or all of
their respective indebtedness to Sub 33;
(xviii) Sub 35 will lend approximately $y to Sub 34, which amount Sub 34
will use to tender for all of its outstanding medium term debt
securities;
(xix) After payment of its approximately $r intercompany indebtedness to
Sub 33, Sub 6 will use the balance of the funds loaned to it by Sub
35, or approximately $z, to pay a dividend to Controlled 1.
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(xx) Controlled 1 will repay its approximately $z indebtedness to Sub 33;
(xxi) Sub 33 will use its receivable due from Sub 36, a wholly owned
subsidiary of Distributing 2, in the approximate amount of $aa to
repay part of its indebtedness to Distributing 2, which, in turn,
will contribute the receivable to the capital of Sub 36 thereby
extinguishing Sub 36's intercompany debt;
(xxii) Sub 4 will use its receivable due from Sub 33 in the approximate
amount of $bb to repay the balance of its intercompany debt to Sub
33;
(xxiii) Distributing 2 will contribute to Distributing 1 as a contribution
to capital a receivable from Sub 33 to Distributing 2 in the
approximate amount of $cc, and Distributing 1 will use this
receivable to repay part of its indebtedness to Sub 33. Following
this repayment, Distributing 1 will have an outstanding intercompany
indebtedness of approximately $dd payable to Sub 33;
(xxiv) Sub 33 will enter into a credit facility with a syndicate of banks
for approximatelY $ee (the "New Sub 33 Debt"), guaranteed by
Controlled 2;
(xxv) Sub 33 will use the loan repayment proceeds referred to in (xvii)
and (xx) above, together with the proceeds referred to in (xxiv)
above, aggregating approximately $ff, to repay all commercial paper
issued by it, repay its subordinated debt to certain Trusts, and
tender for all of its outstanding long-term and medium term debt
securities;
(xxvi) Distributing 1 will distribute all of the issued and outstanding
capital stock of Controlled I to Distributing 2 in the "Controlled 1
Spin-Off;"
The following transactions will result in the reincorporation of
Controlled 2 from State Z to State A:
(xxvii) Controlled 2 will form a new State A subsidiary;
(xxviii) Controlled 2 will merge with and into the new State A subsidiary,
which will be the surviving corporation
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(referred to herein as "New Controlled 2"). In the merger, New
Controlled 2 will issue to Distributing 2 that number of shares of
New Controlled 2 Common Stock equal to the sum of the number of
shares of Group B Common Stock which will be outstanding at the time
of the Distribution (the New Controlled 2 Spin-Off) and the number
of shares of New Controlled 2 Common Stock to be issued to holders
of Group C Common Stock according to a formula set forth in the
Separation Agreement;
(xxix) Distributing 2 will contribute the following to the capital of New
Controlled 2: all of the issued and outstanding capital stock of
the following wholly owned subsidiaries of Distributing 2:
Distributing 1, Sub 33, Sub 36, Sub 37, Sub 38, Sub 39, Sub 40 and
Sub 41 (collectively, the Group B Subsidiaries) certain assets,
including intellectual property (such as the name Distributing 2)
and miscellaneous real estate and other assets (such assets,
together with the stock of the Group B Subsidiaries referred to
above, shall be referred to as the "Group B Assets"; the
contribution shall be referred to as the "New Controlled 2
Contribution");
(xxx) As a result of the "New Controlled 2 Contribution," the Business F
currently conducted by Group C, through Sub 7, will be transferred
to New Controlled 2, along with Sub 33 (and the New Sub 33 Debt);
(xxxi) Distributing 2 will distribute all of the issued and outstanding
capital stock of New Controlled 2 to its stockholders as follows:
(1) Each share of Group B Common stock will be exchanged for one
share of New Controlled 2 Common Stock; (2) A fraction of a share of
New Controlled 2 Common Stock will be issued as a distribution on
each share of Group C Common Stock, pursuant to a formula to be set
forth in the Separation Agreement, and representing the fair market
value of Sub 7, net of $gg of the New Sub 33 Debt. As a result of
the Distribution, holders of Group B Common Stock prior to the
Distribution will no longer own any shares in Distributing 2; the
Group C Common Stock will be the only class of common stock of
Distributing 2 which will remain outstanding subsequent to the
Distribution. The Distributing 2 Series C Preferred Stock,
Distribution 2 Series D Preferred Stock, and Distributing 2 Series B
Preferred Stock will also remain outstanding subsequent
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to the Distribution, adjusted, where appropriate, pursuant to
applicable anti-dilution provisions.
