department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc corp b04 plr-145230-04 date date internal_revenue_service number release date index numbers ------------------------ -------------------------------- ------------------------------------ -------------------------------------------- -------------------------------- ------------------------------------ - legend ----------------------------------------------------- ---------------------------------------------- -------------------------------------------- distributing ---------------------------------------------------------------------------- -------------------------------------------------------------------- distributing ---------------------------------------------------------------------------- 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sub ------------------------------------------------------------------------------- -------------------------------------------------------------------- accounts business a business b business c business d a b c d e ------------------------------------ ------------------------------ --------------------------- ------------------------- ---------------- ----------- -------- -------- -------- -------- ---- -------- ---- ---- -- ---- plr-145230-04 f g h i j dear ----------- this letter responds to your date request for rulings regarding certain federal_income_tax consequences of a series of proposed transactions collectively the proposed transaction the information submitted in that request and in later correspondence is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process moreover this office has made no determination regarding whether any distribution described below i satisfies the business_purpose requirement of sec_1 b of the income_tax regulations ii is used principally as a device for the distribution of the earnings_and_profits of any distributing_corporation or controlled_corporation see sec_355 of the internal_revenue_code and sec_1_355-2 and iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a percent or greater interest in the distributing_corporation or any controlled_corporation see sec_355 and sec_1_355-7t summary of facts distributing is a closely_held_corporation that has outstanding class a common_stock distributing is the common parent of an affiliated_group that files a consolidated_return distributing 2’s group includes wholly owned sub sub wholly owns sub and sub stock sub is the common parent of an affiliated_group that files a consolidated_return sub 4’s group includes first tier wholly owned sub sub conducts business c and business d through subsidiaries and disregarded entities additionally sub owns a percent of distributing common_stock and b percent of distributing preferred_stock c percent of sub d percent of sub and e percent of sub common_stock and f sub is a closely_held_corporation that has outstanding common and preferred sub sub sub sub sub and sub hold the remaining shares of plr-145230-04 percent of sub preferred_stock the remaining shares of sub sub and sub are owned by sub 4’s shareholders distributing in amounts less than a percent of the common_stock and b percent of the preferred_stock distributing is the common parent of an affiliated_group that includes sub and files a consolidated_return distributing is engaged in business a and business b through subsidiaries and disregarded entities stock outstanding distributing owns g percent of sub common_stock sub owns h percent of sub 9’s common_stock the remaining i percent of sub common_stock is owned by an employee_trust the public owns all of sub non-voting preferred_stock sub conducts business b conducted by sub business b as conducted by sub and business c and business d as conducted by sub through subsidiaries and disregarded entities has in the case of each named entity had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years sub has one class of common_stock and one class of non-voting preferred financial information has been submitted indicating that business a as proposed transaction for what are represented as valid business reasons distributing proposes the following series of transactions the proposed transaction i distributing will recapitalize its stock by amending its organizational documents to permit it to have two classes of common_stock outstanding class a and class b which will be held pro_rata by the shareholders the class b stock will be issued to distributing 2’s current shareholders in a ratio to reflect the current value of distributing 2’s direct and indirect interest in business a as compared to business b ii iii distributing will transfer all of its sub stock to a newly formed domestic subsidiary controlled in exchange for all of the controlled stock and the assumption by controlled of distributing liabilities contribution sub will form a wholly-owned single member limited_liability_company that will be disregarded for federal_income_tax purposes under sec_301_7701-3 llc-1 sub will merge into llc-1 the sub merger iv distributing will form a wholly-owned single member limited_liability_company that will be treated as a disregarded_entity for federal_income_tax purposes under sec_301_7701-3 llc-2 sub will merge into llc-2 under plr-145230-04 applicable state law merger pursuant to the merger sub shareholders will receive distributing class a and class b common_stock v distributing will form a wholly-owned single member limited_liability_company that will be treated as a disregarded_entity for federal_income_tax purposes under sec_301_7701-3 llc-3 sub will merge into llc-3 liquidation vi distributing will form a wholly-owned single member limited_liability_company that will be treated as a disregarded_entity for federal_income_tax purposes under sec_301_7701-3 llc-4 sub will merge into llc-4 liquidation vii distributing will form three wholly-owned single member limited_liability companies each of which will be treated as a disregarded_entity for federal_income_tax purposes under sec_301_7701-3 llc-5 llc-6 and llc-7 sub will merge into llc-5 sub will merge into llc-6 and sub will merge into llc-7 under applicable state law each merger respectively merger merger and merger pursuant to merger merger and merger sub sub and sub 8’s shareholders will each receive distributing class a and class b common_stock viii distributing will form a wholly owned single member limited_liability_company that will be treated as a disregarded_entity for federal_income_tax purposes under sec_301_7701-3 llc-8 sub will merge into llc-8 the sub transaction ix distributing will contribute the sub stock acquired from sub to distributing in constructive exchange for distributing common_stock contribution x xi distributing will contribute the sub stock acquired from distributing in the previous step above to controlled in constructive exchange for controlled common_stock contribution sub will amend its organizational documents to provide its non-voting preferred_stock with the right to vote the vote will be less than j of the total voting power of all classes of stock entitled to vote xii distributing will transfer all of its membership interest in llc-2 and llc-6 to distributing in constructive exchange for distributing common_stock and the assumption by distributing of distributing liabilities contribution xiii distributing will distribute all of the controlled stock to distributing distribution plr-145230-04 xiv distributing will distribute all of the controlled stock to its shareholders in exchange for their distributing class b stock_distribution distribution and distribution collectively the distributions representations the following representations are made with respect to the sub merger the merger of sub into llc-1 will be pursuant to state law no sub stock will be issued so sub has no plan or intention to reacquire any of its stock issued in the sub merger sub has no plan or intention to sell or otherwise dispose_of the assets acquired in the sub merger except for i merger ii dispositions made in the ordinary course of business and iii transfers described in sec_368 the liabilities of sub assumed by sub and the liabilities to which the transferred assets are subject were incurred by sub in the ordinary course of its business and are associated with the assets transferred following the sub merger sub and distributing will continue the historic_business of sub or use a significant portion of sub 5’s historic_business asset in a business either directly or indirectly through distributing sub and sub will each pay their respective expenses if any incurred in connection with the sub merger no intercorporate indebtedness exists or will exist between sub and sub that was issued acquired or will be settled at a discount no two parties to the sub merger are investment companies as defined in sec_368 and iv the fair_market_value of the sub assets transferred to sub will equal or exceed the sum of the liabilities assumed by sub plus the amount of liabilities if any to which the transferred assets are subject the total adjusted_basis of the assets of sub transferred to sub will equal or exceed the sum of the liabilities assumed by sub plus the amount of liabilities if any to which the transferred assets are subject a b c d e f g h i j k sub is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 plr-145230-04 l at least percent of the proprietary interest in sub will be preserved within the meaning of sec_1_368-1 by reason of an exchange of sub stock held by sub for a direct interest in the sub enterprise the following representations are made with respect to merger a b c d e f g h i j the fair_market_value of the distributing stock and other consideration received by sub shareholders will approximately equal the fair_market_value of the sub stock surrendered in merger at least percent of the proprietary interest in sub will be exchanged for distributing stock and will be preserved within the meaning of sec_1 e except for the exchange of distributing class b stock in distribution distributing has no plan or intention to reacquire any of its stock issued in merger distributing has no plan or intention to sell or otherwise dispose_of any of the assets of sub acquired in merger except for i dispositions made in the ordinary course of business and ii transfers described in sec_368 the liabilities of sub assumed by distributing and the liabilities to which the transferred assets are subject were incurred by sub in the ordinary course of its business and are associated with the assets transferred following merger distributing will continue the historic_business of sub or will use a significant portion of sub 4’s