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-145225-04 date date internal_revenue_service number release date index numbers ------------------------ ------------- ------------------------------------ ------------------------------------------------ -------------------------------- ------------------------------------ - legend ----------------------------------------------------- ---------------------------------------------- -------------------------------------------- distributing ---------------------------------------------------------------------------- -------------------------------------------------------------------- distributing ---------------------------------------------------------------------------- -------------------------------------------------------------------- sub 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------------------------------------------------------------------------------- -------------------------------------------------------------------- accounts business a business b business c business d a b c d e ------------------------------------ ------------------------------ --------------------------- ------------------------- ---------------- ----------- -------- -------- -------- -------- ---- -------- ---- ---- -- ---- plr-145225-04 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-145225-04 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-145225-04 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-145225-04 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-145225-04 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-145225-04 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-145225-04 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-145225-04 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-145225-04 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-145225-04 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-145225-04 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-145225-04 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-145225-04 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-145225-04 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-145225-04 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-145225-04 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-145225-04 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-145225-04 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-145225-04 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-145225-04 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-145225-04 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-145225-04 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-145225-04 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-145225-04 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-145225-04 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 plr-145225-04 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 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 plr-145225-04 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


id office uilc cca_2011022813313566 ---------- 6707a number release date from ---------------------------- sent monday date pm to ------------------ cc --------------------------------------------------------------------------------------------------------------------------- ------------------------------------------- subject re 6707a calculation request --------- i agree with the field the sec_6707a penalty is calculated based on the return of the person against whom the penalty is being imposed which in this case is the transferee although the transferee may be liable for the additional tax under sec_6901 that liability is a result of the person's receipt of assets of the transferor ie a derivative liability ------------------ ------------------------------------------------------------------------------------- -----------------------------------------------------


department of the treasury_department of the treasury int ernal revenue service int ernal revenue service washington d c washington d c o f f i c e o f o f f i c e o f c h i e f c o u n s e l c h i e f c o u n s e l date number release date cc ita tl-n-341-01 uilc internal_revenue_service national_office field_service_advice memorandum for associate area_counsel lmsb from associate chief_counsel income_tax accounting subject expenses attributable to prior sale of stock this field_service_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent legend corp a corp b corp c corp d corp e corp f period g corp h mr j mr k dollar_figurel x business tax years issue whether the expenses_incurred by a subsidiary to administer certain claims both of and against a former related subsidiary are currently deductible when the underlying claims relate back to the sale of the stock of the former subsidiary conclusion tl-n-341-01 the expenses_incurred by a subsidiary to administer certain claims both of and against a former related subsidiary are not currently deductible because they represent the expenses of another taxpayer and because they relate back to the sale of the stock of the former subsidiary facts corp a was and still is engaged in the x business corp a is a wholly owned subsidiary of corp b corp a and corp b are subsequently referred to as corps ab corp b was formerly the wholly-owned subsidiary of corp c which in turn is a wholly-owned subsidiary of corp d corp d changed its name to corp e and will subsequently be referred to as such the stock of corp b was sold to corp f in period g corp f originally intended to acquire the assets of corp a or corp b rather than corp b’s stock however concerns over the potential interruption of corp