(xxxii) Following the Distribution, New Controlled 2 will be renamed
Distributing 2 and Distributing 2 will be renamed Corporation Y;
(xxxiii) Following the Distribution, the New Controlled 2 Common Stock is
expected to be listed for trading on the New York and Pacific Stock
Exchanges, and the Group C Common Stock will continue to trade on
the New York and Pacific Stock Exchanges.
With respect to the liquidation by merger of Subs 14 through 23 with and
into Sub 13 (steps (i) through (x), above), the taxpayers have made the
following representations:
(a) Sub 13, on the date of adoption of the plans of complete liquidation,
and at all times until the final liquidating distributions have been
completed, will be the owner of at least 80 percent of the single
outstanding class of stock of each of Sub 14, Sub 15, Sub 16, Sub 17,
Sub 18, Sub 19, Sub 20, Sub 21, Sub 22 and Sub 23 (collectively
hereinafter, the "Sub 13 Subsidiaries").
(b) No stock of any of the Sub 13 Subsidiaries will have been redeemed
during the three years preceding the adoption of the plans of complete
liquidation of the Sub 13 Subsidiaries.
(c) All distributions from the Sub 13 Subsidiaries to Sub 13 pursuant to the
plans of complete liquidation will be made within a single taxable year
of the Sub 13 Subsidiaries.
(d) As soon as the first liquidating distributions have been made, each of
the Sub 13 Subsidiaries will cease to be a going concern and its
activities will be limited to winding up its affairs, paying its debts,
and distributing its remaining assets to Sub 13.
(e) The Sub 13 Subsidiaries will retain no assets following the final
liquidating distribution.
(f) None of the Sub 13 Subsidiaries will have acquired any assets in any
nontaxable transaction at any time, except for acquisitions occurring
more than three years prior to the date of adoption of the plans of
complete liquidation and except as described in the following sentences.
On Date I Sub 14 (then known as Corporation J) received all of
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the assets of partnership 1 in connection with the liquidation of that
partnership. On Date K, Corporation L (the predecessor of Sub 13)
contributed to the capital of Sub 15 all of the outstanding capital
stock of Corporation M and to the capital of Sub 20 all of the
outstanding capital stock of Corporation N. On Date O, Sub 15 and Sub
20 acquired the assets of Corporation M and Corporation N, respectively,
pursuant to liquidations intended to qualify under Section 332.
(g) No assets of any Sub 13 Subsidiary have been, or will be, disposed of by
any Sub 13 Subsidiary or Sub 13 except for dispositions in the ordinary
course of business, dispositions occurring more than three years prior
to adoption of the plans of complete liquidation and transfers to
Controlled 1 pursuant to the Sub 13 Liquidation.
(h) The Sub 13 Subsidiary Liquidations will not be preceded or followed by
the reincorporation in, or transfer or sale to, a recipient corporation
("Recipient") of any of the businesses or assets of any Sub 13
Subsidiary, if persons holding, directly or indirectly, more than 20
percent in value of the stock of any Sub 13 Subsidiary also hold,
directly or indirectly, more than 20 percent in value of the stock in
Recipient, except for transfers to Controlled 1 pursuant to the Sub 13
Liquidation and to Distributing 2 pursuant to the Controlled 1 Spin-Off.
For purposes of this representation, ownership will be determined by
application of the constructive ownership rules of Section 318(a) as
modified by Section 304(c)(3).
(i) Prior to the adoption of the plans of complete liquidation, no assets of
any of the Sub 13 Subsidiaries will have been distributed in kind,
transferred, or sold to Sub 13, except for transactions occurring in the
normal course of business and transactions occurring more than three
years prior to adoption of the plans of complete liquidation.
(j) The Sub 13 Subsidiaries will report all earned income represented by
assets that will be distributed to Sub 13, such as receivables being
reported on a cash basis, unfinished construction contracts, commissions
due, etc.
(k) The fair market value of the assets of each Sub 13 Subsidiary will
exceed its liabilities both at the date of the adoption of each Sub 13
Subsidiary plan of complete liquidation and immediately prior to the
time the first liquidating distribution of each Sub 13 Subsidiary is
made.
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(l) There is no intercorporate debt existing between Sub 13 and any Sub 13
Subsidiary and none has been cancelled, forgiven, or discounted except
for transactions that occurred more than three years prior to the date
of adoption of the plans of complete liquidation.
(m) Sub 13 is not an organization that is exempt from federal income tax
under Section 501 or any other provision of the Code.
