Private Letter Ruling
201845009
Released November 9, 2018
Approved
Tax-free spin-off ruling for a public company separating two business groups
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This page covers one taxpayer's ruling from 2018, which can't be cited as precedent. Ezel answers your situation under the current Code and IRS guidance, with citations.
Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.
About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.
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Plain-English summary
A publicly traded corporation wanted to split its operations into two separate business groups by contributing one group's subsidiaries and assets into a newly formed subsidiary ("Controlled") and then distributing all of that subsidiary's stock to its own shareholders, a classic tax-free spin-off. The company asked the IRS to confirm the federal income tax treatment. The IRS ruled the contribution and distribution together qualify as a reorganization under Internal Revenue Code § 368(a)(1)(D) and § 355, so neither the parent (Distributing) nor the new subsidiary (Controlled) recognizes gain on the contribution, and the shareholders recognize no gain or income on receiving Controlled stock (except that cash paid in lieu of fractional shares is treated as a taxable sale of those fractions). The ruling also spells out the carryover of asset basis and holding periods, how shareholders split their stock basis between the two companies, the allocation of earnings and profits, and that Controlled can file its own consolidated return going forward. Consistent with current IRS practice for spin-offs, the IRS did not rule on the "business purpose," "device," or § 355(e) plan questions, leaving those for the taxpayer to establish. Spin-offs like this let a company separate distinct businesses without an immediate corporate-level or shareholder-level tax.
Ruling snapshot
- Question: Does the proposed contribution-and-distribution qualify as a tax-free spin-off under §§ 368(a)(1)(D) and 355, and what are the resulting basis, holding-period, and E&P consequences?
- Outcome: Approved (12 rulings granted; IRS expressly did not rule on business purpose, device, or § 355(e) plan issues)
- Key authorities: IRC §§ 355, 368(a)(1)(D), 357, 361, 362, 358, 1032, 1223, 312(h), 1504; Rev. Proc. 2017-52
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 201845009 Third Party Communication: None
Release Date: 11/9/2018 Date of Communication: Not Applicable
Index Number: 355.01-00, 368.04-00
Person To Contact:
--------------------------- --------------------------, ID No. ----------------
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-------------- Telephone Number:
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---------------------- Refer Reply To:
---------------------------- CC:CORP:1
In Re: PLR-103960-18
----------------------------- Date:
August 09, 2018
Distributing = ------------------------------
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Controlled = -----------------
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Sub 1 = ------------------------------------------------
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Sub 2 = --------------------------------------
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Sub 3 = ----------------------------------------
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Sub 5 = ----------------------------------------------
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PLR-103960-18 2
Sub 6 = -----------------------------------------------------------------------
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Sub 7 = --------------------------------------
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Sub 8 = -------------------------------------
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Sub 9 = -----------------------------------------------------
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DRE1 = --------------------------------
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DRE2 = --------------------------------
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DRE3 = --------------------------------
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DRE4 = ------------------------------------------------------
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DRE5 = ---------------------------------------------
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DRE6 = -------------------------------------------
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DRE7 = ------------------------------------
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PLR-103960-18 3
DRE8 = --------------------------------------
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FSub = ----------------------------------------------
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FDRE1 = -----------------------------------------------------------------------
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FDRE2 = -----------------------------------------------------------------------
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FDRE3 = -------------------------------------------------------
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PRS1 = ----------------------------------
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PRS2 = ---------------------------------------
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State X = --------------
Country 1 = -----------------
Country 2 = ----------
Business Group A = ------------------------------------------------------------------------
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Business Group B =` ------------------------------------------------------------------------
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Business 1 = -------------------------------
PLR-103960-18 4
Business 2 = --------------------------------------------
Business 3 = ------------------------------------------------------------------------
Business 4 = ------------------------------------------------------
Business 5 = -------------------------------------
Business 6 = ------------------------------------------------------------------------
Business 7 = ------------------------------------------------------------------------
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Business 8 = -------------------------------------------
Property 1 = --------------------------------------------
Property 2 = -------------------------------------------------------
Property 3 = ------------
Property 4 = ------------------------------------------
Property 5 = -----------------------------
Property 6 = ---------------------------------------
Property 7 = -------------------------------------
Property 8 = --------------------------------------------
Products = ----------------
Services = ------------
Dear -----------------:
This letter responds to your letter dated February 12, 2018, as supplemented by
subsequent submissions, submitted by your authorized representatives, requesting
rulings on certain federal income tax consequences of a proposed transaction. The
information submitted is summarized below.
PLR-103960-18 5
This letter is issued pursuant to Rev. Proc. 2017-52, 2017-41 I.R.B. 283 regarding
one or more "Covered Transactions" under section 355 and/or section 368 of the
Internal Revenue Code (the "Code"). This Office expresses no opinion as to any issue
not specifically addressed by the rulings below.
