internal_revenue_service number release date index number -------------------------- ---------------------------------------------------------- ---------------------- ----------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------------ id no ------------ ----------------- telephone number ---------------------- refer reply to cc corp b04 plr-100213-12 date january legend foreign parent ------------------------------- --------------------------------------------------------- parent ------------------------------------ ---------------------------------------------------------------------------------------------------------------- ----------------------- sub -------------------------- ---------------------------------------------------------------------------------------------------------------- ----------------------- sub --------------------------------------- ---------------------------------------------------------------------------------------------------------------- ----------------------- fsub ------------------------------------------------------------ -------------------------------------- fsub -------------------------------------------------------- --------------------------------- fsub ------------------------------------------------------ ----------------------------- fsub ------------------------------------------------------ ---------------------- plr-100213-12 fsub ------------------------------------ ----------------------------------------------------------------- fsub ------------------------------------------------------------ -------------------------------------------- fsub --------------------------------------------------------- ----------------------------------- fsub ----------------------------------------------------- --------------- fsub -------------------------------------------------------- ------------------------------------------ fsub ------------------------------------------------------------------------ ------------------------------------------------------------ fsub ------------------------------------------------------------ ------------------- fsub ------------------------------------------------------------------------ -------------------------------- fsub ----------------------------- ------------------------------------------------------- fsub ---------------------------------------------------- --------------- country a --------- country b ------------ country c -------------- country d ------ country e ----------------------- country f ------------------ country g ---------- plr-100213-12 country h ---------- country i ------------------------------ country j -------- country k ------------ business a ------------------------------------- business b --------------------------------------------------------------------------------------- business c --------------------------------------------------------------------------------- a b c d e date sub business fsub business fsub business ------ -------- ---------------- ------ --------- ---------------------- ----------------------------------------------------------------- ------------------------------------------------------------------- -------------------------------------------------------- fsub sag ----------------------------------------------------------------------------------------- business -------- fsub business --------------------------------------------- plr-100213-12 dear ------------------ this letter is in response to your date request for rulings on certain federal_income_tax consequences of a proposed transaction defined below the information submitted in that request and in subsequent correspondence is summarized below the rulings contained in this letter are based upon the facts and representations submitted by the taxpayer and accompanied by a penalty 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 not verified any information pertaining to and has made no determination regarding whether the proposed transaction i satisfies the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii is used principally as a device for the distribution of earnings_and_profits of any of the distributing corporations the controlled corporations or both see sec_355 and sec_1_355-2 and iii is part of a plan or series or related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a percent or greater interest in any of the distributing corporations or the controlled corporations see sec_355 and sec_1_355-7 facts parent is the common parent of a consolidated_group of corporations the parent consolidated_group and has numerous corporate and non-corporate direct and indirect subsidiaries parent has a single class of common_stock all of which is owned by foreign parent parent through its direct and indirect subsidiaries operates business a business b and business c parent owns all the outstanding_stock of sub which owns all the outstanding_stock of sub sub and sub are members of the parent consolidated_group sub wholly owns fsub a country b corporation fsub a country c entity that is treated as a disregarded_entity for federal_income_tax purposes fsub a country d company fsub a country d company fsub a country e company fsub a country f company fsub a country g company fsub a country h company fsub a country j company and a of the outstanding equity_interest and b of the beneficial_interest in fsub a country i company fsub wholly owns fsub a country b corporation fsub wholly owns fsub a country d company fsub wholly owns plr-100213-12 fsub a country i company fsub a country k company that is treated as a disregarded_entity for federal_income_tax purposes and several other non-us entities that are not relevant to the proposed transaction parent represents that it wishes to separate business a from business b for the following business purposes collectively the corporate business purposes i organize each business unit along geographic lines ii allow for each business line to borrow on an independent stand-alone basis iii reduce managerial conflict and competition over internal resources and iv create distinct financial reporting chains to separate the financial results of the independent business lines proposed transaction to achieve the corporate business purposes parent has proposed and partially completed the following steps the proposed transaction i fsub filed an election to be treated as an association classified as a corporation for federal_income_tax purposes on date conversion and the date that the election is effective the conversion date ii foreign parent contributes approximately dollar_figurec to parent immediately thereafter parent contributes dollar_figurec to sub in exchange for newly issued sub preferred_stock together the cash contribution sub transfers dollar_figurec to foreign parent in full repayment on an outstanding indebtedness unrelated to the proposed transaction due to foreign parent iii sub contributes cash to fsub in exchange for approximately d percent of the outstanding equity interests of fsub contribution sub will comply with the reporting requirements of sec_6038b and sec_1_6038b-1 iv sub distributes all of the outstanding equity interests of fsub to parent distribution v sub loans cash to fsub the fsub loan to permit fsub to repay an existing loan between its business divisions vi fsub contributes the assets and liabilities associated with business a located in country b to fsub contribution vii fsub distributes all of the outstanding equity interests of fsub to sub distribution viii sub contributes all of the fsub outstanding equity interests and assets and liabilities associated with business a in the united_states to sub contribution plr-100213-12 ix sub distributes all of the outstanding_stock of sub to parent distribution x sub and sub will execute a promissory note to permit sub to fund working_capital and satisfy liquidity needs the promissory note xi fsub files an election to be treated as an entity that is disregarded from its owner for federal_income_tax purposes conversion and the date that the election is effective the conversion date xii sub contributes to fsub all of the outstanding equity interests in fsub fsub fsub and fsub and its a percent equity_interest and b percent beneficial_interest in fsub contribution xiii sub distributes all of the outstanding equity interests in fsub to parent distribution xiv fsub contributes to fsub its a percent equity_interest and b percent beneficial_interest in fsub that it received in contribution contribution xv sub distributes all of the outstanding equity interests of fsub to parent distribution xvi fsub files an election to be classified as an association classified as a corporation for federal_income_tax purposes conversion xvii fsub distributes all of the outstanding equity interests in fsub to parent distribution xviii parent contributes more than e percent of the outstanding equity interests in fsub to sub contribution representations proposed transaction the taxpayer makes the following general representation regarding the proposed transaction a with respect to any existing gain_recognition_agreement gra previously entered into by parent as the parent of the parent consolidated_group in connection with a prior transfer of stock_or_securities or any gra to be entered into in connection with the proposed transaction parent will in accordance with sec_1 a - k and a -8 c enter into a new gra i identifying all triggering events and exceptions thereto resulting from the proposed transaction ii designating a successor transferor_corporation transferee corporation and or transferred corporation as applicable and iii complying with all other requirements for gras under sec_1_367_a_-8 plr-100213-12 additionally parent will comply with the notification requirements of sec_1_367_a_-8 with respect to any such gra conversion the taxpayer makes the following representations regarding conversion b no stock was issued for services rendered to or for the benefit of fsub in connection with conversion and no stock was issued for indebtedness of fsub that was not evidenced by a security or for interest on indebtedness of the transferee which accrued on or after the beginning of the holding_period of the transferor for the debt c sub did not retain any significant_power_right_or_continuing_interest within the meaning of sec_1235 in the franchises trademarks or trade names deemed transferred d conversion was not the result of the solicitation by a promoter broker or investment house e sub did not retain any rights in the property deemed transferred to fsub f the value of the fsub stock deemed received in exchange for accounts_receivable