(n) All other transactions undertaken contemporaneously with, in
anticipation of, in conjunction with, or in any way related to, the
proposed complete liquidation of a Sub 13 Subsidiary have been fully
disclosed.
With respect to the liquidation by merger of Sub 13 with and into
Controlled 1 (step (xi), above), the taxpayers have made the following
representations:
(o) Controlled 1, on the date of adoption of the plan of complete
liquidation, and at all times until the final liquidating distribution
is completed, will own at least 80 percent of the single outstanding
class of Sub 13 stock.
(p) No stock of Sub 13 has been redeemed during the three years preceding
the adoption of the plan of complete liquidation of Sub 13.
(q) All distributions from Sub 13 to Controlled 1 pursuant to the plan of
complete liquidation will be made within a single taxable year of Sub 13.
(r) As soon as the first liquidating distribution has been made, Sub 13 will
cease to be a going concern and its activities will be limited to
winding up its affairs, paying its debts, and distributing its remaining
assets to Controlled 1.
(s) Sub 13 will retain no assets following the final liquidating distribution.
(t) Sub 13 (or its predecessor) will not have acquired assets in any
nontaxable transaction at any time, except for acquisitions occurring
more than three years prior to the date of adoption of the plan of
complete liquidation, pursuant to the Sub 13 Subsidiary Liquidations and
except as described in the following sentences. On Date I, Corporation
L received all of the outstanding capital stock of the predecessor of
Sub 23 upon the liquidation of Partnership 2, and on the same date,
Controlled 1 contributed to the capital of Corporation L all of the
outstanding capital stock of Sub 14. On Date K, Controlled 1
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contributed to the capital of Corporation L all of the outstanding
capital stock of Corporation M and Corporation N. On Date P,
Corporation L was merged with and into Sub 13 in a transaction
intended to qualify under Section 568(a)(1)(F).
(u) No assets of Sub 13 have been, or will be, disposed of by either Sub 13
or Controlled 1 except for dispositions in the ordinary course of
business and dispositions occurring more than three years prior to
adoption of the plan of complete liquidation.
(v) The Sub 13 Liquidation will not be preceded or followed by the
reincorporation in, or transfer or sale to, a recipient corporation
("Recipient") of any of the businesses or assets of Sub 13, if
persons holding, directly or indirectly, more than 20 percent in
value of the Sub 13 stock also hold, directly or indirectly, more
than 20 percent in value of the stock in Recipient, except for
transfers to Distributing 2 pursuant to the Controlled 1 Spin-Off.
For purposes of this representation, ownership will be determined by
application of the constructive ownership rules of Section 318 (a) as
modified by Section 304(c)(3).
(w) Prior to the adoption of the plan of complete liquidation, no assets of
Sub 13 will have been distributed in kind, transferred, or sold to
Controlled 1, except for transactions occurring in the normal course
of business and transactions occurring more than three years prior to
adoption of the liquidation plan.
(x) Sub 13 will report all earned income represented by assets that will be
distributed to Controlled 1, such as receivables being reported on a
cash basis, unfinished construction contracts, commissions due, etc.
(y) The fair market value of the assets of Sub 13 will exceed its liabilities
both at the date of the adoption by Sub 13 of its plan of complete
liquidation and immediately prior to the time the first liquidating
distribution is made.
(z) There is no intercorporate debt existing between Controlled 1 and Sub 13
and none has been cancelled, forgiven, or discounted except for
transactions that occurred more than three years prior to the date of
adoption of the plan of complete liquidation.
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(aa) Controlled 1 is not an organization that is exempt from federal income tax
under Section 501 or any other provision of the Code.
(ab) All other transactions undertaken contemporaneously with, in anticipation
of, in conjunction with, or in any way related to, the Sub 13 Liquidation
have been fully disclosed.
With respect to the Controlled 1 Contribution and the Controlled
1 Spin-Off (steps (xiv) and (xxvi), above), the taxpayers have made
the following representations:
(ac) The indebtedness, if any, owed by Controlled 1 to Distributing 1 after the
Controlled 1 Spin-Off will not constitute stock or securities.
(ad) No part of the Controlled 1 stock to be distributed by Distributing 1 will
be received by Distributing 2 as a creditor, employee, or in any capacity
other than that of a shareholder of Distributing 1.
(ae) Immediately after the Controlled 1 Spin-Off, at least ninety percent of
the fair market value of the gross assets of Distributing 1 will
consist of the stock of and securities of a controlled corporation
that is engaged in the active conduct of a trade or business, as
defined in Section 355(b)(2).
