Public-shareholder repurchases receive pro rata treatment under section 355(e)

Plain-English summary

A public corporation had completed two distributions intended to qualify under section 355 and planned to repurchase shares through open-market purchases, accelerated share-repurchase programs, or tender offers. It asked how those repurchases would affect the section 355(e) test for a prohibited 50-percent acquisition connected with the distributions. The IRS ruled that repurchases from public shareholders would be treated as occurring pro rata if they were part of a plan with the distributions. It also ruled that a shareholder's ownership increase would be reduced by offsetting ownership decreases from repurchases, dispositions, or new stock issuances that were part of the same plan. These rules apply only when the repurchases are otherwise treated as part of a plan with the distributions.

Ruling snapshot

• Question: How do public-shareholder repurchases and offsetting ownership changes count under section 355(e) after corporate distributions?
• Outcome: approved
• Key authorities: IRC §§ 355(e), 6110(k)(3); Treas. Reg. § 1.355-7(h)

Full text (IRS public release)

Internal Revenue Service                                        Department of the Treasury
                                                                Washington, DC 20224

Number: 201748007                                               Third Party Communication: None
Release Date: 12/1/2017                                         Date of Communication: Not Applicable
Index Number: 355.10-00
                                                                Person To Contact:
-----------------------------                                   --------------------, ID No. ------------------
------------------------------------                            Telephone Number:
-------------------------------------------                     ----------------------
-----------------------------------                             Refer Reply To:
------------------------------                                  CC:CORP:B3
                                                                PLR-137800-16
                                                                Date:
                                                                June 13, 2017



Legend

Distributing 2                      =         ----------------------------------------------
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Distributing 1                      =         ----------------------------------------
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Business C Controlled               =         ------------------------------------------
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State A                             =         --------------

Shareholder A Entities              =         -----------------------------------------------------------------------
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Shareholder B                       =         --------------------------------------------
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Date A                              =         ----------------------

Date B                              =         ---------------------------

Date C                              =         ------------------------

Date D                              =         ----------------------
PLR-137800-16                                             2


Date E                              =        -----------------------

Date F                              =        ------------------

Date G                              =        --------------------------

a                                   =        ------

b                                   =        ----

c                                   =        ------

d                                   =        ----

e                                   =        --------------

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


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

This letter responds to your December 2, 2016 request, submitted by your authorized
representatives, for rulings under section 355(e) relating to a proposed transaction. The
information submitted 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 penalties of perjury statements executed by an
appropriate party. While this office has not verified any of the material submitted in
support of the request for rulings, it is subject to verification on examination.

This letter is issued pursuant to section 6.03 of Rev. Proc. 2016-1, 2016-1 I.R.B. 1,
regarding significant issues presented in a transaction described 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 2, a State A corporation, is the parent of a worldwide group of domestic and
foreign entities. Distributing 2 is the common parent of an affiliated group of
corporations that join in filing a consolidated federal income tax return. Distributing 2
PLR-137800-16                                3

has a single class of common stock outstanding, which is publicly traded.

Pursuant to transactions described in PLR-130090-15 (issued on February 24, 2016),
Distributing 2 proposed to effectuate the distribution of the stock of Distributing 1 and
Business C Controlled, each a State A corporation, to Distributing 2’s shareholders
(together, the Distributions). The Distributions are intended to qualify under section 355.
The Distributions were accomplished on or before Date A.

Before Date B, approximately a percent of Distributing 2’s outstanding common stock
was owned by affiliated entities (the Shareholder A Entities). The Shareholder A Entities
sold approximately b percent of Distributing 2’s outstanding common stock in a public
offering on Date B and disposed of an additional approximately c percent of such stock
shortly thereafter. Pursuant to a stock purchase agreement entered into on Date C, the
Shareholder A Entities sold approximately d percent of the outstanding shares of
common stock of each of Distributing 2, Distributing 1, and Business C Controlled to an
unrelated party, Shareholder B, on Date D (a date that occurred after Date A). The
Shareholder A Entities may dispose of additional shares of Distributing 2, Distributing 1,
or Business C Controlled stock. Shareholder B is not a public shareholder (i.e., a
shareholder who is not a “controlling shareholder” or “10 percent shareholder,” within
the meaning of Treas. Reg. §§1.355-7(h)(3) and (14)) (Public Shareholder).