was equal to the net value of the accounts transferred ie the face_amount of the accounts_receivable previously included in income less the amount of the reserve for bad_debts g the adjusted_basis and the fair_market_value of the assets deemed transferred by sub to fsub was in each instance equal to or exceeded the sum of the liabilities deemed assumed within the meaning of sec_357 by fsub plus any liabilities to which the transferred assets were subject h the liabilities of sub deemed assumed within the meaning of sec_357 by fsub were incurred in the ordinary course of its business and were associated with the assets to be transferred no indebtedness created in favor of sub as a result of conversion there is no indebtedness between fsub and sub and there was the deemed transfers and exchanges pursuant to conversion occurred under a plan agreed upon before the transaction in which the rights of the parties were defined k same date all exchanges pursuant to conversion occurred on approximately the l there is no plan or intention on the part of fsub to redeem or otherwise reacquire any stock or indebtedness issued in conversion i j o p q plr-100213-12 m taking into account any issuance of additional shares of fsub stock any issuance of stock for services the exercise of any fsub stock_rights warrants or subscriptions a public offering of fsub stock and the sale exchange transfer by gift or other_disposition of any of the stock of fsub to be received in the exchange sub was and remains in control of fsub within the meaning of sec_368 n sub was deemed to receive stock securities or other_property approximately equal to the fair_market_value of the property deemed transferred to fsub fsub will remain in existence and retain and use the property transferred to it in a trade_or_business property other than in the normal course of business operations there is no plan or intention by fsub to dispose_of the transferred each of the parties to conversion paid its own expenses if any incurred in connection with conversion r as of the date of conversion fsub was not an investment_company within the meaning of sec_351 and sec_1_351-1 s sub is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 and the stock deemed received in the exchange will not be used to satisfy the indebtedness of such debtor t fsub is not a personal_service_corporation within the meaning of sec_269a u the aggregate fair_market_value of the assets deemed transferred by sub exceeded the sum of a the amount of liabilities to be deemed assumed as determined under sec_357 by fsub in connection with conversion b the amount of liabilities owed to fsub by sub that will be discharged or extinguished in connection with conversion and c the amount of any money or fair_market_value of any other_property other than stock permitted to be received under sec_351 without the recognition of gain deemed received by sub in connection with conversion the fair_market_value of the assets of fsub will exceed the amount of its liabilities immediately after conversion v as of the conversion date fsub was eligible to elect to be treated as a corporation for federal_income_tax purposes under sec_301_7701-3 and filed a valid election to be treated as a corporation effective on date the taxpayer makes the following representations regarding distribution distribution w no part of the consideration to be distributed by sub will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of the corporation plr-100213-12 x the five years of financial information submitted on behalf of 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 y the five years of financial information submitted on behalf of fsub 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 z following the transaction sub and fsub will each continue the active_conduct of its business independently and with its separate employees aa distribution is carried out for the corporate business purposes distribution is motivated in whole or substantial part by one or more of these corporate business purposes bb distribution is not used principally as a device for the distribution of the earnings_and_profits of sub or fsub or both cc no intercorporate debt will exist between sub and fsub at the time of or subsequent to distribution dd 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 1995_32_irb_6 and as currently in effect sec_1_1502-13 as published by t d ee 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 sub stock entitled to vote or percent or more of the total value of shares of all classes of sub 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 ff 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 fsub stock entitled to vote or percent or more of the total value of shares of all classes of fsub 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 sub stock_or_securities that were 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 gg payments made in connection with all continuing transactions if any between sub and fsub will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm's length plr-100213-12 hh distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in sub or fsub including any predecessor or successor of any such corporation ii immediately after distribution either i no person will hold a percent or greater interest within the meaning of sec_355 in the stock of sub or fsub who did not hold such an interest immediately before distribution or ii neither sub nor fsub will be a disqualified_investment_corporation within the meaning of sec_355 jj neither the sub business nor control of an entity conducting the sub business will have been acquired during the five-year period ending on the date of distribution in a transaction in which gain_or_loss was recognized or treated as recognized under proposed sec_1_355-3 in whole or in part throughout the five-year period ending on the date distribution sub will have been the principal_owner of the goodwill and significant assets of the sub business and will continue to be the principal_owner of its share of the sub business following distribution kk neither the fsub business nor control of an entity conducting the fsub business will have been acquired during the five-year period ending on the date of distribution in a transaction in which gain_or_loss was recognized or treated as recognized under proposed sec_1_355-3 in whole or in part throughout the five-year period ending on the date of distribution fsub will have been the principal_owner of the goodwill and significant assets of the fsub business and will continue to be the principal_owner of its share of the fsub business following distribution ll there is no regulatory legal contractual or economic compulsion or requirement that parent make part or all of the cash contribution to sub as a condition to distribution contribution and distribution the taxpayer makes the following representations regarding contribution and the distribution mm no part of the consideration to be distributed by fsub will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of the corporation nn the five years of financial information submitted on behalf of fsub is representative of the corporation’s present operations and with regard to such corporation there have been no substantial operational changes since the date of the last financial statements submitted plr-100213-12 oo the five years of financial information submitted on behalf of the business contributed to fsub is representative of the business’s present operation and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted pp following the transaction fsub and fsub will each continue the active_conduct of its business independently and with its separate employees qq distribution is carried out for the corporate business purposes distribution is motivated in whole or substantial part by one or more of these corporate business purposes rr distribution is not used principally as a device for the distribution of the earnings_and_profits of fsub or fsub or both ss the total adjusted bases and the fair_market_value of the assets transferred to fsub in contribution will equal or exceed the sum of i the total liabilities assumed within the meaning of d by fsub and ii the total amount of any money and the fair_market_value of any other_property within the meaning of sec_361 received by fsub and transferred to its creditors in connection with contribution tt the liabilities assumed within the meaning of sec_357 by fsub in contribution were incurred in the ordinary course of business and are associated with the assets being transferred uu the fair_market_value of the assets of fsub will exceed the amount of its liabilities immediately_after_the_exchange vv the aggregate fair_market_value of the assets transferred to fsub in contribution will equal or exceed the aggregate adjusted_basis of these assets ww no intercorporate debt will exist between fsub and fsub at the time of or subsequent to distribution xx 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 fsub stock entitled to vote or percent or more of the total value of shares of all classes of fsub 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 yy 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 fsub stock entitled to vote or percent or more of the total value of shares of all classes of fsub 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 fsub stock_or_securities that were acquired by plr-100213-12 purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of distribution zz payments made in connection with all continuing transactions if any between fsub and fsub will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm's length aaa no two parties to the transaction will be investment companies as defined in sec_368 and iv bbb distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in fsub or fsub including any predecessor or successor of any such corporation ccc immediately after distribution either i no person will hold a percent or greater interest within the meaning of sec_355 in the stock of fsub or fsub who did not hold such an interest immediately before the distribution or ii neither fsub nor fsub will be a disqualified_investment_corporation within the meaning of sec_355 ddd neither the fsub business nor control of an entity conducting the fsub business will have been acquired during the five-year period ending on the date of distribution in a transaction in which gain_or_loss was recognized or treated as recognized under proposed sec_1_355-3 in whole or in part throughout the five-year period ending on the date of distribution fsub will have been the principal_owner of the goodwill and