IRS approves discrete active-business and split-off issues
Apply this to your situation
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.
Plain-English summary
A public company proposed a multistep separation involving transfers of business assets and stock to a new controlled corporation, followed by exchanges and possible cleanup dispositions of that corporation's shares. The IRS ruled that the operating business's relative value would not prevent it from satisfying the active-trade-or-business requirement for the relevant distributions. Temporary retention of remaining controlled-company shares pending later disposition would not be treated as part of a principal tax-avoidance plan. Later shareholder exchanges, debt exchanges, sales, or a cleanup spin-off could be treated as part of the same plan and receive the same nonrecognition treatment as the initial exchange, assuming the initial exchange otherwise qualified.
Ruling snapshot
- Question: Do the identified active-business, retained-share, and later-disposition issues prevent nonrecognition treatment for the proposed split-off?
- Outcome: Approved on all three discrete issues
- Key authorities: IRC §§ 355 and 361
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 201634010 Third Party Communication: None
Release Date: 8/19/2016 Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-01,
355.03-00, 361.00-00 Person To Contact:
-----------------, ID No. -----------------
------------------------ Telephone Number:
------------------------------------------------------- -------------------
----------------------------------------------------- Refer Reply To:
--------------------------------- CC:CORP:2
----------------------- PLR-120932-15
---------------------------------- Date:
March 01, 2016
Legend
Distributing 3 = -----------------------------------------------------
Distributing 2 = -------------------------
Distributing 1 = -------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
--------------------------------------------
Corp = ---------------------
LLC = ------------------------
------------------------------------------------------------------------
-----------------------------------------------------------------
PRS = ----------------------
PLR-120932-15 2
DRE = ----------------------------------------
SplitCo = ---------------------------------
---------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------
Business = ------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
----------------
Preferred Stock = ------------------------------------------------------------------------
------------------
Asset Type 1 = ----------------------------------
Asset Type 2 = --------------------------
Provision 1 = ------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
PLR-120932-15 3
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
--------------------------------------------------------------------- --
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
-----------------------------
Provision 2 = ------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
-----------------------------------------------
Own = -----------------------
Regulation = ------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
-------
Agreement = ------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
--------------------------------
Regulatory Constraint = ------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
----------------------------------------------------------
Advisor = -------------------------------------
Event = ------------------------------------------------------------------------
------------------------------------------------------------------------
PLR-120932-15 4
------------------------------------------------------------------------
-----------------------------------------------------------------------
Governing Document = ------------------------------------------------------------------------
-------------------------------------------------------------- ---------
------------------------------------------------------------------------
----------------------------
a = ---
b = ------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
-------------------------------
c = ------
d = ------
e = --
f = ------
g = ---
h = ---
i = ------
m = ------
k = ---
Date 1 = ---------------------
Date 2 = ---------------------------
Date 3 = -----------------------
Date 4 = ------------------------------------------------------------------------
--------------
Dear ----------------:
PLR-120932-15 5
This letter responds to your letter dated June 16, 2015, submitted by your
authorized representatives, requesting rulings under sections 355 and 361 of the
Internal Revenue Code (Code) and related regulations with respect to the Proposed
Transaction (described below). The information provided in that request and in later
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. 2016-1, 2016-1 I.R.B.
1, regarding one or more significant issues under sections 332, 351, 355, 368, or 1036.
The rulings contained in this letter only address one or more discrete legal issues
involved in the transaction. 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 3 is a widely held, publicly traded corporation and the common
parent of an affiliated group of corporations that files a consolidated U.S. federal income
tax return (the Distributing 3 Group). Distributing 3 owns all the stock of Distributing 2, a
corporation. Distributing 2 owns all the common stock of Distributing 1, a corporation.
Distributing 3 owns all the Preferred Stock of Distributing 1, the value of which is less
than a percent of the aggregate value of Distributing 1’s outstanding stock. As of Date
1, Distributing 2 owned b (more than 20) percent of the stock of Corp, a corporation.
Distributing 1 owns (i) the sole interest in DRE, a limited liability company that is
disregarded for U.S. federal income tax purposes; (ii) a c-percent interest in LLC, a
limited liability company that is a partnership for U.S. federal income tax purposes; and
(iii) a d-percent limited partnership interest in PRS, a partnership. LLC owns an e-
percent general partnership interest in PRS. The remaining interests in LLC and PRS
are held by entities that are unrelated to any member of the Distributing 3 Group.
