Sales are easy in a merger. I remember a merger in the 80's where it took several tax attorneys and a team of accountants to outline where the sales would show. Ultimately the surviving entity has the tax burden but it looks like there are options. Look how easy this was on the dealing with the taxes. - "This is in reply to a letter dated October 11, 1984, concerning the federal income tax consequences of a proposed transaction. Additional information was submitted in letters dated January 15 and May 1, 1985. The information submitted for consideration is summarized below.
P, a domestic corporation, functions as a holding company which owns all of the outstanding stock of S, a domestic corporation, which is engaged in the L, M and Q businesses. S also provides management services for P's seven other subsidiaries. P owns all of the outstanding stock of these seven other domestic corporations, each of which engages in the R business. P has outstanding Value 1 shares of common stock, Value 3 of which are held by H and W, and Value 2 shares of preferred stock, Value 4 of which are held by H and W. P was formed in 1981 when H, W, their son A, and A's children, B and C, contributed to P their shares of stock in S and the seven other corporations now owned by P in a transaction which has been represented to have been a non-taxable one (viz. one governed by section 351). H, W, A, B, and C own, and have owned since its incorporation in 1981, all of the outstanding stock of P.
Pursuant to a plan of complete liquidation, S will be merged with P in accordance with state law. P will be the surviving corporation and will acquire all the assets and assume all the liabilities of S. The separate corporate existence of S will cease. P will then distribute all of the assets of the L business to H and W in exchange for a portion of their P stock and P will cease to engage in the L business. H and W will continue to operate the L business after the distribution. P will, after the distribution, conduct active trade or business through the continued operation of the N and Q businesses and will continue to provide management services to its subsidiaries.
Financial information has been received which indicates that the L, M and Q businesses have had gross receipts and operating expenses representative of the active conduct of a trade or business for each of the past five years immediately preceding the proposed transaction.
In connection with the liquidation of S into P, the following representations have been made:
(a) The liquidation of S will not be preceded or followed by the reincorporation, transfer or sale to a recipient corporation of all or part of the business or assets of S where more than a nominal amount of the stock (that is, more than 20 percent in value) of S and the recipient corporation are owned by the same shareholders. For purposes of this representation, ownership will be determined by application of the constructive ownership rules of section 318 of the Internal Revenue Code, as modified by section 304(c)(3).
(b) No assets of S will have been distributed in kind or sold to P within three years before the adoption of the plan of liquidation of S.
(c) After the first liquidating distribution, S will cease to be a going concern and its activities will be limited to winding up its affairs, paying its debts, and distributing its remaining assets to P.
(d) S will retain no assets following its final liquidating distribution.
(e) The fair market value of the assets of S will exceed the sum of its liabilities (including any amounts owed to P) assumed by P plus the liabilities to which the assets transferred are subject both on the date of the adoption of the plan of liquidation of S and at the time of the first liquidating distribution is made.
(f) As of August 31, 1984, P was indebted to S in the approximate amount of $Y. The entire amount will be cancelled pursuant to the plan of complete liquidation of S. No indebtedness between P and S was issued or acquired at a discount and, except as described above, none will be cancelled, forgiven, or discounted in connection with the proposed transaction.
(g) On the date of the adoption of the plan of complete liquidation of S and at all times until the final liquidating distribution of S, P will own at least 80 percent of the stock of S.
(h) S will not have acquired assets in any non-taxable transaction during the three year period preceding the adoption of the plan of complete liquidation.
(i) No shares of stock of S will have been redeemed during the three years preceeding the adoption of the plan of complete liquidation.
(j) There is no plan or intention to liquidate P completely, and P will continue to operate the N and Q businesses directly and the R business through its subsidiaries after the proposed transaction.
(k) All the liquidating distributions will be made within one taxable year.
(l) S will distribute no assets representing earned but unreported income.
(m) Both P and S employ the accrual method of accounting for federal income tax purposes.
(n) S has not adopted formal or informal plans of liquidation other than the current transaction.
(o) No shares of capital stock of S have been redeemed within three years of the adoption of the plan of liquidation of S or since the acquisition of S stock by P.
(p) The stock of S was acquired by P in March of 1981 pursuant to a transfer by H and W of their S stock to P in exchange for P voting preferred and voting common stock, in a transaction described in section 351(a) of the Internal Revenue Code.
(q) Each of the taxpayers will pay those expenses of the proposed transaction which are attributable to it.
(r) Neither P nor S has or expects to incur an operating loss or a deficit in accumulated earnings and profits.