significant assets of the fsub business and will continue to be the principal_owner of its share of the fsub business following distribution eee neither the business contributed to fsub in contribution nor control of an entity conducting this business will have been acquired during the five-year period ending on the date of distribution in a transaction in which gain_or_loss was recognized or treated as recognized under proposed sec_1_355-3 in whole or in part throughout the five-year period ending on the date of distribution fsub or an entity controlled by fsub will have been the principal_owner of the goodwill and significant assets related to the business contributed to fsub in contribution and fsub will be the principal_owner of this business following distribution fff there is no regulatory legal contractual or economic compulsion or requirement that the fsub loan is made as a condition of distribution ggg fsub is and both fsub and fsub will be a controlled_foreign_corporation within the meaning of sec_957 immediately before and after contribution and distribution hhh at all times before and immediately after contribution and distribution neither fsub nor fsub has been or will be a passive_foreign_investment_company within the meaning of sec_1297 plr-100213-12 iii fsub1’s transfer of assets to fsub in actual or constructive exchange for fsub stock in contribution is not an exchange described in sec_1_367_b_-4 sec_1_367_b_-4 or sec_1_367_b_-4 jjj the notice requirements of sec_1_367_b_-1 will be satisfied for the contribution and distribution kkk sub will be a sec_1248 shareholder within the meaning of sec_1 b - b with respect to fsub immediately before distribution and with respect to each of fsub and fsub immediately after distribution contribution and distribution the taxpayer makes the following representations regarding contribution and distribution lll any indebtedness owed by sub or any entity controlled directly or indirectly by sub to sub or any entity controlled directly or indirectly by sub after the distribution will not constitute stock_or_securities mmm no part of the consideration to be distributed by sub will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of the corporation nnn the five years of financial information submitted on behalf of 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 ooo the five years of financial information submitted on behalf of the business contributed to sub is representative of the business’s present operation and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted ppp following the transaction sub and sub will each continue the active_conduct of its business independently and with its separate employees qqq distribution is carried out for the corporate business purposes distribution is motivated in whole or substantial part by one or more of these corporate business purposes rrr distribution is not used principally as a device for the distribution of the earnings_and_profits of sub or sub or both sss the total adjusted bases and the fair_market_value of the assets transferred to sub in contribution will equal or exceed the sum of i the total liabilities assumed within the meaning of sec_357 by sub and ii the total amount of any money and the fair_market_value of any other_property within the meaning of plr-100213-12 sec_361 received by sub and transferred to its creditors in connection with the reorganization ttt the liabilities assumed within the meaning of sec_357 by sub in contribution were incurred in the ordinary course of business and are associated with the assets being transferred uuu the fair_market_value of the assets of sub will exceed the amount of its liabilities immediately_after_the_exchange vvv the aggregate fair_market_value of the assets transferred to sub in contribution will equal or exceed the aggregate adjusted_basis of these assets www no intercorporate debt will exist between sub or any entity controlled directly or indirectly by sub and sub or any entity controlled directly or indirectly by sub at the time of or subsequent to distribution other than the promissory note or other obligations that have arisen or will arise in the ordinary course of business xxx 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 1995_32_irb_6 and as currently in effect sec_1_1502-13 as published by t d further any excess_loss_account sub may have in the stock of sub will be included in income immediately before distribution to the extent required by the regulations see sec_1_1502-19 yyy 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 sub stock entitled to vote or percent or more of the total value of shares of all classes of sub 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 zzz 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 sub stock entitled to vote or percent or more of the total value of shares of all classes of sub 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 sub stock_or_securities that were 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 aaaa payments made in connection with all continuing transactions if any between sub and sub will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm's length bbbb no two parties to the transaction will be investment companies as defined in sec_368 and iv plr-100213-12 cccc distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in sub or sub including any predecessor or successor of any such corporation dddd immediately after distribution either i no person will hold a percent or greater interest within the meaning of sec_355 in the stock of sub or sub who did not hold such an interest immediately before the distribution or neither sub nor sub will be a disqualified_investment_corporation within the meaning of sec_355 eeee neither the sub business nor control of an entity conducting the sub business will have been acquired during the five-year period ending on the date of distribution in a transaction in which gain_or_loss was recognized or treated as recognized under proposed sec_1_355-3 in whole or in part throughout the five-year period ending on the date of distribution sub will have been the principal_owner of the goodwill and significant assets of the sub business and will continue to be the principal_owner of its share of the sub business following distribution sub will be the principal_owner of the goodwill and significant assets of its share of the sub business following distribution ffff neither the business contributed to sub in contribution nor control of an entity conducting this business will have been acquired during the five-year period ending on the date of distribution in a transaction in which gain_or_loss was recognized or treated as recognized under proposed sec_1_355-3 in whole or in part throughout the five-year period ending on the date of distribution sub or an entity controlled by sub will have been the principal_owner of the goodwill and significant assets related to the business contributed to sub in contribution and sub will be the principal_owner of this business following distribution gggg there is no regulatory legal contractual or economic compulsion or requirement that parent make part or all of the cash contribution to sub as a condition to distribution conversion the taxpayer makes the following representations regarding conversion hhhh sub on the conversion date will directly own all of fsub 4’s single class of stock as of this date fsub has no and will have no outstanding warrants options convertible securities or other obligations that may be classified as equity for federal_income_tax purposes iiii no shares of fsub 4's stock have been redeemed during the years preceding the conversion date jjjj all distributions deemed to occur from fsub to sub pursuant to the conversion will occur on the conversion date plr-100213-12 kkkk on the conversion date for federal_income_tax purposes fsub will cease to be a going concern and it will cease to conduct any activities as a corporation llll fsub has not acquired assets in any nontaxable_transaction at any mmmm time except for acquisitions occurring more than years prior to the conversion date except as described in contribution no assets of fsub have been or will be disposed of by either sub or fsub except for i transactions occurring in the normal course of business and ii transactions occurring more than three years prior to the conversion date nnnn except as described in contribution the deemed liquidation of fsub as a result of conversion will not be preceded or followed by the reincorporation in or transfer or sale to a recipient corporation of any of the businesses or assets of fsub if persons holding 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 prior to the conversion date no assets of fsub will have been distributed in_kind transferred or sold to sub except for i transactions occurring in the ordinary course of business and ii transactions occurring more than years prior to the conversion date oooo pppp the fair_market_value of the assets of fsub exceeded its liabilities immediately prior to the conversion date qqqq immediately prior to the conversion date there was no intercorporate debt existing between sub and fsub and none has been cancelled forgiven or discounted except for transactions that occurred more than years prior to the conversion date rrrr sub is not an organization that is exempt from federal_income_tax under sec_501 or any other provision of the code ssss all other transactions undertaken contemporaneously with in anticipation of in conjunction with or in any way related to conversion have been fully disclosed tttt fsub will report all earned_income represented by assets that will be distributed to its shareholders such as receivables being reported on a cash_basis unfinished construction contracts commissions due etc contribution and distribution the taxpayer makes the following representations regarding contribution and distribution plr-100213-12 uuuu no part of the consideration to be distributed by sub will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of the corporation vvvv the five years of financial information submitted on behalf of sub is representative of the corporation’s present operation and with regard to sub there have been no substantial operational changes since the date of the last financial statements submitted wwww the five years of financial information submitted on behalf of fsub is representative of the corporation’s present operation and with regard to such operation there have been no substantial operational changes since the date of the last financial statements submitted xxxx neither the sub business nor control