Debt purchase does not prevent tax-free securities exchange

Plain-English summary

A public company planned to separate business assets into a newly formed controlled corporation and distribute that corporation's stock to shareholders. As part of the transaction, a bank would first buy existing debt from current holders and later exchange those notes for debt securities issued by the controlled corporation. The taxpayer represented that the existing notes were not issued in anticipation of the separation and that the contribution and distributions would otherwise qualify under sections 355, 361, and 368. Addressing only this discrete issue, the IRS ruled that the bank's purchase of the existing debt would not prevent the later securities exchange from qualifying under section 361(c)(3).

Ruling snapshot

• Question: Would the bank's purchase of existing distributing-company debt prevent the later debt-for-controlled-securities exchange from qualifying under IRC § 361(c)(3)?
• Outcome: Approved on the stated representations.
• Key authorities: IRC §§ 355, 361(c)(3), and 368(a)(1)(D)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201613008                                              Third Party Communication: None
Release Date: 3/25/2016                                        Date of Communication: Not Applicable
Index Numbers: 368.04-00, 355.01-00,
361.00-00                                                      Person To Contact:
--------------------------------                               ----------------------------,
---------------------------------------------------------      ID No. ------------------
--------------------------------------------                   Telephone Number:
-----------------------------------                            ----------------------
---------------------------                                    Refer Reply To:
                                                               CC:CORP:B02
                                                               PLR-125508-15
                                                               Date:
                                                               December 21, 2015



Parent                                                =         -----------------------------------------------
-----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------

Distributing                                          =         -----------------------------------------------------
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----------------------------------------------------------------------------------------

Subsidiary                                            =         ------------------------------------------
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----------------------------------------------------------------------------------------

Controlled                                            =         ----------------------------------------
-----------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------

LLC 1                                                 =         -----------------------------------------------------
                                                               ---------
----------------------------------------------------------------------------------------------------------------
         -------------------------------------------------------------------------------

LLC 2                                                 =         ----------------------------------------------
----------------------------------------------------------------------------------------

Intermediate LLC                                      =         --------------------------------------
----------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------

Bank                                                  =        ------------------------

PLR-125508-15           2


Exchange            =       -------------------------------------

Business A          =       ------------------------------------------------------
                            ------------------------------------------------------
                            ------------------------------------------------------
                            ---------------

Business B          =       ------------------------------------------------------
                            ------------------------------------------------------
                            ---------------

Business C          =       ------------------------------------------------------
                            ------------------------------------------------------
                            ------------------------------------------------------
                            ------------------------------------------------------
                            ------------------------------

Year 1              =       -------

Date 2              =       ---------------------------

State A             =       --------------

Distributing Debt   =       ------------------------------------------------------
                            ------------------------------------------------------
                            ------------------------------------------------------
                            ------------------------------------------------------
                            ------------------------------------------------------
                            ------------------------------------------------------
                            ------------------------------------------------------
                            ------------------------------------------------------
                            ------------------------------------------------------
                            ------------------------------------------------------
                            ------------------------------------------------------
                            --------------------------------------

$a                  =       -----------------

$b                  =       -----------------

$c                  =       ---------------------

PLR-125508-15                                 3


Dear --------------------:

      We respond to a letter dated July 28, 2015, submitted by your authorized
representatives, requesting a ruling on certain federal income tax consequences of a
proposed transaction, as defined below (the Proposed Transactions). The information
submitted in that letter is summarized below.

        This letter is issued pursuant to section 6.03 of Rev. Proc. 2015-1, 2015-1 I.R.B.
1, regarding one or more significant issues under sections 355, 361, and 368. The
ruling contained in this letter only addresses one discrete significant legal issue involved
in the Proposed Transactions. This Office expresses no opinion as to the overall tax
consequences of the Proposed Transactions or as to any issue not specifically
addressed by the ruling set forth below.

      The ruling contained in this letter is based on the facts and representations
submitted by the taxpayer and accompanied by a penalties-of-perjury statement
executed by an appropriate party. This Office has not verified any of the materials
submitted in support of the request for a ruling. Verification of the information,
representations, and other data may be required as part of the audit process.

                                   Summary of Facts

         Parent is a publicly traded State A corporation and the common parent of an
affiliated group of domestic corporations that join in filing a consolidated U.S. federal
income tax return (the Distributing Group). The Distributing Group maintains its books
on a calendar year basis, and its members use the accrual method of accounting.
Parent’s stock trades on the Exchange.

      Distributing is a wholly owned subsidiary of Parent and is the issuer of all of the
external debt of the Distributing Group. As of Date 2, Distributing had outstanding long
term debt of $c (the Distributing Debt).

        The Distributing Group operates three distinct business units: (i) Business A,
(ii) Business B, and (iii) Business C. The three business units operate through
numerous subsidiaries, joint ventures, and entities disregarded as separate from their
owners. Each business unit has its own executive management team that reports to the
senior management of Parent.

      Distributing operates Business A through direct and indirect wholly owned
subsidiaries and through joint ventures with unaffiliated management companies.
Business A provides a broad range of services to the communities in which it is located.

      Business A began operation in Year 1 and has developed over the years through
acquisitions. As a result of this growth, Business A now has two strategically separate

PLR-125508-15                                4

groupings: those that are compatible with the Business A group (the Retained Business
A) and those that are not compatible (the Distributed Business A).