The following representations have been made with respect to the distribution of the L business in partial liquidation of P:
(a) The assets of the L business to be distributed by P have been actively used for the past five years in the operation of the business to be distributed or are improvements of assets actively used or will be replacements of assets actively used for such period.
(b) The partial liquidation of P will not be preceded or followed by the reincorporation in or transfer or sale to, a recipient corporation of any of the business or assets of P, where persons holding more than 20 percent in value of the stock of P also hold more than 20 percent in value of the stock in such recipient corporation. For purposes of this representation, ownership will be determined by application of the constructive ownership rules of section 318 of the Internal Revenue Code, as modified by section 304(c)(3).
(c) There is no plan or intention to completely liquidate P.
(d) There is no plan or intention for P to re-enter the L business or to enter any new line of business other than through normal internal growth.
(e) No part of the assets of the L business will be received by H or W as a debtor, creditor, employee, or in any capacity other than that of a shareholder of P.
(f) There is no plan or intention on the part of H or W to reinvest in P any proceeds of the distribution in partial liquidation.
(g) The distribution pursuant to the plan of partial liquidation of P will consist of the assets associated with the L business.
(h) All distributions pursuant to the plan of partial liquidation of P will be made within the taxable year in which the plan of partial liquidation is adopted or in the succeeding tax year.
(i) There are no declared but unpaid dividends on any P stock, and none will be declared before the distributions.
(j) The fair market value of the assets to be distributed to H and W, less the amount of liabilities to which assets will be subject will equal the fair market value of the P stock surrendered in exchange therefor.
(k) P does not maintain a reserve for bad debts.
(l) The fair market value and the basis of the assets to be distributed will, in each instance, exceed the liabilities to be assumed, or to which the distributed assets are subject.
(m) There has been no unusual or abnormal increases in working capital, extraordinary sales, purchases, replacements, or renovations of fixed or operating assets, or shifts, transfers, or loans of assets (including working capital) from one business activity to another, or termination or contraction of a business, and no substantial changes in assets of P and its Subsidiaries during the past five years other than those occuring in the normal course of business and other than the contribution by H, W, A, B, and C of their stock of the subsidiaries to P in exchange for P stock in the organization of P in 1981.
(n) The assets to be distributed are not from any of the following sources: (i) a reserve for expansion no longer needed; (ii) a mere decline in loss of business; (iii) a mere decrease in need for working capital; (iv) proceeds from the sale of a business which is nominal in relation to the entire business of P or S; or (v) a business operated at a loss which acquired assets from another business of S or P.
(o) There is no other outstanding capital of P, including bonds, debentures, notes, warrants, options, or other securities, which should be considered a stock interest, nor is there any outstanding indebtedness indebtedness that was not incurred in the ordinary course of business.
Based solely on the information submitted and on the representations set forth above, subject to any limitations and modifications that may result from the application of the personal holding company provisions of the Code, it is held as follows:
(1) For federal income tax purposes, the merger of S with and into P pursuant to applicable state law will be treated as distributions by S in complete liquidation within the meaning of section 332 of the Code (section 1.332 - 2(d) of the Income Tax Regulations).
(2) Provided that the requirements of section 332(b) of the Code are met, no gain or loss will be recognized by P upon the receipt of the property of S distributed in complete liquidation (section 332(a); Rev. Rul. 74-54, 1974 - 1 C.B. 76).
(3) The basis of the property of S to be received by P will be the same as the basis of such property in the hands of S immediately prior to the liquidation (section 334(b)(1)).
(4) The holding period of the property of S in the hands of P will include the holding period of that property in the hands of S immediately before the liquidation (section 1223(2)).
(5) No gain or loss will be recognized by S on the distribution of its property to P in complete liquidation (section 336).
(6) As provided in section 381(c)(2) of the Code and section 1.381(c)(2) - 1 of the regulations, P will succeed to and take into account the earnings and profits or deficit in earnings and profits of S as of the date of the transfer. Any deficits in earnings and profits of S will be used only to offset the earnings and profits accumulated after the date or dates of the transfer.
(7) The liquidating distribution will not subject S to any investment credit recapture pursuant to section 47(b).
(8) The distribution by P of the assets of its L business in redemption and cancellation of the stock of H and W pursuant to a plan of partial liquidation will qualify under section 302(e)(2) of the Internal Revenue Code.