The rulings contained in this letter are based on facts 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 office has made no determination regarding whether the Distribution (as
defined below): (i) satisfies the business purpose requirement of Treas. Reg. § 1.355-
2(b); (ii) is used principally as a device for the distribution of the earnings and profits of
the distributing corporation or the controlled corporation or both (see section
355(a)(1)(B) and Treas. Reg. § 1.355-2(d)); or (iii) is part of a plan (or series of related
transactions) pursuant to which one or more persons will acquire directly or indirectly
stock representing a 50-percent or greater interest in the distributing corporation or the
controlled corporation, or any predecessor or successor of the distributing corporation
or the controlled corporation, within the meaning of Treas. Reg. § 1.355-8T (see section
355(e)(2)(A)(ii) and Treas. Reg. § 1.355-7).
Summary of the Facts
Distributing is a State X publicly traded corporation and the common parent of an
affiliated group filing a consolidated return. Distributing and entities that it owns directly
or indirectly conduct the businesses of Business Group A and Business Group B.
Business Group A includes Business 1, Business 2, and Business 4. Business Group B
includes Business 3, Business 5, Business 6, Business 7, and Business 8. Distributing
is relying on Businesses 1 and 2 to meet the "active business" requirement of Section
355(b) for Distributing, and Business 3 to meet the "active business" requirement for
Controlled. Distributing conducts these businesses through domestic corporate
subsidiaries (referred to as Subs), domestic entities that are disregarded as separate
from their owners for federal income tax purposes (referred to as DREs); one foreign
corporation (FSub), and foreign entities disregarded as separate from their owners for
United States income tax purposes (referred to as FDREs).
Distributing conducts Business 1 through, among other entities, DRE1, which is
owned by Distributing; Sub 9, which is owned by DRE1; FDRE3, which is owned by
DRE1 directly and through another disregarded entity owned by DRE1; and DRE5,
which is owned by DRE1. Sub 9 owns Property 1.
PLR-103960-18 6
Distributing conducts Business 2 through Sub 1, which is owned by Distributing,
and entities owned by Sub 1. Sub 1 also owns a minority interest in two partnerships,
PRS 1 and PRS 2; unrelated parties own the remaining interests in those partnerships.
Distributing conducts Business 3 through, among other entities, Sub 2, Sub 3,
Sub 4, FSub (a Country 1 corporation), DRE2, DRE3, and DRE4, which are owned by
Distributing; FDRE1, a Country 2 entity owned by FSub directly and through
disregarded entities owned by FSub, and FDRE2, a Country 2 entity owned by FDRE1.
FDRE2 owns Property 2, Property 4, Property 5, Property 6, and Property 7.
Business 4 is conducted by Sub 8, which is owned by Distributing, and DRE8,
which is owned by Sub 8. Sub 8 owns Property 8, and DRE8 owns Property 3, at which
DRE6 maintains equipment.
Business 5 is conducted by DRE6 and DRE7, which are owned by DRE5.
Business 6 is conducted by Sub 5, which is owned by Distributing. Business 7 is
conducted by Sub 6 which is owned by Distributing. Business 8 is conducted by Sub 7,
which is owned by Distributing.
Controlled is a domestic corporation that has been formed for purposes of the
proposed transaction.
Financial information has been received indicating that Business 1, Business 2,
and Business 3, as conducted by Distributing's separate affiliated group (DSAG), as
defined in section 355(3)(B), have had gross receipts and operating expenses
representing the active conduct of a trade or business for at least the past five years.
After the proposed transaction, the DSAG will continue to operate Business Group A,
including Business 1 and Business 2, and members of Controlled's separate affiliated
group (CSAG), as defined in section 355(b)(3)(B), will continue to operate Business
Group B, including Business 3.
Proposed Transactions
For what are represented to be valid business purposes, Distributing proposes to
separate Business Group B from Business Group A by the following transactions (the
"Proposed Transactions"):
(i) DRE6 will sell the equipment located at Property 3 to DRE8.
(ii) DRE5 will distribute the membership interests in DRE6 and DRE7 to DRE1.
(iii) DRE1 will distribute the membership interests of DRE6 and DRE7 to
Distributing.
PLR-103960-18 7
(iv) FDRE3 will purchase a portion of Property 4, all of Property 5, all of
Property 6, and part of Property 7 from FDRE2.
(v) Sub 8 will sell Property 8 to DRE3.
(vi) Distributing will contribute the stock or interests in the following entities to
Controlled, which contribution will include all other entities owned directly or indirectly by
these entities (the "Contribution"):
(a) DRE6 and DRE7;
(b) Sub 2, Sub 3, Sub 4, Sub 5, Sub 6, and Sub 7;
(c) FSub, and
(d) DRE2, DRE3, and DRE4.
(vii) Distributing will distribute all the stock of Controlled to its shareholders (the
"Distribution"). Any Distributing shareholder that would otherwise be entitled to a
fractional share of Controlled stock is expected to receive cash in lieu of a fractional
share.
