Public share repurchases tested pro rata under section 355(e)

Plain-English summary

A publicly traded company had been separated from a corporate group through distributions intended to qualify under section 355. After major shareholders sold their positions, the company authorized open-market purchases, accelerated share repurchases, tender offers, or a combination of those methods, primarily involving public shareholders. The IRS ruled that if those repurchases were part of a plan with the earlier distributions, they would be treated as made pro rata from all public shareholders when testing section 355(e). A shareholder's percentage increase would be measured after netting related percentage reductions from repurchases, stock dispositions, and company stock issuances. The ruling included knowledge and securities-filing rules for identifying nonpublic five-percent or ten-percent shareholders, but it did not decide whether the repurchases were actually part of a plan with the distributions.

Ruling snapshot

• Question: How should widely held share repurchases affect the section 355(e) acquisition test if they are part of a plan with earlier distributions?
• Outcome: approved, use pro rata public-shareholder treatment and net related ownership increases and decreases
• Key authorities: IRC § 355(e); Treas. Reg. § 1.355-7(h)

Full text (IRS public release)

Internal Revenue Service                                        Department of the Treasury
                                                                Washington, DC 20224

Number: 201943001                                               Third Party Communication: None
Release Date: 10/25/2019                                        Date of Communication: Not Applicable
Index Number: 355.10-00
                                                                Person To Contact:
-----------------------                                         --------------------------, ID No. ----------------
------------------------------------                            -----------------
-------------------------------------                           Telephone Number:
------------------------------------------------                ----------------------
---------------------------------------                         Refer Reply To:
                                                                CC:CORP:2
                                                                PLR-101305-19
                                                                Date:
                                                                August 01, 2019

Legend

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

Distributing 1                           =         ----------------------------------------------------------------------------------
                                                   ------------------------------------
                                                   ------------------------------------------

Distributing 2                           =         ---------------------------------------------------------------
                                                   -------------------------------------------------
                                                   -------------------------------------------------------

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

Shareholder A Entities                   =         -----------------------------------------------------------------------------
                                                   ---------------------------------------------

Shareholder B                            =         ----------------------------------------

Investment Advisor 1                     =         --------------

Investment Advisor 2                     =         -----------------------------

Investment Advisor 3                     =         ----------------------------------------------

Date A                                   =         ----------------------

Date B                                   =         ---------------------------

Date C                                   =         ------------------------
PLR-101305-19                                 2


Date D                          =     ----------------------

Date E                          =     --------------------

Date F                          =     ----------------------------

Date G                          =     -----------------

Date H                          =     ---------------------------

Date I                          =     --------------------

a percent                       =     ------------------

b percent                       =     ------------------

c percent                       =     ---------------------

d percent                       =     --------------------

e percent                       =     ------------------

f percent                       =     ------------------

g percent                       =     ----------------

h percent                       =     --------------------

i percent                       =     ------------------

$a                              =     -----------------


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

This letter responds to your December 21, 2018 request, submitted by your authorized
representatives, for rulings under section 355(e) relating to the Share Repurchases
(defined below). The material information provided in that request and in subsequent
correspondence is summarized below.

The rulings contained in this letter are based on facts and representations submitted by
the taxpayer and accompanied by penalties of perjury statements executed by an
appropriate party. This office has not verified any of the materials submitted in support
PLR-101305-19                                 3

of the request for rulings. Verification of the information, representations, and other
data may be required as part of the audit process.

This letter is issued pursuant to section 6.03 of Rev. Proc. 2018-1, 2018-1 I.R.B. 1,
regarding significant issues presented in a transaction described under section 355 of
the Internal Revenue Code (the Code). 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 transactions described in this letter or as to
any issue not specifically addressed by the rulings below.

                                    Summary of Facts

Distributing 2, a State A corporation, was the parent of a worldwide group of domestic
and foreign entities. Distributing 2 was the common parent of an affiliated group of
corporations that joined in filing a consolidated federal income tax return. Distributing 2
had a single class of common stock outstanding, which was publicly traded.

Pursuant to transactions described in PLR-130090-15 (issued on February 24, 2016),
Distributing 2 effectuated the distribution of the stock of Distributing 1 and Controlled,
each a State A corporation with a single class of common stock, to Distributing 2’s
shareholders (together, the Distributions). The Distributions were intended to qualify
under section 355. The Distributions were accomplished on or before Date A.

Before Date B, approximately a percent of Distributing 2’s outstanding common stock
was owned by affiliated entities (the Shareholder A Entities). The Shareholder A
Entities sold approximately b percent of Distributing 2’s outstanding common stock in a
public offering on Date B and disposed of an additional approximately c percent of such
stock shortly thereafter. Pursuant to a stock purchase agreement entered into on Date
C, the Shareholder A Entities sold approximately d percent of the outstanding shares of
common stock of each of Distributing 2, Distributing 1, and Controlled to an unrelated
party, Shareholder B, on Date D (a date that occurred after Date A).

Following the Distributions, the Shareholder A Entities sold approximately e percent of
Controlled’s outstanding common stock in a public offering on Date E and disposed of
an additional approximately f percent of such stock shortly thereafter. On Date F, the
Shareholder A entities sold approximately g percent of Controlled’s outstanding
common stock in a privately negotiated transaction. Following these sales, the
Shareholder A Entities did not own any of Controlled’s outstanding common stock.

