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IRS rules on determining voting power related to Section 355

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The IRS has ruled in PLR 2015-05-007 that the voting power of stock within the meaning of Section 355(d) was determined by reference to the ability to elect members of the corporation’s board of directors.

The private letter ruling addressed a corporation (Distributing) with two classes of common stock issued and outstanding, Class A and Class B. The Class A stock was high-vote stock (regarding the election of directors) and was convertible into Class B stock. The Class B was low-vote stock and was entitled to an annual dividend preference over the Class A stock. If the outstanding Class A stock fell below a certain amount, every class of the Distributing stock would automatically be entitled to the same voting rights (stock unification).

Distributing proposed to distribute all of the issued and outstanding stock of its wholly owned subsidiary (Controlled) to Distributing’s shareholders (the distribution). Before the distribution, certain Class A shareholders entered into an agreement to convert their Class A stock into Class B stock. The conversion would result in a stock unification, which could be viewed as resulting in a shift of more than 50% of the voting power of Distributing.

Section 355(c) provides that no gain or loss is recognized to a corporation on a distribution of “qualified property” for which Section 355 applies. Qualified property is defined as stock or securities in the controlled corporation under Section 355(a)(1)(A)(ii).  

Section 355(e) provides that stock or securities of Controlled is not qualified property if it is part of a plan for one or more individuals to acquire at least 50% of the total combined voting power of the stock (within the meaning of Section 355(d)(4)) of either Distributing or Controlled.

The IRS first ruled that “voting power” for the purposes of Section 355(d)(4) was measured by reference to the relative ability to elect members of Distributing’s board of directors under Rev. Rul. 69-126.

The IRS also ruled that the stock unification may be disregarded for the purposes of testing whether there was an acquisition of at least 50% of the voting power of the Distributing stock as a result of the stock unification under Section 355(e)(2)(A)(ii).

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Andy Cordonnier
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andy.cordonnier@us.gt.com

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