Acquisition of partnership interest constitutes an expansion of distributing corporation's business.

• Author: Chang, Anne

In Letter Ruling 201528016, the IRS ruled that a distributing corporation's acquisition of an interest in a partnership was not an acquisition of a new or different business. It was an expansion of the distributing corporations business under Regs. Sec. 1.355-3(b)(3)(ii).

Parent is the common parent of an affiliated group of corporations that file a consolidated federal income tax return (the Parent Group). Parent owns all of the membership interests in Disregarded Entity, a limited liability company (LLC) that is disregarded as separate from Parent for federal income tax purposes. Disregarded Entity owns all of the stock of Distributing 2, which owns all of the stock of Distributing 1. Distributing 1 and Distributing 2 are members of the Parent Group.

Distributing 1 owns a "significant" economic interest and voting interest (subject to special majority provisions relating to certain significant actions) in Partnership, an LLC that is treated as a partnership for federal income tax purposes. Distributing 1 also owns several subsidiaries (the Distributing 1 Subsidiaries), all of which are members of the Parent Group. Distributing 1, directly and through the Distributing 1 Subsidiaries, has been engaged in the active conduct of Business 1 for more than five years.

On date 1, Partner A and Partner B (the Founders) formed Partnership and contributed to it the assets used in the conduct of Segment A (a segment of Business 1) since year 1 in exchange for all of the membership interests (then composed of Classes A-1,A-2, and B) in Partnership.

On date 2, the Founders sold all of their Class B membership interests in Partnership to Distributing 1 in a taxable transaction. At the time, Class B membership interests represented a significant economic interest and voting interest in Partnership.

The management of Partnership is vested exclusively in Partnership's Board of Managers (the Board). The Founders have been delegated certain responsibilities with respect to the conduct of Segment A, subject to the general oversight of the Board. Notwithstanding the delegation, the Board generally has the authority to make management decisions and control the day-to-day conduct of Segment A.

To enable the long-term growth and expansion of Segment A as an independent business, the Parent Group intends to raise capital through an initial public offering (IPO) of stock of a newly formed corporation that will be directly engaged in Segment A. To facilitate this...