historic_business_assets in a business either directly or indirectly through distributing distributing sub and the sub shareholders will pay their respective expenses if any incurred in connection with merger there is no intercorporate indebtedness existing between distributing and sub that was issued acquired or will be settled at a discount no two parties to merger are investment companies as defined in sec_368 and iv the fair_market_value of the sub assets transferred to distributing will equal or exceed the sum of the liabilities assumed by distributing plus the amount of the liabilities if any to which the transferred assets are subject plr-145230-04 k l a b c d e f g h i j the total adjusted_basis of the sub assets transferred to distributing will equal or exceed the sum of the liabilities to be assumed by distributing plus the amount of the liabilities if any to which the transferred assets are subject sub is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 the following representations are made with respect to merger the fair_market_value of the distributing stock and other consideration received by sub shareholders will approximately equal the fair_market_value of the sub stock surrendered in merger at least percent of the proprietary interest in sub will be exchanged for distributing stock and will be preserved within the meaning of sec_1 e except for the exchange of distributing class b stock in distribution distributing has no plan or intention to reacquire any of its stock issued in merger distributing has no plan or intention to sell or otherwise dispose_of any of the assets of sub acquired in merger except for i dispositions made in the ordinary course of business and ii transfers described in sec_368 the sub liabilities assumed by distributing and the liabilities to which the transferred assets are subject were incurred by sub in the ordinary course of its business and are associated with the assets transferred following merger distributing will continue the historic_business of sub or will use a significant portion of sub 6’s historic_business_assets in a business distributing sub and the sub shareholders will pay their respective expenses if any incurred in connection with merger there is no intercorporate indebtedness existing between distributing and sub that was issued acquired or will be settled at a discount no two parties to merger are investment companies as defined in sec_368 and iv the fair_market_value of the sub assets transferred to distributing will equal or exceed the sum of the liabilities assumed by distributing plus the amount of liabilities if any to which the transferred assets are subject plr-145230-04 k the total adjusted_basis of the sub assets transferred to distributing will equal or exceed the sum of the liabilities assumed by distributing plus the amount of liabilities if any to which the transferred assets are subject l sub is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 the following representations are made with respect to merger a b c d e f g h i the fair_market_value of the distributing stock and other consideration received by sub shareholders will approximately equal the fair_market_value of the sub stock surrendered in merger at least percent of the proprietary interest in sub will be exchanged for distributing stock and will be preserved within the meaning of sec_1 e except for the exchange of distributing class b stock in distribution distributing has no plan or intention to reacquire any of its stock issued in merger distributing has no plan or intention to sell or otherwise dispose_of any of the sub assets acquired in merger except for i dispositions made in the ordinary course of business and ii transfers described in sec_368 the sub liabilities assumed by distributing and the liabilities to which the transferred assets are subject were incurred by sub in the ordinary course of its business and are associated with the assets transferred following merger distributing will continue the historic_business of sub or will use a significant portion of sub 7’s historic_business_assets in a business either directly or indirectly through distributing distributing sub and the sub shareholders will each pay their respective expenses if any incurred in connection with merger no intercorporate indebtedness exists or will exist between distributing and sub that was issued acquired or will be settled at a discount no two parties to the transaction are investment companies as defined in sec_368 and iv plr-145230-04 the fair_market_value of the sub assets transferred to distributing will equal or exceed the sum of the liabilities assumed by distributing plus the amount of liabilities if any to which the transferred assets are subject the total adjusted_basis of the sub assets transferred to distributing will equal or exceed the sum of the liabilities assumed by distributing plus the amount of the liabilities if any to which the transferred assets are subject sub is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 the following representations are made with respect to merger the fair_market_value of the distributing stock and other consideration received by sub shareholders will approximately equal the fair_market_value of the sub stock surrendered in merger at least percent of the proprietary interest in sub will be exchanged for distributing stock and will be preserved within the meaning of sec_1 e except for the exchange of distributing class b stock in distribution distributing has no plan or intention to reacquire any of its stock issued in merger distributing has no plan or intention to sell or otherwise dispose_of any of the sub assets acquired in the transaction except for i dispositions made in the ordinary course of business and ii transfers described in sec_368 the sub liabilities assumed by distributing and the liabilities to which the transferred assets are subject were incurred by sub in the ordinary course of its business and are associated with the assets transferred following merger distributing will continue the historic_business of sub or will use a significant portion of sub 8’s historic_business_assets in a business distributing sub and the sub shareholders will each pay their respective expenses if any incurred in connection with merger no intercorporate indebtedness exists or will exist between distributing and sub that was issued acquired or will be settled at a discount j k l a b c d e f g h plr-145230-04 i j k l a b c d no two parties to merger are investment companies as defined in sec_368 and iv the fair_market_value of the sub assets transferred to distributing will equal or exceed the sum of the liabilities assumed by distributing plus the amount of the liabilities if any to which the transferred assets are subject the total adjusted_basis of the sub assets transferred to distributing will equal or exceed the sum of the liabilities assumed by distributing plus the amount of the liabilities if any to which the transferred assets are subject sub is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 the following representations are made with respect to liquidation distributing on the date of adoption of the plan_of_liquidation of sub into distributing and at all times until the final liquidating_distribution is completed will be the owner of at least percent of the single outstanding class of sub stock no shares of sub stock will have been redeemed during the three years preceding the adoption of the plan of complete_liquidation of sub all distributions from sub to distributing pursuant to the plan of complete_liquidation will be made within a single taxable_year of sub as soon as the first liquidating_distribution has been made sub 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 its shareholders e sub will retain no assets following the final liquidating_distribution f g h sub will not have acquired assets in any nontaxable_transaction at any time except for acquisitions occurring more than three years before the date of the adoption of the plan_of_liquidation no sub assets have been or will be disposed of by sub or distributing except for dispositions in the ordinary course of business and dispositions occurring more than three years before the adoption of the plan_of_liquidation the liquidation of sub into distributing 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 if persons holding directly or indirectly more than percent in value of the sub stock also plr-145230-04 hold directly or indirectly more than percent in value of the stock in recipient for purposes of this representation ownership will be determined by application of the constructive_ownership rule_of sec_318 as modified by sec_304 before the adoption of the plan_of_liquidation no sub assets will have been distributed in_kind transferred or sold to distributing except for transactions occurring in the normal course of business and transactions occurring more than three years before adoption of the plan_of_liquidation sub will report all earned_income represented by assets that will be distributed to distributing such as receivables being reported on a cash_basis unfinished construction contracts commissions due etc the fair_market_value of the sub assets will exceed its liabilities both at the date of the adoption of the plan of complete_liquidation and immediately before the time the first liquidating_distribution is made distributing is not an organization that is exempt from federal_income_tax under sec_501 or any other provision of the code i j k l m all other transactions undertaken contemporaneously with in anticipation of in conjunction with or in any way related to liquidation have been fully disclosed n immediately before liquidation items of income gain loss deduction or credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d and as currently in effect sec_1_1502-13 as published by t d o on the date of liquidation there will be outstanding intercorporate debt owed by distributing to sub debt apart from debt there is no intercorporate debt existing between distributing and sub and none has been cancelled forgiven or discounted except for transactions that occurred more than three years before the date of adoption of the liquidation plan or alternatively if such date is later except for transactions occurring before the date distributing initially acquired sub the following representations are made with respect to liquidation a distributing on the date of adoption of the plan_of_liquidation of sub into distributing and at all times until the final liquidating_distribution is completed will be the owner of at least percent of the single outstanding class of