a’s x business altered corp f’s plans corp a was required by most states to become licensed these state licenses were nontransferable therefore if corp f merely purchased corp a’s assets it would have had to apply for new state licenses and would have had to suspend corp a’s x business operations until such licenses were granted during negotiations for the purchase of corp b’s stock corp f and corp e agreed upon a value for certain outstanding claims pending against corp a on the purchase date preclosing claims some of these preclosing claims were in litigation corp f and corp e were also unable to agree upon a value for certain claims made by corp a against third parties which were also outstanding on the purchase date pre-closing plaintiff claims the pre-closing plaintiff claims included rights to reimbursement subrogation rights and litigation in which corp a was the plaintiff we will subsequently refer to the preclosing claims and the preclosing plaintiff claims collectively as the claims in the purchase agreement corp e and corp c essentially agreed to retain the claims they agreed also to indemnify and hold harmless corp f and corps ab against all losses resulting or arising from certain listed events as well as any other claim or liability against corps ab arising before the sale under the purchase agreement the aggregate purchase_price payable by corp f to corp c for all of corp b’s stock was an amount equal to the adjusted shareholders’ equity defined as the shareholders’ equity of corp b as shown on an adjusted closing date balance_sheet as of the closing date for sale of the stock the claims were excluded from this closing date balance_sheet through an adjustment mechanism provided in the purchase agreement corp e used another of its subsidiaries corp h to administer the claims under an agreement between corp e and corp h corp h had to consult with corp e before making significant tactical decisions and to keep corp e informed on the progress of the claims on a monthly basis corp e would either reimburse corp h or pay directly tl-n-341-01 all expenses directly or indirectly related to the claims including without limitation all costs of paying the claims all costs of managing the claims including counsel and expert fees internal administrative expenses salaries and other employee_benefits overhead court costs and other costs corp h would engage certain corp e employees specifically mr j and mr k pursuant to the same terms and conditions due them by corp e corp e would pay corp h an administrative fee of dollar_figurel per month for its services in administering the claims to handle the claims corp h rented an office and incurred expenses in relation to that office mr k would meet regularly with corps ab’s management to discuss their liability for claims made after the stock sale that related to events occurring prior to the sale if the parties were in agreement that corps ab should pay all or a portion of any claims corp e was obligated under the stock sale agreement to indemnity corps ab for that payment often however corps ab would want to pay a claim in order to retain a continuing customer in circumstances where mr k believed that corps ab had no liability in that event corps ab were not entitled to an indemnity payment from corp e with respect to litigation matters involving corps ab as either plaintiff or defendant relating to matters that arose prior to the stock sale mr j selected and supervised outside counsel who were engaged with corps ab’s consent and were technically retained and paid_by corps ab within the limitations of the purchase agreement corp e was obligated to corps ab for the attorneys fees and any amounts paid to resolve preclosing claims corps ab and corp f were in turn obligated to turn over to corp e any recoveries from preclosing plaintiff claims corp e now agrees that the claims relate back to the sale of the stock under the rationale of 344_us_6 and are therefore adjustments to sales_price the expenses at issue here are those incurred by corp h in administering the claims the corp h expenses the corp h expenses include such items as compensation including the compensation of mr j and mr k and the administrative expenses of renting and running a office corp h was a member of corp e’s affiliated_group and filed consolidated_returns with corp e for the tax years which are at issue here law and analysis sec_162 generally allows as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business sec_263 generally disallows deductions for any amounts paid out for new buildings or for permanent improvements or betterments made to increase the value of any property the supreme court has determined that sec_263 has priority over sec_162 418_us_1 expenses are expenses of another tl-n-341-01 corp e argues that the corp h expenses are currently deductible as its current business_expenses or as the expenses of a former business relying upon groetzinger v 480_us_23 276_us_145 77_tc_608 and 68_tc_294 nonacq 1978_2_cb_3 among others however these expenses do not relate to a current or former business of either corp e or corp h but to the former and current business of corps ab the expenses of another are not deductible specifically a parent_corporation normally may not deduct the expenses of its subsidiary see 319_us_590 410_f2d_1233 cl_ct the 71_tc_955 acq on other issues 1979_2_cb_1 42_tc_800 acq on other issues 1965_2_cb_4 that the amounts are paid under a contractual obligation is not determinative interstate transit lines u s pincite 453_f2d_1144 2d cir cert_denied 407_us_934 to be deductible the amount_paid must proximately and directly benefit the parent’s own business beyond its role as a