(af) Immediately after the Controlled 1 Spin-Off, the gross assets of the
businesses actively conducted (as defined in Section 355(b)(2)) by
Distributing 1 (through Sub 7) and Controlled 1, respectively, will have a
fair market value of at least five percent of the total fair market value
of such corporation's gross assets.
(ag) The five years of financial information submitted on behalf of Business E
and Business F is representative of each business's present operations,
and, with regard to each business, there have been no substantial
operational changes since the date of the last financial statements
submitted.
(ah) Following the Controlled 1 Spin-Off, Controlled 1 and Distributing 1
(through Sub 7) will each continue the active conduct of their businesses,
independently and with their separate employees.
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(ai) The Controlled 1 Spin-Off is to be carried out for the corporate business
purposes of facilitating (i) the alignment of Business F with Group B and
(ii) the Separation. The Controlled 1 Spin-Off is motivated, in whole or
substantial part, by these corporate business purposes.
(aj) Except in connection with the Controlled 2 Contribution and the
Distribution, there is no plan or intention on the part of Distributing 2
to sell, exchange, transfer by gift, or otherwise dispose of any of their
stock in, or securities of, Distributing 1 or Controlled 1 after the
transaction.
(ak) There is no plan or intention by either Distributing 1 or Controlled 1,
directly or through any subsidiary corporation, to purchase any of its
outstanding stock after the transaction.
(al) There is no plan or intention to liquidate either Distributing 1 or
Controlled 1, 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, and
except that, in the event the Mergers are not consummated prior to
the Distribution Date, Controlled 1 will dispose of Sub 9 and Sub 10
pursuant to its agreement with Corporation X.
(am) The total adjusted bases and the fair market value of the stock in the
Group C Subsidiaries to be transferred pursuant to the Controlled 1
Contribution will be equal to or exceed the sum of the liabilities to be
assumed by Controlled 1, if any, plus any liabilities to which the
transferred assets are subject.
(an) The liabilities assumed in the Controlled 1 Contribution, if any, and any
liabilities to which the transferred assets are subject were incurred in
the ordinary course of business and are associated with the assets to be
transferred.
(ao) Distributing 1 neither accumulated its receivables nor made extraordinary
payments of its payables in anticipation of the transaction, other
than the repayment of a portion of its intercompany indebtedness to
Sub 33, described above.
(ap) No intercorporate debt will exist between Distributing 1 and its
subsidiaries, on the one hand, and Controlled 1 and its subsidiaries,
on the other hand, at the time of, or subsequent to, the Controlled 1
Spin-Off.
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(aq) Immediately before the Controlled 1 Spin-Off, items of income, gain, loss,
deduction, and credit will be taken into account as required by the
applicable intercompany transaction regulations (see Section
1.1502-13 and Section 1.1502-14 as in effect before the publication
of T.D. 8597, 1995-2 C.B. 147, and as currently in effect; Section
1.1502-13 as published in T.D. 8597). Distributing 1 will not have
an excess loss account with respect to the stock of Controlled 1
immediately prior to the Controlled 1 Spin-Off. Distributing 2 will
not have an excess loss account with respect to the stock of
Controlled 1 immediately following the Controlled 1 Spin-Off and at
the time of the Separation.
(ar) Payments made in connection with all continuing transactions, if any,
between Distributing 1 and Controlled 1, will be for fair market value
based on terms and conditions arrived at by the parties bargaining at
arm's length.
(as) Neither Distributing 1 nor Controlled 1 is an investment company as
defined in Section 368(a)(2)(F)(iii) and (iv).
With respect to the Reincorporation, (steps (xxvii) and (xxviii), above),
the taxpayers have made the following representations:
(at) Subject to receipt of a ruling from the Internal Revenue Service that the
consummation of the New Controlled 2 Contribution and the
Distribution will not adversely affect qualification of the
Reincorporation as a tax-free reorganization described in Section
368(a)(1)(F), the Reincorporation will constitute a reorganization
within the meaning of Section 368(a)(1)(F).
With respect to the New Controlled 2 Contribution and the Distribution
(steps (xxix) through (xxxi), above), the taxpayers have made the following
representations:
(au) The indebtedness, if any, owed by New Controlled 2 to Distributing 2 after
the Distribution will not constitute stock or securities.
(av) The fair market value of the New Controlled 2 Common Stock and other
consideration to be received by each holder of Group B Common Stock
will be approximately equal to the fair market value of the Group B
Common Stock surrendered by the shareholder in exchange therefor.
