Private Letter Ruling
201920008
Released May 17, 2019
Approved
Public-company segment spin-off qualified as a D reorganization
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This page covers one taxpayer's ruling from 2019, 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 company planned to contribute one business segment to a newly formed controlled corporation and distribute all controlled shares pro rata to its shareholders. After the distribution, the controlled corporation would sell shares for cash to fund its operations, and employee and director stock awards would be divided or adjusted between the two companies. The IRS ruled that the contribution and distribution would qualify as a section 368(a)(1)(D) reorganization and section 355 spin-off, generally without gain or loss. It also treated controlled-company options and restricted stock units as securities for the spin-off rules, addressed basis and holding periods, and allowed cash-in-lieu treatment for fractional shares. The IRS did not decide the business-purpose, device, or section 355(e) acquisition-plan issues.
Ruling snapshot
- Question: Would the segment contribution, pro rata distribution, stock offering, and equity-award adjustments receive tax-free spin-off treatment?
- Outcome: approved on the specified issues, subject to the representations and caveats
- Key authorities: IRC §§ 355, 357, 358, 361, 362, 368(a)(1)(D), 1001, 1032, 1223, 1504; Rev. Proc. 2017-52
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 201920008 Third Party Communication: None
Release Date: 5/17/2019 Date of Communication: Not Applicable
Index Number: 355.01-01, 368.04-00
Person To Contact:
--------------------- ----------------------, ID No. ----------------
----------------------------- Telephone Number:
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------------------- Refer Reply To:
----------------------------------- CC:CORP:2
PLR-127026-18
Date:
February 15, 2019
TY:------
Distributing = -------------------------------------------------------------------------------------
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Controlled = -------------------------------------------------------------------------------------
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Exchange = --------------------------------------------------------
Distributing = ----------------------------------------------------------------------------
Common Stock
Business -------------------------------------------------------------------------------------
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Segment 1 = -------------------------------------------------------------------------------------
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Segment 2 = -------------------------------------------------------------------------------------
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Segment 3 = -------------------------------------------------------------------------------------
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PLR-127026-18 2
Segment 4 = -------------------------------------------------------------------------------------
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Business Evolution = -------------------------------------------------------------------------------------
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Services = -------------------------------------------------------------------------------------
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Continuing = -------------------------------------------------------------------------------------
Relationships -------------------------------------------------------------------------------------
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Distributing = -------------------------------------------------------------------------------------
Restricted Stock -------------------------------------------------------------------------------------
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PLR-127026-18 3
Distributing = -------------------------------------------------------------------------------------
Options -------------------------------------------------------------------------------------
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Distributing RSUs = -------------------------------------------------------------------------------------
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Event = -------------------------------------------------------------------------------------
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Distributing Notes = -------------------------------------------------------------------------------------
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Disposition = ------------------------
Product = ------------
a = -----
b = ----
Date 1 = ------------------------
Date 2 = ------------
State A = -----------
State B = ------------------
Dear --------------------:
This letter responds to your representative’s September 7, 2018 letter, as supplemented
on December 10, 2018, January 30, 2019, and February 13, 2019, requesting rulings
under Section 355, 368(a)(1)(D), and related provisions of the Internal Revenue Code of
1986, as amended, and related regulations with respect to the proposed transaction
described below (the “Proposed Transaction”).
PLR-127026-18 4
The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalties 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.
This letter is issued pursuant to Rev. Proc. 2019-1, 2019-1 I.R.B. 1, and Rev. Proc.
2017-52, 2017-41 I.R.B. 283, regarding a Transactional Ruling for a Covered
Transaction. This Office expresses no opinion as to the overall tax consequences of
the Proposed Transaction or as to any issue not specifically addressed by the rulings
below.
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 § 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
§ 355(e)(2)(A)(ii) and Treas. Reg. § 1.355-7).
Summary of Facts
Distributing is a State A corporation and the common parent of a group of affiliated
corporations that join in filing a consolidated U.S. federal income tax return (the
“Distributing Group”). Each member of the Distributing Group uses the accrual method
of accounting. The outstanding capital stock of Distributing consists solely of
Distributing Common Stock, which is publicly traded on Exchange.
Distributing is engaged in Business, which is comprised of Segments 1 through 4,
although Distributing is in the process of exiting Segment 3. As a result of Business
Evolution, Distributing expanded into Segments 2 through 4. Financial information has
been submitted with respect to Business in accordance with Revenue Procedure 2017-
52.
Proposed Transaction
Distributing proposes to carry out the Proposed Transaction, which is comprised of the
following steps:
1. On Date 1, Distributing formed Controlled, a State B corporation formed solely for
the purposes of effecting the Proposed Transaction, with nominal capital in
exchange for a shares of common stock of Controlled (“Controlled Common
Stock”).
PLR-127026-18 5
2. Distributing will contribute all of the assets associated with Segment 4 and
related operations to Controlled solely in exchange for additional shares of
Controlled Common Stock and the assumption by Controlled of all of the
liabilities associated with such assets and operations (collectively, the
“Contribution”).