shareholder austin t c pincite see young rubicam f 2d pincite the test is whether a hardheaded businessman would have incurred the expense for his or her own business b forman f 2d pincite austin t c pincite coulter electronics inc v commissioner tcmemo_1990_186 aff’d without published opinion 943_f2d_1318 11th cir benefits derived by a parent_corporation as the owner of the subsidiary are considered indirect and incidental_benefits which do not justify a current deduction by the parent austin t c pincite columbian rope t c pincite the expenses in the present case appear to have been incurred solely in the parent’s role of a shareholder corp e acknowledges that the claims relate back to the sale of the stock in corps ab which it no longer owns thus we do not see how the claims can comprise a current or former business of corp e because they relate only to corp e’s ownership of corps ab further corp e does not have the licenses to run a x business and has no interest in retaining any of the clients in conclusion corp e simply cannot claim as its own expense amounts paid for activities that were concerned with the day-to-day operation of the subsidiary’s business austin co t c pincite citing young rubicam f 2d pincite here corp h another corp e subsidiary is actually deducting the expenses however the analysis when one subsidiary is taking the expenses of another is the same as when a parent is deducting the expenses of a subsidiary see bone v commissioner tcmemo_2001_43 a j concrete pumping inc v commissioner tcmemo_2001_42 oxford development v commissioner tcmemo_1964_182 for example in a j concrete the tax_court relied upon austin to require a subsidiary which was deducting the expenses of another subsidiary to demonstrate that the expenses were for its own proximate and direct benefit because the subsidiary had no relationship to the other tl-n-341-01 subsidiary beyond common shareholders the expenses were not deductible the present case is indistinguishable from these facts in a j concrete character of the expenses relates back to the sale of stock it is appropriate to consider whether corp h expenses should be disallowed as current deductions under the principle of 344_us_6 because they relate back to the sale of its stock in arrowsmith two former shareholders of a liquidated corporation were required as its transferees to pay a judgment against the corporation several years after its liquidation the gain from the liquidation had been a capital_gain to the shareholders however they deducted the judgment payment made in the subsequent year as an ordinary_loss the supreme court found the loss to be capital rather than ordinary the court reasoned that had the judgment payment been required during the tax_year of the liquidation there was no question that the payment would have been capital arrowsmith u s pincite the court held that the payment would still be capital even though the payment was made in a subsequent year and that this classification did not offend the well-established principle that each taxable_year is a separate_unit for tax purposes id pincite although the relation-back principle established in arrowsmith normally involves a determination of whether an amount is capital or ordinary if no gain_or_loss was recognized on the prior transaction no gain_or_loss will be allowed on subsequent transactions found to relate back to it revrul_58_374 1958_2_cb_396 see 370_f2d_729 5th cir missouri pacific corp v united_states cl_ct we assume that if the corp h expenses relate back to the sale of the stock they are subject_to disallowance under sec_1 generally the relation-back principle established in arrowsmith is that a subsequent event is so intimately tied to a prior transaction here a sale of stock that the character of the subsequent event must be ascertained by reference to the prior one 66_tc_283 aff’d 558_f2d_128 2d cir seagate technology inc v commissioner tcmemo_2000_361 the rationale is that the tax consequences should be the same as if the subsequent event had occurred at the time of the prior event seagate however each taxable_year remains a separate_accounting period and the events are recognized in the year they normally would be see 69_tc_697 aff’d 647_f2d_487 5th cir nonacq 1984_2_cb_2 their character is determined by the earlier event thus a payment is not deductible under sec_162 if it is required to be capitalized to the stock sale under arrowsmith mitchell v commissioner tcmemo_1994_237 see nelson v commissioner tcmemo_1971_327 aff’d per curiam 472_f2d_1224 9th cir rejecting the relevance of kornhauser to a case governed by arrowsmith tl-n-341-01 numerous cases have held that expenses_incurred by former shareholders of corporations take on the character of the prior transfer of the corporate interest under the rationale of arrowsmith see eg federal bulk carriers supra 69_tc_620 aff’d without opinion 620_f2d_310 9th cir 67_tc_570 amounts received rather than expended by former shareholders have been likewise characterized by the prior transaction see 44_tc_363 acq in result 1966_2_cb_5 holding that there is nothing in arrowsmith to make it inapplicable to a gain to former shareholders see also bressler v commissioner 65_tc_182 acq 1976_2_cb_1 here corp e agrees that the claims relate back to the sale of stock under arrowsmith however corp e continues to contend that the corp h expenses are current deductions corp e argues that existing case law is distinguishable because arrowsmith is only applicable if the expenses are part of an agreement between the buyer and seller and the expenses involve payments between the buyer and the seller the present case involves neither circumstance corp e’s