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(aw) No part of the New Controlled 2 Common Stock to be distributed by
Distributing 2 will be received by a stockholder as a creditor, employee,
or in any capacity other than that of a shareholder of Distributing 2.
(ax) Immediately after the Distribution, at least ninety percent of the fair
market value of the gross assets of Distributing 2 will consist of the
stock of and securities of controlled corporations that are engaged in the
active conduct of a trade or business, as defined in Section 355(b)(2).
(ay) Immediately after the Distribution, the gross assets of Controlled 1
comprising Business E will have a fair market value that is equal to or
greater than five percent of the total fair market value of the gross
assets of Controlled 1.
(az) The five years of financial information submitted on behalf of Business D,
Business E, and Business F is representative of each business' respective
present operations, and, with regard to each business, there have been no
substantial operational changes since the date of the last financial
statements submitted.
(ba) Immediately after the Distribution, at least ninety percent of the fair
market value of the gross assets of New Controlled 2 will consist of the
stock of and securities of controlled corporations that are engaged in the
active conduct of a trade or business, as defined in Section 355(b)(2).
(bb) Immediately after the Distribution, the gross assets of Sub 24 comprising
the Group B business (Business D) will have a fair market value that is
equal to or greater than five percent of the total fair market value of
the gross assets of Sub 24.
(bc) Immediately after the Distribution, at least ninety percent of the fair
market value of the gross assets of Distributing 1 will consist of the
stock of and securities of controlled corporations that are engaged in the
active conduct of a trade or business, as defined in Section 355(b)(2).
(bd) Immediately after the Distribution, the gross assets of Sub 7 comprising
Business F will have a fair market value that is equal to or greater than
five percent of the total fair market value of the gross assets of Sub 7.
(be) Following the Distribution, Distributing 2 and New Controlled 2 (through
subsidiary corporations) will each
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continue the active conduct of their businesses, independently and
with their separate employees.
(bf) The Distribution is to be carried out for the corporate business purpose
of separating Group B and Group C, thus enabling each to compete more
effectively in the rapidly changing marketplace. The Distribution is
motivated, in whole or substantial part, by this corporate business
purpose.
(bg) The management of Distributing 2, to the best of its knowledge, is not
aware to any plan or intention on the part of any particular
stockholder of Distributing 2 to sell, exchange, transfer by gift, or
otherwise dispose of any of their stock in, or securities of,
Distributing 2 or New Controlled 2 after the transaction.
(bh) There is no plan or intention by Distributing 2 or New Controlled 2,
directly or through any subsidiary corporation, to purchase any stock of
Distributing 2 or New Controlled 2 after the transaction, other than
through stock purchases meeting the requirements of Section 4.05(1)(b) of
Rev. Proc. 96-30.
(bi) There is no plan or intention to liquidate either Distributing 2 or New
Controlled 2, to merge either corporation with any other corporation, or
to sell or otherwise dispose of the assets of either corporation
after the Distribution, except in the ordinary course of business.
(bj) The total adjusted bases and the fair market value of the stock in the
Group B Assets to be transferred pursuant to the New Controlled 2
Contribution will be equal to or exceed the sum of the liabilities to be
assumed by New Controlled 2, if any, plus any liabilities to which the
transferred assets are subject.
(bk) The liabilities assumed in the New Controlled 2 Contribution, if any, and
any liabilities to which the transferred assets are subject were incurred
in the ordinary course of business and are associated with the assets to
be transferred.
(bl) Distributing 2 neither accumulated its receivables nor made extraordinary
payments of its payables in anticipation of the transaction.
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(bm) No intercorporate debt will exist between Distributing 2 and its
subsidiaries, on the one hand, and New Controlled 2 and its subsidiaries,
on the other hand, at the time of, or subsequent to, the Distribution.
(bn) Immediately before the Distribution, items of income, gain, loss,
deduction, and credit will be taken into account as required by the
applicable intercompany transaction regulations (see Section 1.1502-13 and
Section 1.1502-14 as in effect before the publication of T.D. 8597, 1995-2
C.B. 147, and as currently in effect; Section 1.1502-13 as published in
T.D. 8597). Further, Distributing 2's excess loss account, if any, with
respect to the New Controlled 2 Stock will be included in income
immediately before the distribution (see Section 1.1502- 19).
(bo) Payments made in connection with all continuing transactions, if any,
between Distributing 2 and New Controlled 2, will be for fair market value
based on terms and conditions arrived at by the parties bargaining at
arm's length.