After the Contribution and the Distribution, Distributing will provide transition
services to Controlled pursuant to a Transition Services Agreement. These services
may include administrative, tax, treasury, human resources, financial reporting, cash
management, payroll, information technology services, and other services relating to
Business Group B. The Transition Service Agreement will last for no more than two
years, but any of these services can be provided beyond that period only if the parties
mutually agree and the services are provided at prices determined by arms-length
negotiations. There will also be a Tax Matters Agreement between Distributing and
Controlled relating to the tax treatment of the Distribution.
In addition, after the Contribution and the Distribution, the following transactions
will occur between Distributing or entities under Distributing and Controlled or entities
under Controlled:
` (a) Entities engaged in Business 5 will sell Products to Distributing or entities
under Distributing.
(b) Business 4 under Distributing may continue to provide Services to entities
under Controlled.
:
(c) DRE7 will continue to lease part of Property 1 from Sub 9.
PLR-103960-18 8
(d) FDRE2 will lease Property 2 to FDRE3.
Representations
Except as set forth below, Distributing makes all of the representations set forth
in section 3 of the Appendix to Rev. Proc. 2017-52, 2017-41 I.R.B. 283, in the form set
forth therein.
Distributing does not make representations 7, 24, and 25 because they do not
apply to the proposed transaction.
Regarding the representations in which Rev. Proc. 2017-52 provides alternative
representations, Distributing makes the following alternative representations:
(a) Representation 3: Alternative (a).
(b) Representation 8: Alternative (b).
(c) Representation 11: Alternative (a).
(d) Representation 15: Alternative (a)
(e) Representation 22: Alternative (a)
(f) Representation 31: Alternative (a).
(g) Representation 41: Alternative (a).
Rulings
Based solely on the information submitted and the representations referred to
above, we rule as follows:
1. The Contribution, followed by the Distribution, will be a reorganization
under section 368(a)(1)(D). Distributing and Controlled each will be a "party to a
reorganization" within the meaning of section 368(b).
2. No gain or loss will be recognized by Distributing on the Contribution
(sections 357(a) and 361(b)).
3. No gain or loss will be recognized by Controlled on the Contribution
(section 1032(a)).
PLR-103960-18 9
4. The basis in each asset received by Controlled in the Contribution will be
the same as the basis of that asset in the hands of Distributing immediately before the
Contribution (section 362(b)).
5. The holding period in each asset received by Controlled in the
Contribution will include the period during which Distributing held that asset (section
1223(2)).
6. No gain or loss will be recognized by Distributing on the distribution of
Controlled stock to its shareholders in the Distribution (section 361(c)).
7. No gain or loss will be recognized by (and no amount will be included
in the income of) the Distributing shareholders on the receipt of Controlled stock in
the Distribution (section 355(a)(1)).
8. The basis of the Distributing shares and the Controlled shares (including
any fractional share interest) in the hands of each distributee Distributing shareholder
will be the same as the shareholder's basis in the Distributing stock immediately before
the Distribution, allocated between the Distributing shares and the Controlled shares in
proportion to the fair market value of each in accordance with section 358(a)(1) and
Treas. Reg. § 1.358-2(a)(2) (section 358(b)(2) and (c)).
9. The holding period of the Controlled shares received by each Distributing
shareholder in the Distribution (including any fractional share interest) will include the
holding period of the Distributing shares with respect to which the Distribution will be
made, provided that such shareholder holds the Distributing shares as a capital asset
on the date of the Distribution (section 1223(1)).
10. The receipt by a Distributing shareholder of cash in lieu of fractional shares
of Controlled stock will be treated for federal income tax purposes as if the fractional
shares had been distributed to the shareholder and then sold for that amount of cash in
a sale or exchange. The gain or loss recognized (determined by the basis of shares
determined under ruling (8) allocated to the fractional shares) will be treated as a capital
gain or loss to the selling shareholder (section 1001). Such gain or loss will be short-
term or long-term capital gain or loss or loss determined under the holding period
provided under ruling (9).
11. As provided in section 312(h), proper allocation of earnings and profits
between Distributing and Controlled will be made under Treas. Regs. §§ 1.312-10(a) and
1.1502-33.
12. Following the Distribution, Controlled will not be a successor of Distributing
for purposes of section 1504(a)(3). Therefore, Controlled and its direct and indirect
subsidiaries that are "includible corporations" under section 1504(b) and satisfy the
ownership requirements of section 1504(a)(4) will be members of an affiliated group of
PLR-103960-18 10
corporations entitled to file a consolidated federal income tax return with Controlled as the
common parent.
Caveats
Except as expressly provided herein, no opinion is expressed or implied concerning
the tax treatment of the Proposed Transactions 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 Transactions that is not specifically addressed by this letter.
Procedural Statements
This ruling is directed only to the taxpayer(s) who requested it. Section
6110(k)(3) of the Code provides that it may not be used or cited as precedent.
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 (PLR-116160-16) of this letter ruling.
Pursuant to the Power of Attorney on file in this office, a copy of this letter is
being sent to your authorized representative.
Sincerely,
_______________________________
Mark S. Jennings
Senior Technician Reviewer, Branch 1
Office of Associate Chief Counsel
(Corporate)
cc:
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