of an entity conducting the sub business will have been acquired during the five-year period ending on the date of distribution in a transaction in which gain_or_loss was recognized or treated as recognized under proposed sec_1_355-3 in whole or in part throughout the five-year period ending on the date of distribution sub will have been the principal_owner of the goodwill and significant assets of the sub business and will continue to be the principal_owner of its share of the sub business following distribution yyyy neither the fsub business nor control of an entity conducting the fsub business will have been acquired during the five-year period ending on the date of distribution in a transaction in which gain_or_loss was recognized or treated as recognized under proposed sec_1_355-3 in whole or in part throughout the five-year period ending on the date of distribution fsub will have been the principal_owner of the goodwill and significant assets of the fsub business and will continue to be the principal_owner of its share of the fsub business following distribution zzzz following the transaction sub and fsub will each continue the active_conduct of its business independently and with its separate employees aaaaa distribution is carried out for the corporate business purposes distribution is motivated in whole or substantial part by one or more of these corporate business purposes bbbbb distribution is not used principally as a device for the distribution of the earnings_and_profits of sub or fsub or both ccccc the total adjusted bases and the fair_market_value of the assets transferred to fsub by sub in contribution will equal or exceed the sum of i the total liabilities assumed within the meaning of sec_357 by fsub and ii the total amount of any money and the fair_market_value of any other_property within the meaning of sec_361 received by sub and transferred to its creditors in connection with the reorganization ddddd the liabilities assumed as determined under sec_357 by fsub in contribution were incurred in the ordinary course of business and are associated with the assets being transferred plr-100213-12 eeeee the fair_market_value of the assets of fsub will exceed the amount of its liabilities immediately_after_the_exchange fffff the aggregate fair_market_value of the assets transferred to fsub in contribution will equal or exceed the aggregate adjusted_basis of these assets ggggg no intercorporate debt will exist between sub and fsub at the time of or subsequent to distribution hhhhh 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 1995_32_irb_6 and as currently in effect sec_1_1502-13 as published by t d iiiii 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 sub stock entitled to vote or percent or more of the total value of shares of all classes of sub 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 the distribution jjjjj 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 fsub stock entitled to vote or percent or more of the total value of shares of all classes of fsub 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 sub stock_or_securities that were 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 kkkkk payments made in connection with all continuing transactions if any between sub and fsub will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm's length lllll no two parties to the transaction will be investment companies as defined in sec_368 and iv mmmmm distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in sub or fsub including any predecessor or successor of any such corporation nnnnn immediately after distribution either i no person will hold a percent or greater interest within the meaning of sec_355 in the stock of sub or fsub who did not hold such an interest immediately before the distribution or ii neither sub nor fsub will be a disqualified_investment_corporation within the meaning of sec_355 plr-100213-12 ooooo there is no regulatory legal contractual or economic compulsion or requirement that parent make part or all of the capital_contribution to sub as a condition to distribution contribution the taxpayer makes the following representations regarding contribution ppppp i no stock will be issued for services rendered to or for the benefit of fsub in connection with the contribution and ii no stock will be issued for indebtedness of fsub that is not evidenced by a security or for interest on indebtedness of fsub which accrued on or after the beginning of the holding_period of fsub for the debt qqqqq contribution is not the result of the solicitation by a promoter broker or investment house rrrrr sssss fsub will not retain any rights in the property transferred to fsub the value of the fsub stock received in exchange for accounts_receivable will be equal to the net value of the accounts transferred ie the face_amount of the accounts_receivable previously included in income less the amount of the reserve for bad_debts ttttt any debt related to the stock being transferred that is being assumed or to which such stock is subject was incurred to acquire such stock and was incurred when such stock was acquired and fsub is transferring all the stock for which the acquisition_indebtedness being assumed or to which such stock is subject was incurred uuuuu the adjusted_basis and the fair_market_value of the assets to be transferred by fsub will in each instance be equal to or exceed the sum of the liabilities if any to be assumed within the meaning of sec_357 by fsub plus any liabilities to which the transferred assets are subject vvvvv the liabilities of fsub to be assumed within the meaning of sec_357 by fsub if any were incurred in the ordinary course of its business and are associated with the assets to be transferred wwwww there is no indebtedness between fsub and fsub and there will be no indebtedness created in favor of fsub as a result of the transaction xxxxx the transfers and exchanges pursuant to contribution will occur under a plan agreed upon before the transaction in which the rights of the parties are defined all exchanges pursuant to contribution will occur on approximately otherwise reacquire any stock or indebtedness to be issued in contribution there is no plan or intention on the part of fsub to redeem or yyyyy the same date zzzzz plr-100213-12 aaaaaa taking into account any issuance of additional shares of fsub stock any issuance of stock for services the exercise of any fsub stock_rights warrants or subscriptions a public offering of fsub stock and the sale exchange transfer by gift or other_disposition of any of the stock of fsub to be received in the exchange fsub will be in control of fsub within the meaning of sec_368 bbbbbb fsub will receive stock securities or other_property approximately equal to the fair_market_value of the property transferred to fsub cccccc fsub will remain in existence and retain and use the property transferred to it in a trade_or_business dddddd there is no plan or intention by fsub to dispose_of the transferred property other than in the normal course of business operations eeeeee each of the parties to contribution will pay its own expenses if any incurred in connection with contribution ffffff fsub will not be an investment_company within the meaning of sec_351 and sec_1_351-1 gggggg fsub 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 hhhhhh of sec_269a fsub will not be a personal_service_corporation within the meaning iiiiii the aggregate fair_market_value of the assets transferred by fsub will exceed the sum of a the amount of liabilities to be assumed as determined under sec_357 by fsub in connection with contribution b the amount of liabilities owed to fsub by fsub that will be discharged or extinguished in connection with the exchange and c the amount of any money or fair_market_value of any other_property other than stock permitted to be received under sec_351 without the recognition of gain to be received by fsub in connection with the exchange the fair_market_value of the assets of fsub will exceed the amount of its liabilities immediately after the contribution jjjjjj fsub will be a controlled_foreign_corporation within the meaning of sec_957 immediately before and after contribution kkkkkk contribution the notice requirements of sec_1_367_b_-1 will be satisfied for distribution the taxpayer makes the following representations regarding distribution llllll no part of the consideration to be distributed by sub will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of the corporation plr-100213-12 mmmmmm the five years of financial information submitted on behalf of sub is representative of the corporation’s present operation and with regard to sub there have been no substantial operational changes since the date of the last financial statements submitted nnnnnn the five years of financial information submitted on behalf of the fsub separate_affiliated_group sag is representative of the fsub sag’s present business operation and with regard to such fsub sag there have been no substantial operational changes since the date of the last financial statements submitted oooooo fsub will treat all members of its sag as defined in sec_355 as one corporation in determining whether it meets the requirements of sec_355 regarding the active_conduct_of_a_trade_or_business pppppp neither the sub business nor control of an entity conducting the sub business will have been acquired during the five-year period ending on the date of distribution in a transaction in which gain_or_loss was recognized or treated as recognized under proposed sec_1_355-3 in whole or in part throughout the five-year period ending on the date of distribution sub will have been the principal_owner of the goodwill and significant assets of the sub business and will continue to be the principal_owner of its share of the sub business following distribution qqqqqq neither the fsub sag business nor control of an entity conducting the fsub sag business will have been acquired during the five-year period ending on the date of distribution in a transaction in which gain_or_loss was recognized or treated as recognized under proposed sec_1_355-3 in whole or in part throughout the five-year period ending on the date of distribution the fsub sag will have been the principal_owner of the goodwill and significant assets of the fsub sag business and will continue to be the principal_owner of its share of the fsub sag business following distribution rrrrrr following the transaction sub and fsub will each continue the active_conduct of its business independently and with its separate employees ssssss distribution is carried out for the corporate