IRS preserves prior spin-off rulings after a planned business combination and related payment changes

Plain-English summary

After receiving an earlier ruling for a § 355 business separation, the distributing corporation negotiated a combination between the separated company and another corporate group. The revised transaction also included post-closing adjustments, possible pension-plan contributions, debt repayment, and open-market repurchases of the separated company's shares. The IRS ruled that post-closing payments would be treated as occurring immediately before the distribution and as money or other property under § 361(b), and that the pension plans would be treated as creditors up to specified amounts. It also ruled that qualifying post-closing share repurchases would be treated as pro rata purchases from public shareholders for § 355(e) and would not be evidence of a prohibited device. Subject to the supplemental rulings and representations, the revised facts would not otherwise undermine the prior ruling. The IRS declined to rule on the use of transaction cash to repay or repurchase specifically identified debt and on the resulting basis consequences.

Ruling snapshot

• Question: Would a post-spin business combination, related cash adjustments, pension contributions, and later share repurchases preserve the taxpayer's earlier § 355 and Type D reorganization rulings?
• Outcome: approved (the prior rulings remain effective as supplemented, but the IRS reserved the treatment of cash used for specified debt)
• Key authorities: IRC §§ 355, 357, 361, 362, 368; Treas. Reg. §§ 1.355-2(d), 1.355-7

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 202051009                                             Third Party Communication: None
Release Date: 12/18/2020                                      Date of Communication: Not Applicable
Index Number: 355.00-00, 355.06-00,
              358.00-00, 361.00-00,                           Person to Contact:
              361.02-02, 362.00-00                            ----------------------, ID No. -----------------
                                                              Telephone Number:
--------------------                                          --------------------
----------------------------------------------                Refer Reply To:
-------------                                                 CC:CORP:4
----------------------------                                  PLR-121703-19
-------------------------------                               Date:
                                                              March 17, 2020


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Legend


Corporation X                  =     ---------------
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Corporation X Sub 1            =     ----------------
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Corporation X Sub 2            =     -----------------
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Sub 4                          =     -----------------------------------------
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Sub 5                                -------------------------------------
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Corporation Y                  =     ----------------------------
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Date 1                         =     ------------------

Date 2                         =     -------------------
PLR-121703-19                                     2

 Date 3                  =   ------------------

 Controlled              =   -----------------------------------------------------------------------------
 Accelerated Share           -----------------------------------------------------------------------------
 Repurchase Program          -----------------------------------------------------------------------------
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 Pension Plans           =   -----------------------------------------------------------------------------
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 Pension Plan Amount =       -----------------------------------------------------------------------------
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 a                       =   --

 b                       =   --

 c                       =   ---

 d                       =   ---

 e                       =   --

 f                       =   ---

 g                       =   ---

 h                       =   ---

 i                       =   ---


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

       This letter responds to your authorized representatives’ letter dated September
13, 2019, as supplemented by additional submissions dated November 19, 2019,
November 26, 2019, February 10, 2020 and February 26, 2020 requesting that we
supplement the private letter ruling dated May 13, 2019 (PLR-133731-18) (the “Prior
Ruling Letter”). The information provided in the request for the Prior Ruling Letter and
PLR-121703-19                                   3

the subsequent letter and correspondence is summarized below. Capitalized terms not
defined in this letter have the meanings assigned to them in the Prior Ruling Letter.

        This letter is issued pursuant to sections 3.05 and 4 of Rev. Proc. 2017-52, 2017-
41 I.R.B. 283, as amplified and modified by Rev. Proc. 2018-53, 2018-43 I.R.B. 667,
regarding one or more “Covered Transactions” under section 355 and/or section 368 of
the Internal Revenue Code (the “Code”), section 6.03(2) of Rev. Proc. 2019-1, 2019-1
I.R.B. 1, regarding one or more significant issues under section 355 and/or section 368
of the Code, and section 3.01(58) of Rev. Proc. 2019-3, 2019-1 I.R.B. 130, with respect
to a significant issue under section 355(a)(1)(B) and Treas. Reg. § 1.355-2(d) pertaining
to a device. 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 penalty 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.

                                 SUPPLEMENTAL FACTS

       After the receipt of the Prior Ruling Letter, Distributing commenced negotiations
with Corporation X, a Country A corporation, regarding a potential transaction in which
Corporation X would combine with Controlled after the Distribution. Corporation X is the
parent of a worldwide group of entities (the “Corporation X Worldwide Group”).

