In a spin-off, cash paid into terminating pension plans counts as a transfer to creditors

Plain-English summary

A publicly traded parent corporation planned to separate one of its two businesses into a new, separately traded company (a "spin-off") intended to qualify as a tax-free divisive reorganization under sections 355 and 368(a)(1)(D). As part of the deal, the parent would move the business into a new subsidiary, receive cash (funded by the new company's borrowing) in the transfer, and then use that cash in several "purges," including large contributions to its own underfunded, soon-to-be-terminated pension plans. The parent asked the IRS for two narrow rulings. First, that paying cash into the terminating pension plans (up to the amount needed to fully wind them up) is treated as a transfer to "creditors" of the parent under section 361(b)(3), which lets the parent use spin-off cash for that purpose without triggering gain. Second, that keeping a minority stake in the new company for up to five years (to be sold later in taxable transactions) would not be considered part of a plan whose principal purpose is tax avoidance under section 355(a)(1)(D)(ii). The IRS ruled favorably on both points, based on the taxpayer's representations, while expressing no opinion on whether the overall transaction qualifies under sections 355 and 368 or on any issue it did not specifically address.

Ruling snapshot

• Question: (1) Is a cash contribution to the parent's terminating pension plans, up to the full termination amount, a transfer to "creditors" under § 361(b)(3)? (2) Does the parent's retention of a minority stake in the spun-off company for up to five years violate § 355(a)(1)(D)(ii)?
• Outcome: Approved (both rulings favorable, subject to the transaction otherwise qualifying under §§ 355 and 368(a)(1)(D))
• Key authorities: IRC §§ 355, 361(b)(3), 355(a)(1)(D)(ii), 368(a)(1)(D)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201852015 Third Party Communication: None
Release Date: 12/28/2018 Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-00,
361.00-00, 361.02-02 Person To Contact:
-------------------------, ID No. -----------------
----------------------- -----------------------------------------------------
--------------------------- Telephone Number:
-------------------------------- ----------------------
---------------------------------------------------------- Refer Reply To:
------------------------------ CC:CORP:3
PLR-118631-18
Date:
October 01, 2018

Legend

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

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

Business B = -----------------------------------------------------------------------

---

Year 1 = -------

Year 2 = -------

Date X = ---------------------------

Termination Date = ------------------------

a = ------------------

b = ------------------

c = ------------------

d = --

PLR-118631-18 2

e = --------

f = ----------------

g = ----

h = --

k = --

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

This letter responds to your authorized representative's letter dated June 1, 2018,
requesting rulings on certain federal income tax consequences of a series of
transactions (the "Proposed Transaction"). The information provided in that letter and in
later correspondence is summarized below.

The rulings contained in this letter are based upon 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.

The letter and the rulings contained herein are issued pursuant to § 6.03 of Rev. Proc.
2018-1, 2018-1 I.R.B. 1, regarding one or more significant issues under §§ 355 and
368(a)(1)(D). The rulings contained in this letter only address one or more discrete
legal issues in the transaction. This office expresses no opinion as to the overall tax
consequences of the Proposed Transaction described in this letter or as to any issue
not specifically addressed by the rulings below.

                              Summary of Facts

Distributing is a publicly traded corporation and the common parent of a consolidated
group engaged in Business A and Business B. Distributing currently maintains two
qualified defined-benefit pension plans (the "Pension Plans"). The Pension Plans have
been closed to new entrants since Year 1 and Year 2. As of Date X, the Pension Plans'
GAAP gross plan assets were $a and gross plan liabilities were $b, resulting in a net
liability of $c (the "GAAP Amount"). Distributing plans to terminate the Pension Plans by
the Termination Date as part of the Proposed Transaction described below.

As part of the termination process, Distributing must file a Standard Termination Notice
(Form 500) with the U.S. Pension Benefit Guarantee Corporation (the "PBGC") within

PLR-118631-18 3

180 days of the Termination Date. The filing of this notice will initiate an additional 60
day review period with the PBGC. Within 180 days of the expiration of the PBGC's
review period, Distributing must make cash contributions to the Pension Plans to allow
them to distribute final benefits to plan beneficiaries.

Distributing will make final cash contributions to the Pension Plans in an amount
necessary to finance the Pension Plans' purchase of the insurance annuities and lump-
sum distributions within d months of the External Distribution (defined below) (such
amount , the "Full Termination Amount"). Distributing estimates that the Pension Plans'
cost to purchase annuities and make the requisite lump-sum payments will be
approximately e percent greater than the corresponding gross plan liabilities.

                              Proposed Transaction

Taxpayer proposes to separate Business A from Business B into Controlled (defined
below), a separate, publicly traded corporation. Distributing has undertaken or
proposes to undertake the following steps (each a "step" and, collectively, the Proposed
Transaction):

(1) Distributing will form a new, first-tier domestic corporate subsidiary ("Controlled").