During Date G, Shareholder B sold approximately h percent of the outstanding common
stock of Controlled in a secondary public offering and Controlled redeemed an
additional approximately i percent of such stock. Following these transactions,
Shareholder B did not own any of Controlled’s outstanding common stock.
PLR-101305-19                                4

Following the Distributions, on Date H, Controlled’s board of directors approved a new
share repurchase plan of up to $a (the Share Repurchases). On Date I, Controlled’s
board of directors authorized additional share repurchases of up to an additional $a.
Controlled had not repurchased any of its shares prior to implementing the Share
Repurchases, and Controlled may engage in additional share repurchases in the future.

Certain Share Repurchases will be made through: (i) open market purchases, (ii) one or
more accelerated share repurchase (ASR) programs, (iii) one or more tender offers
open to all public holders of Controlled common stock, or (iv) a combination thereof. It
is anticipated that the only participants in the Share Repurchases will be public
shareholders (i.e., shareholders who are not a “controlling shareholders” or “10 percent
shareholders,” within the meaning of Treas. Reg. sections 1.355-7(h)(3) and (14),
respectively (Public Shareholders)). It is expected that, under an ASR program,
Controlled would purchase a specified number or dollar amount of its shares from a
third-party investment bank at a price per share that is determined over a specified
calculation period (which often may be terminated early at the bank’s option) and may
be subject to certain caps and/or floors. Controlled would pay for the shares upfront,
and the bank would obtain shares that it delivers upfront by borrowing shares (e.g., from
customers or mutual funds). Then the bank would buy shares, generally in the open
market, over time to return the borrowed shares and to obtain any additional shares it
owes to Controlled, with a possible true-up adjustment as between Controlled and the
bank at maturity of the ASR program. The timing and total amount of the Share
Repurchases will ultimately be dependent upon business considerations and market
factors, among other factors.

Prior to Date H, Investment Advisors 1, 2, and 3, filed Schedules 13G reporting
beneficial ownership of more than ten-percent, or more than five-percent, of Controlled’s
total outstanding common shares. Item 6 on each Schedule 13G stated that no one
person's interest in the common stock of Controlled was more than five-percent of the
total outstanding common shares.

                                    Representations

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

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. At the time that a Share Repurchase is consummated, Controlled will not know the
identity of any beneficial shareholder: (i) from which Controlled stock is repurchased in
the open market; (ii) in the case of an ASR program, from which the third-party
investment bank borrows Controlled stock or purchases Controlled stock to fulfill the
PLR-101305-19                                 5

bank’s obligation to return borrowed shares; or (iii) that participates in a tender offer
(except to the extent that the shareholder is the record holder of tendered shares or
provides an identifying tax-related form or statement to Controlled in connection with
such participation).

                                          Rulings

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

1. To the extent the Share Repurchases are treated as part of a plan (or series of
related transactions) with the Distributions for purposes of section 355(e), the Share
Repurchases will be treated as being made from all Public Shareholders of Controlled
common stock on a pro rata basis for purposes of testing the effect of the Share
Repurchases on the Distributions under section 355(e).

For purposes of this ruling, each Controlled common stock shareholder will be treated
as a Public Shareholder with respect to any Share Repurchases that occur on or prior to
five business days after either: (i) actual knowledge of the Vice President of Investor
Relations, the General Counsel, or a functionally similar position at Controlled of the
existence of a non-Public Shareholder, or (ii) the filing of a Schedule 13D, Schedule
13G, Form 3, or Form 4, indicating the shareholder holds enough shares to be
considered a five-percent shareholder within the meaning of Treas. Reg. section 1.355-
7(h)(8) (and such shareholder actively participates in the management or operation of
Controlled as described in Treas. Reg. section 1.355-7(h)(3)) or a ten-percent
shareholder within the meaning of Treas. Reg. section 1.355-7(h)(14). For purposes of
determining whether a five-percent shareholder within the meaning of Treas. Reg.
section 1.355-7(h)(8) or a ten-percent shareholder within the meaning of Treas. Reg.
section 1.355-7(h)(14) exists, Controlled may disregard a Schedule 13G unless Item 6
reports such a shareholder or is left blank, or the filer discloses its status as a
five-percent shareholder within the meaning of Treas. Reg. section 1.355-7(h)(8) or a
ten-percent shareholder within the meaning of Treas. Reg. section 1.355-7(h)(14) on
Form 3 or Form 4.

2. Any increase, directly or indirectly, in the percentage of either voting power or value
of the stock of Controlled owned by a shareholder by virtue of the Share Repurchases
or acquisitions of the stock of Controlled, if any, as part of a plan (or series of related
transactions) with the Distributions will be taken into account for purposes of section
355(e) only after reducing such increase for any reduction in such percentage interest,
directly or indirectly, resulting from the Share Repurchases and any disposition of stock
of Controlled by such shareholder or issuance of stock by Controlled, if any, as part of a
plan (or series of related transactions) with the Distributions.
PLR-101305-19                                 6

3. The effect of the Share Repurchases will be taken into account under section 355(e)
and these rulings only to the extent such Share Repurchases are otherwise treated for
purposes of section 355(e) as part of a plan (or series of related transactions) with the
Distributions.

                                          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.

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.

In accordance with the Power of Attorney on file with this office, copies of this letter are
being sent to your authorized representatives.



                                       Sincerely,



                                       Robert M. Rhyne
                                       Assistant to the Branch Chief, Branch 2
                                       Office of Associate Chief Counsel (Corporate)




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