(bp) Neither Distributing 2 nor New Controlled 2 is an investment company as
defined in Section 368(a)(2)(F)(iii) and (iv).
(bq) The payment of cash to holders of Group C Common Stock in lieu of
fractional shares of New Controlled 2 Common Stock is solely for the
purpose of avoiding the expense and inconvenience to Distributing 2 of
issuing fractional shares and does not represent separately bargained for
consideration.
(br) The Group B Common Stock and the Group C Common Stock constitute stock of
Distributing 2 for federal income tax purposes.
Based on the information submitted and on the representations set forth
above, with respect to the liquidation by merger of Subs 14 through 23 with and
into Sub 13 (steps (i) through (x), above), we hold as follows:
(1) For federal income tax purposes, the statutory mergers of each of the Sub
13 Subsidiaries with and into Sub 13 pursuant to applicable state law
will be treated as a distribution by each of the Sub 13 Subsidiaries
in complete liquidation within the meaning of Section 332 of the Code
(Section 332(a) and Section 1.332-2(d) of the Income Tax Regulations).
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(2) Sub 13 will recognize no gain or loss on its receipt of the assets of the
Sub 13 Subsidiaries distributed pursuant to the Sub 13 Subsidiaries' plans
of complete liquidation (Section 332(a)).
(3) The basis of each asset in the hands of Sub 13 will equal the basis of
that asset in the hands of the Sub 13 Subsidiaries immediately before
the Sub 13 Subsidiary Liquidations (Section 334(b)(1)).
(4) The holding period of each asset in the hands of Sub 13 will include the
period during which that asset was held by the Sub 13 Subsidiaries
(Section 1223(2)).
(5) Sub 13 will succeed to and take into account the items of the Sub 13
Subsidiaries described in Section 381(c). Sub 13 will take these items
into account subject to the conditions and limitations specified in
Sections 381, 382, 383 and 384 and the regulations thereunder (Section
381(a) and Section 1.381(a)-1).
(6) Sub 13 will succeed to and take into account the earnings and profits, or
deficit in earnings and profits, of the Sub 13 Subsidiaries as of the date
of complete liquidation. Any deficit in earnings and profits of the
Sub 13 Subsidiaries or Sub 13 will be used only to offset earnings
and profits accumulated after the date of complete liquidation. The
amount of earnings and profits, or deficit in earnings and profits,
of the Sub 13 Subsidiaries to which Sub 13 succeeds to under Section
381 must be adjusted so as not to duplicate any amount reflected in
earnings and profits of Sub 13 under Section 1.1502-33(b) (Section
381(c)(2), Section 1.381(c)(2)-1 and Section 1.1502-33(a)(2)).
(7) The Sub 13 Subsidiaries will recognize no gain or loss on the distribution
of assets to or the assumption of liabilities by Sub 13 in complete
liquidation (Sections 336(d)(3) and 337).
With respect to the liquidation by merger of Sub 13 with and into
Controlled 1 (step (xi), above), we hold as follows:
(8) For federal income tax purposes, the statutory merger of Sub 13 with and
into Controlled 1 pursuant to applicable state law will be treated as a
distribution by Sub 13 in complete liquidation within the meaning of
Section 332 (Section 332(a) and Section 1.332-2(d)).
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(9) Controlled 1 will recognize no gain or loss on its receipt of the Sub 13
assets distributed pursuant to the plan of complete liquidation of Sub 13
(Section 332 (a)).
(10) Controlled 1's basis of the Sub 13 assets will equal the basis of such
assets in the hands of Sub 13 immediately prior to its liquidation
(Section 334(b)(1)).
(11) Controlled 1's holding period of the Sub 13 assets will include the
holding period during which Sub 13 held such assets (Section 1223(2)).
(12) Controlled 1 will succeed to and take into account the items of Sub 13
described in Section 381(c). Controlled 1 will take these items into
account subject to the conditions and limitations specified in Sections
381, 382, 383, and 384 and the regulations thereunder (Section 381(a) and
Section 1.381(a)-1).
(13) Controlled 1 will succeed to and take into account the earnings and
profits, or deficit in earnings and profits, of Sub 13 as of the date of
complete liquidation. Any deficit in earnings and profits of Sub 13 will
be used only to offset earnings and profits accumulated after the date of
the liquidation. The amount of earnings and profits, or deficit in
earnings and profits, of Sub 13 to which Controlled 1 succeeds to under
Section 381 must be adjusted so as not to duplicate any amount reflected in
earnings and profits of Controlled 1 under Section 1.1502-33(b) (Section
381(c)(2), Section 1.381(c)(2)-1 and Section 1.1502-33(a)(2)).