       On Date 1, Distributing, Controlled, Corporation X and certain of their
subsidiaries entered into definitive agreements for a business combination transaction
pursuant to which, subject to certain terms and conditions, (i) Distributing will transfer
Business B to Controlled, (ii) Distributing will distribute to its shareholders all of the
issued and outstanding shares of Controlled common stock held by Distributing by way
of either (at Distributing’s option) a Regular Spin or a Split-Off and, if necessary, a
Clean-Up Spin, and (iii) immediately following such distribution, Controlled and
Corporation X will engage in a strategic business combination transaction described
below.

       The closing of the Combination (as defined below) is conditioned on, among
other things, the receipt by Distributing of a private letter ruling to the effect that the
Combination will not adversely affect Distributing’s ability to rely upon the rulings
granted in the Prior Ruling Letter.

       Immediately prior to the Proposed Transactions, Controlled will wholly own Sub
4, a State A corporation. Sub 4 will wholly own Sub 5, a State A corporation.
Corporation X will wholly own Corporation X Sub 1, a Country A corporation.
Corporation X Sub 1 will wholly own Corporation X Sub 2, a Country A corporation.
PLR-121703-19                                  4


       On Date 2, in a transaction unrelated to the Contribution and the Distribution (the
“Separation”) and the Combination, Distributing entered into an agreement to acquire all
of the stock of Corporation Y, a publicly traded corporation, subject to the terms and
conditions of the agreement, for a specified amount of cash. Distributing closed the
acquisition of Corporation Y on Date 3. To finance the acquisition of Corporation Y,
Distributing issued commercial paper between Date 2 and Date 3 (such commercial
paper (or commercial paper incurred, directly or indirectly, to refinance the original
issuance of commercial paper) that is outstanding as of the Distribution, the “Specified
Distributing Debt”).

                                  Proposed Transaction

      The steps of the Proposed Transaction, as modified by the business combination
transaction, are set forth below. Distributing will not undertake either of the First IPO or
the Second IPO described in the Prior Ruling Letter.

        (i)    Controlled will incur third-party debt financing through a combination of
               bonds and/or term loans (the “Controlled Debt” and the proceeds from the
               Controlled Debt, the “Initial Cash Proceeds”). It is expected that the
               Controlled Debt will be guaranteed by Distributing, but any Distributing
               guarantees will terminate no later than the completion of the Distribution.

        (ii)   Distributing will transfer the stock and/or membership interests of Sub 1,
               Sub 2 and LLC 1 and possibly cash (the “Contribution Assets”) to
               Controlled in exchange for (i) Controlled common shares, (ii) the Initial
               Cash Proceeds and (iii) the assumption by Controlled of certain liabilities
               of Distributing that are related to Business B. Immediately after the
               completion of this step, Distributing will own all of the outstanding stock of
               Controlled. Pending the use of the Initial Cash Proceeds as described in
               Step (vii) below, the Initial Cash Proceeds will be held by Distributing in a
               segregated bank account.

       (iii)   Immediately after the Contribution, Distributing will effect the Distribution.

       (iv)    Immediately after the Distribution, Corporation X will merge with and into
               Corporation X Sub 2, with Corporation X Sub 2 surviving as a wholly
               owned subsidiary of Corporation X Sub 1 (the “Corporation X Merger”).
               Each holder of shares of Corporation X will receive, in exchange for each
               Corporation X ordinary share, a shares of stock in Corporation X Sub 1.

       (v)     Immediately after the completion of the Corporation X Merger, Sub 5 or its
               nominee will acquire all of the shares of Corporation X Sub 2 from
               Corporation X Sub 1 in exchange for an exchangeable note (the
               “Exchangeable Note”) issued by Sub 5 (the “Share Sale”). The
PLR-121703-19                               5

             Exchangeable Note is mandatorily convertible into a number of shares of
             Controlled common stock on the liquidation of Corporation X Sub 1.

     (vi)    As soon as practicable after the completion of the Share Sale, Corporation
             X Sub 1 will distribute the Exchangeable Note to its shareholders in a
             liquidating distribution. Immediately upon such liquidating distribution, the
             Exchangeable Note will, pursuant to its terms, be automatically and
             mandatorily exchanged for shares of Controlled common stock delivered
             by Sub 5, such that each shareholder of Corporation X Sub 1 will receive
             b shares of Controlled common stock for each share of Corporation X Sub
             1 stock, subject to applicable withholding taxes, if any (together with
             transactions described in Steps (v) and (vi), the “Combination”).