argument ignores that arrowsmith itself involves a payment to a third party other than the purchaser that is payment of a judgment admittedly in arrowsmith there were no new owners of the stock because the corporation had been liquidated however other cases where there are new owners of the stock and the corporation still exists have treated payments to others by former shareholders as part of a sale of stock clay v commissioner tcmemo_1981_375 nelson v commissioner tcmemo_1971_327 aff’d per curiam 472_f2d_1224 9th cir see 54_tc_1 see also freedom newspapers v commissioner tcmemo_1977_429 holding that a third party payment to the new owner of a corporation related back to the original sale of stock in particular the corp h expenses are analogous to litigation and legal expenses paid to third parties which in clay and nelson were found to relate back to the sale of stock in neither clay nor nelson were the litigation and legal expenses_incurred mentioned in the original agreement for sale of the stock in clay the taxpayers sold their stock in a subchapter_s_corporation which they properly treated as a capital_gain as part of the contract for sale the taxpayers agreed to indemnify the buyer for any undisclosed liabilities pursuant to the contract the buyer subsequently filed for arbitration claiming damages from the taxpayers for certain undisclosed liabilities both the arbitrator and subsequently a court of law found that the taxpayers had to pay damages to the buyer which the taxpayers paid and deducted the taxpayers also expended dollar_figure in the tax_year for their own legal fees and other costs of litigation in connection with the dispute with the buyers the court in clay found that the indemnity damages paid related back to the sale of the stock under arrowsmith and were therefore adjustments to purchase_price more importantly the court found that the dollar_figure in litigation expenses were therefore also tl-n-341-01 capital the court reasoned that the character of the underlying claim determined the nature of the litigation expenses see 397_us_572 68_tc_960 aff’d 628_f2d_516 9th cir similarly in nelson the taxpayer owned all of the stock of hollywood finance company hfc which he sold for a capital_gain hfc was in the business of making loans and purchasing installment_sales contracts in the contract for the sale of the stock the taxpayer warranted that all of hfc’s loans were validly made and that there were no defenses against them he also agreed to reimburse the purchaser for any claims against hfc arising out of transactions before the sale if the claims had not been reflected on hfc’s balance_sheet subsequently the california commissioner of corporations threatened to sue hfc for alleged violations of california’s personal_property broker law the new shareholders of the corporation told the taxpayer that defense of the suit would be costly and that numerous loans including many that the taxpayer had warranted were in danger of being declared void the taxpayer decided to settle all of his potential liability to the new shareholders by paying them a total of dollar_figure in the meantime the taxpayer had formed a new corporation and had applied to the commissioner of corporations for a personal_property broker’s license his license was ultimately denied because of his involvement with hfc the taxpayer incurred expenses of dollar_figure for legal services it was stipulated that these services involved representation of the petitioners’ interest before the california commissioner of corporations relating to the loans of hollywood finance company that were about to be voided and the negotiation and drafting of the agreement releasing petitioner mr nelson of liability on those loans the tax_court in nelson found that the dollar_figure payment was an outgrowth of the sale of the stock and was a capital_expenditure under arrowsmith the court also found that the dollar_figure payment was so closely related to and identified with the dollar_figure payment that it must be treated in a like manner in coming to this conclusion the court relied upon similar cases holding that legal fees incurred in disputes over prior sales of property relate back to the prior sale see 41_tc_598 aff’d per curiam 342_f2d_990 9th cir 21_tc_422 n the corp h expenses_incurred in the present case are analogous to the litigation and legal expenses_incurred in clay and nelson corp e agrees that the claims which are part purchase agreement relate back to the sale under arrowsmith therefore the expenses_incurred to settle the claims are to be treated in a like manner see woodward supra see also 372_us_39 in such circumstances it does not matter that the claims originally arose in corp a’s prior tl-n-341-01 business see clay in which the undisclosed liabilities appear to have arisen in the prior business in one sense the present case is a less compelling case for the taxpayer than clay and nelson in that the corp h expenses_incurred would have been completely foreseeable at the time of the contract for sale and would have been necessary to implement the sale that is both parties knew that corp e would have to incur additional expenses to settle the claims those expenses would have reasonably been considered in valuing the claims had they been part of the sale price again the claims were excluded from the sales_price because the parties could not agree on their value the expenses were thus incurred as part of the implementation of the sale of stock and as a condition of the sale see siple t c pincite although the corp h expenses are not totally attributable to an actual dispute between the parties to the sale of stock as in clay and nelson at least