Newer product segment is an expansion of an existing business for spin-off purposes

Plain-English summary

A public company planned to separate one product segment from another through a series of internal transfers followed by a pro rata spin-off. The group had conducted the retained segment's business for more than five years, but it had acquired a company developing products in the segment to be separated and began selling those products later. The company asked whether the separated segment's two operations were expansions of the corresponding established operations rather than acquisitions of new or different businesses. The IRS ruled that both operations were expansions under the active-trade-or-business regulations and relevant revenue rulings. This addressed a discrete issue related to the section 355 five-year business requirement. The IRS expressly did not rule that the overall transaction qualified under section 355 or address any other step or consequence.

Ruling snapshot

• Question: Did the newer segment's two operations expand the group's existing business rather than create or acquire new businesses for the section 355 active-business test?
• Outcome: approved on the two discrete expansion issues only
• Key authorities: IRC § 355; Treas. Reg. § 1.355-3(b)(3)(ii); Rev. Rul. 2003-18; Rev. Rul. 2003-38

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201706005 Third Party Communication: None
Release Date: 2/10/2017 Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-00,
355.03-00, 355.03-01 Person To Contact:
--------------------------, ID No. --------------
----------------- Telephone Number:
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------------------------------- Refer Reply To:
CC:CORP:B03
------------------------------------- PLR-115616-16
------------------------------- Date:
November 08, 2016

LEGEND

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Distributing US = ----------------------------------------------------------------------------
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Controlled US = ----------------------------------------------------------------------------
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Distributing Operations = ----------------------------------------------------------------------------
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Controlled Operations = ----------------------------------------------------------------------------
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Distributing Support = ----------------------------------------------------------------------------
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Controlled Support = ----------------------------------------------------------------------------
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Distributing Foreign 1 = ----------------------------------------------------------------------------
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Controlled Foreign 1 = ----------------------------------------------------------------------------
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Distributing Foreign 2 = ----------------------------------------------------------------------------
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Controlled Foreign 2 = ----------------------------------------------------------------------------
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Corporation S = ----------------------------------------------------------------------------
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Business X = --------------------------------------------

Segment A = ----------------

Segment B = --------------------------------------------------------------------------

Year 1 = -------

Year 2 = ----------------------------------------------------------------------------
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Year 3 = ----------------------------------------------------------------------------
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Country 1 = ----------------------------------------------------------------------------
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PLR-115616-16 3

Country 2 = ----------------------------------------------------------------------------
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Operation A = ----------------------------------------------------------------------------
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Operation B = ----------------------------------------------------------------------------
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Dear ------------------:

This letter responds to your letter dated May 10, 2016, requesting rulings on certain
federal income tax consequences of a series of transactions (the “Proposed
Transaction” as defined below). The material information submitted in that request and
in subsequent correspondence is summarized below.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty 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 facts, representations, and other
information may be requested 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. 18,
regarding rulings on one or more significant issues that involve the tax consequences of
a transaction (or part of a transaction) occurring in the context of a distribution under
Section 355 of the Internal Revenue Code (the “Code”). This office has not reviewed
any information pertaining to and expresses no opinion as to the overall tax
consequences of the Proposed Transaction (as defined herein), including qualification
under section 355 of the Code, or as to any issue or step not specifically addressed by
this letter. Rather, the rulings contained in this letter only address discrete legal issues
involved in the transaction. Further, except as expressly provided herein, no opinion is
expressed or implied concerning the tax consequences of any aspect of any transaction
or item discussed or referenced in this letter.

                                        Facts

Distributing, through the members of its separate affiliated group within the meaning of
section 355(b)(3)(B) (the “DSAG”), is engaged in Business X that includes Segment A
and Segment B. Each of Segment A and Segment B is engaged in Operation A and
Operation B. Distributing, wholly owns Distributing Operations. Distributing Operations
wholly owns Distributing US, Distributing Foreign 1, Distributing Foreign 2, Distributing
Support, and Corporation S. .
PLR-115616-16 4

Financial information submitted by Distributing indicates that Business X’s Segment B
has had gross receipts and operating expenses representing the active conduct of a
trade or business for each of the past five years.