(2) Prior to the Contribution (defined below), Distributing will undertake an internal
restructuring to transfer the subsidiaries conducting Business A to Distributing
and a first-tier domestic corporate subsidiary of Distributing ("RetainCo"), to the
extent such subsidiaries are not currently directly held by Distributing or
RetainCo.

(3) Distributing will transfer the Business A assets and liabilities that it holds directly
to a newly formed corporation ("Business A OpCo") in exchange for Business A
OpCo stock. Distributing and RetainCo will then transfer all of the equity
interests in Business A OpCo and the remaining Business A entities to Controlled
in exchange for (a) Controlled stock and (b) in the case of Distributing, cash that
will be funded by newly issued debt of Controlled (an amount equal to the cash
received by Distributing in this step, the "Boot," and this step, the "Contribution").
Distributing will receive at least 80% of Controlled's stock in the Contribution.

(4) No later than k months after the External Distribution, Distributing will (i) transfer
up to $f of the Boot to its creditors in satisfaction of Distributing's debt (the "Debt
Cash Purge"), (ii) transfer to the Pension Plans an amount of the Boot up to the
Full Termination Amount (the "Pension Cash Purge") and (iii) use the remainder
(if any) of the Boot to repurchase Distributing common stock from its
shareholders pursuant to a newly authorized share repurchase plan (the
"Repurchase Cash Purge" and, together with the Debt Cash Purge and the
Pension Cash Purge, the "Cash Purges").

PLR-118631-18 4

(5) Distributing will distribute at least 80% of the stock of Controlled pro rata to
Distributing shareholders (the "External Distribution"). Distributing intends, within
g months after the External Distribution, to dispose of (directly or indirectly) the
remaining stock of Controlled (the "Retained Stake") in one or more taxable
sales. In determining how to dispose of the Retained Stake, Distributing will use
business judgment and take into account market conditions. In all cases
Distributing will dispose of the entire Retained Stake within five years of the
External Distribution.

                                Representations

(a) Distributing will terminate the Pension Plans no later than the Termination Date.

(b) Distributing will pay the Pension Cash Purge within d months of the External
Distribution.

(c) The aggregate amount of Distributing liabilities that will be repaid as part of the
Cash Purges will not exceed the weighted quarterly average of third party
liabilities of Distributing for the 24-month period ending on the close of the last full
business day before the date on which Distributing's board of directors initially
discussed the separation.

(d) Distributing will retain (directly or indirectly) the Retained Stake in order to
facilitate directly or indirectly Distributing's financing of future acquisitions.

(e) None of Distributing's directors or officers will serve as a director or officer of
Controlled as long as Distributing (directly or indirectly) continues to own a
portion of the Retained Stake, except that up to h of Distributing's directors may
serve as a director of Controlled. If these directors so serve as directors of
Controlled, each will do so solely to accommodate Controlled's business need for
a director with his or her unique experience or expertise in Business A and to
provide a sense of continuity. Any such directors will serve as directors of
Controlled for no more than h years.

(f) Distributing (directly or indirectly) will dispose of the Retained Stake as soon as a
disposition is warranted consistent with the business purpose for the Retained
Stake and, in any event, no later than five years following the External
Distribution.

(g) Distributing (directly or indirectly) will vote the Retained Stake in the same
proportion to the votes cast by Controlled's other shareholders.

PLR-118631-18 5

                                      Rulings

Based solely on the information submitted and the representations set forth above, and
provided that the Contribution and the External Distribution otherwise qualify under
§§ 368(a)(1)(D) and 355, we rule as follows:

(1) The payment of the Pension Cash Purge to the Pension Plans to the extent of
the Full Termination Amount will be treated as a transfer to "creditors" of
Distributing within the meaning of § 361(b)(3).

(2) Distributing's direct or indirect continuing ownership of the Retained Stake until
its disposition within five years of the External Distribution will not be in
pursuance of a plan having as one of its principal purposes the avoidance of
federal income tax for purposes of § 355(a)(1)(D)(ii).

                                       Caveat

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.

                              Procedural Statements

This letter ruling is directed only to the taxpayers who requested it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.

A copy of this letter must be attached to any federal income tax return to which it is
relevant. Alternatively, a taxpayer filing its return electronically may satisfy this
requirement by attaching a statement to its federal income tax return that sets forth the
date and control number (PLR-118631-18) of this ruling letter.

In accordance with a power of attorney on file in this office, a copy of this letter is being
sent to your authorized representative.

                                    Sincerely,



                                    Richard K. Passales
                                    Senior Counsel, Branch 4
                                    Office of Associate Chief Counsel (Corporate)