(14) Sub 13 will recognize no gain or loss on its distribution of assets to or
the assumption of liabilities by Controlled 1 in complete liquidation
(Sections 336(d)(3) and 337).
With respect to the Controlled 1 Contribution and the Controlled 1 Spin-Off
(steps (xiv) and (xxvi), above), we hold as follows:
(15) The transfer by Distributing 1 to Controlled 1 of the Group C Subsidiaries
(described in step (xiv), above) solely in constructive exchange for
additional stock of Controlled 1 and Controlled 1's assumption of
liabilities, as described above, followed by Distributing 1's distribution
of the Controlled 1 stock to Distributing 2, will be a reorganization
within the meaning of Section 368(a)(1)(D). Distributing 1 and Controlled 1
will each be "a party to a reorganization" within the meaning of Section
368(b).
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(16) Distributing 1 will recognize no gain or loss upon the transfer of assets
to Controlled 1 in constructive exchange for Controlled 1 stock and
Controlled 1's assumption of liabilities, if any, as descrIbed above
(Sections 361(a) and 357(a)).
(17) Controlled 1 will recognize no gain or loss on the receipt of the assets
in constructive exchange for Controlled 1 stock, as described above
(Section 1032(a)).
(18) Controlled l's basis of the assets received in the proposed transaction
will equal the basis of the assets in the hands of Distributing 1
immediately prior to the transaction (Section 362(b)).
(19) Controlled l's holding period of the assets received in the proposed
transaction will include the period during which Distributing 1 held the
assets (Section 1223(2)).
(20) Distributing 1 will recognize no gain or loss upon its distribution of all
of the Controlled 1 stock to Distributing 2 pursuant to the Controlled 1
Spin-Off (Section 361(c)(1)).
(21) No gain or loss will be recognized by (and no amount will be included in
the income of) Distributing 2 upon its receipt of the stock of
Controlled 1 pursuant to the Controlled 1 Spin-Off (Section 355(a)).
(22) Distributing 2's basis in the stock of Controlled 1 and Distributing 1
after the distribution will be the same as the basis of the
Distributing 1 stock immediately before the Controlled 1 Spin-Off,
allocated in proportion to the fair market value of each in
accordance with Section l.358-2(a)(2) (Section 358(a)(1) and (b)).
(23) Distributing 2's holding period of the Controlled 1 stock received in the
Controlled 1 Spin-Off will include the holding period of the stock of
Distributing 1 with respect to which the Controlled 1 Spin-Off will
be made, provided that the Distributing 1 stock was held as a capital
asset on the date of the Controlled 1 Spin-Off (Section 1223 (1)).
(24) Appropriate adjustments to Controlled l's earnings and profits to prevent
the earnings and profits of the Group C Subsidiaries from being
eliminated will be made under Section 1.1502-33(f) (2). Proper
allocation of earnings and profits between Distributing 1 and
Controlled 1 will be made under Section l.3l2-10(a) of the Income Tax
Regulations (Section
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312(h)). The amount of earnings and profits allocated between
Distributing 1 and Controlled 1 under Section 312(h) and Section
1.312-l0(a) must be adjusted to prevent duplication (Section
l.1502-33(a)(2)).
With respect to the Reincorporation of Controlled 2 (steps (xxvii) and
(xxviii), above), we hold as follows:
(25) The consummation of the New Controlled 2 Contribution and the Distribution
will not adversely affect qualification of the Reincorporation as a
tax-free reorganization described in Section 368(a) (1) (F).
With respect to the New Controlled 2 Contribution and the Distribution
(steps (xxix) and (xxxi), above), we hold as follows:
(26) The transfer by Distributing 2 to New Controlled 2 of the Group B Assets
solely in constructive exchange for additional stock of New Controlled 2
and New Controlled 2's assumption of liabilities, as described above,
followed by Distributing 2's distribution of the New Controlled 2 stock to
Distributing 2's shareholders, as described above, will be a
reorganization within the meaning of Section 368(a) (1) (D). Distributing 2
and New Controlled 2 will each be "a party to a reorganization" within the
meaning of Section 368(b).
(27) Distributing 2 will recognize no gain or loss upon the transfer of assets
to New Controlled 2 in constructive exchange for New Controlled 2 Common
Stock and New Controlled 2's assumption of liabilities, if any, as
described above (Section 361(a) and 357(a)).