sub stock plr-145230-04 b no shares of sub stock will have been redeemed during the three years preceding the adoption of the plans of complete_liquidation of sub c d all distributions from sub to distributing pursuant to the plan of complete_liquidation will be made within a single taxable_year of sub as soon as the first liquidating_distribution has been made sub 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 its shareholders e sub will retain no assets following its final liquidating_distribution f g h i j k l sub will not have acquired assets in any nontaxable_transaction at any time except for acquisitions occurring more than three years before the date of the adoption of the plan_of_liquidation no sub assets have been or will be disposed of by sub or distributing except for dispositions in the ordinary course of business and dispositions occurring more than three years before the adoption of the plan_of_liquidation the liquidation of sub into distributing 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 if persons holding directly or indirectly more than percent in value of the sub stock also hold directly or indirectly more than percent in value of the stock in recipient for purposes of this representation ownership will be determined by application of the constructive_ownership rule_of sec_318 as modified by sec_304 before the adoption of the plan_of_liquidation no sub assets will have been distributed in_kind transferred or sold to distributing except for transactions occurring in the normal course of business and transactions occurring more than three years before the adoption of the plan_of_liquidation sub will report all earned_income represented by assets that will be transferred to its shareholder such as receivables being reported on a cash_basis unfinished construction contracts commissions due etc the fair_market_value of the sub assets will exceed its liabilities both at the date of the adoption of the plan of complete_liquidation and immediately before the time the first liquidating_distribution is made distributing is not an organization that is exempt from federal_income_tax under sec_501 or any other provision of the code plr-145230-04 m all other transactions undertaken contemporaneously with in anticipation of in conjunction with or in any way related to liquidation have been fully disclosed n immediately before liquidation items of income gain loss deduction or credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d and as currently in effect sec_1_1502-13 as published by t d o on the date of liquidation there will be outstanding intercorporate debt owed by sub to distributing as successor to sub debt apart from debt there is no intercorporate debt existing between distributing sub and sub and none has been cancelled forgiven or discounted except for transactions that occurred more than three years before the date of adoption of the liquidation plan or alternatively if such date is later except for transactions occurring before the date sub initially acquired sub the following representations are made with respect to the sub transaction should the transaction be treated as a reorganization under sec_368 a the merger of sub into llc-8 will be pursuant to state law b c d e f g no distributing stock will be issued so distributing has no plan or intention to reacquire any of its stock issued in the sub transaction distributing has no plan or intention to sell or otherwise dispose_of the assets of sub acquired in the transaction except for i dispositions made in the ordinary course of business ii the distributions and iii transfers described in sec_368 the sub liabilities assumed by distributing and the liabilities to which the transferred assets are subject were incurred by sub in the ordinary course of its business and are associated with the assets transferred following the sub transaction distributing will continue the historic_business of sub or use a significant portion of each historic_business asset in a business either directly or indirectly through controlled sub and distributing will each pay their respective expenses if any incurred in connection with the sub transaction no intercorporate indebtedness exists or will exist between distributing and sub that was issued acquired or will be settled at a discount plr-145230-04 h no two parties to the transactions are investment companies as defined in sec_368 and iv the fair_market_value of the sub assets transferred to distributing will equal or exceed the sum of the liabilities assumed by distributing plus the amount of the liabilities if any to which the transferred assets are subject the total adjusted_basis of the sub assets transferred to distributing will equal or exceed the sum of the liabilities assumed by distributing plus the amount of the liabilities if any to which the transferred assets are subject sub is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 i j k l at least percent of the proprietary interest in sub will be preserved within the meaning of sec_1_368-1 by reason of an exchange of sub stock held by distributing for a direct interest in the sub enterprise the following representations are made with respect to the sub transaction should the transaction be treated as a liquidation under sec_332 a distributing on the date of the adoption of the plan of complete_liquidation of sub into distributing and at all times until the final liquidating_distribution is completed will be the owner of at least percent of the single outstanding class of sub stock b c d no shares of sub stock will have been redeemed during the three years preceding the adoption of the plan of complete_liquidation of sub all distributions from sub to distributing pursuant to the plan of complete_liquidation will be made within a single taxable_year of sub as soon as the first liquidating distributions occur sub 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 its shareholders e sub will retain no assets following its final liquidating_distribution f sub will not have acquired assets in any nontaxable_transaction at any time except for acquisitions occurring more than three years before the date of the adoption of the plan_of_liquidation g no assets of sub have been or will be disposed of by either sub or distributing except for dispositions in the ordinary course of business and plr-145230-04 dispositions occurring more than three years before the adoption of the plan_of_liquidation except for the transfers after the merger in contribution and contribution the liquidation of sub 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 if persons holding directly or indirectly more than percent in value of the sub stock also hold directly or indirectly more than percent in value of the stock in recipient for purposes of this representation ownership will be determined by application of the constructive_ownership rule_of sec_318 as modified by sec_304 before the adoption of the plan_of_liquidation no sub assets will have been distributed in_kind transferred or sold to distributing except for transactions occurring in the normal course of business and transactions occurring more than three years before the adoption of the plan_of_liquidation sub will report all earned_income represented by assets that will be distributed to its shareholder such as receivables being reported on a cash_basis unfinished construction contracts commissions due etc the fair_market_value of the sub assets will exceed its liabilities both at the date of the adoption of the plan of complete_liquidation and immediately before the time the first liquidating_distribution is made distributing is not an organization that is exempt from federal_income_tax under sec_501 or any other provision of the code h i j k l m all other transactions undertaken contemporaneously with in anticipation of in conjunction with or in any way related to the sub transaction have been fully disclosed n immediately before the sub transaction items of income gain loss deduction or credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d and as currently in effect sec_1 as published by t d o on the date of the sub transaction there will be outstanding intercorporate debt owed by sub to sub debt apart from debt there is no intercorporate debt existing between distributing sub and sub and none has been cancelled forgiven or discounted except for transactions that occurred more than three years before the date of adoption of the liquidation plan or alternatively if such date is later except for transactions occurring before the date sub initially acquired sub plr-145230-04 contribution the following representations are made with respect to contribution and a b c d e f no stock_or_securities will be issued for services rendered to or for the benefit of distributing in connection with contribution and contribution and no stock_or_securities will be issued for distributing indebtedness that is not evidenced by a security or for interest on distributing indebtedness which accrued on or after the beginning of the holding_period of distributing for the debt the transfer is not the result of the solicitation by a promoter broker or investment house distributing will not retain any rights in the property transferred to distributing the adjusted_basis and the fair_market_value of the assets to be transferred by distributing to distributing will in each instance equal or exceed the sum of the liabilities assumed within the meaning of sec_357 by distributing the distributing liabilities to be assumed within the meaning of sec_357 by distributing were incurred in the ordinary course of business and are associated with the assets to be transferred there is no indebtedness between distributing and distributing and there will be no indebtedness created in favor of distributing as a result of contribution or contribution g the transfers and exchanges will occur under a plan agreed upon before the transaction in which the rights of the parties are defined h all exchanges will occur on the same date i j there is no plan or intention on the part of distributing to redeem or otherwise reacquire any stock or indebtedness to be issued in contribution or contribution taking into account any issuance of additional shares of distributing stock any issuance of stock for services the exercise of any distributing stock_rights warrants or subscriptions a public offering of distributing stock and the sale exchange transfer by gift or other dispositions of any of the stock of distributing to be received in the exchange distributing will be in control of distributing within the meaning of sec_368 plr-145230-04 k distributing will receive stock securities or other_property approximately equal to the fair_market_value of the property transferred to distributing l distributing will remain in existence and retain and use the property transferred to it in a trade_or_business except for the sub stock which will be transferred to controlled m each of the parties to the transaction will pay its own expenses if any incurred in connection with contribution and contribution distributing will not be an investment_company within the meaning of sec_351 and sec_1_351-1 distributing is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 and the stock_or_securities received in the exchange will not be used to satisfy the indebtedness of such debtor distributing will not be a personal_service_corporation within the meaning of sec_269a the following representations are made with respect to contribution contribution and distribution the accounts owed by sub to distributing and its affiliates after distribution will not constitute stock_or_securities no part of the consideration distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a distributing shareholder the five years of financial information submitted for business a business c and business d represents the present operations of each respective business and regarding each there have been no substantial operational changes since the date of the last financial statements submitted the five years of financial information submitted for business b as conducted by sub is representative of the corporation’s present operation and with regard to such corporation there have been no substantial operational changes since the date of the last financial statements submitted immediately after distribution at least percent of the fair_market_value of the gross assets of controlled will consist of the stock of sub a controlled_corporation that is engaged in the active_conduct_of_a_trade_or_business as defined in sec_355 n o p a b c d e plr-145230-04 f following distribution distributing and controlled will each continue the active_conduct of its business independently and with its separate employees g h i j k l distribution is being carried out for the following corporate business purposes avoidance of regulatory interference with the conduct of business a facilitate financing of business b on more advantageous terms to divide the risks of business b from business a to allow expansion of business b to permit cost savings for business b and to facilitate expeditious compliance with changes to federal laws and regulations distribution is motivated in whole or substantial part by one or more of these corporate business purposes distribution is not used principally as a device for the distribution of the earnings_and_profits of either distributing or controlled or both the total adjusted bases and the fair_market_value of the assets transferred to controlled by distributing equals or exceeds the sum of the liabilities assumed within the meaning of sec_357 by controlled the liabilities assumed within the meaning of sec_357 in distribution were incurred in the ordinary course of business and are associated with the assets being transferred no intercorporate debt will exist between distributing and controlled at the time of or after distribution immediately before distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before publication of t d and as currently in effect sec_1_1502-13 as published by t d further distributing 1’s excess_loss_account with respect to the controlled stock if any will be included in income immediately before distribution m payments made in connection with all continuing transactions between distributing and controlled following distribution will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length n no two parties to the transaction are investment companies as defined in sec_368 and iv plr-145230-04 distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7t pursuant to which one or more persons will acquire directly or indirectly stock representing a percent or greater interest within the meaning of sec_355 in either distributing or controlled including any predecessor or successor of any such corporation for purposes of sec_355 immediately after distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five year period determined after applying sec_355 ending on the date of distribution or ii attributable to distributions on distributing stock that were acquired by purchase as defined by sec_355 and during the five-year period determined after applying sec_355 ending on the date of distribution for purposes of sec_355 immediately after distribution no person determined by applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of distribution the following representations are made with respect to distribution the accounts owed by sub to distributing and its affiliates after distribution will not constitute stock_or_securities the fair_market_value of the controlled stock to be received by each holder of distributing class b stock will be approximately equal to the fair_market_value of the distributing class b stock surrendered by the shareholder in the exchange no part of the consideration distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of distributing shareholder immediately after distribution at least percent of the fair_market_value of the gross assets of controlled will consist of the stock of sub a controlled_corporation that is engaged in the active_conduct_of_a_trade_or_business as defined in sec_355 o p q a b c d plr-145230-04 e f g h i j k l the five years of financial information submitted for business b as conducted by sub is representative of the corporation’s present operation and with regard to such corporation there have been no substantial operational changes since the date of the last financial statements submitted immediately after distribution at least percent of the fair_market_value of the gross assets of distributing will consist of the stock of distributing a controlled_corporation that is engaged in the active_conduct_of_a_trade_or_business as defined in sec_355 the five years of financial information submitted for business a business c and business d represents the present operations of these businesses and regarding each there have been no substantial operational changes since the date of the last financial statements submitted following distribution distributing either directly or indirectly through distributing and controlled will each continue the active_conduct of its business independently and with its separate employees distribution is being carried out for the following corporate business purposes avoidance of regulatory interference with the conduct of business a facilitate financing of business b on more advantageous terms to divide the risks of business b from business a to allow expansion of business b to permit cost savings for business b and to facilitate expeditious compliance with changes to federal laws and regulations distribution is motivated in whole or substantial part by one or more of these corporate business purposes distribution is not used principally as a device for the distribution of the earnings_and_profits of either distributing or controlled or both no intercorporate debt will exist between distributing or controlled at the time of or after distribution immediately before distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before publication of t d and as currently in effect sec_1_1502-13 as published by t d further distributing 2’s excess loss accounts with respect to the controlled stock if any will be included in income immediately before distribution m payments made in connection with all continuing transactions between distributing and controlled following distribution will be for fair market plr-145230-04 n o p q value based on terms and conditions arrived at by the parties bargaining at arm’s length no two parties to the transaction are investment companies as defined in sec_368 and iv distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7t pursuant to which one or more persons will acquire directly or indirectly stock representing a percent or greater interest within the meaning of sec_355 in either distributing or controlled including any predecessor or successor of any such corporation for purposes of sec_355 immediately after distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five year period determined after applying sec_355 ending on the date of distribution or ii attributable to distributions on distributing stock that were acquired by purchase as defined by sec_355 and during the five-year period determined after applying sec_355 ending on the date of distribution for purposes of sec_355 immediately after distribution no person determined by applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of distribution rulings based solely on the information submitted and representations set forth above provided the sub merger qualifies as a statutory merger under applicable state law sub 5’s merger into llc-1 will constitute a reorganization within the meaning of sec_368 sub and sub will each be a_party_to_a_reorganization within the meaning of sec_368 we rule as follows sub merger plr-145230-04 no gain_or_loss will be recognized by sub on the transfer of sub 5’s assets to sub in constructive exchange for sub common_stock and the assumption by sub of sub liabilities sec_361 and sec_357 no gain_or_loss will be recognized by sub on the receipt of assets of sub in constructive exchange for sub common_stock and the assumption_of_liabilities by sub of sub sec_1032 the basis of sub assets in the hands of sub will be the same as the basis of such assets in the hands of sub sec_362 the holding_period of sub assets received by sub will include the period during which the assets were held by sub sec_1223 sub will succeed to and take into account as of the close of the date of the sub merger the items of sub described in sec_381 subject_to the conditions and limitations specified in sec_381 sec_382 sec_383 and sec_384 and the regulations thereunder except to the extent that sub has earnings_and_profits reflected in sub 4’s earnings_and_profits sub will succeed to and take into account the earnings_and_profits or deficit in earnings_and_profits of sub as of the date of the sub merger sec_381 and sec_1_381_c_2_-1 any deficit in the earnings_and_profits of sub and sub will be used only to offset earnings_and_profits accumulated after the date of the sub merger sec_381 merger merger merger and merger provided merger merger merger and merger collectively the mergers each qualify as a statutory merger under