PLR Determines Tax Consequences of Corporate TransactionPLR Determines Tax Consequences of Corporate Transaction
Indirect transfers weren’t gifts because they were made in the ordinary course of business.
In Private Letter Ruling 202406001 (Feb. 9, 2024), the taxpayer sought a determination of the gift tax consequences of a capital reorganization. An executive had previously formed several trusts and GRATs that owned shares of Stock A and Stock B in Company. A limited liability company was formed for a certain business purpose (not described in the PLR). Company and a disregarded entity wholly owned the LLC. Company and its Board approved a share repurchase program whereby executives and the trusts would contribute shares of Stock A and B to Company, which would then retire those shares and issue new shares of Stock C to the LLC. As part of the plan, the executive and the trusts planned to sign a contribution agreement under which they would contribute a proportionate number of shares back to Company. Then, the LLC would use cash derived from Stock C for a business purpose.
A transfer of property by one shareholder of a company to a corporation is a gift to the other shareholders unless it’s made in the ordinary course of business, meaning it’s bona fide, at arm’s length and free from donative intent. In that case, the transfer is considered to be made for adequate and full consideration in money or money’s worth.
The IRS held that the agreement implemented transfers that met these requirements. First, the whole structure of the agreement was for a business purpose. Second, the executive and trusts acted in their own self-interest, and the non-contributing shareholders weren’t related to the executive or the trusts. So, the indirect transfers resulting from the share contributions increased the value of the non-contributing shareholders but weren’t gifts because they were made in the ordinary course of business.
As between the executive and the trusts, the transfers the executive made increased the value of the shares held by trusts, but the same was true for the transfers made by the trusts to the executive. Because they contributed an equal proportion of their shares, the value contributed by each will equal the value each received. Therefore, those indirect transfers weren’t gifts either.
Separately, the IRS held that the exchange of shares didn’t interfere with a GRAT qualifying under IRC Section 2702. The question was whether the contribution of shares to Company would be characterized as a transfer to the executive annuitant, which would violate the GRAT. The GRAT correctly prohibits any distributions to the annuitant other than the qualified annuity interest. The contribution of the shares to Company resulted in an indirect transfer from the GRAT to the executive (as the annuitant) and an indirect transfer to the non-contributing shareholders (as the remaindermen). The IRS held that those transfers were really a reinvestment of GRAT assets, not an addition to the GRAT or a specific distribution to the annuitant executive.