some of the expenses arose in reconciling conflicting interests between the two sides to the transaction in arguing the corp h expenses are currently deductible the taxpayer relies upon vca corporation v united_states 566_f2d_1192 ct_cl aftr 2d which held that the purchaser of stock could take a current deduction for a cost that had been indemnified by the seller the service followed vca in revrul_83_73 1983_1_cb_84 which reaches the same conclusion on similar facts although vca as well as revrul_83_73 rely extensively on sec_381 they also rest the allowance of the deduction on conclusions significant to the present case notably that the indemnity payment by the seller is a capital_contribution which relates back to the sale of stock under the rationale of arrowsmith significantly in reaching this conclusion both rely upon revrul_58_374 which found the seller had no gain_or_loss on indemnities paid and received where there was no gain_or_loss on the original sale of stock capital contributions are not reimbursement and can provide basis for a deduction for the corporation indemnified see vca aftr 2d pincite7 thus the rationale of vca would lead to conclusion that the corp h expenses relate back to the sale of the stock and are not deductible as the seller of the stock corp e cannot rely on the holdings of indemnity cases applying to purchasers because the legal position of the two sides of the transaction are completely different compare revrul_83_73 focusing on the buyer’s side of transaction with revrul_58_374 dealing with the seller’s side see 111_tc_256 aff’d 196_f3d_866 7th cir holding that amounts received by a purchaser of stock from a law suit that had existed prior to the purchase does not relate back to or derive its character from the initial stock purchase analogy to old sec_337 finally denying the deductibility of the corp h expenses is supported by analogy to cases decided under pre-1986 sec_337 old sec_337 old sec_337 provided that a corporation that had adopted a plan of complete_liquidation sold all of its assets tl-n-341-01 within_12_months of the adoption of that plan and distributed the sales proceeds to its shareholders in complete_liquidation recognized no gain_or_loss on the sale of its assets two cases in which the application of old sec_337 was at issue 582_f2d_544 10th cir and 499_f2d_754 4th cir are similar to the present case in these cases legal fees and other expenses which were related or incidental to the sale were considered capital expenditures affecting basis and thus were not currently deductible in each the taxpayer sold all of its assets after adopting a plan of complete_liquidation and distributed the proceeds to its shareholders in complete_liquidation pursuant to old sec_337 neither taxpayer recognized gain on the sale of its assets although the taxpayer in benedict oil reported recapture_income from the sale which was not protected from nonrecognition under old sec_337 both taxpayers incurred legal fees and other expenses in executing the sale and sought to deduct such expenses the government argued that such expenses were related to or were incidental to the sale of the assets of a business thus such expenses should be considered capital expenditures affecting the basis of those assets in that case such expenses would not be currently deductible in other words such expenses simply offset the gain realized on the sale of the assets on the other hand the taxpayers argued that these expenses were separate from the sale and consequently deductible it should be noted that these taxpayers derived no tax_benefit from the payment of these expenses these courts held that the expenses were related to the sale of the assets and thus reduced the amount of gain the taxpayers realized but did not recognize on such sale the courts noted that the fact that the taxpayers received no tax_benefit from the payment of these expenses was irrelevant because the taxpayers were not required to recognize the gain on the sale the courts concluded that symmetry required that if gain was not recognized the expenses necessary to determine such gain should not be recognized either in the present case the expenses corp h incurred to resolve the claims indirectly determined the amount of loss corp e realized but did not recognize on the sale of the stock that is if the parties had been able to agree on a value for the claims such valuation would have also reflected their estimate of the amount that the holder of the claims would have expended in order to resolve those claims because corp e’s loss on the sale of the stock was subject_to disallowance under sec_1 corp e would have the same incentive as the taxpayer in the old sec_337 cases cited to argue that such expenses were separate from the sale no tax_benefit however for the reasons cited in those cases and discussed above we agree that they are related to the sale and not deductible tl-n-341-01 tl-n-341-01 tl-n-341-01 heather c maloy by clifford m harbourt senior technician reviewer branch


department of the treasury int ernal revenue service washington d c o f f i c e o f c h i e f c o u n s e l july number release date index cc corp b06 tl-n-2608-00 memorandum for associate area_counsel cc sb den slc small_business_self-employed_division attn david w sorensen from jasper l cummings associate chief_counsel cc corp subject this memorandum responds to your request for field_service_advice received date and supplements a field_service_advice dated date the prior fsa issued by assistant chief_counsel employee_benefits this memorandum is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend employees company a company b company c company d company e date date date date dollar_figurek issue whether the consolidated_group of which company c is the parent the company c group may deduct the compensation payments made to and included in income by the employees of company a and company b the employees when they sold their callable nonstatutory_options for company c stock to company c tl-n-2608-00 conclusion the company c group may deduct the compensation payments made to and included in income by the employees when they sold their options to company c facts the facts are stated in the prior fsa and are summarized here employees were employees of company a and company b company a and company b granted nonstatutory_options to employees to purchase common_stock in those companies at the time those options were issued they had no readily_ascertainable_fair_market_value by date the options had fully vested company c was the common parent of an affiliated_group of corporation filing a consolidated federal_income_tax return the company c group company c owned all of the stock of company d which owned all of the stock of company e on date through a series of steps company c company d and company e each acquired stock of company a and company b in exchange for cash and notes collectively the company c group acquired all of the stock of company a and company b the acquisition company c and company d transferred all of their company a and company b stock to company e company a and company b were liquidated into company e the liquidation and employees exchanged their vested company a and company b options for vested nonstatutory_options to acquire shares of company c none of the options for company c stock had a readily_ascertainable_fair_market_value when they were granted some of the options for company c stock were callable by company c on date company c exercised its calls and paid employees dollar_figurek for their company c options for company d’s taxable_year ending date its taxable_year during which employees’ relevant calendar taxable_year ended it reported a dollar_figurek compensation expense deduction attributable to employees’ sale of their callable options to company c 1the submission does not state why company d reported the deduction when company e is the successor to both company a and company b and therefore should have reported the deduction for purposes of determining the federal_income_tax liability of the company c group it does not matter which member of the group reports the deduction however for certain accounting purposes under the consolidated_return_regulations basis of stock earnings_and_profits of the member it tl-n-2608-00 the prior fsa concluded that under the rules of sec_83 because company d was not the person for whom were performed the services it was not entitled to the deduction rather if the deduction was otherwise allowable under that section it was allowable only to company a or company b the prior fsa noted that although company d has similarly concluded that it was not a service_recipient with respect to the options in question it offers an alternative rationale for its entitlement to the deduction when company a and company b liquidated into company e in a sec_332 transaction company e became their successors under sec_381 and sec_1_381_c_4_-1 as such company e was properly entitled to take the deduction with respect to the callable options we are not suggesting that company e is entitled to the deduction due to its being the service_recipient of the services with respect to which the callable options were issued but instead that company e is entitled to the deduction due to its stepping into the shoes by operation of sec_332 liquidation of each of company a and company b - the entities that were the service recipients with respect to which the callable options were issued in order for sec_332 to apply to the liquidation the acquisition must be respected as a separate step if it is not then the transaction could be recast as an acquisition by company e of the assets of company a and company b under this recast the liquidation would be disregarded below we comment on whether this recast is appropriate and if it is not whether the taxpayer’s alternative argument is correct discussion the acquisition if the acquisition by the company c group of the stock of company a and company b each qualifies as a qualified_stock_purchase within the meaning of sec_338 then each stock purchase will each be treated as a separate step from the liquidation of each of company a and company b sec_338 provides that the term qualified_stock_purchase means any transaction or series of transactions in which stock does matter also the submission does not explain why the common parent of the group is listed as company d instead of company c for the sake of consistency we will refer to the group as the company c group tl-n-2608-00 meeting the requirements of sec_1504 of one corporation is acquired by another corporation by purchase during the twelve-month_acquisition_period pursuant to sec_338 the acquisition of the stock of the target_corporation by the members of the same affiliated_group is treated as made by one corporation thus the acquisition of all of the stock of company a and company b by the members of the company c group each qualifies as a qualified_stock_purchase by the group even though no one member of that group by itself acquired a sufficient amount of the stock of either company a or company b for that acquisition to so qualify as a result even though the company c group acquired all of the stock of each of company a and company b in a qualified_stock_purchase apparently pursuant to a plan to acquire their assets because it immediately liquidated them the