The IRS Office of Chief Counsel ruled in a private letter ruling (PLR 201748007
) that stock repurchases by a corporation will be treated as being made from all public shareholders on a pro rata basis to determine their effect for the purposes of Section 355(e).
In the PLR, a corporation (Distributing) had a single class of stock which was publicly traded. Distributing had proposed in a prior PLR to distribute to its shareholders the stock of certain subsidiary corporations in distributions that were intended to qualify under Section 355.
Since the date that the distributions occurred, certain Distributing shareholders had disposed of some Distributing stock. In addition, prior to and subsequent to the distributions, Distributing had publicly announced its intention to engage in a stock repurchase program to return capital to its public shareholders. Such share repurchases would be made through (i) open market purchases; (ii) one or more repurchase programs; (iii) one or more tender offers open to all public holders of Distributing stock; or (iv) a combination of the above thereof.
Section 355 provides that, if certain requirements are met, a corporation may distribute stock, or stock and securities, of a controlled corporation tax-free to its shareholders and security holders. Section 355(a) provides for tax-free treatment to the distributee and Section 355(c)(1) provides for no gain or loss to the distributing corporation. However, Section 355(c)(2) provides that gain is recognized to the distributing corporation if appreciated property is distributed that is not “qualified property.” Qualified property means the stock or securities of the controlled corporation.
Section 355(e)(1) provides that stock or securities of the controlled corporation are not treated as qualified property under Section 355(c) if distributed as part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, stock representing 50% or more of either the distributing corporation or the controlled corporation, a 50% acquisition. Section 355(e)(3) provides certain acquisitions that are not taken into account for this purpose.
Generally, if a 50% acquisition occurs within the four-year period beginning two years before the distribution, such an acquisition is presumed to be part of a plan unless established otherwise.
The primary issue in PLR 201748007 was how the share repurchases should be treated for the testing for a 50% acquisition if treated as part of a plan. The IRS ruled that the share repurchases should be treated as being made from all public shareholders of Distributing on a pro rata basis.
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