Distributing 1, directly and through DRE, will have been engaged in the active
conduct of the Business throughout the five-year period ending on the date of the Initial
Exchange (defined below). As of Date 2, with respect to the Business, and Date 3, with
respect to Distributing 2’s stock of Corp, the aggregate gross fair market value of the
Business was approximately m (10 or more) percent of the fair market value of the stock
of Corp owned by Distributing 2.
PLR-120932-15 6
Corp, Distributing 3, and Distributing 2 have entered into the Agreement, which
obligates Distributing 2 to transfer to Corp a certain number of shares of Corp stock to
partially fund awards to officers and employees as part of a long-term stock incentive
plan that permits Corp to, among other things, attract and retain employees of
outstanding ability.
Because of recently imposed Regulatory Constraint, which restricts Distributing
3’s ability to acquire assets related to its core businesses, such as Asset Type 1 and
Asset Type 2, Distributing 3 proposes to carry out the Proposed Transaction, described
below.
Proposed Transaction
The Proposed Transaction will include the following steps (each, a Step). To the
extent the order of the Steps is neither relevant to any requested ruling nor otherwise
explicitly stated as between specific Steps or a series of Steps, Steps may occur in an
order different from the order set forth below:
(1) Distributing 1 will form a new corporation (HoldCo).
(2) Distributing 1 will contribute to HoldCo (i) its c-percent interest in LLC and
(ii) its d-percent limited partnership interest in PRS, in actual or
constructive exchange for all the stock of HoldCo.
(3) Distributing 1 will distribute all the stock of HoldCo to Distributing 2.
(4) Distributing 2 will form a new entity that will be a corporation for U.S.
federal income tax purposes (SplitCo). SplitCo will incorporate into its
Governing Document Provision 1 and Provision 2.
(5) Distributing 2 will contribute to SplitCo (i) its stock of Corp and (ii) all the
stock of HoldCo, in actual or constructive exchange for all the stock of
SplitCo. SplitCo will agree to satisfy Distributing 2’s obligations under the
Agreement.
(6) Distributing 1 (directly and through DRE) will sell to SplitCo all the assets
of the Business (or the sole interest in a limited liability company to be
formed that will be disregarded for U.S. federal income tax purposes that
will own all such assets) and all personnel of the Business in exchange for
an amount of cash equal to the fair market value of the Business, which
will be funded through a borrowing from one or more third-party lenders.
(7) Distributing 2 will distribute all the stock of SplitCo to Distributing 3 (the
SplitCo Distribution).
PLR-120932-15 7
(8) Distributing 3 will distribute no less than f (more than 80) percent of the
stock of SplitCo to the Distributing 3 shareholders through an initial
exchange of shares of SplitCo for shares of Distributing 3 (the Initial
Exchange).
(9) In the event Distributing 3 does not distribute all the stock of SplitCo in the
Initial Exchange, Distributing 3 will dispose of any remaining shares of
SplitCo stock (Remaining SplitCo Shares) during the g months following
the Initial Exchange as follows:
(i) Distributing 3 would expect to undertake one or more offers to
exchange all the Remaining SplitCo Shares for shares of
Distributing 3 (each, a Subsequent Exchange, and collectively with
the Initial Exchange, the External Split-Off).
(ii) If the External Split-Off is undersubscribed, any Remaining SplitCo
Shares that are not disposed of will be (a) transferred to one or
more third-party creditors of Distributing 3 (each, a Stock-for-Debt
Exchange), (b) disposed of through one or more sales or
exchanges, and/or (c) distributed to Distributing 3’s shareholders (a
Clean-Up Spin-Off) (Steps 8 and 9, collectively, the Separation).
Representations
Distributing 3 makes the following representations with regard to the Proposed
Transaction:
(a) Distributing 3 expects to distribute all the stock of SplitCo to the
Distributing 3 shareholders in the Initial Exchange.