step_transaction_doctrine does not apply to treat in each case the stock acquisition and liquidation as an asset purchase see revrul_90_95 situation 1995_2_cb_67 revrul_90_95 further states under sec_338 asset purchase treatment turns on whether a sec_338 election is made or deemed made following a qualified_stock_purchase of target stock and not on whether the target’s stock is acquired to obtain the assets through a prompt liquidation of the target the acquiring_corporation may receive stock purchase treatment or asset purchase treatment whether or not the target is subsequently liquidated a qualified_stock_purchase of target stock is accorded independent significance from a subsequent liquidation of the target regardless of whether a sec_338 election is made or deemed made id pincite thus in each case the acquisition is considered a separate step from the liquidation even though the liquidation occurred immediately after the acquisition the liquidation once in each case the liquidation is considered a separate step from the acquisition it is clear that the liquidation qualifies under sec_332 for example if the transfers of the company a and company b stock by company c and company d to company e and the liquidations are considered separate steps then company e directly owns all of the company a and company b stock because under this scenario company e satisfies the ownership requirements of sec_332 each liquidation qualifies under sec_332 sec_1504 provides that the ownership of stock of any corporation meets the requirements of this paragraph if it possesses at least percent of the total voting power of the stock of such corporation and has a value of at least percent of the total value of the stock of such corporation tl-n-2608-00 on the other hand even if company c and company d had not transferred their company a and company b stock to company e or such transfer is disregarded the stock of company a and company b owned by company c company d and company e would be aggregated see sec_1_1502-34 in that case each liquidation still would have qualified under sec_332 sec_381 in the case of a liquidation to which sec_332 applies sec_381 provides that the acquiring_corporation shall succeed to and take into account the items of the distributor corporation described in sec_381 see sec_381 in this case company e is the acquiring_corporation and company a and company b are each a distributor corporations the item described in sec_381 that is at issue is certain option obligations of the distributor corporation under sec_381 sec_381 and sec_1_381_c_16_-1 provide that if in a transaction to which sec_381 applies the acquiring_corporation assumes an obligation of a distributor corporation which gives rise to a liability after the date of distribution and if the distributor corporation would be entitled to deduct such liability in computing taxable_income were it paid_or_accrued after that date by such corporation then under the provisions of sec_381 and this section the acquiring_corporation shall be entitled to deduct such liability as if it were the distributor corporation sec_1_381_c_16_-1 provides that for purposes of this section an obligation of a distributor corporation gives rise to a liability when the liability would be accruable by a taxpayer using the accrual_method of accounting notwithstanding the fact that the distributor corporation is not using the accrual_method of accounting see sec_1_461-1 sec_1_461-1 provides that under an accrual_method of accounting a liability is incurred and generally is taken into account for federal_income_tax purposes in the taxable_year in which all the events have occurred that establish the fact of the liability the amount of the liability can be determined with reasonable accuracy and economic_performance has occurred with respect to the liability in this case pursuant to sec_1_461-1 the liability to employees did not become accruable to the company c group until date a date after the liquidation this was so even though the fact of the liability was established by date the date the options vested as noted above date is a date before the liquidation also economic_performance also occurred at least by date pursuant to sec_461 if the liability of the taxpayer arises out of the providing of service to in that case however sec_337 would not apply to provide tax-free treatment to company a and company b upon the liquidation because that provision only applies if there is one shareholder that meets the ownership requirements of sec_332 see sec_337 instead sec_336 would apply tl-n-2608-00 the taxpayer by another person economic_performance occurs as such person provides such services we do not know the exact date when these services were completed however it is clear that they were completed by date the amount of the liability however could not be determined with reasonable accuracy until the employees sold their options to company c on date a date after the liquidation until that event the options did not have a readily_ascertainable_fair_market_value see sec_1_83-7 thus the amount of the liability was not determinable with reasonable accuracy until the options were redeemed on date under sec_1_461-1 the obligation was not accruable until date as a result under sec_1_381_c_16_-1 the obligation to the employees did not give rise to a liability until date consequently under sec_1 c - a the company c group may deduct the amounts paid to employees to cancel their options because company e is the successor to company a and company b please contact if you have any questions sincerely jasper l cummings associate chief_counsel corporate steven j hankin senior technician reviewer branch by cc