Pro rata corporate spin-off receives nonrecognition rulings

Plain-English summary

A parent corporation proposed merging one subsidiary into another and then
distributing all stock of the surviving controlled corporation pro rata to its
two shareholders. The IRS ruled that neither the shareholders nor the parent
will recognize gain or loss on the distribution under IRC § 355. Each
shareholder's existing basis will be allocated between the parent and
controlled-company stock according to relative fair market value, and the
controlled-stock holding period will include the related parent-stock holding
period if the parent stock was a capital asset. Earnings and profits will be
allocated under the applicable Code and consolidated-return rules. The
controlled corporation also will not be treated as a successor to the parent
or its affiliates under § 1504(a)(3). The IRS did not determine the
transaction's business purpose, device status, or whether it formed part of a
50-percent acquisition plan.

Ruling snapshot

• Question: What tax consequences follow from the proposed pro rata
  distribution of all controlled-corporation stock?
• Outcome: Approved, with six specified rulings
• Key authorities: IRC §§ 312(h), 355, 358, 1223(1), and 1504(a)(3);
  Treas. Reg. §§ 1.312-10(b), 1.358-2(a)(2), and 1.1502-33(e)(3)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202045001 Third Party Communication: None
Release Date: 11/6/2020 Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-00,
355.03-00 Person To Contact:
-----------------------, ID No. -----------------
----------------------- Telephone Number:
------------- --------------------
--------------------------------------------- Refer Reply To:
------------------ CC:CORP:2
--------------------------- PLR-104000-20
------------------------- Date:
July 24, 2020

     TY:-------

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

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

Subsidiary = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
-----------------------

Shareholder = -----------------------------------------------------------------------------------------
1 -----------------------------------------------------------------------------------------
-----------------------

Shareholder = -----------------------------------------------------------------------------------------
2 -----------------------------------------------------------------------------------------
-----------------------

Partnership = -----------------------------------------------------------------------------------------
----------------------------------------

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

State B = -------------
PLR-104000-20 2

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

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

C = --------------

D = --------------

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

This letter responds to your representative’s December 18, 2019 letter, requesting rulings
under Section 355 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”).

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. 2020-1, 2020-1 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. § 1.355-8 (see § 355(e)(2)(A)(ii)
and Treas. Reg. § 1.355-7).

                                      Summary of Facts

Shareholder 1 and Shareholder 2 own Distributing. 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. Distributing owns all the
PLR-104000-20 3

issued and outstanding stock of Controlled, a State A corporation, and Subsidiary, a State
B corporation. Controlled owns C percent of Partnership, a State A limited partnership,
and Subsidiary owns D of Partnership. Unrelated third parties own the remaining
interests in Partnership.

Distributing Group, excluding Controlled and Subsidiary, is engaged in Business A and
Partnership is engaged in Business B. Financial information has been submitted with
respect to Business A and Business B in accordance with Revenue Procedure 2017-52.

                            Proposed Transaction

Distributing proposes the following transaction (the “Proposed Transaction”):

1. Subsidiary will merge with and into Controlled, with Controlled surviving.

2. Distributing will distribute all its Controlled Common Stock pro rata to Shareholder
  1 and Shareholder 2 (the “Distribution”).


                               Representations

Except with respect to representations 7, 24, 25, and 35 of section 3 of the appendix to
Revenue Procedure 2017-52, which are inapplicable to the Proposed Transaction,
Distributing makes all 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), 8(b), 11(a), 15(b), 22(a), 31(a), and 41(a).

                                    Rulings

Based solely on the information submitted and the representations set forth above, we
rule as follows regarding the Proposed Transaction:

1) No gain or loss will be recognized by (and no amount will be included in the
income of) Shareholder 1 or Shareholder 2 upon receipt of the Controlled Stock
in the Distribution. Section 355(a)(1).

2) No gain or loss will be recognized by Distributing upon the Distribution. Section
355(c)(1).

3) The aggregate basis of the Distributing stock and the Controlled stock in the
hands of Shareholder 1 and Shareholder 2 immediately after the Distribution will
equal the aggregate basis of the Distributing stock held by such shareholder
immediately before the Distribution allocated between the stock of Distributing
and Controlled in proportion to the fair market value of each in accordance with
Treas. Reg. § 1.358-2(a)(2). Sections 358(a)(1), (b), and (c).
PLR-104000-20 4

  4)   The holding period of Controlled stock received by Shareholder 1 and
       Shareholder 2 in the Distribution will include the holding period of the Distributing
       stock held by each shareholder with respect to which the distribution will be
       made, provided that such Distributing stock is held as a capital asset on the date
       of the Distribution. Section 1223(1).

  5)   Earnings and profits of Distributing, if any, will be allocated between Distributing
       and Controlled in accordance with section 312(h), Treas. Reg. § 1.312-10(b),
       and Treas. Reg. § 1.1502-33(e)(3).

  6)   Immediately following the Distribution, Controlled will not be treated as a
       “successor” to Distributing or any of its affiliates for purposes of Section
       1504(a)(3).

                                        Caveats

No opinion is expressed or implied about the tax treatment of the Proposed Transaction
under any other provisions of the Code or regulations, or effects resulting from the
Proposed Transaction that are not specifically covered by the above rulings.

                               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, a copy of this letter is
being sent to your authorized representative.

                                     Sincerely,



                                     Richard K. Passales
                                     Senior Counsel
                                     (Corporate)

cc: