Private Letter Ruling
201626002
Released June 24, 2016
Approved
IRS approves three discrete issues in planned business spin-off
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This page covers one taxpayer's ruling from 2016, which can't be cited as precedent. Ezel answers your situation under the current Code and IRS guidance, with citations.
Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.
About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.
View official IRS release (PDF)
Plain-English summary
A publicly traded company proposed separating one business division into a new controlled corporation after internal subsidiary liquidations and asset transfers. The IRS ruled that a component's revenue source would not prevent the new corporation from meeting the active-trade-or-business requirement of IRC § 355(b). Assuming the contribution and distribution otherwise qualified under §§ 368(a)(1)(D) and 355, contributing a newly formed limited liability company would not prevent two earlier subsidiary liquidations from qualifying under § 332. The IRS also ruled that an additional cash transfer planned for six to twelve months after the distribution would be treated as part of the reorganization plan and as exchanged for controlled-company stock. The letter addressed only these discrete issues and did not rule on the transaction's overall tax consequences.
Ruling snapshot
- Question: Do the identified revenue, internal-liquidation, and delayed-cash-transfer issues prevent the proposed spin-off structure from receiving the specified tax treatment?
- Outcome: Approved, subject to the stated qualification assumptions
- Key authorities: IRC §§ 332, 355(b), and 368(a)(1)(D)
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 201626002 Third Party Communication: None
Release Date: 6/24/2016 Date of Communication: Not Applicable
Index Number: 332.00-00, 355.03-00,
368.09-00 Person To Contact:
-------------------------, ID No. -----------------
---------------------- ----------------------------------------------------
---------------------------------------------------------- Telephone Number:
------------------------------------ ------------------
-------------------------------------------- Refer Reply To:
--------------------------------------- CC:CORP:B05
PLR-123055-15
Date:
December 29, 2015
Legend
Distributing = -----------------------------------
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Sub 1 = ----------------------
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Sub 2 = ----------------------------
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Sub 3 = --------------------
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Sub 4 = ------------------------------------------
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FSub 1 = ---------------------------
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FSub 2 = --------------------------------------------------------------
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PLR-123055-15 2
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FSub 3 = -----------------------
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DRE 1 = ---------------
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DRE 2 = ----------------------------------------------------------
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DRE 3 = ----------------------------------------------------------------
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FDRE 1 = -------------------------------------------------------
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Asset A = --------------------------------------------------------------------------
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Asset B = -----------------------------------------------
Asset C = ---------------------------------------------------------------
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Asset D = --------------------------------
Delayed = ------------------------------------------------------------------------
Transfer -------------------------------------------------------------------------
Agreement --------------------------------------------------------------
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PLR-123055-15 3
Individual A = ----------------
Individual B = ---------------------------
Business = -----------------------------------------------------------------------------
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Business A = ------------------------------------------------------------------------------
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Business B = --------------------------------------------------------------
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Component A = --------------------------------------------------------------------
of Business B -----------------------------------------------------------------
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Revenue = --------------------------------------------------------------------------------
Source ----------------------------------------------------------------------------------
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Specific = ------------------------------------------------------------------------
Services --------------------------------------------------------------------
Distribution = -----------------------------------------------------------------------------------
Agreement -----------------------------------------------------------------------------------
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Production = -------------------------------------------------------------------------------------
Services -------------------------------------------------------------------------------------
Agreement -------------------------------------------------------------------------------------
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Intellectual = --------------------------------------------------------------------------------
PLR-123055-15 4
Property A ---------------------------------------------------------------------------------
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Intellectual = ----------------------------------------------------------------------------------
Property B ----------------------------------------------------------------------------------
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Specified Event = --------------------------------------------------------------------------------
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State A = ------------
State B = ------------
Country A = ----------
Date A = --------------------
a = ------------------------
b = --
c = ------------------------------
d = ------------------------------
e = ------------------------------
f = --
g = --
h = --
i = ---
j = --
k = ---
Dear ------------------:
PLR-123055-15 5
This letter responds to your letter dated July 2, 2015, requesting rulings on certain
federal income tax consequences of the Proposed Transaction (defined below). The
information provided in that letter and in subsequent correspondence is summarized
below.
The rulings contained in this letter are based on 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 material submitted in support of
the request for rulings. Verification of the information, representations, and other data
may be required as part of the audit process.
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 §§ 332, 351, 355, 368, or 1036. The
rulings contained in this letter only address one or more discrete legal issues involved in
the transactions. This office expresses no opinion as to the overall tax consequences of
the transactions described in this letter or as to any issue not specifically addressed by
the rulings below.
SUMMARY OF FACTS
Distributing is a publicly traded corporation, the parent of a worldwide group of entities
(the “Distributing Worldwide Group”), and the common parent of an affiliated group of
corporations that join in filing a consolidated federal income tax return (the “Distributing
Consolidated Group”). Individual A directly and indirectly owns a% of the single class of
common stock of Distributing and directly participates in the management or operation
of Distributing. Distributing is aware of b institutional shareholders that, as of Date A,
beneficially held 5% or more of the stock of Distributing, but none of these shareholders
actively participate in the management or operation of Distributing.