In Year 1, Distributing acquired Corporation S, a company engaged in the development
of Segment A products in Business X, as part of a strategy of product expansion (the
“Year 1 Acquisition”). After Distributing’s acquisition of Corporation S, Distributing
employed its experience in Business X to further develop Corporation S’s products and
successfully bring them to market. In Year 2, Distributing reevaluated its business
strategy and decided to focus on areas related to Segment B products. It terminated its
efforts in other unrelated areas and disposed of other assets, and concentrated its
research and development primarily on Segment B products. Despite the abandonment
of these other programs, Distributing continued the development of Segment A
products. Sales of Segment A products commenced in Year 3.

                              Proposed Transaction

  For what is represented to be a valid business purpose, Distributing proposes to

separate Segment A from Segment B by contributing it to Controlled, and distributing
the Controlled stock to its shareholders (together, the “Proposed Transaction”).

  (i) Distributing US will contribute the assets and liabilities, including employees,
  associated with Segments A’s Operation A to Controlled US, a newly-formed
  State A limited liability company disregarded as an entity separate from
  Distributing US for federal tax purposes, in exchange for all of the interests in
  Controlled US. Controlled US will elect to be treated as a corporation for federal
  tax purposes.

  (ii) Distributing Support will contribute all of its assets and liabilities, including
  employees, associated with Segment A’s Operation A to Controlled Support, a
  newly-formed State A limited liability company disregarded as an entity separate
  from Distributing Support for federal tax purposes, in exchange for all of the
  interests in Controlled Support. Controlled Support will elect to be treated as a
  corporation for federal tax purposes.

  (iii) Distributing Foreign 2 will contribute the assets and liabilities, including
  employees, associated with Segment A’s Operation A to Controlled Foreign 2, a
  newly-formed Country 2 corporation, in exchange for all of the stock of Controlled
  Foreign 2.

  (iv) Distributing US, Distributing Support, and Distributing Foreign 2, will distribute
  their respective interests in Controlled US, Controlled Support, and Controlled
  Foreign 2 to Distributing Operations.

PLR-115616-16 5

  (v) Before Controlled Foreign 1 has any assets other than nominal capital,
  Distributing Foreign 1 will transfer shares of Controlled Foreign 1 to Distributing
  Operations. Distributing Foreign 1 will then transfer the assets and liabilities,
  including employees, associated with Segment A’s Operation A held by
  Distributing Foreign 1 to Controlled Foreign 1 via demerger under Country 1 law.

  (vi) Distributing Operations will contribute the assets and liabilities, including
  employees, associated with Segment A’s Operation B to Controlled Operations,
  a newly-formed State A limited liability company disregarded as an entity
  separate from Distributing Operations for federal tax purposes.

  (vii) Distributing Operations will contribute the interests in Controlled Operations
  and the stock of each of Controlled US, Controlled Foreign 1, Controlled Foreign
  2, and Controlled Support to Corporation S.

  (viii) Distributing Operations will distribute the stock of Corporation S to
  Distributing.

  (ix) Distributing will contribute the stock of Corporation S and additional assets
  and liabilities associated with Segment A to Controlled.

  (x) Distributing will distribute all of the Controlled stock on a pro rata basis to
  Distributing’s public shareholders (the “Spin-off”).

Other than certain continuing arrangements on a transitional basis, following the Spin-
off, the DSAG will continue the active conduct of Business X (except as it relates to
Segment A, and Controlled, and its separate affiliated group will continue the active
conduct of Business X related to Segment A), in each case independently and with its
separate employees.

                                     Representation

(a) The DSAG has been engaged in the active conduct of Segment B of Business X for
greater than 5 years.

                                      Rulings

Based solely on the facts and information submitted and the representations set forth
above, we rule as follows:

(1) The Segment A Operation A business constitutes an expansion of Segments B’s
Operation A business and does not constitute the acquisition of a new or different
business. Treas. Reg. § 1-355-3(b)(3)(ii) and Rev. Rul. 2003-38, 2003-17 I.R.B. 811,
and Rev. Rul. 2003-18, 2003-7 I.R.B. 467.
PLR-115616-16 6

(2) The Segment A Operation B business constitutes an expansion of Segments B’
Operation B business and does not constitute the acquisition of a new or different
business. Treas. Reg. § 1-355-3(b)(3)(ii) and Rev. Rul. 2003-38, 2003-17 I.R.B. 811,
and Rev. Rul. 2003-18, 2003-7 I.R.B. 467.

                                      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 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 representatives.

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,



                                    _Richard K. Passales________
                                    Richard K. Passales
                                    Senior Counsel, Branch 4
                                    Office of Associate Chief Counsel (Corporate)