business purposes distribution is motivated in whole or substantial part by one or more of these corporate business purposes tttttt distribution is not used principally as a device for the distribution of the earnings_and_profits of sub or fsub or both uuuuuu no intercorporate debt will exist between sub and fsub at the time of or subsequent to the distribution of the fsub stock vvvvvv 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 1995_32_irb_6 and as currently in effect sec_1_1502-13 as published by t d plr-100213-12 wwwwww 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 sub stock entitled to vote or percent or more of the total value of shares of all classes of sub 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 xxxxxx 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 fsub stock entitled to vote or percent or more of the total value of shares of all classes of fsub 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 sub stock_or_securities that were 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 yyyyyy payments made in connection with all continuing transactions if any between sub and fsub will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm's length zzzzzz distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in sub or fsub including any predecessor or successor of any such corporation aaaaaaa immediately after distribution either i no person will hold a percent or greater interest within the meaning of sec_355 in the stock of sub or fsub who did not hold such an interest immediately before distribution or ii neither sub nor fsub will be a disqualified_investment_corporation within the meaning of sec_355 bbbbbbb there is no regulatory legal contractual or economic compulsion or requirement that parent make part or all of the cash contribution to sub as a condition to distribution conversion and distribution the taxpayer makes the following representations regarding conversion and distribution ccccccc no part of the consideration to be distributed by fsub will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of the corporation ddddddd the five years of financial information submitted on behalf of fsub is representative of the corporation’s present operation and with regard to such plr-100213-12 corporation there have been no substantial operational changes since the date of the last financial statements submitted eeeeeee the five years of financial information submitted on behalf of the business deemed contributed to fsub is representative of the business’ present operation and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted fffffff neither the fsub business nor control of an entity conducting the fsub business will have been acquired during the five-year period ending on the date of distribution in a transaction in which gain_or_loss was recognized or treated as recognized under proposed sec_1_355-3 in whole or in part throughout the five-year period ending on the date of distribution fsub will have been the principal_owner of the goodwill and significant assets of the fsub business and will continue to be the principal_owner of its share of the fsub business following distribution ggggggg neither the fsub business deemed contributed in conversion nor control of an entity conducting that business will have been acquired during the five- year period ending on the date of distribution in a transaction in which gain_or_loss was recognized or treated as recognized under proposed sec_1_355-3 in whole or in part throughout the five-year period ending on the date of distribution fsub through its ownership of fsub will have been the principal_owner of the goodwill and significant assets of the fsub business deemed contributed in conversion and will continue to be the principal_owner of its share of that business following distribution hhhhhhh following the transaction fsub and fsub will each continue the active_conduct of its business independently and with its separate employees iiiiiii distribution is carried out for the corporate business purposes distribution is motivated in whole or substantial part by one or more of these corporate business purposes jjjjjjj distribution is not used principally as a device for the distribution of the earnings_and_profits of fsub or fsub or both kkkkkkk the total adjusted bases and the fair_market_value of the assets deemed transferred to fsub by fsub equals or exceeds the sum of i the total liabilities deemed assumed as determined under sec_357 by fsub and ii the total amount of any money and the fair_market_value of any other_property within the meaning of sec_361 deemed received by fsub and transferred to its creditors in connection with the reorganization lllllll the liabilities deemed assumed within the meaning of sec_357 by fsub in conversion were incurred in the ordinary course of business and are associated with the assets deemed transferred mmmmmmm of its liabilities immediately after conversion the fair_market_value of the assets of fsub will exceed the amount plr-100213-12 nnnnnnn the aggregate fair_market_value of the assets deemed transferred to fsub in conversion will equal or exceed the aggregate adjusted_basis of these assets ooooooo no intercorporate debt will exist between fsub and fsub at the time of or subsequent to distribution ppppppp 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 fsub stock entitled to vote or percent or more of the total value of shares of all classes of fsub 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 qqqqqqq 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 fsub stock entitled to vote or percent or more of the total value of shares of all classes of fsub 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 fsub stock_or_securities that were 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 rrrrrrr payments made in connection with all continuing transactions if any between fsub and fsub will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm's length sssssss no two parties to the transaction will be investment companies as defined in sec_368 and iv ttttttt distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in fsub or fsub including any predecessor or successor of any such corporation uuuuuuu immediately after distribution either i no person will hold a percent or greater interest within the meaning of sec_355 in the stock of fsub or fsub who did not hold such an interest immediately before the distribution or ii neither fsub nor fsub will be a disqualified_investment_corporation within the meaning of sec_355 vvvvvvv as of the date conversion fsub will be an entity eligible to elect to be treated as a corporation for u s tax purposes under sec_301_7701-3 and will file a valid election to be treated as a corporation effective on the date of conversion wwwwwww corporations within the meaning of sec_957 immediately before and after conversion and distribution fsub is and both fsub and fsub will be controlled foreign plr-100213-12 xxxxxxx at all times before and immediately after conversion and distribution neither fsub nor fsub has been or will be a passive_foreign_investment_company within the meaning of sec_1297 yyyyyyy fsub 6’s deemed transfer of assets to fsub in actual or constructive exchange for fsub stock in conversion is not an exchange described in sec_1_367_b_-4 sec_1_367_b_-4 or sec_1_367_b_-4 zzzzzzz the notice requirements of sec_1_367_b_-1 will be satisfied for conversion and distribution aaaaaaaa parent will be a sec_1248 shareholder within the meaning of sec_1 b - b with respect to fsub immediately before distribution and with respect to each of fsub and fsub immediately after distribution contribution the taxpayer makes the following representations regarding contribution bbbbbbbb i no stock will be issued for services rendered to or for the benefit of sub in connection with contribution and ii no stock will be issued for indebtedness of sub that is not evidenced by a security or for interest on indebtedness of sub which accrued on or after the beginning of the holding_period of parent for the debt cccccccc contribution is not the result of the solicitation by a promoter broker or investment house dddddddd eeeeeeee parent will not retain any rights in the property transferred to sub the value of the sub stock received in exchange for accounts_receivable will be equal to the net value of the accounts transferred ie the face_amount of the accounts_receivable previously included in income less the amount of the reserve for bad_debts ffffffff any debt related to the stock being transferred that is being assumed or to which such stock is subject was incurred to acquire such stock and was incurred when such stock was acquired and parent is transferring all the stock for which the acquisition_indebtedness being assumed or to which such stock is subject was incurred gggggggg the adjusted_basis and the fair_market_value of the assets to be transferred by parent will in each instance be equal to or exceed the sum of the liabilities to be assumed within the meaning of sec_357 by sub if any plus any liabilities to which the transferred assets are subject hhhhhhhh the liabilities of parent to be assumed within the meaning of sec_357 by sub if any were incurred in the ordinary course of its business and are associated with the assets to be transferred kkkkkkkk the same date llllllll plr-100213-12 iiiiiiii there is no indebtedness between sub and parent and there will be no indebtedness created in favor of parent as a result of the transaction jjjjjjjj the transfers and exchanges pursuant to contribution will occur under a plan agreed upon before the transaction in which the rights of the parties are defined all exchanges pursuant to contribution will occur on approximately otherwise reacquire any stock or indebtedness to be issued in contribution there is no plan or intention on the part of sub to redeem or mmmmmmmm taking into account any issuance of additional shares of sub stock any issuance of stock for services the exercise of any sub stock_rights warrants or subscriptions a public offering of sub stock and the sale exchange transfer by gift or other_disposition of any of the stock of sub to be received in the exchange parent will be in control of sub within the meaning of sec_368 nnnnnnnn parent will receive stock securities or other_property approximately equal to the fair_market_value of the property transferred to sub oooooooo sub will remain in existence and retain and use the property transferred to it in a trade_or_business pppppppp there is no plan or intention by sub to dispose_of the transferred property other than in the normal