3. Distributing will distribute all of its Controlled Common Stock pro rata to its
shareholders (the “Distribution”).
As part of the Proposed Transaction and immediately following the Distribution,
Controlled will issue shares of Controlled Common Stock to one or more investors in
exchange for cash (the “Offering”). Controlled will retain the proceeds of the Offering for
use in Controlled’s operation of Segment 4.
In the event the distribution ratio for the Distribution (the “Distribution Ratio”) is other
than one-to-one, no fractional shares of Controlled Common Stock will be issued.
Instead, the distribution agent will aggregate such fractional shares into whole shares,
sell such shares in the open market, and distribute the proceeds to each Distributing
shareholder who would otherwise be entitled to receive a fractional share. No
shareholder of Distributing will receive cash representing more than one share of
Controlled Common Stock.
Distributing Restricted Stock held by directors who become directors of Controlled will
be converted into Controlled Common Stock that will be subject to the same restrictions
as the Distributing Restricted Stock (the “Controlled Restricted Stock”) and will revert to
Controlled if forfeited by the holder thereof. Distributing Restricted Stock held by
directors who remain directors of Distributing will be adjusted to reflect the Distribution.
The shares of Controlled Restricted Stock will constitute less than b percent of the
shares of Controlled Common Stock outstanding immediately prior to the Distribution.
Immediately after and contingent on the completion of the Distribution, each vested
Distributing Option, including those held by employees who transfer to Controlled, will
be split, with a portion of such option continuing as a vested option to acquire one share
of Distributing Common Stock from Distributing (collectively, the “Vested New
Distributing Options”) and the remainder exchanged for a new vested option to acquire
one share of Controlled Common Stock or a fraction or multiple thereof, based on the
Distribution Ratio (collectively, the “Vested Controlled Options”). The aggregate
exercise price of the Vested New Distributing Option and the Vested Controlled Option
will equal the exercise price of the vested Distributing Option and will be determined by
reference to the relative equity values of Distributing immediately before the Distribution
and of Distributing or Controlled, as applicable, immediately after the Distribution.
Each unvested Distributing RSU (other than unvested Distributing RSUs issued by
Distributing to certain of its employees on Date 2) and unvested Distributing Option held
by an employee who transfers to Controlled will be exchanged for a new RSU
PLR-127026-18 6
(collectively, the “Controlled RSUs”) or unvested option (collectively, the “Controlled
Unvested Options,” and, together with the Vested Controlled Options, the “Controlled
Options”) to acquire shares of Controlled Common Stock from Controlled, rather than
shares of Distributing Common Stock. The number of shares of Controlled Common
Stock subject to each new Controlled award will be determined by reference to the
Distribution Ratio. The aggregate exercise price of the Controlled Unvested Options will
equal the aggregate exercise price of the unvested Distributing Options exchanged
therefor. The per share exercise price of the Controlled Unvested Options will be
determined by reference to the relative equity values of Distributing immediately before
and of Controlled immediately after the Distribution.
The number of unvested Distributing RSUs (collectively, with the Controlled RSUs, the
“Post-Separation RSUs”) and the number of, and exercise price per share applicable to,
the unvested Distributing Options (collectively, with the Vested New Distributing Options
and the Controlled Options, the “Post-Separation Options”) held by employees who will
remain with Distributing will be adjusted to reflect the Distribution, but will not entitle the
holders to any Controlled Common Stock.
The Post-Separation RSUs and the Post-Separation Options will be designed to
preserve the economic terms of the Distributing RSUs and the Distributing Options. On
the exercise of any Post-Separation Option, the exercise price will be paid directly to the
issuing corporation in exchange for the underlying stock.
Following the Distribution, Distributing and Controlled will engage in the Continuing
Relationships, including the provision of Services. Once Controlled ceases providing
Services to Distributing, Controlled may not generate revenue, but it will continue to
seek to generate future revenue through future Events.
Representations
Except with respect to (i) representations 7, 25, 40, and 43 of section 3 of the Appendix
to Revenue Procedure 2017-52, which are inapplicable to the Proposed Transaction,
and (ii) representations 8(b), 10, 23, 32, 33, 34, and 46 of section 3 of the Appendix to
Revenue Procedure 2017-52, which Distributing has modified below, and subject to the
additional representation (8), below, Distributing makes all of the representations in
section 3 of the Appendix to Revenue Procedure 2017-52. With respect to the
representations that allow for alternative representations to be made and are not
otherwise modified below, Distributing makes representations 3(a), 15(a), 22(a), 31(a),
and 41(a).
1. Representation 8(b): In the Distribution, Distributing will not distribute Controlled
stock, Controlled securities, or Other Property to any holder of the Distributing
Notes or any other instrument that might be considered a security for U.S. federal
income tax purposes.
PLR-127026-18 7
2. Representation 10: With respect to the business relied on by each of Distributing
and Controlled to meet the active trade or business requirement of section
355(b), there have been no substantial operational changes since the end of the
taxpayer’s most recent taxable year, other than the termination of Segment 3.
