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CORPORATE CASE SUMMARY
PRINCIPAL CODE SECTION: 305
CASE NAME: * * *
PLR#: 109865-97
DOCKET ATTY: Roy Hirschhorn
REVIEWER: Richard Osborne
FRONT OFFICE CONF: January 30, 1998
ISSUED: February 6, 1998

FACTS AND RESOLUTION: * * * ("Company") is a closely held Tennessee corporation and was in the business of * * *. More than * * *% of the Company stock is held by members of the * * *. The remaining * * *% is owned by members of a family unrelated to the * * * and a charitable organization.

Company's authorized and outstanding stock consists only of common stock. The common stock is divided into four classes, which are designated as Class B, C, D, and E. Class B is nonvoting stock while Classes C, D, and E have voting rights. Dividends may be paid to the holders of the Class B stock without a dividend being paid to the holders of the other classes of stock. To the extent dividends are paid to the holders of any class of stock besides the Class B stock, the holders of all classes of stock participate equally. All classes of stock participate equally in liquidation.

Company was faced with the prospect of having to expend increasingly larger amounts to meet its obligations to the estates of deceased shareholders under its Buy-Sell Agreements. Company, therefore, wanted to encourage * * * individual shareholders to make inter-vivos transfers of their stock to trusts with remainder interests for their children. In addition, Company had met its charitable deduction limits and thus any payments directly to charity would not give rise to any deductions under section 170. The Board of Directors believed that Company's charitable giving could be redirected through its shareholders and their use of split interest charitable income or lead trusts.

To accomplish its objectives, Company proposed to do a recapitalization of its capital stock. Company proposed to issue 500,000 shares of a new class of nonvoting stock, to be denominated Class F stock. Shares of Class F stock may only be obtained in exchange for Class B common stock. The exchange of class B stock for shares of Class F stock would be based on the respective fair market values of the shares on the date of exchange. The holders of Class F Stock would be entitled to dividends at a cumulative fixed rate per annum for a period of 15 years. The holders of the Class F common stock would participate equally, share for share, in all distributions in liquidation of Company's assets as if each share of Class F common stock had been converted to Class B common stock using the same conversion ratio established for the initial exchange of shares, discussed above. The Class F stock would be nonvoting stock. Any shareholders [sic] who received the Class F stock were required to transfer that stock into a charitable trust.

Company requested a ruling that the issuance of Class F nonvoting common stock would not be treated as a distribution to the Company's shareholders to which section 301 of the Code applies by reason of section 305(b) and section 305(c). Company indicated in its submission that it had nine redemptions of Class B stock over the three years preceding the proposed transaction a majority of which were to a charitable organization. Company also indicated that it was going to have a pro rata redemption among the Class B shareholders in the near future.

We were concerned that under the section 305 regulations these redemptions if deemed periodic could be linked to the proposed transaction. If linked, the proposed exchange could give rise to those participating shareholders receiving section 301 treatment on their receipt of new Class F stock by reason of the application of sections 305(b) and 305(c) of the Code. Following a front office meeting, we determined that neither these redemptions nor the recapitalization were parts of a plan to periodically increase any shareholder's proportionate interests in the assets and earnings and profits of the Company, but were instead transactions. Therefore, under section 1.305-7(c), the receipt should not be treated as a distribution to which section 301 applied by reason of sections 305(b) and 305(c). See also Rev. Rul. 77-19, 1977-1 C.B. 83. We issued a favorable ruling. However, because of the future redemption, we inserted the following language "This letter does not purport to rule on the effect of any future distributions on these rulings."