applicable state law each merger into llc-2 llc-5 llc-6 and llc-7 respectively will constitute a reorganization within the meaning of sec_368 distributing sub sub sub and sub will each be a_party_to_a_reorganization within the meaning of sec_368 no gain_or_loss will be recognized in each instance by distributing and sub sub sub or sub on the transfer of their respective assets to distributing in exchange for distributing common_stock and the assumption by distributing of the liabilities of sub sub sub and sub sec_361 and sec_357 no gain_or_loss will be recognized by distributing on the receipt of assets of sub sub sub and sub in exchange for distributing common_stock and the assumption_of_liabilities by distributing of each of sub sub sub and sub as described above sec_1032 plr-145230-04 the basis of the assets of sub sub sub and sub in the hands of distributing will be the same as the basis of such assets in the hands of each of sub sub sub and sub sec_362 the holding_period of the assets of sub sub sub and sub received by distributing will include the period during which the assets were held by each of sub sub sub and sub sec_1223 distributing will succeed to and take into account as of the close of the date of each of merger merger merger and merger the items of sub sub sub and sub respectively described in sec_381 subject_to the conditions and limitations specified in sec_381 sec_382 sec_383 and sec_384 and the regulations thereunder except to the extent that sub sub sub and sub have earnings_and_profits reflected in distributing 2’s earnings_and_profits distributing will succeed to and take into account the earnings_and_profits or deficit in earnings_and_profits of sub sub sub and sub as of the date of each of the mergers sec_381 and sec_1_381_c_2_-1 any deficit in the earnings_and_profits of distributing sub sub sub and sub will be used only to offset earnings_and_profits accumulated after the date of the mergers sec_381 no gain_or_loss will be recognized by the shareholders of sub sub sub and sub on the exchange of their sub sub sub and sub stock for distributing stock in merger merger merger and merger sec_354 the basis of the distributing stock received by each shareholder of sub sub sub and sub in each of merger merger merger and merger will equal the basis of the sub sub sub and sub stock surrendered by that shareholder in exchange therefor sec_358 the holding_period of the distributing stock received by each shareholder of sub sub sub and sub in each of merger merger merger and merger will include the holding_period of the sub sub sub and sub stock surrendered by that shareholder in exchange therefor sec_1223 liquidation and liquidation liquidation and liquidation will each constitute a complete_liquidation of each of sub and sub under sec_332 and sec_1_332-2 except as provided in the succeeding sentence no gain_or_loss will be recognized by distributing sub and sub as a result of liquidation and liquidation sec_332 sec_337 sec_337 sec_336 however items of income plr-145230-04 gain loss and deductions with respect to debt and debt will be taken into account as required by the applicable intercompany_transaction regulations distributing 2’s basis in each asset received from sub and sub in liquidation and liquidation will be the same as the basis of that asset in the hands of sub and sub immediately before liquidation and liquidation sec_334 distributing 2’s holding_period in each asset received from sub and sub in liquidation and liquidation respectively will include the period during which that asset was held by sub and sub sec_1223 distributing will succeed to and take into account the items of sub and sub described in sec_381 subject_to the conditions and limitations specified in sec_381 sec_382 sec_383 and sec_384 and the regulations thereunder sec_381 and sec_1_381_a_-1 except to the extent sub and sub 2’s earnings_and_profits are reflected in distributing 2’s earnings_and_profits distributing will succeed to and take into account the earnings_and_profits or deficit in earnings_and_profits of sub and sub as of the date of liquidation and liquidation respectively sec_381 and sec_1_381_c_2_-1 and sec_1_1502-33 any deficit in earnings_and_profits of sub or sub will be used only to offset earnings_and_profits accumulated after the date of liquidation and liquidation sec_381 sub transaction no gain_or_loss will be recognized by sub in the sub transaction no gain_or_loss will be recognized by distributing in the sub transaction the basis of each asset received by distributing in the sub transaction will equal the basis of that asset in the hands of sub immediately before the sub transaction the holding_period of each asset received by distributing in the sub transaction will include the period during which sub held that asset contribution and contribution no gain_or_loss will be recognized by distributing on the transfer of assets to distributing in constructive exchange for distributing stock and the assumption by distributing of the related liabilities as a result of contribution and contribution sec_351 and sec_357 plr-145230-04 no gain_or_loss will be recognized by distributing on the receipt of assets from distributing as a result of the exchanges in contribution and contribution sec_1032 the basis of the distributing stock held by distributing will be increased by the basis of the assets transferred to distributing in contribution and contribution reduced by the amount of the liabilities assumed by distributing sec_358 and sec_358 the basis of the assets transferred by distributing in contribution and contribution to distributing will equal the basis of those assets in the hands of distributing immediately before contribution sec_362 the holding_period of the assets received by distributing as a result of the exchanges in contribution and contribution will include the holding_period of the assets in the hands of distributing sec_1223 contribution contribution and distribution contribution and contribution followed by distribution will qualify as a reorganization under sec_368 distributing and controlled each will be a_party_to_a_reorganization under sec_368 no gain_or_loss will be recognized by distributing on contribution and contribution sec_357 sec_357 sec_361 no gain_or_loss will be recognized by controlled on contribution and contribution sec_1032 the basis of each asset received by controlled in contribution and contribution will equal the basis of that asset in the hands of distributing immediately before its transfer sec_362 the holding_period of each asset received by controlled in contribution and contribution will include the period during which distributing held that asset sec_1223 no gain_or_loss will be recognized by and no amount will otherwise be included in the income of distributing on receipt of controlled stock in distribution sec_355 the holding_period of the controlled stock received by distributing will in each instance include the holding_period of the distributing stock on which plr-145230-04 distribution is made provided the distributing stock is held as a capital_asset on the date of distribution sec_1223 no gain_or_loss will be recognized by distributing on distribution sec_361 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made under sec_312 sec_1_1502-33 and sec_1_312-10 distribution no gain_or_loss will be recognized by distributing on distribution sec_355 no gain_or_loss will be recognized by and no amount will be included in the income of the holders of distributing class b stock on the receipt of controlled stock in distribution sec_355 and the aggregate basis of the controlled stock received by each holder of distributing class b stock pursuant to distribution will be equal to such holder's adjusted_basis in the shares of distributing class b stock exchanged therefor sec_358 the holding_period of the controlled stock received by each distributing class b shareholder in distribution will include the holding_period of the distributing class b stock surrendered in exchange therefor provided the distributing class b stock is held as a capital_asset on the date of distribution sec_1223 as provided sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made under sec_312 sec_1_312-10 and sec_1_1502-33 following distribution controlled and its direct and indirect subsidiaries that are includible corporations under sec_1504 and satisfy the ownership requirements of sec_1504 will be an affiliated_group_of_corporations entitled to file consolidated federal_income_tax returns with controlled as the common parent caveats no opinion is expressed about the tax treatment of the proposed transaction under any other provision of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings in particular no opinion is expressed and none was requested regarding plr-145230-04 i whether distribution or distribution satisfies the business_purpose requirement of sec_1_355-2 ii whether distribution or distribution is used principally as a device for the distribution of the earnings_and_profits of distributing distributing or controlled see sec_355 and sec_1_355-2 iii whether any distribution described above and an acquisition or acquisitions are part of a plan or series of related transactions under sec_355 iv the tax treatment of the recapitalizations described in the proposed transaction steps i and xi above v whether any entity described as a disregarded_entity actually qualifies as a disregarded_entity under sec_301_7701-3 procedural statements this ruling is directed only to the taxpayer who requested it sec_6110 a copy of this letter must be attached to the federal_income_tax return of each provides that it may not be used or cited as precedent party involved in the proposed transaction for the taxable_year in which the proposed transaction is completed sent to your authorized representative under the power_of_attorney on file with this office a copy of this letter is being sincerely ___________________ richard k passales senior counsel branch office of associate chief_counsel corporate cc