Distributing directly owns all of the stock of Sub 1 and FSub 1, and all of the equity
interests in DRE 1, DRE 2, and DRE 3. Distributing directly and indirectly owns all of
the stock of Sub 2 and FSub 2. Sub 1 directly owns all of the stock in Sub 3 and Sub 4.
Sub 2 owns all of the equity interests in FDRE 1. Sub 3 directly owns Asset A and
Asset B. FSub 1 directly owns all of the stock of FSub 3 and Asset C. FSub 3 directly
owns Asset D. Distributing holds a note of FSub 1 with a principal amount of $c (the
“FSub 1 Note”).
The Distributing Worldwide Group is engaged in Business. Business has two divisions,
Business A and Business B. Distributing has submitted financial information that
indicates that Business A annually had gross receipts and operating expenses
representing the active conduct of a trade or business for each of the past five years,
and that Component A of Business B has annually had gross receipts and operating
expenses representing the active conduct of a trade or business for each of the past
PLR-123055-15 6
five years. For each year documented, Component A of Business B has generated
gross receipts from Revenue Source.
PROPOSED TRANSACTION
For what are represented as valid business purposes, Distributing and its affiliates
propose to undertake the following steps (collectively, the “Proposed Transaction”) in
the order set forth below:
(i) Sub 3 will convert to a State A limited liability company (“DRE 4”) under
State A law (the “Sub 3 Liquidation”).
(ii) Sub 1 will merge with and into Distributing under State B law, with Sub 1
ceasing to exist and Distributing surviving as the legal entity (the “Sub 1
Liquidation”).
(iii) Distributing will form Newco LLC, a State B limited liability company.
(iv) DRE 4 will transfer Asset B and related liabilities to Newco LLC.
(v) Distributing expects to contribute a portion of the FSub 1 Note to Newco LLC.
(vi) It is expected that, through a series of transactions, FSub 1 and FSub 3 will
restructure the ownership of Asset C and Asset D.
(vii) It is expected that Newco LLC will acquire from FSub 1 (or its successor), in
exchange for a portion of the FSub 1 Note, Asset C and Asset D (which may
take the form of the acquisition of interests in one or more disregarded
entities owning Asset C and Asset D).
(viii) Distributing will form Controlled (which may occur earlier in the sequence of
steps) and will contribute DRE 1, Newco LLC, and $d in cash to be used to
fund the operations of Business B solely in exchange for Controlled stock and
the assumption of liabilities associated with Business B (the “Contribution”).
(ix) Distributing will distribute all of its Controlled stock pro rata to its shareholders
(the “Distribution”).
(x) Within six to twelve months following the Distribution, Distributing will transfer
to Controlled (or an entity disregarded as separate from Controlled) an
additional $e in cash to be used to fund the operations of Business B (the
“Delayed Transfer”). The precise corporate law mechanism for accomplishing
the Delayed Transfer has not been definitively determined, but it is currently
expected that the Delayed Transfer will be effected by the Delayed Transfer
Agreement. The Delayed Transfer may be required at a date determined at
PLR-123055-15 7
the time of the Distribution or the timing may be determined based upon the
cash flow needs of Controlled in the six to twelve months following the
Distribution.
It is possible that, in connection with the Distribution, Controlled will issue shares of its
stock to third parties in exchange for cash in a private placement. Such private
placement will be structured in such a manner to ensure that Distributing continues to
own, immediately prior to the Distribution, at least 80 percent of the single class of
Controlled stock outstanding.
In connection with the Proposed Transaction, Distributing and Controlled will enter into
certain agreements relating to post-Distribution matters with respect to the Distributing
Worldwide Group and the worldwide group of entities of which Controlled will be the
common parent (the “Controlled Worldwide Group”), including a separation agreement,
a tax matters agreement relating to tax liabilities related to business activity prior to the
Distribution or resulting from the Distribution, an employee matters agreement, a
Transition Services Agreement (described below), and Commercial Agreements
(collectively, the “Continuing Agreements”).
The Transition Services Agreement will provide for certain transitional and
administrative support services to be provided by the Distributing Worldwide Group to
the Controlled Worldwide Group for a transitional period while the Controlled Worldwide
Group establishes its own administrative support and corporate service arrangements.
Controlled expects to pay Distributing a fee for such services on a cost or cost-plus
basis. The Transition Services Agreement will have a term of f years, but Distributing
and Controlled may agree to extend the term of the agreement due to unforeseen
circumstances, in which case it will be extended on arm’s length terms. The services
are expected to include information technology, legal, regulatory, finance and
accounting, human resources, payroll, benefits, treasury, and other administrative
support services, and will also include Specific Services.
The Commercial Agreements will include a Production Services Agreement, an
intellectual property agreement, and potentially a Distribution Agreement. The
Production Services Agreement and the Distribution Agreement (if applicable) will be
based on arm’s length terms, including market-based pricing, with terms similar to those
entered into in other agreements with third parties. The intellectual property agreement
will provide for a perpetual royalty free license to the Controlled Worldwide Group of
Intellectual Property A owned by the Distributing Worldwide Group, and the right to
sublicense Intellectual Property A, with certain limitations. The Distributing Worldwide
Group will also grant the Controlled Worldwide Group a royalty-free license to use
Intellectual Property B until Specified Event occurs.
