QSP via Busted 351 IPO Explained
S is the parent of a group of corporations engaged in various businesses. Prior to January 1 of Year 1, S decides to discontinue one line of business. To do so, S forms a new corporation, New Co, with a nominal amount of cash. Before that date, S and an underwriter (U) had entered into a binding agreement under which U would purchase 60 shares of Newco common stock from S and then sell those shares to the public in an Initial Public Offering (IPO).
On January 1 of Year 1, S transfers all of the stock of the subsidiary conducting the unwanted business (T) to New Co in exchange for 100 shares of Newco common stock and a Newco promissory note. On January 6 of Year 1, the IPO closes: U buys 60 shares of Newco stock from S for cash and resells those shares to the public for cash, leaving S with 40% of New Co and the public with 60%.
New Co’s acquisition of the T stock is one of a series of transactions undertaken pursuant to one integrated plan, and the series ends with the closing of the IPO. Immediately after the last transaction, S owns only 40 percent of New Co, which does not give rise to a relationship described in section 338(h)(3)(A)(iii). Accordingly, S and New Co are not related for purposes of section 338(h)(3)(A)(iii).
Because the plan causes the contribution to fail section 351, New Co’s basis in the T stock is not determined by reference to S’s basis, and the transaction is not an exchange to which section 351, 354, 355, or 356 applies. New Co’s acquisition of the T stock is therefore a purchase within the meaning of section 338(h)(3), and can count toward a qualified stock purchase of T.
