IRS Rules on Conversion from Taxable to Tax-Exempt Entity

IRS Rules on Conversion from Taxable to Tax-Exempt Entity

News story posted in Letter Rulings on 23 June 1998| comments
audience: National Publication | last updated: 18 May 2011
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Summary

The IRS has ruled privately that a taxable corporation's conversion to a tax-exempt, nonprofit title-holding corporation, which is to be accomplished prior to the effective date of the proposed regulations under Code Section 337, would not cause gain or loss to be recognized under Code Sections 336 or 337.

Ltr. Rul. 9825013

PGDC Summary:

The IRS has ruled privately that a taxable corporation's conversion to a tax-exempt, nonprofit title-holding corporation, which is to be accomplished prior to the effective date of the proposed regulations under Code Section 337, would not cause gain or loss to be recognized under Code Sections 336 or 337. The proposed regulations to Section 337 were issued in January of 1997 and are to be effective for transfers (or binding obligations to transfer) made after the date that are thirty days after final regulations are published in the Federal Register. These proposed regulations provide that a conversion from taxable to tax-exempt status will generally be treated as a distribution to a tax-exempt entity for purposes of Section 337 and so would not qualify for nonrecognition treatment under that Section.

Facts:

The stock of the taxpayer, a taxable, for-profit parent corporation, is owned by a taxable trust which has Foundation A as the residuary beneficiary. The parent corporation files consolidated returns with its subsidiaries. The trust instrument specifies that a particular facility owned by one of the subsidiaries of the parent corporation is to be distributed to Foundation B. Foundation A and Foundation B are tax-exempt organizations under Code Section 501(c)(3).

In order to carry out the terms of the trust instrument, the parent corporation proposed the following steps: The subsidiary which owned the facility and certain other subsidiaries would liquidate into the parent corporation in transactions designed to qualify for nonrecognition treatment under Code Section 332. The parent corporation would attempt to sell or otherwise dispose of the subsidiaries not liquidating in the Section 332 transactions and nominal assets (not including the facility) received from the liquidating subsidiaries. The trust would distribute all the stock of the parent corporation to Foundation A. The parent corporation would convert from taxable status to a non-profit title holding corporation by amending its articles of incorporation prior to the effective date of proposed regulation section 1.337(d)-4. It is intended that the title holding company would be tax-exempt under Code Section 501(c)(2). Some years thereafter, the parent corporation would distribute all its assets other than the facility to Foundation A. Finally, Foundation A would then distribute the stock of the parent corporation to Foundation B.

The parent corporation represents that it will pay federal income tax on any gain that results from the dispositions of the non-liquidating subsidiaries and the nominal assets received from the liquidating subsidiaries, even if these dispositions occur after the conversion to non-profit status. HOLDING:

The conversion will not cause the parent corporation to recognize gain or loss under Code Section 336 or Section 337. The IRS did not rule on any other aspects of the proposed transactions.

Points to Ponder:

Can a taxpaying entity convert to tax-exempt status without incurrence of tax so long as such conversion occurs prior to the issuance of final regulations under Code Section 337?

Full Text:

Date: March 17, 1998

In Reference to: CC:DOM:CORP:4 PLR-120747-97

LEGEND:

Taxpayer = * * *
Sub 1 = * * *
Sub 2 = * * *
Business Subs = * * *
Other Subs = * * *
Trust = * * *
Foundation A = * * *
Foundation B = * * *
Business M = * * *
State X = * * *
Facility Y = * * *
Z = * * *

Dear * * *

This letter responds to your November 14, 1997 request for rulings on certain federal income tax consequences of a proposed transaction.

Summary of Facts

Taxpayer, a State X corporation, files a consolidated federal income tax return with its subsidiaries. Taxpayer wholly owns Sub 1, Sub 2, the Business Subs, and the Other Subs. Sub 1 owns Facility Y, a small amount of publicly traded stock, and certain nominal assets (the "Nominal Assets"). The Business Subs have conducted Business M, but this activity is now limited. Sub 2 and the Other Subs hold cash. Taxpayer's stock is held by Trust, whose residuary beneficiary is Foundation A. Under the terms of Trust, Facility Y must be contributed to Foundation B. Foundation A and Foundation B are exempt from federal income taxation under section 501(c)(3) of the Internal Revenue Code.

Proposed Transaction

To fulfill the terms of Trust, Taxpayer proposes the following transaction:

(i) Sub 1 and the Other Subs will liquidate into Taxpayer in transactions intended to qualify under section 332.

(ii) Taxpayer will attempt to sell or otherwise dispose of the Business Subs and the Nominal Assets.

(iii) Trust will distribute the stock of Taxpayer to Foundation A.

(iv) Before the effective date of final regulations governing certain transfers to a tax-exempt entity (now Proposed Regulation section 1.337(d)-4), Taxpayer will amend its articles of incorporation under State X law to convert from a taxable for-profit corporation to a nonprofit title-holding corporation intended to be tax-exempt under section 501(c)(2) (the "Conversion"). Under State X law, this change in the articles of incorporation does not constitute a dissolution of the corporation.

(v) Z years after the Conversion, Taxpayer will distribute its assets other than Facility Y to its shareholder, Foundation A.

(vi) Foundation A will contribute the stock of Taxpayer to Foundation B.

REPRESENTATIONS

Taxpayer represents that:

(a) Taxpayer will pay federal income tax on any gain resulting from the sale or other disposition of the Business Subs and the Nominal Assets even if the sales or other dispositions occur after the conversion of Taxpayer into a tax-exempt, nonprofit title-holding corporation.

(b) Trust is a taxable trust for federal income tax purposes.

(c) Taxpayer uses the accrual method of tax accounting.

RULING

Based solely on the information submitted and the representations made, we rule that the Conversion will not cause Taxpayer to recognize gain or loss under section 336 or section 337.

CAVEATS

We express no opinion on (i) whether Taxpayer will be a tax-exempt organization under section 501(c)(2) after the Conversion, (ii) the tax treatment of the distributions and contribution described above in steps (iii), (v), and (vi), or (iii) the tax treatment of the proposed transaction under other provisions of the Code or regulations (including the consolidated return regulations) or the tax treatment of any condition existing at the time of, or effect resulting from, the proposed transaction not specifically covered by the above ruling.

The ruling in this letter is based on the facts and representations submitted under penalties of perjury in support of the request for a ruling. Verification of that information may be required as part of the audit process.

Procedural Statements

This ruling letter is addressed only to the taxpayer who requested it. Section 6110(j)(3) provides that it may not be used or cited as precedent.

Each taxpayer involved in the proposed transaction should attach a copy of this letter to the taxpayer's federal income tax return for the taxable year in which that part of the transaction affecting the taxpayer is completed.

Under a power of attorney on file in this office, a copy of this letter is being sent to your authorized representative.

Sincerely,

Assistant Chief Counsel(Corporate)
By: Wayne T. Murray
Senior Technician Reviewer, Branch 4

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