3. Representation 23: Except for the provision of Services, the transaction does not
involve and will not result in a situation in which one party recognizes income but
another party recognizes the deductions associated with such income or a
situation in which one party owns Property but another party recognizes the
income associated with such Property.
4. Representation 32: No intercorporate debt will exist between Distributing and
Controlled at the time of, or subsequent to, the Distribution, except for payables
and receivables arising in connection with certain Continuing Relationships.
5. Representation 33: Payments made in connection with all continuing
transactions, if any, between Distributing and Controlled after the Distribution will
be for fair market value based on arm’s length terms, other than payments in
connection with certain Continuing Relationships, which will be provided at cost.
6. Representation 34: Distributing and Controlled will each pay its own expenses, if
any, incurred in connection with the Distribution, except for legal and accounting
expenses, appraisal fees, administrative costs of Controlled (such as those
incurred for printing and clerical work), security underwriting and registration fees
and expenses, transfer taxes, and transfer agents’ fees, in each instance only to
the extent that they are solely and directly related to the Distribution, all of which
will be paid by Distributing.
7. Representation 46: Except for the Offering, Controlled will not issue stock or
securities to a person other than Distributing in anticipation of the Distribution.
8. There is no plan or intention for Distributing or Controlled to divest of any of the
historic business assets of Distributing before or after the Distribution, except for
(i) the termination of Segment 3 by Distributing, (ii) the potential Disposition of
Product by Controlled, and (iii) dispositions of assets in the ordinary course of
business.
Rulings
Based solely on the information submitted and the representations set forth above, we
rule as follows regarding the Proposed Transaction:
PLR-127026-18 8
1) The Contribution and the Distribution, together, will be a reorganization within
the meaning of Section 368(a)(1)(D). Distributing and Controlled will each 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(a), (b).
3) No gain or loss will be recognized by Controlled on the Contribution. Section
1032(a).
4) Controlled’s basis in each asset received in the Contribution will be the same
as the basis of that asset in the hands of Distributing immediately before its
transfer, increased by the amount of gain, if any, recognized by Distributing
pursuant to Section 357(c) on the transfer. Section 362(b).
5) Controlled’s holding period in each asset received in the Contribution will
include the period during which Distributing held the asset. Section 1223(2).
6) For purposes of Section 355(a)(1)(A) and (D), the Controlled Options and the
Controlled RSUs will be treated as securities of Controlled. Treas. Reg. §
1.355-1(c).
7) Any exercise or vesting of, or lapse of restriction with respect to, a Controlled
Option or Controlled RSU will not be treated as occurring prior to the
Distribution. Cf. Rev. Rul. 2002-1, 2002-1 C.B. 268.
8) Neither Controlled nor any of its affiliates will be treated as a “successor” to
Distributing or any of its affiliates for purposes of Section 1504(a)(3).
9) No gain or loss will be recognized by Distributing on the Distribution. Section
361(c).
10) No gain or loss will be recognized by (and no amount will otherwise be included
in the income of) the Distributing shareholders upon their receipt of the
Controlled Common Stock in the Distribution. Section 355(a).
11) Each Distributing shareholder’s basis in a share of Distributing Common Stock
(as adjusted under Treas. Reg. § 1.358-1) will be allocated between the share
of Distributing Common Stock with respect to which the Distribution is made
and the Controlled Common Stock (or allocable portions thereof) received in
the Distribution with respect to the share of Distributing Common Stock in
proportion to their fair market values. Treas. Reg. § 1.358-2.
PLR-127026-18 9
12) Each Distributing shareholder’s holding period in the Controlled Common Stock
received will include the holding period of the Distributing Common Stock with
respect to which the Distribution of the Controlled Common Stock is made,
provided the Distributing Common Stock is held as a capital asset on the date
of the Distribution. Section 1223(1).
13) Earnings and profits (if any) will be allocated between Distributing and
Controlled in accordance with Section 312(h) and Treas. Reg. §§ 1.312-10(a)
and 1.1502-33(e)(3).
14) A Distributing shareholder that receives cash in lieu of a fractional share of
Controlled Common Stock will recognize gain or loss measured by the
difference between the basis of the fractional share received and the amount of
cash received. Section 1001. Any gain or loss will be treated as a capital gain
or loss, provided the fractional share of stock is held as a capital asset on the
date of the Distribution. Sections 1221 and 1222.
15) Except for purposes of Section 355(g), any post-distribution payments made by
Distributing or any of its affiliates to Controlled or any of its affiliates, or vice
versa, that (i) have arisen or will arise with respect to a taxable period ending
on or before the Distribution or for a taxable period beginning on or before and
ending after the Distribution and (ii) will not have become fixed and
ascertainable until after the Distribution will be treated as occurring immediately
before the Distribution. See Arrowsmith v. Comm’r, 344 U.S. 6, 73 (1952); Rev.
Rul. 83-73, 1983-1 C.B. 84.
Caveats
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.
PLR-127026-18 10
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,
Gerald B. Fleming
Senior Technician Reviewer, Branch 2
(Corporate)
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