S corporation transaction structured with help from F reorganization
Transaction exemplifies flexibility of the 'F in a bubble' concept
TAX ALERT |
A recently released IRS private letter ruling, PLR 201638004, illustrates the flexibility that F reorganizations can add to corporate transaction planning. A limited liability corporation (X LLC) treated as an S corporation for tax purposes (Old S Corp) planned to spin off one of its two businesses (Business A, with the other being Business B) by distributing it to its shareholders. Business A would be conducted by an LLC treated as an S corporation (New S Corp) after the spin-off.
The company wanted to create a new LLC (Y LLC) that would hold Business B and be treated as Old S Corp, while X LLC would remain in existence, hold Business A, and be treated as New S Corp. The IRS held that preceding the spin-off with an F reorganization would accomplish this. By virtue of the F reorganization, Y LLC would be treated as Old S Corp, and X LLC would not be.
Without the F reorganization, the company’s options included distributing Y LLC as New S Corp, conducting either Business A or Business B. If X LLC’s Business A was difficult to transfer due to legal restrictions, options without the F reorganization may have been further limited to distributing Y LLC as New S Corp, conducting Business B. With the F reorganization, the company could distribute X LLC as New S Corp, conducting Business A.
This ruling illustrates the helpfulness of F reorganizations. For another illustration, see our previous article, F reorganizations add restructuring flexibility. Remember, of course, to always discuss potential reorganization or spin-off transactions with your tax advisor.