After the Distribution, Distributing and Controlled will have certain persons having a role
in both corporations. Individual A is the executive chairman of Distributing’s board of
directors and will continue in that role after the Distribution. Individual A will not be an
PLR-123055-15 8
executive or other employee of Controlled after the Distribution, but is expected to be
the non-executive chairman of Controlled’s board of directors. Individual B, who holds
less than g% of Distributing’s common stock, is the chief executive officer of Distributing
and a director of Distributing. It is expected that Individual B will not be an officer or
employee of Controlled after the Distribution, but will be a director of Controlled.
Individual B’s initial term on the board of directors will be h years, at which time the
board may nominate Individual B for an additional term. Distributing currently has i
directors, and it is expected that Controlled will have j to k directors. Distributing and
Controlled may have an additional overlapping director besides Individual A and
Individual B after the Distribution. In all events, the total number of overlapping
directors will constitute a minority of each board after the Distribution, and none of the
overlapping directors besides Individual A or Individual B will be an officer or employee
of Distributing or Controlled.
REPRESENTATIONS
(a) In applying Section 355(b)(2)(A) regarding the active conduct of a trade or
business, Distributing will treat all members of its separate affiliated group, as
defined in Section 355(b)(3)(B) (the “Distributing SAG”), as one corporation.
(b) The five years of financial information submitted on behalf of Business
conducted by the Distributing SAG are representative of its present
operations, and with regard to such operations, there have been no
substantial changes since the date of the last financial statements submitted.
(c) In applying Section 355(b)(2)(A) regarding the active conduct of a trade or
business, Controlled will treat all members of its separate affiliated group, as
defined in Section 355(b)(3)(B) (the “Controlled SAG”), as one corporation.
(d) The five years of financial information submitted on behalf of Component A of
Business B conducted by the Distributing SAG before the Distribution (and to
be operated by the Controlled SAG after the Distribution) are representative
of its present operations, and with regard to such operations, there have been
no substantial changes since the date of the last financial statements
submitted.
(e) Other than with respect to the acquisition of Sub 1 and FSub 1 and their
subsidiaries and certain asset acquisitions which were not material to the
overall scope and nature of Business, the Distributing SAG neither acquired
Business during the five-year period ending on the date of the Distribution in a
transaction in which gain or loss was recognized (or treated as recognized) in
whole or in part.
(f) Other than with respect to the acquisition of Sub 1 and FSub 1, the
Distributing SAG neither acquired Business B nor acquired control of an entity
PLR-123055-15 9
conducting Business B during the five-year period ending on the date of the
Distribution in a transaction in which gain or loss was recognized (or treated
as recognized) in whole or in part.
(g) Following the Distribution, the Controlled SAG will continue the active conduct
of Component A of Business B independently and with their separate
employees (except as provided pursuant to the Continuing Agreements).
(h) Except for Distributing’s transfer of Newco LLC to Controlled in the
Contribution, neither the Sub 3 Liquidation or the Sub 1 Liquidation will be
preceded or followed by the reincorporation in, or transfer or sale to, a
recipient corporation (“Recipient”) of any of the businesses or assets of Sub 3
or Sub 1, if persons holding, directly or indirectly, more than 20 percent of the
value of the stock of Sub 3 or Sub 1 also hold, directly or indirectly, more than
20 percent in the value of the stock of Recipient. For purposes of this
representation, ownership will be determined by application of the
constructive ownership rules of Section 318(a), as modified by Section
304(c)(3).
RULINGS
Based solely on the information submitted, we rule as follows:
(1) The annual revenues earned by Component A of Business B from Revenue
Source will not prevent Controlled from satisfying the active trade or business
requirement of Section 355(b).
(2) Provided that the Contribution and the Distribution qualify under Sections
368(a)(1)(D) and 355, respectively, Distributing’s contribution of Newco LLC
to Controlled will not preclude either the Sub 3 Liquidation or the Sub 1
Liquidation from qualifying as tax-free liquidation under Section 332.
(3) Provided that the Contribution otherwise qualifies under Section 368(a)(1)(D),
the Delayed Transfer will be treated as a transfer of cash for Controlled stock
that occurs pursuant to the plan of reorganization that includes the
Contribution and Distribution.
CAVEATS
Except as expressly provided herein, no opinion is expressed or implied concerning the
tax treatment of any aspect of the Proposed Transaction under any provision of the
Code and regulations, or the tax treatment of any condition existing at the time of, or
effects resulting from the Proposed Transaction that is not specifically covered by the
above rulings.
PLR-123055-15 10
PROCEDURAL STATEMENTS
This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.
In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.
A copy of this 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 the
letter ruling.
Sincerely,
_Isaac W. Zimbalist_________
Isaac W. Zimbalist
Senior Technician Reviewer
(Corporate)
cc:
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