The IRS said in a private letter ruling that a transfer of assets to a corporation by its sole shareholder constituted a transaction under Section 351, notwithstanding that the corporation would distribute assets to its shareholder prior to that contribution.
In PLR 201338040, a publicly traded, widely held corporation (Parent) directly wholly owned a subsidiary corporation (Sub 1). Sub 1 owned all the stock of three other corporations (the Subs). For valid business reasons, Parent proposed to undertake the following transactions:
(i) Sub 1 would borrow cash from a third-party
lender,
(ii) Sub 1 would then distribute that cash and the stock of
the subs to Parent (the distribution),
(iii) Parent would contribute certain assets to Sub 1 (the
contribution),
(iv) Parent would contribute all the stock of Sub 1 to a newly
formed corporation (Controlled), and
(v) Parent would distribute all the common stock of Controlled
to its shareholders on a pro rata basis.
The IRS ruled that the distribution would be a distribution with respect to Sub 1’s stock under Section 301, and that Parent would not recognize any gain or loss related to the contribution under Section 351.
Notwithstanding that the distribution and contribution were part of the proposed transaction, the IRS ruled that the two transactions should be respected as separate steps rather than integrated (i.e., a taxable exchange under Section 1001). Specifically, the taxpayer represented to the IRS that there was no requirement or economic compulsion on behalf of Parent to make all or part of the contribution as a condition of the distribution.
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