internal_revenue_service number release date index number ------------------------ -------------------------- -------------------- ------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-105058-10 date date in re -------------------------------------------- --------------------------------------------------------- --------------------- legend ---------------------------- testator -------------------------------------- child a ----------------------------- child b --------------------------------------- child c -------------------------------- stock ------------------------------------------------------------------------------ stock trust ------------------------------------------------------------------------------ residuary_trust children’s agreement ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------- state state a date date date date date date a b c d stock trust a residuary_trust a cite --------------------------------------------------------------------------------------------------- ------------------ ---------- -------------------- ------------------- -------------------------- ------------------------- ------------------------- ----------------------- ------ ------- ------ ------ ------------------------------------------------------------------------ --------------------------------------------------------------------------------- ------------------------------------------------------------------------ plr-105058-10 ------------------------------------------------------------------------ --------------------------------------------------------------------------------- cite ------------------------------------------------------------------------------------------------------------------------ cite ------------------------------------------------------ cite ------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------------- cite ------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------ cite ------------------------------------------------------------------------ ------------------------------------------------------- cite cite ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------- highest court highest court of state a state court state statute ------------------------------------------------------------------------------------------ --------------------------------------------- state governing statute a -------------------------------------------------- state governing statute b state a statute --------------------------------- ---- q ---- r ---- s t ---- -------- u -------- v x --------- ------ y z ------------ ------------------------------------------- ----------------------------------- ------------------------------------------------------------------------ --------------------------------------------------------------------------------- dear ------------- this responds to the date letter from your authorized representative requesting rulings on the income gift estate and generation-skipping_transfer gst tax consequences of a proposed settlement agreement the facts and representations are as follows testator died a resident of state on date he was survived by three children child a child b and child c the children five grandchildren the five grandchildren were then living there were no great-grandchildren at the time plr-105058-10 under articles third and eighth of testator’s will the will his shares of stock were to be held in trust the stock trust trust income was to be divided equally among the children on a child’s death the child’s income share was to be divided equally among the child’s then living children testator’s grandchildren the stock trust was to terminate twenty-one years after the death of testator’s last surviving grandchild when the principal would be divided equally per capita among testator’s then living great-grandchildren and deceased great-grandchildren whose then living descendants would take by representation under article twenty-second of the will the residue of testator’s estate was to be held in another trust the residuary_trust the residuary_trust provisions were identical to those of the stock trust except that the residuary_trust was to terminate when testator’s youngest great-grandchild reached age twenty-one the rule_against_perpetuities under the state rule_against_perpetuities in effect at testator’s death a bequest of a future_interest was void if considered prospectively at the testator’s death there was a possibility that the interest would not vest by the end of twenty-one years after the death of a life or lives in being at the testator’s death the permissible period a bequest to a class was void if there was a possibility that all the members of the class would not be ascertained and take vested interests within the permissible period a void specific_bequest passed to the testator’s residuary_estate if the testator’s disposition of the residuary_estate was void as well the residuary_estate passed as a reversion by intestacy cite in this case at testator’s death it was possible for the children to have additional children so that there could be grandchildren whose lives were not then in being this was the pivotal factor in determining whether his bequests of stock trust and residuary_trust income and remainders to his grandchildren and great-grandchildren violated the rule_against_perpetuities testator’s bequest of lifetime income interests to the grandchildren was to all of his grandchildren as a class a grandchild born after testator’s death would be part of the grandchildren’s class and would receive stock trust income_for_life based on this it was considered possible that not all of the grandchildren’s income interests would vest during lives in being at testator’s death testator’s bequests of remainders to his great-grandchildren were to vest only after all of testator’s grandchildren died the life of a grandchild born after testator’s death would also be a measuring life therefore at testator’s death it was possible that the certain annuities were also created that have since terminated each trust considered herein ie stock trust and residuary_trust in the will and stock trust a and residuary_trust a under the children’s agreement provided for distribution of the remainder at the end plr-105058-10 time for vesting of the great-grandchildren’s remainders would be based on a life not in being at testator’s death accordingly the validity of these bequests was in doubt the bequests in the stock trust if void passed to the residuary_trust at testator’s death the bequests in the residuary_trust if void passed to testator’s intestate estate as a reversionary_interest the children’s agreement the children were testator’s heirs at law they acquired his property passing by intestacy consequently on date shortly after testator died the children entered into an agreement the children’s agreement revising the time when the great-grandchildren’s remainders were to vest under the children’s agreement the trusts were to terminate and the great-grandchildren’s remainders were to take effect on the death of the survivor of the children and five grandchildren that is lives in being at testator’s death the children’s agreement also changed the will’s pro_rata distribution of the stock trust and residuary_trust remainder to a per stirpes distribution on termination trust principal would be divided into three equal parts and distributed per stirpes under this revision the great-grandchildren descended from child a would share one third of the principal per stirpes those descended from child b would share a second third per stirpes and those descended from child c would share the last third per stirpes in all other respects the terms of the revised stock trust stock trust a and residuary_trust residuary_trust a were the same as those provided in testator’s will on a date before date testator’s shares of stock were transferred to stock trust a residuary_trust a was not funded it is represented that no additions have been made since then the litigation over more than x decades the trust beneficiaries and others have instituted actions for state court determinations regarding testator’s will and the children’s agreement specifically in cite the highest court of state highest court considered testator’s bequests of income interests to the grandchildren the court reasoned that under testator’s will a grandchild’s income_interest would vest when his or her parent child a child b or child c died thus the grandchildren’s class would necessarily close at the death of the last survivor of the children who were in being at testator’s death highest court held that therefore the bequest of lifetime income interests to the of twenty-one years following the death of the last survivor of the persons whose lives measured the duration of that trust because the perpetuities issue in this case centers on the lives measuring a respective trust’s duration and not on the twenty-one year period following the death of the last survivor the twenty-one year period is hereafter assumed to be a part of each trust’s duration even though it is not specifically stated plr-105058-10 grandchildren as a class did not violate the rule_against_perpetuities the court held the stock trust created in the will to be valid through the lives of the grandchildren highest court then considered testator’s bequest of remainders to his great-grandchildren the court reasoned that the grandchildren’s life estates preceded the remainders and the grandchildren’s class was not limited to lives in being at testator’s death because the remainders would take effect only after all of those including afterborn grandchildren died it was possible that the remainders would not vest within lives in being at testator’s death therefore highest court held the stock trust remainders to be void and illegal as violating the rule_against_perpetuities cite state statute the wait and see rule nearly y decades after highest court rendered its decision in cite the state legislature enacted state statute state statute provides a wait and see rule in determining whether a future_interest satisfies the rule_against_perpetuities or is void under the wait and see rule a future_interest does not violate the rule_against_perpetuities if actual events demonstrate that the interest did in fact vest by the end of the permissible period state statute applies retroactively to all interests heretofore created following the enactment of state statute highest court considered the statute’s retroactivity cite in the case before the court the trust was created many decades before state statute was enacted at the time of creation certain interests were void as violating the rule_against_perpetuities however highest court applied state statute’s wait and see rule to conclude in retrospect that the interests were not void and did not violate the rule_against_perpetuities as a result the courts of state now apply the wait and see rule retroactively to conclude that a future_interest that was void when created many years before state statute was enacted is not void because in hindsight it vested before the permissible period ended accordingly such otherwise void interests are retroactively sustained as not violating the rule_against_perpetuities