Acquisition financing did not prevent a foreign target's F reorganization

Plain-English summary

A U.S. corporate group planned to acquire the public shares of a foreign target that one group member already partly owned. Under a court-approved scheme, a new foreign company would issue short-term notes to the public shareholders, acquire all target shares, and fund repayment of the notes with both an equity contribution and related-party debt. The target would then convert to an eligible entity and elect disregarded status, with the relevant steps represented to qualify as an F reorganization apart from the requested issues. The IRS ruled that the notes would be disregarded for federal tax purposes. The debt-funded portion would be treated as a target-stock redemption, while the equity-funded portion would be treated as a direct stock purchase by the U.S. subsidiary. Neither the parent guarantee nor the debt financing would prevent the specified steps from qualifying as an F reorganization.

Ruling snapshot

• Question: How would the acquisition notes be treated, and would the guarantee or debt financing prevent the target's F reorganization?
• Outcome: approved
• Key authorities: IRC § 368(a)(1)(F); Treas. Reg. § 1.368-2(m)(1)(ii); Rev. Rul. 79-273

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201737010                                              Third Party Communication: None
Release Date: 9/15/2017                                        Date of Communication: Not Applicable
Index Number: 368.06-00
                                                               Person To Contact:
--------------------                                           -----------------------, ID No. -------------------
------------------------------------------------------------   ---------------------------------------------------
------------                                                   Telephone Number:
-----------------------------------------                      ----------------------
----------------------------------------                       Refer Reply To:
-----------------------------                                  CC:CORP:B04
                                                               PLR-139680-16
                                                               Date:
                                                               June 20, 2017




Legend

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

USS1                = ------------------------------------------
                      --------------------------------
                      ------------------------

USS2                = --------------------------
                      --------------------------------
                      ------------------------

Target              = ----------
                      -----------------------------------------
                      ------------

Nominee             = -----------------------------------------------------
                      --------------------------------
                      ------------------------

FinCo               = ----------------------------------------------------

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

Laws                = ---------------------------------------------------

Country X           = ---------------------------

PLR-139680-16                                          2

Country Y          = ----------

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

Eligible Entity = ---------------------------------

a                  = ----

b                  = ----

c                  = ----

d                  = ----------

e                  = ----

f                  = ------------------------------------------------------

g                  = ------------------------------------------------------


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

This letter responds to your authorized representatives’ letter dated December 21, 2016
requesting rulings on certain federal income tax consequences of a proposed
transaction (the “Proposed Transaction”). The information provided 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 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 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 section 368. The rulings contained in
this letter only address one or more discrete legal issues involved in the Proposed
Transaction. This Office expresses no opinion as to the overall tax consequences of
the Proposed Transaction or as to any issue not specifically addressed by the rulings
below.


                                                  FACTS

PLR-139680-16                                  3

Parent is a U.S. publicly traded corporation and the parent of a worldwide group of
entities. Parent is also the common parent of an affiliated group of corporations that
files a U.S. consolidated federal income tax return. Parent owns all the stock of USS1
and USS1 owns all of the stock of USS2.

Target is a Country X public company, engaged in Business A. Target has a single
class of voting shares outstanding, and the shares are listed and traded on the
Exchange. USS2 is the beneficial owner of approximately a% of Target, with the
remaining approximately b% held by the public (the “Public Shareholders”). USS2’s
beneficial interest in Target is currently held through Nominee, an entity disregarded as
separate from USS2 for federal income tax purposes. It is anticipated that prior to the
Proposed Transaction described below, Nominee will transfer the legal title to the a%
Target shares it holds to USS2 before the winding up of Nominee.


                               PROPOSED TRANSACTION

In order to make Target a wholly owned subsidiary of USS2, while complying with
Country X laws, the following steps will be implemented (The “Proposed Transaction”).
Many of the steps will be effected pursuant to the Laws of Country X (the “Scheme”).

(i)     USS1 will form FinCo under the laws of Country Y.

(ii)    USS2 will form NewCo in Country X with capital of approximately c.

(iii)   Pursuant to Country X laws, Target will obtain a court order for Public
        Shareholders to vote on the Scheme.

(iv)    Following an affirmative vote from the Public Shareholders and obtaining the
        proper court orders required under Country X laws, the following will be
        implemented: (a) the Target stock held by the Public Shareholders will be
        transferred to NewCo; (b) in exchange for their Target stock, the Public
        Shareholders will receive approximately d per share consideration in the form of
        NewCo notes (“NewCo Notes”); and (c) the Target stock owned by USS2 will be
        transferred to NewCo in exchange for NewCo stock of equal value.
        NewCo will pay off the NewCo Notes within a short period of time, and pursuant
        to Country X laws, such payment will occur no later than e days after issuance.
        In addition, solely to satisfy certain requirements under the regulations of Country
        X, the NewCo Notes will be guaranteed by Parent (the “Parent Guarantee”).

(v)     The day after step (iv), Target will pass a special resolution to convert to a
        Country X Eligible Entity and will convert thereafter.

PLR-139680-16                                  4

(vi)     Following the conversion, Target will elect to be treated as a disregarded entity
         for federal income tax purposes.

(vii)    USS1 will transfer approximately f to USS2 in exchange for equity, debt, or a
         combination of both.

(viii)   USS1 will transfer approximately g to FinCo in exchange for equity, debt, or a
         combination of both.

(ix)     At least one day after step (vi), USS2 will contribute approximately f to NewCo in
         exchange for additional shares of NewCo (“Equity Contribution”) and NewCo will
         borrow approximately g from FinCo in various tranches including short term debt
         (the debt, “NewCo Financing Debt,” and the borrowing, “Debt Financing”). The
         funds resulting from the Equity Contribution and the Debt Financing (f + g in total)
         will be used to settle the NewCo Notes issued in step (iv).


                                    REPRESENTATIONS

(a)      The NewCo Financing Debt is debt for federal income tax purposes. The NewCo
         Financing Debt will remain outstanding following the Proposed Transaction, and
         NewCo will repay such debt in accordance with its terms.

(b)      The Parent Guarantee, in step (iv), is required for Country X regulatory purposes.

(c)      Steps (iv) through (vi), without regard to the issues addressed in the rulings
         herein, will qualify as a reorganization under section 368(a)(1)(F).


                                          RULINGS

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

1.       For federal income tax purposes, the NewCo Notes issued in step (iv) will be
         disregarded, and instead: (a) to the extent the NewCo Notes are settled with
         funds from the Debt Financing, Target will be treated as redeeming its shares
         from the Public Shareholders, and (b) to the extent the NewCo Notes are settled
         with funds from the Equity Contribution, USS2 will be treated as directly
         purchasing Target stock from the Public Shareholders immediately before step
         (iv). Cf. Waterman Steamship Corp. v. Comm’r, 430 F.2d 1185 (5th Cir. 1970);
         Rev. Rul. 79-273, 1979-2 C.B. 125.

PLR-139680-16                                  5

2.     The Parent Guarantee will not preclude steps (iv) through (vi) from qualifying as
       a reorganization under section 368(a)(1)(F).

3.     The Debt Financing will not preclude steps (iv) through (vi) from qualifying as a
       reorganization under section 368(a)(1)(F). Treas. Reg. § 1.368-2(m)(1)(ii).


                                         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,



                                           ______________________________
                                           Julie T. Wang
                                           Assistant to the Branch Chief, Branch 1
                                           Office of Associate Chief Counsel
                                           (Corporate)



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