Integrates contribution and merger steps in a proposed spin-off

Plain-English summary

A foreign parent proposed moving selected U.S. assets and subsidiaries from one U.S. consolidated group to another through contributions, two stock distributions, a contribution to the receiving U.S. parent, and a merger. The IRS ruled that the final contribution and merger would be integrated and treated as a section 368(a)(1)(D) reorganization. The foreign parent had considered two alternatives that would increase foreign taxes and were expected to restrict the receiving group's use of net operating losses. The IRS ruled that those costs and restrictions could be considered when deciding whether the alternatives were impractical and unduly expensive under the section 355 business-purpose regulations. It did not decide whether the spin-off distributions actually had a valid corporate business purpose or whether an earlier cash distribution was separate from, or boot in, the reorganization.

Ruling snapshot

• Question: How would the final contribution and merger be integrated, and could foreign-tax and NOL costs make alternative structures impractical and unduly expensive for section 355 business-purpose analysis?
• Outcome: Approved on both discrete issues.
• Key authorities: IRC §§ 301, 351, 355, 368(a)(1)(D), and 382; Treas. Reg. §§ 1.355-2(b) and 1.1502-21.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201812002
Release Date: 3/23/2018
Third Party Communication: None
Date of Communication: Not Applicable
Index Number: 355.01-00, 355.04-00,
368.04-00

Person To Contact:
[redacted], ID No. [redacted]
Telephone Number:
[redacted]
Refer Reply To:
CC:CORP:4
PLR-121641-17
Date:
December 19, 2017

Legend

Foreign Parent = [redacted]
U.S. Sub 1 = [redacted]
U.S. Sub 2 = [redacted]
Foreign Sub 1 = [redacted]
Foreign Sub 2 = [redacted]
Foreign Sub 3 = [redacted]
Foreign Sub 4 = [redacted]

PLR-121641-17 2

Date A = [redacted]
Date B = [redacted]
a = [redacted]
b = [redacted]
c = [redacted]
d = [redacted]
e = [redacted]
f = [redacted]
g = [redacted]

Dear [redacted]:

This letter ruling responds to a letter from your authorized representative dated
July 12, 2017, submitted on behalf of U.S. Sub 1 (or “Taxpayer”), requesting rulings on
certain federal income tax consequences of a series of transactions (the “Proposed
Transaction”). Additional information was submitted in letters dated September 8, 2017,
October 13, 2017, November 10, 2017, and December 18, 2017. The material
information provided in that letter and in later correspondence is summarized below.

This letter is issued pursuant to § 6.03 of Rev. Proc. 2017-1, 2017-1 I.R.B. 1,
regarding one or more significant issues under §§ 332, 351, 355 or 368. 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

Foreign Parent wholly owns U.S. Sub 1, the common parent of U.S.
Consolidated Group 1. Foreign Parent also owns a% (at least 80%) of Foreign Sub 1,
which owns approximately b% (at least 80%) of U.S. Sub 2, the common parent of U.S.
Consolidated Group 2. Foreign Sub 1 also owns Foreign Sub 2, which owns Foreign

PLR-121641-17 3

Sub 3, which owns Foreign Sub 4. Foreign Sub 4 owns the remaining approximately
c% of U.S. Sub 2. U.S. Sub 1 owns various U.S. subsidiaries while U.S. Sub 2 owns
various U.S. subsidiaries and foreign subsidiaries.

On Date A, U.S. Sub 1 distributed $d to Foreign Parent (“U.S. Sub 1
Distribution”). Within e months after the U.S. Sub 1 Distribution, Foreign Parent
proposes to undertake the following steps (each a “Step” and collectively, the “Proposed
Transaction”).

1. U.S. Sub 2 will contribute certain assets and liabilities, including its stock
   in the subsidiaries of the U.S. Consolidated Group 2 (and excluding
   foreign subsidiaries), to U.S. Spinco (a newly formed domestic
   corporation) in exchange for 100% of U.S. Spinco’s stock.

2. Foreign Sub 4 will sell its c% interest in U.S. Sub 2 to Foreign Parent in
   exchange for $f.

3. U.S. Sub 2 will distribute 100% of U.S. Spinco pro rata to Foreign Sub 1
   and Foreign Parent (“U.S. Spinco Distribution 1”).