(9) The maximum amount of property that will be considered to be distributed in partial liquidation will consist of the assets used in the terminated L business distributed by P to H and W, less all liabilities attributed to that business (including any taxes and expenses incurred in connection with that distribution), plus that amount of working capital reasonably attributable to the terminated activities. A determination as to that portion of the working capital that may be included in a distribution cannot be made until the tax returns for the years involved are filed and examined by an Internal Revenue Agent (see Rev. Rul. 60-232, 1960 - 2 C.B. 115; Rev. Rul. 71-250, 1971 - 1 C.B. 112; Rev. Rul. 76-279, 1976 - 2 C.B. 99; Rev. Rul. 76-289, 1976 - 2 C.B. 100).
(10) The distribution made by P pursuant to the plan of partial liquidation, to the extent indicated in ruling (9) above, will be treated as a distribution in partial liquidation under section 302(b)(4) of the Code and will be treated as in full payment in exchange for the P stock redeemed as provided in section 302(a) of the Code.
(11) To the extent that property distributed by P is in excess of amounts specified in ruling (9) above, such excess, if any, may be treated as distributions of property under sections 301 and 316 of the Code.
(12) Except as provided in the recapture provisions of the Code and similar rules of law, including but not limited to sections 47, 291(a)(1), 311(b), 311(c), 311(d), 341f, 453B, 541, 617(d), 904(f)(3), 995, 1245, 1248(f), 1250, 1252, 1253, and 1254 of the Code, the assignment of income doctrine, the clear reflection of income doctrine of section 446(b) and 482, and the tax benefit rule (see, Hillsboro National Bank v. Commissioner, 460 U.S. 370 (1983) and Rev. Rul. 74-396, 1974 - 2 C.B. 106), no gain or loss will be recognized to P on the distribution of its property in partial liquidation to the holders of "qualified stock" as provided in ruling (15) (section 311(d)(2)).
(13) Gain or loss will be recognize by H and W to the extent of the difference between the amount distributed in partial liquidation and the adjusted basis of the shares of P stock surrendered in exchange therefor. Provided that (a) the P stock constitutes a capital asset in the hands of H and W, and (b) section 341(a) (relating to collapsible corporations) is not applicable, the gain or loss, if any, will be considered capital gain or loss subject to the provisions and limitations of Subchapter P of Chapter 1 of the Code.
(14) Regardless of the number of shares of P stock surrendered for redemption, the number that will be considered redeemed to determine gain or loss for purposes of the partial liquidation will be the number determined in accordance with the principles set forth in Rev. Rul. 77-245, 1977 - 2 C.B. 105. To the extent that the fair market value of the distribution in partial liquidation received by H or W exceeds the fair market value of the P stock surrendered in exchange therefor, the additional shares considered redeemed pursuant to Rev. Rul. 77-245 will be determined in accordance with the principles set forth in Rev. Rul. 68-348, 1968 - 2 C.B. 141 and Rev. Rul. 85-48, 1985 - 16 I.R.B. 5.
(15) The shares of P stock surrendered by H and W in the partial liquidation will be treated as "qualified stock" under section 311(e)(1) of the Code.
If any asset of P that is distributed in kind to H and W is subsequently sold, no opinion is expressed about whether P or H and W will be deemed to have made the sale (see Commissioner v. Court Holding Company, 324 U.S. 331 (1945), and Rev. Proc. 85-22, 1985 - 12 I.R.B. 13, 15, section 3.0121).
No opinion is expressed about the tax treatment of the proposed transaction under other provisions of the Code or regulations or about the tax treatment of any conditions existing at the time of or effects resulting from, the proposed transaction that are not specifically covered by the above rulings.
Specifically, no opinion is expressed about the tax treatment of any distributions to H and W other than in the partial liquidation of P as described above.
No rulings were requested and no opinion is expressed about the limitations and modifications that may result from the application of the personal holding company provisions of the Code. Therefore, all of the above rulings are effective only to the extent that they are not modified by the provisions of the Code relating to personal holding companies including section 541 to 547 and 316(b). See, Weiss et al. v. United States, 75 - 2 U.S.T.C. para. 538 (N.D.Ohio 1975).
Temporary or final regulations pertaining to one or more issues addressed in this ruling have not yet been adopted. Therefore this ruling will be modified or revoked by adoption of temporary or final regulations, to the extent the regulations are inconsistent with any conclusions in this ruling. See section 17.04 of Rev. Proc. 85-1, 1985 - 1 I.R.B. 21, 31. However, when the criteria of section 17.05 of Rev. Proc. 85-1 are satisfied, a ruling is not revoked or modified retroactively, except in rare or unusual circumstances.
This ruling letter is directed only to the taxpayer who requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent."
AI
