Bankruptcy distribution of controlled stock was not an earnings device

Plain-English summary

A company completed a bankruptcy reorganization that separated two businesses and distributed controlled-company stock solely to first-lien creditors. The value those creditors received was significantly less than the principal amount of the debt they exchanged. The company's existing shareholders were also expected to have their stock canceled for no consideration in a later bankruptcy restructuring. In a supplemental ruling limited to this discrete section 355 issue, the IRS concluded that the distribution was not used principally as a device to distribute either company's earnings and profits. The IRS expressed no view on the transaction's overall tax consequences or other parts of the bankruptcy proceeding.

Ruling snapshot

• Question: Was the bankruptcy distribution of controlled-company stock principally a device for distributing earnings and profits?
• Outcome: Approved, the distribution was not a prohibited device on the represented facts.
• Key authorities: IRC § 355(a)(1)(B); Treas. Reg. § 1.355-2(d)

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201743017                                             Third Party Communication: None
Release Date: 10/27/2017                                      Date of Communication: Not Applicable
Index Number: 355.06-00
                                                              Person To Contact:
--------------------                                          ----------------, ID No. ------------------
-----------------------------------------------------------   Telephone Number:
------------------------------------------------------        ----------------------
----------------------------------------------------------    Refer Reply To:
-------------------                                           CC:CORP:B01
-------------------------                                     PLR-135405-16
-------------------------------------                         Date:
                                                              July 26, 2017


Legend

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

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

LLC2             = ----------------------------------------------------------------------------------------------
                   ----------------------------------------------------------------------------------------------
                   ------------------------

LLC7             = ----------------------------------------------------------------------------------------------
                   ----------------------------------------------------------------------------------------------
                   -----------------------

Date 8           = ----------------------

r                = --------

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

This letter responds to your November 3, 2016 letter, submitted by your authorized
representatives, requesting that we supplement the private letter ruling dated July 28,
2016 (PLR-123917-14) (the “Initial Ruling Letter”). The material information submitted
in the request for the Initial Ruling Letter and this supplemental ruling request is
summarized below. Capitalized or underlined terms not defined in this letter have the
meanings assigned to them in the Initial Ruling Letter.
PLR-135405-16

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 a significant issue under section 355. The ruling contained in this letter only
addresses a discrete legal issue 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 ruling below.

                               SUPPLEMENTAL FACTS

On Date 8, pursuant to the Bankruptcy Plan of Reorganization confirmed by the
Bankruptcy Court, the Proposed Transaction effecting the separation of Distributing’s
Business 1 and Business 2 was completed. Distributing and LLC7 remain under the
jurisdiction of the Bankruptcy Court in the Bankruptcy Proceeding; any transaction (or
transactions) that Distributing and LLC7 may undertake with respect to their remaining
assets and subsidiaries, and their remaining outstanding debt, has not yet been
confirmed by the Bankruptcy Court.

                       SUPPLEMENTAL REPRESENTATIONS

(a)   The value of the consideration received by the LLC2 First Lien Creditors in
      exchange for their LLC2 First Lien Debt in the Distribution, was significantly
      (approximately r%) less than the principal amount of such LLC2 First Lien Debt.

(b)   It is anticipated that the Distributing Shareholders’ Distributing stock will be
      cancelled for no consideration in any subsequent restructuring of Distributing and
      LLC7 in the Bankruptcy Proceeding.

                              SUPPLEMENTAL RULING

Based solely on the information and representations submitted in connection with this
supplemental ruling request and the request for the Initial Ruling Letter, we rule as
follows:

      Because (1) the distribution of Controlled stock was solely to the LLC2 First Lien
      Creditors in a title 11 case; (2) the value of the consideration received by the
      LLC2 First Lien Creditors in the Distribution was significantly (approximately r%)
      less than the principal amount of the LLC2 First Lien Debt exchanged therefor;
      and (3) it is anticipated that the Distributing Shareholders’ Distributing stock will
                                            2
PLR-135405-16

       be cancelled for no consideration in any subsequent restructuring of Distributing
       and LLC7 in the Bankruptcy Proceeding, the Distribution was not used principally
       as a device for the distribution of earnings and profits of Distributing or Controlled
       (or both). Section 355(a)(1)(B) and §1.355-2(d).

                                        CAVEATS

No opinion is expressed or implied concerning the tax consequences of any aspect of
any transaction or item discussed or referenced in this letter, except as specifically
addressed by the ruling above. In particular, no opinion is expressed concerning any
aspect of any transaction or item occurring as part of the Bankruptcy Proceeding,
whether prior to or following the Proposed Transaction, or the effect of any such
transaction or item on the ruling above.

                             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,


                                       Frances L. Kelly
                                       Frances L. Kelly
                                       Senior Counsel, Branch 2
                                       Office of Associate Chief Counsel (Corporate)



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