Prior to the Distributions, on Date E and Date F, as well as on certain other dates,
Distributing 2 publicly announced or disclosed Distributing 2’s intention to engage in a
stock buyback program to return capital to its shareholders. Following the Distributions,
on Date G, Distributing 2 publicly announced that its board of directors had authorized
share repurchases of up to e. Distributing 2 also may engage in additional share
repurchases in the future.

Certain share repurchases will be made through (i) open market purchases, (ii) one or
more accelerated share repurchase (ASR) programs, (iii) one or more tender offers
open to all public holders of Distributing 2 common stock, or (iv) a combination thereof
(the Share Repurchases). It is anticipated that only Public Shareholders will participate
in the Share Repurchases. It is expected that, under the ASR program, Distributing 2
will purchase a specified number or dollar amount of its shares from a third-party
investment bank at a price per share that is determined over a specified calculation
period (which often may be terminated early at the bank’s option) and may be subject to
certain caps and/or floors. Distributing 2 would pay for the shares upfront, and the bank
would obtain shares that it delivers upfront by borrowing shares (e.g., from customers or
mutual funds). Then the bank would buy shares, generally in the open market, over time
to return the borrowed shares and to obtain any additional shares it owes to Distributing
2, with a possible true-up adjustment as between Distributing 2 and the bank at maturity
of the ASR program. The amount and timing of the Share Repurchases would be
dependent upon, among other factors, the performance of Distributing 2’s share price
and the amount of free cash flow from Business A.
PLR-137800-16                                   4


REPRESENTATIONS
a) The Share Repurchases will be motivated by a business purpose, and the stock to
   be repurchased in the Share Repurchases will be widely held.

b)    The Share Repurchases, including at the time the tender offer is initiated, will not
      be motivated by a desire to increase or decrease the ownership percentage of any
      particular shareholder or group of shareholders.

c)    At the time that a Share Repurchase is consummated, Distributing 2 will not know
      the identity of any beneficial shareholder (i) from which Distributing 2 stock is
      repurchased in the open market; (ii) in the case of an ASR program, from which
      the third-party investment bank borrows Distributing 2 stock or purchases
      Distributing 2 stock to fulfill the bank’s obligation to return borrowed shares; or (iii)
      that participates in a tender offer (except to the extent that the shareholder is the
      record holder of tendered shares or provides an identifying tax-related form or
      statement to Distributing 2 in connection with such participation).

RULINGS

Based upon the facts and information submitted and the representations made, we rule
as follows:

     1) To the extent the Share Repurchases are treated as part of a plan (or series of
        related transactions) with the Distributions for purposes of section 355(e), the
        Share Repurchases will be treated as being made from all Public Shareholders
        of Distributing 2 common stock on a pro rata basis for purposes of testing the
        effect of the Share Repurchases on the Distributions under section 355(e).
     2) Any increase, directly or indirectly, in the percentage of either voting power or
        value of the stock of Distributing 2 owned by a shareholder by virtue of the Share
        Repurchases or acquisitions of the stock of Distributing 2, if any, as part of a plan
        (or series of related transactions) with the Distributions will be taken into account
        for purposes of section 355(e) only after reducing such increase for any reduction
        in such percentage interest, directly or indirectly, resulting from the Share
        Repurchases and any disposition of stock of Distributing 2 by such shareholder
        or issuance of stock by Distributing 2, if any, as part of a plan (or series of related
        transactions) with the Distributions.
     3) The effect of the Share Repurchases will be taken into account under section
        355(e) and these rulings only to the extent such Share Repurchases are
        otherwise treated for purposes of section 355(e) as part of a plan (or series of
        related transactions) with the Distributions.
PLR-137800-16                                  5

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 MATTERS

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,



                                       Susan E. Massey
                                       Assistant to the Branch Chief, Branch 4
                                       Office of Associate Chief Counsel (Corporate)