cite however highest court has not yet addressed due process issues that may be presented testator’s bequest to the grandchildren though valid did not provide for distribution of a grandchild’s income share when the grandchild died before the trust ended on the death of the first grandchild to die on date the trustees petitioned the state court for instructions the state court held that based on testator’s intent a deceased grandchild’s children succeeded to the income share for the duration of the trust cite by inference highest court also considered testator’s bequest of the residuary_trust remainders highest court in effect confirmed that the stock trust remainder and residuary_trust remainder passed by intestacy to the children however the court did not rule on how the remainder would pass to the great-grandchildren in contrast the legislature of state a enacted state a statute which like state statute retroactively plr-105058-10 the actualities in this case no additional grandchildren were born after testator’s death the lives of the children and the five grandchildren were all in being at testator’s death all of the children have died the last survivor of the five grandchildren died on date at the time there were z great-grandchildren of testator the trust will terminate twenty-one years after date which is date of testator’s z great-grandchildren a descended from child a b descended from child b and c descended from child c if the wait and see rule is applied to validate testator’s bequest of remainders to his great-grandchildren the principal would be divided into z equal shares and distributed under the will alternatively if testator’s disposition of the remainders is considered void the principal would be divided into three equal shares and distributed per stirpes under the children’s agreement the portion of a one-third share distributable to a great-grandchild would depend on the framework of the family line ie child a’s child b’s or child c’s to which that great-grandchild belongs great-grandchildren’s litigation there is a substantial difference between what a great-grandchild would receive in a per capita distribution and what he or she would receive in a per stirpes distribution on date the great-grandchildren benefitting from a per capita distribution the per capita parties instituted their action in state court for adjudication on the distribution of the stock trust remainder the great-grandchildren benefitting from a per stirpes distribution the per stirpes parties opposed the suit and also requested adjudication in addition an action was instituted concerning the distribution of income during the twenty-one year period state court combined the proceedings to consider the income and principal issues together cite over a d-year period guardians ad litem were appointed there was extensive discovery counsel filed three voluminous sets of briefs and the court heard two days of oral arguments the per capita parties argued that the wait and see test of state statute now applies under that test testator’s the will’s disposition of the stock trust remainder does not violate the rule_against_perpetuities therefore the stock trust principal is distributable per capita to testator’s living great-grandchildren and deceased great-grandchildren whose living descendants would take by representation applies a wait and see rule to determine whether a future_interest that was void at the time it was created before the state a statute was enacted did in fact vest during the permissible period highest court of state a refused to apply the wait and see rule retroactively despite the relevant language in state a statute instead that court addressed issues of constitutionality and held that state a statute could not be applied retroactively to destroy vested or substantive rights created before state a statute was enacted cite plr-105058-10 the per stirpes parties argued that the highest court’s determinations were final and those rulings can not now be constitutionally impaired by a later-in-time state statute or judicial_ruling because highest court determined the remainders in the will to be void they passed as reversionary interests by intestacy to the children as such the remainders passed per stirpes under the children’s agreement some parties argued that trust income should be distributed per stirpes through the roots of the children for the duration of the stock trust others argued that the income is distributable per capita the court encouraged the parties to explore ways to resolve their differences through negotiation and compromise rather than through continued litigation among the potential outcomes regarding trust principal was a judicial_ruling that i ii iii principal is distributable per capita on date under the terms of the stock trust in the will or principal is distributable per stirpes on date under the terms of the children’s agreement or principal was distributable as of the last surviving grandchild’s death under the residuary_trust in the will which vested or will vest in the takers under the residuary_trust among the potential outcomes regarding trust income was a judicial_ruling that iv v vi income is distributable per stirpes from the death of the last surviving grandchild to date under either the will or the children’s agreement or income is distributable per capita from the death of the last surviving grandchild to date under the will or the children’s agreement or all rights to receive stock trust income terminated when the last surviving grandchild died at which time the stock trust principal was distributable under the residuary_trust of the will the great-grandchildren’s settlement agreement the parties negotiated extensively at the outset they agreed that the issues could be settled using a fractional difference settlement based on an assessment of the relative strengths of their adverse positions under the general framework of the compromise the great-grandchildren’s settlement plr-105058-10 agreement the ggc agreement provides for the stock trust principal to be divided into z separate shares based on the number of testator’s then living great-grandchildren and deceased great-grandchildren with then living children the share of a deceased great-grandchild will be divided per stirpes among that great-grandchild’s living descendants the stock trust assets will be divided in accordance with certain percentages the formula of the compromise provides for a q per stirpes r per capita fractional difference as to income and an s per stirpes t per capita fractional difference as to principal after the division into separate shares u of each great-grandchild’s share will be distributed outright to the great-grandchild if living or if the great-grandchild is deceased to his or her living descendants per stirpes the remaining v of each share will continue in trust for such great-grandchild or such descendants until the termination_date date each share will be a separate trust the respective great-grandchild or deceased great-grandchild’s descendants will be the sole beneficiary of the share for distributions of income and principal a sophisticated algorithm taken to thirteen decimal places will be used in the pro_rata division and outright distributions the division will take into account both the market_value and respective tax bases of the assets the ggc agreement was presented to state court for consideration the state court approved the settlement and ordered the division and distribution of the stock trust as set forth in the ggc agreement the ggc agreement is subject_to a favorable ruling from the internal_revenue_service you have asked for the following rulings the terms of the ggc agreement will not cause distributions from the stock trust or the continuing separate settlement trusts to become subject_to the generation-skipping_transfer_tax the terms of the ggc agreement will not cause any party to the agreement to make a gift to any other party to the ggc agreement the terms of the ggc agreement will not cause any party to the agreement to be required to include trust assets in his or her gross_estate unless such assets are distributable or have been distributed to such party prior to his or her death the terms of the ggc agreement will not cause any party to the agreement to realize income from the sale_or_exchange of any trust assets or interests for purposes of describing the ggc agreement the stock trust and stock trust a are considered to be the same trust plr-105058-10 ruling generation-skipping_transfer gst tax sec_2601 of the internal_revenue_code imposes a tax on every generation-skipping_transfer which is defined under sec_2611 as a taxable_distribution a taxable_termination or a direct_skip under of the tax_reform_act_of_1986 the act gst tax is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the tax does not apply to a transfer under a_trust that was irrevocable on date except to the extent the transfer is made out of corpus added to the trust by an actual or constructive_addition after date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under sec_26_2601-1 will not cause the trust to lose its exempt status these rules are applicable only for purposes of determining whether an exempt trust retains exempt status for gst tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a court-approved settlement of a bona_fide issue regarding the administration of the trust or the construction of terms of the governing instrument will not cause an exempt trust to be subject_to chapter if the settlement is the product of arm's length negotiations and the settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing the issues resolved by the settlement a settlement that results in a compromise between the positions of the litigating parties and reflects the parties' assessments of the relative strengths of their positions is a settlement that is within the range of reasonable outcomes in this case the stock trust was irrevocable on date further it is represented that there have been no actual or constructive additions to the stock trust after date accordingly the stock trust is exempt from gst tax under sec_26_2601-1 the terms of the ggc agreement including the proposed division of the stock trust into separate shares and partial distributions of principal are the result of a settlement of substantial issues between the per capita parties and the per stirpes parties these issues have been tenaciously litigated over more than x decades highest court rendered opinions regarding these trusts many years ago however state statute has since been enacted with retroactive effect and highest