4. Foreign Sub 1 will distribute its b% of U.S. Spinco stock to Foreign Parent
   (“U.S. Spinco Distribution 2”).

5. Foreign Parent will contribute 100% of U.S. Spinco to U.S. Sub 1 (“U.S.
   Spinco Contribution”).

6. U.S. Spinco will merge into U.S. Sub 1 with U.S. Sub 1 surviving (“U.S.
   Sub 1 Merger”).

Foreign Parent considered the following two alternative transactions to the
Proposed Transaction.

Alternative Transaction 1: Foreign Parent contributes 100% of U.S. Sub 1 to Foreign
Sub 1. Foreign Sub 1 then contributes 100% of U.S. Sub 1 to U.S. Sub 2.

Alternative Transaction 2: Foreign Sub 1 transfers 100% of U.S. Sub 2 to Foreign
Parent. Foreign Parent then contributes 100% of U.S. Sub 2 to U.S. Sub 1. Alternative
2 contemplates a distribution of Foreign Sub 4’s approximately c% interest in U.S. Sub
2 to Foreign Sub 1 immediately prior to Foreign Sub 1’s distribution of U.S. Sub 2 to
Foreign Parent.

Representations

Taxpayer makes the following representations:

(a) Step 5, when viewed separately and independently from the other Steps and
the U.S. Sub 1 Distribution, would be treated as a contribution of U.S. Spinco stock to
which § 351 applies.

PLR-121641-17 4

(b) Step 6, when viewed separately and independently from the other Steps,
would be treated as a reorganization under § 368(a)(1)(A).

(c) If Foreign Parent undertakes Alternative Transaction 1 or Alternative
Transaction 2, Foreign Parent would incur an increase in foreign taxes that it will not
incur if it undertakes the Proposed Transaction.

(d) As of Date B, the U.S. Consolidated Group 1 had approximately $g of an NOL
carryover balance. The utilization of these NOLs is not subject to any current limitation
under section 382 or Treas. Reg. § 1.1502-21.

(e) If Foreign Parent undertakes Alternative Transaction 1 or Alternative
Transaction 2, it is anticipated that the NOLs of U.S. Consolidated Group 1 would be
limited by § 1.1502-21, and no such limitation would occur as a result of the Proposed
Transaction.

(f) Except for the legal issue of whether the Alternative Transactions are treated
as impractical and unduly expensive for purposes of satisfying the business purpose
requirement in § 1.355-2(b)(3), U.S. Spinco Distribution 1 and U.S. Spinco Distribution 2
would otherwise qualify as distributions under § 355.

(g) Except for the legal issue of whether the U.S. Spinco Contribution and the
U.S. Sub 1 Distribution are treated as separate transactions, the U.S. Sub 1 Distribution
would otherwise be treated as a distribution by U.S. Sub 1 to Foreign Parent with
respect to its stock under § 301.

(h) Neither U.S. Sub 2 nor U.S. Spinco has been or will be a United States real
property holding corporation (within the meaning of section 897(c)(2)) (a “USRPHC”) at
any time during the five-year period ending on the date of the U.S. Spinco Distribution 1,
and neither U.S. Sub 2 nor U.S. Spinco will be a USRPHC immediately after the U.S.
Sub 1 Merger.

Rulings

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

(1) Steps 5 and 6 will be integrated to be treated as a reorganization under
section 368(a)(1)(D). See Rev. Rul. 67-274, 1967-2 C.B. 141 (1967).

(2) The increased foreign tax costs and additional limitation on the use of NOLs
anticipated to result under Alternative Transaction 1 and Alternative Transaction 2 can
be considered for purposes of determining whether Alternative Transaction 1 and
Alternative Transaction 2 are impractical and unduly expensive under § 1.355-2(b)(3).

PLR-121641-17 5

Caveats

(1) No opinion is expressed on whether the U.S. Spinco Distribution 1 or the U.S.
Spinco Distribution 2 is carried out for a valid corporate business purpose for purposes
of § 1.355-2(b)(1).

(2) No opinion is expressed on whether the U.S. Sub 1 Distribution is treated as
a separate § 301 distribution or as boot in the § 368(a)(1)(D) reorganization pursuant to
Ruling 1.

(3) 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.

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.

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. 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.

Sincerely,

Douglas C. Bates
Branch Chief, Branch 4
Office of Associate Chief Counsel (Corporate-)