course of business operations qqqqqqqq each of the parties to contribution will pay its own expenses if any incurred in connection with contribution rrrrrrrr sub will not be an investment_company within the meaning of sec_351 and sec_1_351-1 ssssssss parent 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 tttttttt sec_269a sub will not be a personal_service_corporation within the meaning of uuuuuuuu the aggregate fair_market_value of the assets transferred by parent will exceed the sum of a the amount of liabilities to be assumed as determined under sec_357 by sub in connection with the contributions b the amount of liabilities owed to sub by parent that will be discharged or extinguished in connection with the exchange and c the amount of any money or fair_market_value of any other_property other than stock permitted to be received under sec_351 without the recognition of gain to be received by parent in connection with the exchange the fair_market_value of the assets of sub will exceed the amount of its liabilities immediately after the contributions rulings plr-100213-12 contribution to controlled subsidiary rulings based solely on the information submitted and the representations set forth above we rule as follows with respect to conversion contribution and contribution together the controlled subsidiary contributions transferor_corporation refers to the corporation that will transfer or will be deemed to transfer the assets and liabilities in each of the controlled subsidiary contributions transferee corporation refers to the corporation that will receive or will be deemed to receive the assets and assume or will be deemed to assume the liabilities in each of the controlled subsidiary contributions no gain_or_loss will be recognized by the transferor_corporation on the transfer of the assets to the transferee corporation solely in exchange for any actual issuance or any deemed issuance of the transferee corporation stock and the assumption by the transferee corporation of the related liabilities sec_351 and sec_357 no gain_or_loss will be recognized by the transferee corporation on the receipt of assets from the transferor_corporation in the controlled subsidiary contributions sec_1032 the basis of the transferee corporation stock constructively received by the transferor_corporation will be the same as the basis of the assets transferred by the transferor_corporation to the transferee corporation decreased by the sum of the liabilities assumed by the transferee corporation sec_358 and sec_358 the basis of each asset received by the transferee corporation in the controlled subsidiary contributions will equal the basis of that asset in the hands of the transferor_corporation immediately before the controlled subsidiary contributions sec_362 the holding_period of the stock to be constructively received by the transferor_corporation will include the holding_period of the assets that were transferred in the controlled subsidiary contributions provided that the assets were held as capital assets by sub fsub and parent as applicable on the respective date of the controlled subsidiary contributions sec_1223 the holding_period of each asset received by the transferee corporation in the controlled subsidiary contributions includes the holding_period of that asset in the hands of the transferor_corporation immediately before the controlled subsidiary contributions sec_1223 controlled_corporation contribution and controlled_corporation distribution rulings based solely on the information submitted and the representations set forth above we rule as set forth below with respect to contribution contribution plr-100213-12 contribution and conversion together the controlled_corporation contributions together with distribution distribution distribution and distribution together the controlled_corporation distributions for purposes of rulings through the transferor_corporation is referred to as distributing and the recipient corporation is referred to as controlled each controlled_corporation contribution followed by its respective controlled_corporation distribution will be a reorganization within the meaning of sec_368 each of distributing and controlled will be a_party_to_a_reorganization within the meaning of sec_368 no gain_or_loss will be recognized by distributing on the controlled_corporation contribution sec_357 and sec_361 no gain_or_loss will be recognized by controlled on the receipt of assets from distributing in exchange for actual or deemed-received controlled stock sec_1032 the basis of each asset received by controlled from distributing in each controlled_corporation contribution will equal the basis of that asset in the hands of distributing immediately before the transfer sec_362 the holding_period of each asset received by controlled from distributing in each controlled_corporation contribution will include the period during which that asset was held by distributing sec_1223 no gain_or_loss will be recognized by distributing on the distribution of its stock in controlled to the shareholder of distributing sec_361 no gain_or_loss will be recognized by the shareholder of distributing on the receipt of stock of controlled sec_355 the basis of the stock of distributing and controlled in the hands of distributing’s shareholder after the controlled_corporation distribution will equal such shareholder’s basis in the stock of distributing immediately prior to the controlled_corporation distribution allocated in proportion to the fair_market_value of each in accordance with sec_358 and sec_1_358-2 sec_358 the holding_period of the controlled stock received by distributing’s shareholder in the controlled_corporation distribution will include the holding_period of the distributing stock on which the distribution was made provided that such distributing stock is held as a capital_asset on the date of the distribution sec_1223 earnings_and_profits will be allocated between distributing and controlled under sec_312 and sec_1_312-10 and in the case of the distribution under sec_1_1502-33 plr-100213-12 controlled_corporation distribution rulings based solely on the information submitted and the representations set forth above we rule as set forth below with respect to distribution and distribution together the controlled subsidiary distributions for purposes of the rulings through the distributing_corporation is referred to as distributing and the controlled_corporation is referred to as controlled no gain_or_loss will be recognized by distributing on the distribution of its stock in controlled to the shareholder of distributing sec_355 no gain_or_loss will be recognized by the shareholder of distributing on the receipt of controlled sec_355 the basis of the stock of distributing and controlled in the hands of distributing’s shareholder after the controlled subsidiary distributions will equal such shareholder’s basis in the stock of distributing immediately prior to the distribution allocated in proportion to the fair_market_value of each in accordance with sec_358 and sec_1_358-2 sec_358 the holding_period of the controlled stock received by distributing’s shareholder will include the holding_period of the distributing stock on which the distribution was made provided that such distributing stock is held as a capital_asset on the date of the distribution sec_1223 earnings_and_profits will be allocated between distributing and controlled under sec_312 and sec_1_312-10 conversion rulings based solely on the information submitted and the representations set forth above we rule as set forth below with respect to the conversion the conversion will be treated as a distribution in complete_liquidation of fsub under sec_332 no gain_or_loss will be recognized by sub on its deemed receipt of the assets and assumption of the liabilities of fsub in the conversion sec_332 the basis of each asset of fsub deemed received by sub in the conversion will equal the basis of that asset in the hands of fsub immediately before the conversion sec_334 plr-100213-12 the holding_period of each asset of fsub deemed received by sub in the conversion will include the period during which the asset was held by fsub sec_1223 no gain_or_loss will be recognized by fsub on the deemed_distribution of its assets to and assumption_of_liabilities by sub in the conversion sec_337 sub will succeed to and take into account the items of fsub 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 caveats except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of the proposed transaction under other provisions of the code or the regulations or the tax treatment of any conditions existing at the time of or effect resulting from the proposed transaction that is not specifically covered by the above rulings in particular no opinion is expressed regarding i ii whether any of distribution distribution distribution distribution distribution and distribution satisfy the business_purpose requirement of sec_1_355-2 whether any of distribution distribution distribution distribution distribution and distribution are being used principally as a device for the distribution of the earnings_and_profits of any distributing or controlled_corporation see sec_355 and sec_1_355-2 iii whether any of distribution distribution distribution distribution distribution and distribution and any acquisition or acquisitions are part of a plan or series of related transactions under sec_355 and sec_1_355-7 iv v to the extent not otherwise specifically ruled upon above the adjustments to earnings_and_profits or deficits in earnings_and_profits if any in any of the transactions to which sec_367 or b apply to the extent not otherwise specifically ruled upon above any other consequences under sec_367 on any transaction in this ruling letter vi whether any or all of the above-referenced foreign_corporations is a passive foreign investment corporation pfic within the meaning of sec_1297 if it is determined that any such corporation is a pfic no opinion is expressed with respect to the application of sec_1291 through to the proposed plr-100213-12 transactions in particular in a transaction in which gain is not otherwise recognized regulations under sec_1291 may require gain recognition notwithstanding any other provisions of the code procedural statements this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of this letter_ruling in accordance with the power_of_attorney on file with this office a copy of this ruling letter is being sent to your authorized representatives sincerely _richard k passales______ richard k passales senior counsel branch office of the associate chief_counsel corporate cc