court has affirmed state plr-105058-10 statute’s retroactive application to a similarly-created trust in light of this that court’s earlier determinations of the issues in this case are now in question we conclude that the ggc agreement constitutes a settlement of bona_fide issues concerning the provisions of the stock trust and its administration we also conclude that the terms of the ggc agreement are the product of arm's length negotiations they represent a compromise between the positions of the parties and reflect the parties' assessments of the relative strengths of their positions we further conclude that the ggc agreement is within the range of reasonable outcomes under the governing instruments and the applicable state law addressing the issues resolved in the ggc agreement accordingly based upon the facts submitted and the representations made we rule that the division of the stock trust into the z separate great-grandchildren’s trusts and the distributions to the living great-grandchildren and the descendants by representation of a deceased great-grandchild made in accordance with the ggc agreement will not cause the stock trust the continuing separate stock trusts or the distributions as described above to be subject_to the generation-skipping_transfer_tax ruling gift_tax issue sec_2501 provides that a tax is imposed for each calendar_year on the transfer of property by gift during such calendar_year sec_2511 provides that the gift_tax applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-1 of the gift_tax regulations provides that as to any property or part thereof or interest therein of which the donor has so parted with dominion and control as to leave in him or her no power to change its disposition whether for his or her own benefit or for the benefit of another the gift is complete sec_25_2511-1 provides that any transaction in which an interest in property is gratuitously passed or conferred upon another regardless of the means or device employed constitutes a gift subject_to tax whether an agreement settling a dispute is effective for gift_tax purposes depends on whether the settlement is based on a valid enforceable claim asserted by the parties and to the extent feasible produces an economically fair result see 674_f2d_761 9th cir citing 387_us_456 thus state law must be examined to ascertain the legitimacy of each party's claim if it is determined that each party has a valid claim the service must determine that the distribution under the settlement plr-105058-10 reflects the result that would apply under state law if there is a difference it is necessary to consider whether the difference may be justified because of the uncertainty of the result if the question were litigated the proposed settlement is a mediated settlement and is based on arm's length negotiations among all the parties all interested parties who hold or may hold an interest in the trusts including any minors and unborn heirs have been represented in the negotiations as discussed above the ggc agreement represents the resolution of a bona_fide controversy between the parties the terms of the ggc agreement are the product of arm's length negotiations and represent i a compromise between the positions of the per capita parties and the per stirpes parties and ii reflect the parties' assessments of the relative strengths of their positions we further conclude that the ggc agreement is within the range of reasonable outcomes under the governing instruments and applicable state law accordingly based on the facts submitted and representations made we conclude that the terms of the ggc agreement as described above will not cause any of the beneficiaries to have made a taxable gift_for purposes of the federal gift_tax under sec_2501 ruling estate_tax issue sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2033 provides that the value of the gross_estate includes the value of all property to the extent of the interest therein of the decedent at the time of death sec_2035 provides that if the decedent transferred an interest in property or relinquished a power with respect to any property during the 3-year period ending on the date of death and the value of the property or interest therein would have been included in the gross_estate under sec_2036 sec_2037 sec_2038 or sec_2042 if the interest or power had been retained by the decedent on the date of death then the value of the gross_estate includes the value of the property or interest that would have been so included sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in the case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period that does not in fact end before his death possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the plr-105058-10 property or the income from the property sec_2037 provides that the value of the gross_estate includes the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise if possession or enjoyment of the property can through ownership of such interest be obtained only by surviving the decedent and the decedent has retained a reversionary_interest in the property and the value of such reversionary_interest immediately before the death of the decedent exceed sec_5 percent of the value of such property sec_2038 provides that the value of the gross_estate includes the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona fine sale for adequate_and_full_consideration in money_or_money's_worth by trust or otherwise where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power either by the decedent alone or in conjunction with any person to alter amend or revoke or where the decedent relinquished any such power during the 3-year period ending on the date of the death sec_2041 provides that the value of the gross_estate shall include the value of all property with respect to which the decedent possessed a general_power_of_appointment at the time of death sec_2041 defines the term general_power_of_appointment as a power that is exercisable in favor of the decedent the decedent's_estate the decedent's creditors or the creditors of the decedent's_estate in order for sec_2035 through to apply a decedent must have made a transfer of property or an interest therein except in the case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth under which the decedent retained an interest in or power over the income or corpus of the transferred property as discussed above the ggc agreement represents the resolution of a bona_fide controversy between the parties it is a settlement of bona_fide issues and is the product of arm's length negotiations it reflects the parties' assessments of the relative strengths of their positions no great-grandchild or deceased great-grandchild’s descendants by representation has made a transfer to the stock trust or to any other great-grandchild by reason of the settlement agreement accordingly based upon the facts submitted and representations made we conclude that the terms of the ggc agreement will not cause any party to the agreement to have made a transfer within the meaning of sec_2035 through however once the ggc agreement becomes effective any trust property actually distributed or receivable by a beneficiary or his or her assignee would generally be included in the beneficiary’s federal transfer_tax base see eg sec_2033 sec_2041 sec_2501 plr-105058-10 ruling income_tax issue sec_61 provides that gross_income includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized sec_1001 provides that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained 499_us_554 addresses the issue of whether a sale_or_exchange that has taken place results in the realization of gain_or_loss under sec_1001 in cottage savings a financial_institution exchanged its interests in one group of residential mortgage loans for another lender's interests in a different group of residential mortgage loans the two groups of mortgages were considered substantially identical by the agency that regulated the financial_institution the supreme court in cottage savings u s pincite concluded that sec_1_1001-1 reasonably interprets sec_1001 and stated that an exchange of property gives rise to a realization event under sec_1001 if the properties exchanged are materially different in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent cottage savings u s pincite the court held that mortgage loans made to different obligors and secured_by different homes did embody distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans cottage savings u s pincite in the present case state governing statute a allows the court for cause shown to authorize the division of a_trust into two separate trusts on such terms and conditions and with such notice as the court directs in addition state governing statute b gives trustees the power to distribute in cash or in_kind or partly in each and allocate particular assets in proportionate or disproportionate shares plr-105058-10 in this case the court order approving the ggc agreement orders the division and distribution of the stock trust as set forth in the ggc agreement accordingly the court approved the non-pro rata distributions called for in the ggc agreement and further authorized the trustees to make the necessary transfers and assignments of the unconverted investment securities t herein awarded in_kind accordingly the submission concludes that the distribution scheme in this case is authorized by state law we agree the stock trust will be divided into z trusts on a non pro-rata basis under the state statutes cited above the court has the authority to authorize the trustees to make this type of non pro-rata apportionment thus the proposed division and distribution of the stock trust assets among the z trusts will not result in a material difference in_kind or extent of the legal entitlements enjoyed by the beneficiaries within the meaning of cottage savings accordingly based upon the facts submitted and representations made we conclude that the division of the stock trust into the z great-grandchildren’s trusts will not result in the recognition of gain_or_loss under sec_1001 by the stock trust any beneficiary of the stock trust or any separate great-grandchild’s trust the rulings in this letter pertaining to the federal estate and or generation-skipping_transfer_tax apply only to the extent that the relevant sections of the internal_revenue_code are in effect during the period at issue 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 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely yours leslie h finlow acting senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosure copy for purposes