       Distributing operates Business B through LLC 1, a direct subsidiary of
Distributing, and various other entities. LLC 1 is treated as a disregarded entity.

      Distributing operates Business C through LLC 2, a disregarded entity owned by
Subsidiary, an indirect wholly owned subsidiary of Distributing.

                               The Proposed Transactions

       Distributing represents that it has made the strategic decision to separate,
through a series of internal reorganizing transactions (the Internal Restructuring), the
assets used in the Distributed Business A and in Business C (the Distributed Assets)
from the assets used in Retained Business A and Business B (the Retained Assets).

       1. The Internal Restructuring

        Through the Internal Restructuring, the Distributed Assets will be transferred
between and among the Distributing Group entities in a manner that places the
Distributed Assets in or directly beneath Distributing. These transfers will take the form
of taxable and tax-free distributions and acquisitions of stock and assets and
distributions of stock and assets that are disregarded for federal income tax purposes.

       2. The Intermediate Distribution (Following the Internal Restructuring)

       Step 1: At least 14 days before the External Distribution, as defined below, Bank
will acquire for its own account $b of the existing Distributing indebtedness (the Existing
Notes) from existing Distributing debt holders in exchange for approximately $b in cash
(the Distributing Debt Purchase).

       Step 2: At least five days after the Distributing Debt Purchase, Bank will enter
into an agreement with Distributing to exchange the Existing Notes (with a value of
approximately $b) for approximately $b of Controlled debt securities (the Controlled
Securities) pursuant to the Controlled Securities Exchange Agreement.

       Step 3: Controlled, a newly formed State A corporation wholly owned by
Distributing (through Intermediate LLC, a limited liability company treated as a
disregarded entity of Distributing), will borrow approximately $a, under commercially
standard terms, from a third-party lender (the Cash Proceeds). The closing of the
borrowing will occur immediately before and on the same date as the Intermediate
Contribution (see step 4 below), the Intermediate Distribution (see step 5 below), and
the External Distribution (see below).

     Step 4: At least nine days after entering into the Controlled Securities Exchange
Agreement (and at least 14 days after the Distributing Debt Purchase), (i) Distributing

PLR-125508-15                                 5

will contribute the Distributed Assets to Intermediate LLC and Intermediate LLC will
assume the related liabilities, (ii) Intermediate LLC will contribute the Distributed Assets
to Controlled and Controlled will assume the related liabilities, and (iii) Controlled will
distribute the Cash Proceeds and the Controlled Securities to Intermediate LLC (steps
(i) through (iii) together referred to as the Intermediate Contribution). Following the
Intermediate Contribution, (iv) Intermediate LLC will distribute all of the Controlled stock
to Distributing and (v) Intermediate LLC will merge with and into Distributing, with
Distributing surviving (the Merger).

       Step 5: Immediately after the Intermediate Contribution and on the same date,
Distributing will distribute the Controlled stock to Parent (the Intermediate Distribution).

      Step 6: Simultaneously with the Intermediate Distribution, Distributing will use
the Cash Proceeds to repay Distributing Debt other than the Existing Notes (the Cash
Payment).

        Step 7: Pursuant to the Controlled Securities Exchange Agreement, Distributing
will transfer the Controlled Securities (with a value of $b) to Bank in exchange for the
Existing Notes (with a value of $b) (the Securities Exchange). The Securities Exchange
is expected to occur simultaneously with the Intermediate Distribution and the Cash
Payment and on the same day as the External Distribution.

                                    The External Distribution

       Following the Intermediate Distribution, Parent will distribute the stock of
Controlled pro rata to its shareholders (the External Distribution).

                                         Representations

       Parent makes the following representations:

       (a) Together with the Intermediate Distribution, the Intermediate Contribution will
       qualify as a reorganization under section 368(a)(1)(D).

       (b) The Intermediate Distribution will qualify under section 355.

       (c) The Controlled Securities will constitute securities for purposes of the
       application of section 361(a).

       (d) The debt represented by the Existing Notes to be exchanged for Controlled
       Securities in the Securities Exchange was not incurred in anticipation of the
       Proposed Transactions.

PLR-125508-15                                 6

       (e) The Cash Proceeds will not exceed Distributing’s aggregate tax basis in the
       assets transferred to Controlled in the Intermediate Contribution, reduced by the
       amount of any liabilities assumed by Controlled (within the meaning of section
       357(d)).

                                          Ruling

      Based solely on the information submitted and the representations set forth
above, we rule that the Distributing Debt Purchase will not prevent the Securities
Exchange from qualifying under section 361(c)(3).

                                          Caveats

      We express no opinion about the federal income tax consequences of the
Proposed Transactions under other provisions of the Code and regulations or the tax
treatment of any conditions existing at the time of, or effects resulting from, the
Proposed Transactions that are not specifically covered by the above ruling.

                                    Procedural Matters

      This ruling letter is directed only to the taxpayer who requested it. Section
6110(k)(3) provides that it may not be used or cited as precedent.

       A copy of this ruling letter must be attached to any income tax return to which it is
relevant. Alternatively, taxpayers filing their returns electronically may satisfy this
requirement by attaching a statement to their return that provides the date and control
number of this ruling letter.

        Under a power of attorney on file in this Office, we are sending a copy of this
ruling letter to your authorized representatives.


                                          Sincerely,


                                          ___________________________________
                                          Filiz A. Serbes
                                          Chief, Branch 3
                                          Office of Associate Chief Counsel (Corporate)