PLR 201115016
IRS has privately ruled that the contribution of all of an S corporation's stock to a new wholly owned corporation (NewCo) in exchange for all of the NewCo stock, followed by NewCo making a QSub election for the S corporation, qualifies as a Code Sec. 368(a)(1)(F) reorganization. IRS further determined that NewCo will be eligible to be treated as an S corporation under Code Sec. 1361 and that the corporation's S election won't be terminated by the transaction, but rather will remain in effect for NewCo.
Background on F reorganizations. Code Sec. 368(a)(1)(F) provides that a reorganization includes a mere change in identity, form, or place of organization of one corporation, however effected. In the case of an F reorganization, the acquiring corporation is treated (for purposes of Code Sec. 381) just as the transferor corporation would have been treated if there had been no reorganization. (Reg. §1.381(b)-1(a)(2)) Under Code Sec. 381, a corporation that acquires the assets of another corporation in certain tax-free reorganizations or liquidations also carries over numerous tax items of the transferor (predecessor) corporation.
Under Rev Rul 64-250, 1964-2 CB 333, referenced in Rev Rul 2008-18, 2008-13 IRB 674, when an S corporation merges in a Code Sec. 368(a)(1)(F) reorganization into a newly formed corporation that also meets the requirements of an S corporation, the reorganization does not terminate the S election and the S election remains in effect for the new corporation. Also, under Rev Rul 96-29, 1996-1 CB 50, a F reorganization that effects a mere change may be a step in a larger transaction such that the related preceding or succeeding transactions do not disqualify it from F reorganization treatment, even where there is change in ownership or a distribution of a portion of the business assets.
Background on QSubs. An S corporation cannot have a corporate shareholder. (Code Sec. 1361(b)(1)(B), Reg. §1.1361-1(f)) This rule ordinarily prevents a subsidiary from being an S corporation. However, an S corporation can have an S corporation subsidiary if it owns 100% of the subsidiary's stock, the subsidiary is not an ineligible corporation, and the S corporation parent elects (on Form 8869) to treat the subsidiary as a QSub. (Code Sec. 1361(b)(3)(B), Reg. §1.1361-2, Reg. §1.1361-3) A QSub isn't treated as a separate corporation for federal tax purposes; rather, its assets, liabilities, and items of income, deduction, and credit are treated as those of the parent S corporation. (Code Sec. 1361(b)(3)(A), Reg. §1.1361-4)
Facts. The entity at issue (S corporation) was incorporated on Date 1, has one class of common stock that is held by one shareholder, and made an election to be an S corporation effective Date 2 that has since remained in effect. S corporation's shareholder wants to simplify S corporation's business activities and sell certain of its assets (“target assets”) to a purchaser. To accomplish this, S corporation proposes to transfer the assets it wishes to retain to a new corporation owned by the shareholder as follows:
1. Shareholder will create a new wholly owned corporation (NewCo);
2. Shareholder will transfer all the S corporation stock to NewCo in exchange for all of the Newco common stock, with the result that S corporation will be a wholly owned subsidiary of NewCo and NewCo will be wholly owned by Shareholder;
3. NewCo will make a QSub election for S corporation, effective as of the date of the transfer in (2);
4. S corporation will distribute to NewCo the business assets that it chose to retain and not sell to purchaser.
After the proposed transaction, NewCo intends to sell its S corporation stock, thus conveying all of the target assets.
Representations. S corporation also made the following representations regarding the proposed transaction:
... NewCo won't be engaged in any activity or hold any assets immediately before the proposed transaction, beyond a minimum amount necessary to maintain its corporate status;
... neither S corporation nor NewCo will have outstanding at the time of the transaction any debt, convertible securities, or other instrument constituting an equity interest (or right to acquire an equity interest) therein, and neither plans to issue any stock beyond that described above;
... the NewCo shares received by Shareholder will be identical in all respects to the S corporation stock for which they are exchanged;
... there is no plan or intention to revoke or terminate the S election of NewCo or S corporation (other than the proposed change to a QSub), or for NewCo to terminate the QSub election (other than upon a sale of the S corporation stock); and
... S corporation isn't under the jurisdiction of a court in a Title 11 or similar case within the meaning of Code Sec. 368(a)(3)(A).
Favorable ruling. IRS privately ruled that Shareholder's formation of, and transfer of S corporation stock to, NewCo, followed by the QSub election for S corporation, is a reorganization under Code Sec. 368(a)(1)(F) with NewCo as the surviving corporation. S corporation and NewCo will each be a “party to a reorganization” within the meaning of Code Sec. 368(b), and NewCo will be eligible to be treated as an S corporation. S corporation's S election won't be terminated by the transaction, but will remain in effect for NewCo.
The PLR further concluded that S corporation will be eligible to be a QSub as soon as NewCo acquires all of its stock, and that NewCo and S corporation will be treated as a single entity S corporation for federal tax purposes once a timely QSub election is filed for S corporation. (Code Sec. 1361(b)(3)(A)) Neither S corporation, NewCo, nor Shareholder will recognize any gain or loss in the transaction (Code Sec. 361; Code Sec. 354; Code Sec. 357(a); Code Sec. 1032(a)), and the basis of and holding period for each asset received by NewCo will be the same as that of S corporation immediately before the transaction (Code Sec. 362(b); Code Sec. 1032(a); Code Sec. 1223(2)). Similarly, Shareholder's basis in and holding period for the NewCo stock received will be equal to that in the S corporation stock that he surrendered (Code Sec. 358(a)(1); Code Sec. 1223(1).
IRS also held that, under Rev Rul 96-29, 1996-1 CB 50, the subsequent sale won't affect the treatment of the proposed transaction as an F reorganization.
References: For Type F reorganizations, see FTC 2d/FIN ¶F-3100; United States Tax Reporter ¶3684.06; TaxDesk ¶235,801; TG ¶5169. For QSubs, see FTC 2d/FIN ¶D-1530; United States Tax Reporter ¶13,614.05; TaxDesk ¶611,006; TG ¶4704.
No comments:
Post a Comment