internal_revenue_service number release date index number ------------------ ----------------------------------- ------------------- ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ---------------- telephone number -------------------- refer reply to cc fip b04 plr-148384-13 date date legend year q taxpayer state x company foundation state y date z dear --------------- ------ ----------------------------------- ------------------------- ----------- -------------------------------------------- ------------------------------------------------ -------- ----------------- this is in response to the letter submitted by your authorized representatives requesting a ruling that the transaction described below will not result in a material_change within the meaning of sec_833 of the internal_revenue_code in taxpayer’s operations or structure so that taxpayer will continue to qualify during year q as an existing_blue_cross_or_blue_shield_organization under sec_833 facts taxpayer for many years has been a state x nonprofit health service corporation as an independent locally-operated licensee of the blue cross and blue shield association taxpayer provided health care coverage to state x residents taxpayer also provided stop-loss insurance for employers that covered most of the members covered by administrative services only aso contracts taxpayer’s mission was to plr-148384-13 provide state x residents with affordable innovative health and wellness solutions to help them lead healthier lives and more generally to improve the quality and availability and awareness of healthcare programs and services for state x residents company is a state y mutual legal reserve company operating as a nonprofit health care service plan company has blue cross and blue shield plans in several states company’s articles of incorporation specify its nonprofit status and its bylaws prohibit inurement of its profits to any person taxpayer represents that prior to the transaction described below it qualified as a blue cross or blue shield organization under sec_833 because it was in existence on date it was exempt from tax under sec_501 for its last taxable_year beginning before date and it did not undergo any material_change in operation or structure after date taxpayer’s board_of directors decided to have taxpayer form a business alliance with another blue cross and blue shield plan subsequently taxpayer and company entered into an asset purchase agreement and sale transaction in the transaction taxpayer transferred its insurance and certain other operations and assets to company the assets transferred to company include taxpayer’s name workforce subscriber network provider contracts and going concern and goodwill the acquired_business is a nonprofit blue cross and blue shield plan that company operates as a division of company in state x taxpayer’s members became company members without a break in coverage company assumed taxpayer’s unpaid claims liabilities except that taxpayer retained the resisted claims and other liabilities under both insured and aso plans that are in litigation retained claims the retained claims include all litigation against taxpayer initiated before date z as well as claims against taxpayer for acts or omissions occurring before that date that give rise to litigation the retained claims involve issues such as the scope of policy exclusions the amount of allowable premiums breach of contract allegations liability for attorneys’ fees and similar issues taxpayer retained significant assets from which to satisfy any liabilities it is ultimately determined to owe with respect to the retained claims the assets retained by taxpayer include an escrow fund to protect company against possible breach by taxpayer with respect to certain requirements of the purchase agreement including the requirement that taxpayer pay the amount of any retained claims that are ultimately determined to be due taxpayer may charge amounts its pays on the retained claims as well as defense costs on such retained claims against the escrow fund taxpayer and company filed an application seeking approval of the transaction after hearings on the application both the state x commissioner of insurance and the state x attorney_general approved the transaction the state x attorney general’s final order final order approving the transaction points out that under applicable state x law the attorney_general must ensure that no part of taxpayer’s public assets improperly benefit any private party further the attorney_general must require that a plr-148384-13 fair_market_value is paid for the purchased assets and that the charitable assets of taxpayer are distributed to a new or existing foundation to be held in trust and used in continuance of taxpayer’s mission to provide financial support to improve the quality availability and awareness of healthcare programs and services for state x residents accordingly the state x attorney_general created foundation as a sec_501 charity with a mission statement that closely approximates the mission of taxpayer the final order determines that the agreed purchase_price represented a fair_market_value for the purchased assets in the transaction net of liabilities assumed by company the final order specifies that because the purchased assets were public assets the purchase_price must be transferred by company directly into foundation to continue taxpayer’s mission for the benefits of state x residents into the future as required by the final order upon closing of the transaction company paid the sale proceeds to foundation not taxpayer and taxpayer transferred to company the purchased assets and assumed_liabilities at the same time taxpayer gave up the right to use the blue cross and blue shield name and amended its articles of incorporation to change its name as part of those amended articles taxpayer’s status was changed to a non-member non-profit mutual benefit corporation and its stated purposes were amended to include to wind up its operations as a non-profit health service corporation in addition taxpayer ceased writing new insurance policies and providing healthcare services as required by the final order on date z taxpayer filed a plan of dissolution with the state x department of justice under this plan taxpayer is working to wind up its health insurance and administrator business liquidating its assets and defending and processing the retained claims taxpayer is also working on arrangements for the ordered sale of its remaining assets including an investment portfolio buildings previously used by taxpayer as office space a subsidiary_corporation and receivables due consistent with taxpayer’s charter the provisions of state x law and the final order taxpayer will pay to foundation all its residual net assets after all its liabilities including federal_income_tax if any have been satisfied law and analysis sec_833 provides that existing blue cross or blue shield organizations are subject_to tax as if they were stock insurance_companies under part ii of subchapter_l to be subject_to the provisions of sec_833 sec_833 provides that an organization must be a an existing_blue_cross_or_blue_shield_organization as defined in sec_833 or b an organization described in sec_833 sec_833 defines the term existing_blue_cross_or_blue_shield_organization to mean any blue cross or blue shield organization if a such organization was in existence on date b such organization is determined to be exempt from tax for its last taxable_year beginning before date and c no material_change has occurred in the operation of such organization or plr-148384-13 in its structure after date and before the close of the taxable_year furthermore any successor to an organization that was an existing_blue_cross_or_blue_shield_organization as defined in sec_833 and any organization resulting from the merger or consolidation of organizations which met the requirements of sec_833 are treated as existing blue cross or blue shield organizations for purposes of sec_833 to the extent permitted by the secretary_of_the_treasury the conference_report regarding sec_833 sec_1012 of the tax_reform_act_of_1986 h_r conf_rep no 99th cong 2d sess ii-344 to ii-351 vol c b to contains the following principles that are to be applied to determine whether a material_change in operations or structure has occurred under sec_833 first the merger or split up of one or more blue cross blue shield organizations will not constitute a material_change in organization or structure second if an existing blue cross blue shield organization acquires a new line_of_business or is acquired by another business other than a health business the acquisition does not constitute a material_change in operation or structure if the assets of the other business are a de_minimis percentage ie less than percent of the assets of the existing blue cross blue shield organization at the time of acquisition or the taxpayer can demonstrate to the secretary_of_the_treasury that based on all the facts and circumstances the acquisition does not constitute a material_change in operation or structure of the existing blue cross blue shield organization third a material_change in operations occurs if an existing blue cross blue shield organization drops its high risk coverage or substantially changes the terms and conditions under which high risk coverage is offered by the organization from the terms and condition in effect as of date a change in the high risk coverage is considered substantial if the effect of the change is to defeat the purpose of high risk coverage high risk coverage for this purpose generally means the coverage of individuals and small groups to the extent the organization provides such coverage under the specified terms and conditions as of date or meets the statutory minimum definition of high risk coverage for new organizations a material_change in operations does not occur if an existing organization alters its operations to provide high risk coverage that meets the minimum standards under the conference agreement for new blue cross blue shield organizations plr-148384-13 during the senate debate regarding this provision of the tax_reform_act_of_1986 the chairman of the senate_finance_committee senator packwood discussed the meaning of the material_change in operations and structure provision with another member of the finance_committee senator chafee the following is one of their exchanges mr chafee i would appreciate the chairman’s clarifying some aspects of that important provision the bill limits the use of the deduction to existing blue cross and blue shield