(b) Based in part upon the shareholder composition of Distributing 3,
substantial relevant market data for tender offers comparable to the
External Split-Off, and the existence of a minimum condition for the tender
offer that Distributing 3 will distribute no less than f percent of the stock of
SplitCo to the Distributing 3 shareholders in the Initial Exchange,
Distributing 3 believes and expects that, in accordance with the written
opinion of Advisor, at least k percent of the stock of SplitCo will be
represented by the sum of the shares: (i) distributed in the External Split-
Off to Distributing 3 shareholders who, as a result of their tenders in the
External Split-Off, would be entitled to sale or exchange treatment if
section 355 were not applicable to the External Split-Off; (ii) distributed in
the Separation to Distributing 3 shareholders that are exempt from
taxation under the Code; (iii) transferred in a Stock-for-Debt Exchange;
and (iv) sold by Distributing 3 in a taxable transaction.
PLR-120932-15 8
(c) As long as Distributing 3 owns any Remaining SplitCo Shares, none of
Distributing 3's (or its affiliates’) directors or officers will serve as directors
or officers of SplitCo (or its affiliates).
(d) Distributing 3 will vote any Remaining SplitCo Shares in proportion to the
votes cast by SplitCo’s other shareholders.
(e) Until Date 4, Corp will not Own (as such term is used in the Regulation) h
percent or more of SplitCo’s aggregate outstanding stock.
(f) Until Date 4, SplitCo will not Own (as such term is used in the Regulation)
i percent or more of Corp’s aggregate outstanding stock (Corp Prohibited
Stock Interest).
(g) Until Date 4, SplitCo will not enter into any transaction, arrangement, or
understanding pursuant to which Corp, directly or to SplitCo’s knowledge
indirectly, will acquire any of SplitCo’s assets or any SplitCo stock. For
this purpose, (i) sales or issuances in the open market, (ii) transfers
pursuant to the Agreement, and (iii) the Event will not be taken into
account.
(h) Until Date 4, SplitCo will not enter into any transaction, arrangement, or
understanding pursuant to which SplitCo will: (i) merge or combine with
Corp; (ii) directly or indirectly acquire any of Corp’s assets, provided that,
for purposes of this clause (ii), neither the Event nor an acquisition of
assets on the open market will be taken into account; (iii) directly or
indirectly acquire any additional Corp stock or any interest in Corp stock,
provided that, for purposes of this clause (iii), the Event will not be taken
into account; or (iv) directly or indirectly acquire a Corp Prohibited Stock
Interest.
(i) At the time of the Initial Exchange (and in the event there are Remaining
SplitCo Shares, through the date that Distributing 3 disposes of the last of
the Remaining SplitCo Shares pursuant to the Separation), neither
Distributing 3 nor SplitCo will have any plan or intent for SplitCo to:
(i) Own (as such term is used in the Regulation) at any time in the future a
Corp Prohibited Stock Interest or (ii) be a party at any time in the future to
any transaction, arrangement, or understanding described in
Representation (g) or (h).
Rulings
PLR-120932-15 9
Based solely on the information submitted and representations made, we rule as
follows with regard to the Proposed Transaction:
(1) The relative fair market value of the gross assets of the Business as
compared to the fair market value of SplitCo will not prevent the Business
from qualifying as an active trade or business for purposes of section
355(b) with respect to each of the SplitCo Distribution and the External
Split-Off.
(2) Distributing 3’s continuing ownership of any Remaining SplitCo Shares
until their disposition described in Step (9) will not be in pursuance of a
plan having as one of its principal purposes the avoidance of U.S. federal
income tax for purposes of section 355(a)(1)(D)(ii).
(3) Provided the Initial Exchange otherwise meets the requirements of section
355, any Subsequent Exchange, Stock-for-Debt Exchange, or Clean-Up
Spin-Off will be treated as a distribution in pursuance of the same plan as
the Initial Exchange and will qualify for nonrecognition treatment under
section 355 and/or section 361 to the same extent such stock transfer
would have qualified had it occurred on the same date as the Initial
Exchange.
Caveats
Except as expressly provided herein, no opinion is expressed or implied
concerning the tax treatment 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.
Procedural Statements
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 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.
PLR-120932-15 10
In accordance with the power of attorney on file in this office, a copy of this ruling
letter is being sent to your authorized representatives.
Sincerely,
Stephanie D. Floyd
Assistant to Branch Chief, Branch 3
Office of Associate Chief Counsel (Corporate)
cc:
Get today's answer for your situation
You just read what the IRS ruled for one taxpayer in 2016, and it can't be cited as precedent. Ezel checks the current Internal Revenue Code and IRS guidance and answers your specific situation, with citations.
Opens in Ezel Pro. Every answer cites the authority it relies on.