Open-market repurchases receive pro rata treatment after a spin-off merger

Plain-English summary

A public company separated one business into a controlled corporation, distributed that corporation's stock to its shareholders, and immediately combined the controlled corporation with a subsidiary of an unrelated public acquirer. The acquirer planned open-market share repurchases through a broker with discretion over execution and no preference for particular selling shareholders. The IRS addressed a discrete section 355(e) issue rather than the overall tax treatment of the transactions. If the repurchases are treated as part of a plan with the distribution, the IRS ruled that they will be treated as purchases made proportionately from all public shareholders of the acquirer for testing their effect under section 355(e). The ruling defines when a shareholder stops receiving public-shareholder treatment based on the acquirer's actual knowledge or specified securities filings.

Ruling snapshot

• Question: How should open-market repurchases by the acquirer be allocated among shareholders when testing a related spin-off under section 355(e)?
• Outcome: approved
• Key authorities: IRC § 355(e); Treas. Reg. § 1.355-7(h); Rev. Proc. 2016-1

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 201801012                                            Third Party Communication: None
Release Date: 1/5/2018                                       Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-00,
              355.10-00                                      Person To Contact:
                                                             ------------------------------
-----------------                                            ID No. ------------------
------------------------------------------                   Telephone Number:
---------------------------                                  ----------------------
----------------------------------------                     Refer Reply To:
------------------------------------------                   CC:CORP:B02
                                                             PLR-133542-16
                                                             Date:
                                                             September 06, 2017

                                                    Legend

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

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

Acquiring             = ------------------------------------------------------------------------------------------
                        ------------------------------------------------------------------------------------------
                        -----------------------

MergerSub             = ------------------------------------------------------------------------------------------
                        ------------------------------------------------------------------------------------------
                        -----------------------

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

State A               = --------------

Date 1                = -------------------

Date 2                = ------------------------

Date 3                = --------------------

Date 4                = -----------------------

PLR-133542-16                                    2

a                   = ------

Investment          = ----------------------
Advisor

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

       This letter responds to a letter dated October 19, 2016, submitted on behalf of
Distributing, requesting a ruling on a significant issue presented under section 355(e) of
the Internal Revenue Code (the “Code”). The information provided in that request and in
subsequent correspondence is summarized below.

       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 355 of the Internal Revenue
Code (the “Code”). The ruling contained in this letter only addresses 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 ruling below.

      The ruling contained in this letter is 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 ruling request. Such materials are subject to verification on
examination.

                                         Summary of Facts

       Acquiring and Distributing are each publicly traded State A corporations that are
not related to each other. Controlled is a State A corporation that was formed to
effectuate the Distribution described below and was wholly owned by Distributing until
Date 2. MergerSub was a State A corporation wholly owned by Acquiring that was
formed to effectuate the acquisition of Controlled described below.

       On Date 1, Distributing, Controlled, and Acquiring entered into an agreement
(“Separation Agreement”) to effectuate the separation of Business A from the other
businesses of Distributing. Also on Date 1, Distributing, Controlled, Acquiring, and
MergerSub entered into an agreement (“Merger Agreement”) pursuant to which
Acquiring would acquire Controlled. Pursuant to the Separation Agreement and Merger
Agreement, the following steps were undertaken:

      i.    Distributing contributed the assets and liabilities associated with Business A
            to newly formed Controlled in exchange for the Controlled stock.

PLR-133542-16                                    3

     ii.      Distributing made a pro rata distribution (the “Distribution”) of the Controlled
              stock to its shareholders (the “Historic Distributing Shareholders”).

    iii.      Immediately after the Distribution, MergerSub merged with and into
              Controlled, with Controlled surviving as a wholly owned subsidiary of
              Acquiring (the “Merger”).

       The Distribution and Merger were completed on Date 2. The Historic Distributing
Shareholders received approximately a% of Acquiring’s common stock as consideration
in the Merger.

       Acquiring has engaged in open market repurchases of its common stock for
several years. Acquiring recently adopted a new share repurchase plan that provides for
share repurchases (“Share Repurchases”) following the Merger. The Share
Repurchases will be conducted through a broker, who will have full discretion with
respect to the execution of all purchases, and will be made on the open market. All
Acquiring shareholders will be allowed to participate in and benefit from the Share
Repurchases, and Acquiring is indifferent as to which shareholders participate in the
Share Repurchases.

       On Date 3, Investment Advisor filed a Schedule 13G with respect to Acquiring
indicating beneficial ownership of more than ten percent of Acquiring’s common stock.
Item 6 on that Schedule 13G stated that no one person’s interest in the common stock
of Acquiring was more than five percent of the total outstanding common shares.

                                        Representations

           Distributing makes the following representations:

   1) The Share Repurchases are motivated by a business purpose, the stock to be
      repurchased in the Share Repurchases will be widely held, and the Share
      Repurchases will be made in the open market.

   2) The Share Repurchases are not motivated to any extent by a desire to increase
      or decrease the ownership percentage of any particular shareholder or group of
      shareholders.

   3) Because the Share Repurchases will be made on the open market through a
      broker, Acquiring will not know the identity of any shareholder from which
      Acquiring stock is repurchased.

   4) During the two years before the Merger, neither Distributing nor Acquiring had
      any “controlling shareholders” within the meaning of § 1.355-7(h)(3) (a

PLR-133542-16                                4

      “Controlling Shareholder”), and Acquiring has had no such Controlling
      Shareholders since the Merger.

   5) As of Date 4, except for Investment Advisor, which filed a Schedule 13G on Date
      3, no shareholder of Acquiring has filed a Form 3, Form 4, Schedule 13D, or
      Schedule 13G indicating that it owns enough shares to be a “ten-percent
      shareholder” within the meaning of § 1.355-7(h)(14) (a “Ten-Percent
      Shareholder”) since the Merger, and Acquiring has no Actual Knowledge of any
      Ten-Percent Shareholders since the Merger.

      Actual Knowledge means the actual knowledge of the Vice President of Investor
      Relations, the General Counsel, or a successor position at Acquiring of the
      existence of a Controlling Shareholder or Ten-Percent Shareholder.

                                         Ruling

        Based solely on the information submitted and representations made, we rule
that, to the extent the Share Repurchases are treated as part of a plan (or series of
related transactions) with the Distribution for purposes of Section 355(e), the Share
Repurchases will be treated as being made from all Public Shareholders of Acquiring
common stock (defined as shareholders who are neither Controlling Shareholders nor
Ten-Percent Shareholders) on a pro rata basis for the purpose of testing the effect of
the Share Repurchases on the Distribution under Section 355(e).

        For purposes of this ruling, each Acquiring common stock shareholder will be
treated as a Public Shareholder until five business days after either (1) Actual
Knowledge, or (2) the filing of a Schedule 13D, Schedule 13G, Form 3, or Form 4,
indicating it holds enough shares to be considered a five-percent shareholder within the
meaning of § 1.355-7(h)(8) (and it actively participates in the management or operation
of Acquiring, as described in § 1.355-7(h)(3)) or a Ten-Percent Shareholder. For
purposes of determining whether a Ten-Percent Shareholder exists, Acquiring may
disregard a Schedule 13G unless Item 6 reports such a shareholder or is left blank, or
the filer discloses its status as a Ten-Percent Shareholder on Form 3 or Form 4.

                                        Caveats

       Except as expressly provided herein, no opinion is expressed or implied
concerning the tax treatment of the transactions described herein under any provision of
the Code and regulations or the tax treatment of any condition existing at the time of, or
effects resulting from, these transactions that is not specifically covered by the above
rulings.

PLR-133542-16                                  5

                                  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 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)

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