(28) New Controlled 2 will recognize no gain or loss on the receipt of the
assets in constructive exchange for New Controlled 2 stock, as described
above (Section 1032(a)).
(29) New Controlled 2's basis of the assets received in the proposed
transaction will equal the basis of the assets in the hands of
Distributing 2 immediately prior to the transaction (Section 362(b)).
(30) New Controlled 2's holding period of the assets received in the proposed
transaction will include the period during which Distributing 2 held the
assets (Section 1223(2)).
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(31) Distributing 2 will recognize no gain or loss upon its distribution to its
stockholders of all of the New Controlled 2 Common Stock pursuant to the
Distribution (Section 361(c)(1)).
(32) No gain or loss will be recognized by (and no amount will be included in
the income of) the holders of Distributing 2's Group B Common Stock upon
their receipt of the New Controlled 2 Common Stock in exchange therefor
(Section 355(a)(1)).
(33) No gain or loss will be recognized by (and no amount will be included in
the income of) the holders of Distributing 2's Group C Common Stock upon
their receipt of the New Controlled 2 Common Stock, as described above
(Section 355(a)(1)).
(34) The basis of the New Controlled 2 Common Stock in the hands of the holders
of the Group B Common Stock immediately after the Distribution will be the
same as the basis of the Group B Common Stock surrendered in exchange
therefor (Section 358(a)(1)).
(35) The basis of the New Controlled 2 Common Stock and the Group C Common
Stock in the hands of the holders of the Group C Common Stock
immediately after the Distribution will be the same as their basis in
the Group C Common Stock immediately prior to the Distribution,
allocated in proportion to the fair market value of each in
accordance with Section 1.358-2(a)(2) (Section 358(a)(1) and (b)).
(36) The holding period of the New Controlled 2 Common Stock received by the
holders or the Group B Common Stock will include the holding period of the
Group B Common Stock of Distributing 2 surrendered in exchange therefor,
provided that such Group B Common Stock of Distributing 2 is held as a
capital asset on the date of the Distribution (Section 1223(1)).
(37) The holding period of the New Controlled 2 Common Stock received by the
holders of the Group C Common Stock will include the holding period of the
Group C Common Stock of Distributing 2 with respect to which the
Distribution will be made, provided that such Group C Common Stock of
Distributing 2 is held as a capital asset on the date of the Distribution
(Section 1223 (1)).
(38) The payment of cash, if any, in lieu of fractional shares of New
Controlled 2 Common Stock will be treated for
-27-
federal income tax purposes as if the fractional shares are
distributed as part of the Distribution and then redeemed by New
Controlled 2. These cash payments will be treated as having been
received in full payment in exchange for the fractional shares of New
Controlled 2 Common Stock deemed to be redeemed as provided in
Section 302 (a) (Rev. Rul. 66-365, 1966- 2 C.B. 116; Rev. Proc.
77-41, 1977-2 C.B. 574)
(39) Appropriate adjustments to New Controlled 2's earnings and profits to
prevent the earnings and profits of the Group C Subsidiaries from being
eliminated will be made under Section 1.1502-33(f) (2). Proper allocation
of earnings and profits between Distributing 2 and New Controlled 2
will be made under Section 1.3l2-10(a) of the Income Tax Regulations
(Section 312 (h)). The amount of earnings and profits allocated
between Distributing 2 and New Controlled 2 under Section 312(h) and
Section 1.312-10(a) must be adjusted to prevent duplication (Section
1.1502-33(a)(2)). Distributing 2 and its subsidiaries and Controlled
2 and its subsidiaries will adjust their earnings and profits in
accordance with Section 1.1502-33(e) of the regulations. (In
applying the principles of Section 1.1502-33(e), either Distributing
2 and its subsidiaries or Controlled 2 and its subsidiaries may have
to eliminate earnings and profits).
We express no opinion about the tax treatment of the transaction
under other provisions of the Code and 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. This ruling has no effect on any earlier
documents and is directed only to the taxpayer who requested it.
Section 6110(j) (3) provides that it may not be used or cited as
precedent.
The taxpayers must attach a copy of this letter to their federal
income tax returns for the tax year in which the transaction covered
by this ruling letter is consummated.
In accordance with the power of attorney on file in this office,
we have sent a copy of this letter to your representative.
Sincerely yours,
Assistant Chief Counsel (Corporate)
By /s/ Victor Penico
---------------------------------
Victor Penico
Chief, Branch 3