organizations which do not materially change their operations after the date of the conference agreement does this mean that any change in the organization’s operations after that date will cause it to lose the deduction mr packwood certainly not the purpose of the limitation is to deny the deduction to the organization only if it makes a change in its operations which is so material that the change has the effect of eliminating coverage for a high risk segment of its business an example of such a material_change would be elimination of coverage for individuals cong rec daily ed date subsequently representative rostenkowski the chairman of the ways_and_means_committee made a statement on date with respect to several of the colloquies between sen packwood and other members of the senate although rep rostenkowski stated his belief that certain aspects of the colloquies on sec_833 did not reflect his understanding of the intent of the conferees his summary of the intent of the conferees with respect to material_change in operations was consistent with the view expressed by sen packwood rep rostenkowski said in part it was not the intent of the conferees to prevent an existing blue cross and blue shield organization from making normal adjustments in their business practices such as adjustments to reflect new trends in cost containment or adding new coverages however it is my understanding that any change in business practice that either eliminates coverage of high-risk_individuals or small groups or that has the effect of eliminating such coverage is a material_change in structure or operation for example a premium increase that reflects normal increases in medical costs is not itself treated as a material_change on the other hand a premium increase that has the effect of making high-risk coverage unavailable because of the cost of such coverage is treated as a material_change cong rec e3391 daily ed date plr-148384-13 the general explanation of the tax_reform_act_of_1986 the blue_book at pages prepared by the staff of the joint_committee on taxation states that the merger or split up of one or more existing blue cross or blue shield organizations or the conversion to a mutual company status under local law will not constitute a material_change in operations or structure the blue_book provides that a material_change is presumed to occur if an organization on or after date ceases to offer coverage for individuals or small groups or conversion coverage for those individuals who leave an employment-based group because of termination of employment a material_change generally occurs if an organization which on date offered individual coverage that allowed enrollment regardless of medical_condition modifies enrollment practices for that coverage to exclude certain individuals because of a preexisting medical problem the blue_book also states that a material_change in operations does not occur if the plan increases its premium rates to reflect increases in health care costs or makes normal changes in products or services to respond to changes and development generally in the health care environment the material_change in operations rule is not intended to prevent a plan from making normal adjustments in their business practices such as adjustments to reflect new trends in cost containment or adding new coverages any change in business practice that either eliminates coverage of high-risk_individuals or small groups or that has the effect of elimination such coverage however is a material_change in structure or operation for example a premium increase that reflects normal increases in medical costs is not itself treated as a material_change on the other hand a premium increase that has the effect of making high-risk coverage unavailable because of the cost of such coverage is treated as a material_change similarly a material_change generally will occur if an organization after date ceases offering individual or small_group coverage in a defined geographic area due to a concentration of high risk individuals in that area in addition a material_change generally will occur if an organization institutes subsequent to date a procedure to identify particular individuals within the pool of individual enrollment reassess their individual risk due to excessive utilization and cancels their coverage the blue_book states that the material_change rule is not intended to prevent existing blue cross or blue shield organizations from changing their high risk coverage to respond better to the needs of that population for example a material_change would not occur if the organization introduced a preferred provider arrangement or a managed care product for individual high risk coverage that included financial incentives or plr-148384-13 requirements to use more cost effective providers or benefits eg home health or hospice care rather than hospitalization the material_change rule also is not intended to prevent existing blue cross or blue shield organizations from establishing special coverages that recognize health lifestyles for example a material_change would not occur if smokers were charged a higher premium than non-smokers taxpayer qualifies under sec_832 as an existing_blue_cross_or_blue_shield_organization it was in existence as of date it was tax exempt for its last taxable_year beginning before date and it did not undergo any material_change in operation or structure after date the issue therefore is whether the transaction resulted in a material_change in taxpayer’s operations or structure as contemplated by sec_833 for year q to continue to qualify as an existing_blue_cross_or_blue_shield_organization under sec_833 there is a requirement that no material_change has occurred in the operations of such organization or its structure the flush language of sec_833 provides to the extent permitted by the secretary any successor to any organization meeting the requirements of sec_833 any organization resulting from the merger or consolidation of organizations each of which has to meet such requirements shall be treated as an existing_blue_cross_or_blue_shield_organization in effect this language provides that such changes are not considered material changes for this provision the merger or split up of one or more blue cross or blue shield organization or the conversion to a mutual company under local law will not constitute a material_change in operations or structure there is not material_change in operations or structure in the acquisition of a new line_of_business or the acquisition by another business other than a health business if the assets are a de_minimis amount ie less than percent of the existing_blue_cross_or_blue_shield_organization at the time of the acquisition although words generally carry their usual and customary meaning we believe congress used operations in a narrow context a change in operations appears to be limited to dropping high risk coverage or substantial changes in the terms and conditions under which high risk coverage is offered from the terms and conditions in effect as of date the focus that the legislative_history places on changes to high risk coverage implies that this was the predominant issue that they were concerned about regarding a material_change in operations though neither sec_833 nor its legislative_history specifically addresses the transaction the closing of the transaction on date z does not result in a material_change in taxpayer’s structure until its final dissolution taxpayer will remain a nonprofit corporation under state x law with its net assets committed to the foundation and the shared legal purpose of improving the quality availability and awareness of healthcare programs and services for state x residents after all liabilities are resolved taxpayer will transfer all its net assets to the foundation to continue taxpayer’s mission and then dissolve taxpayer’s continuing its existence after closing the transaction to wind-up its operations will result in no change in year q in structure plr-148384-13 similarly there is no change in taxpayer’s operations taxpayer entered into the agreement to enable its members to receive seamless continuation of healthcare services from a local nonprofit blue cross blue shield plan with the same personnel and with improved economies of scale and financial strength to enhance the plan’s ability to perform taxpayer’s mission far into the future since the closing date company has conducted taxpayer’s former operations as a division of company in substantially the same manner as before company continues this old business of taxpayer without any change affecting high-risk coverage and without material_change legislative_history specifies that a merger is not a material_change in operations but to best accomplish certain business goals a merger in this case was not feasible instead it was necessary for taxpayer to retain its claim liabilities in litigation completing the transaction as an asset sale facilitated taxpayer’s retention of public assets not necessary to continuation of the transferred operations so those assets could be transferred by taxpayer to the foundation consistent with state x law liquidating those assets and adjusting and litigating liability for the retained claims will take some time so as a practical matter taxpayer cannot dissolve immediately but from the standpoint of the policy behind sec_833 this delay should not result in loss of sec_833 status in year q taxpayer simply is doing what a sec_833 entity does when it is winding up its sec_833 operation consistent with its nonprofit charter to improve healthcare in its state-after selling what it can in a way that provides members with continuing coverage it runs off and liquidates what remains taxpayer’s principal activity during the wind-up period will be liquidating assets and adjusting and litigating liability for the retained resisted claims this activity is entirely consistent with sec_833 status this conclusion is supported by the principle that an insurance_company that is winding up its operations and running off its risks under its remaining insurance contracts is still an insurance_company for federal_income_tax purposes see h_r conf_rep no 2d sess which states i t is not intended that a company whose sole activity is the run-off of risks under the company’s insurance contracts be treated as a company other than an insurance_company even if the company has little or no premium income except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-148384-13 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely sheryl b flum branch chief financial institutions products cc