             Under Country A law, the Corporation X Merger must occur within a
             specified period of time after the required documents in connection with
             the Corporation X Merger have been deposited or disclosed for public
             inspection in accordance with Country A law. If the Corporation X Merger
             is not completed within this time period, then, unless otherwise agreed by
             Distributing, Controlled and Corporation X, the structure of the
             Combination will change such that Corporation X will sell all of its assets
             and liabilities to Sub 5 in exchange for the Exchangeable Note, followed
             by the liquidation of Corporation X and the automatic conversion of the
             Exchangeable Note into shares of Controlled common stock on the same
             terms described above.

             In connection with the Combination, Distributing and Controlled will enter
             into certain continuing commercial and transitional agreements and
             arrangements, which were negotiated between Distributing and
             Corporation X.


     (vii)   With respect to the Initial Cash Proceeds, by no later than c days after the
             distribution of Controlled common stock in the Distribution, and, with
             respect to the Post-Closing Cash Proceeds (as defined below), within d
             days after the receipt of any such Post-Closing Cash Proceeds and except
             as described in the next sentence, Distributing will (i) use some or all of
             the Initial Cash Proceeds and the Post-Closing Cash Proceeds to (A)
             repurchase Distributing common stock, including potentially through an
             Accelerated Share Repurchase Program, and/or (B) make pro rata special
             cash distributions to its shareholders, and (ii) use the remaining Initial
             Cash Proceeds and Post-Closing Cash Proceeds to (A) repay or
             repurchase debt (including principal, interest and associated premiums
             and fees) held by third-party lenders, and (B) make contributions to one or
             both of the Pension Plans in amounts not exceeding the Pension Plan
             Amount with respect to that Pension Plan (all such uses of the Initial Cash
PLR-121703-19                                6

               Proceeds and the Post-Closing Cash Proceeds, the “Cash Boot Purge”).
               Distributing may use some of the Initial Cash Proceeds and Post-Closing
               Cash Proceeds to repurchase Specified Distributing Debt, including
               principal, interest and associated premiums and fees. All of the Initial
               Cash Proceeds and the Post-Closing Cash Proceeds will be used as
               described in the preceding two sentences.

      (viii)   After the closing of the Combination, (i) either Distributing or Controlled
               may make a cash payment to the other party in respect of the difference
               between the amount of working capital in Controlled as of the Distribution
               and a specified target working capital amount (the “Working Capital
               Adjustment”), (ii) Controlled will make one or more payments to
               Distributing in an amount equal to the amount of cash in Controlled and its
               subsidiaries (the “Cash Adjustment”), and (iii) Controlled will make a
               payment to Distributing in an amount equal to the costs incurred by
               Controlled but funded by Distributing in issuing the Controlled Debt (the
               “Financing Obligations Adjustment,” each of the Financing Obligations
               Adjustment, the Working Capital Adjustment and the Cash Adjustment, a
               “Post-Closing Payment” and the proceeds from the Post-Closing
               Payments, the “Post-Closing Cash Proceeds”). The Working Capital
               Adjustment and the Cash Adjustment will be made, if at all, within e
               months after closing, unless, in the case of the Cash Adjustment, the
               amount of the Cash Adjustment exceeds a specified amount, in which
               case Controlled will pay the specified amount to Distributing in respect of
               the Cash Adjustment, and Distributing and Controlled will cooperate for f
               months to allow Distributing to recover an amount of cash equal to the
               remaining amount of the Cash Adjustment in a tax-efficient manner.

      After the Combination, Distributing shareholders who received Controlled
common stock in the Distribution will own approximately g% of the common stock of
Controlled, and former Corporation X shareholders will own approximately h% of the
common stock of Controlled.

      Following the closing of the Combination, Controlled may carry out share
repurchases in order to optimize the capital structure of Controlled (“Post-Closing
Controlled Share Repurchases”). Corporation X has historically engaged in share
repurchases for this purpose, as well as to return capital to shareholders, and
Controlled expects to engage in share repurchases for the same purposes once it
achieves certain third-party leverage targets after closing. A Post-Closing Controlled
Share Repurchase may be carried out via open market repurchases or through one or
more Controlled Accelerated Share Repurchase Programs. Any Post-Closing
Controlled Share Repurchase would be made with respect to shares that will be
purchased on the open market (or, in a Controlled Accelerated Share Repurchase
Program, that will be acquired by the counterparty bank (“Counterparty”) on the open
market) and such share repurchase will not be motivated by a desire to increase or
PLR-121703-19                                 7

decrease the ownership percentage of any particular shareholder or group of
shareholders. Furthermore, it is anticipated that Controlled will not have any “controlling
shareholders” within the meaning of Treasury Regulation § 1.355-7(h)(3) after the
Combination.

                                  REPRESENTATIONS

      Except with respect to the information submitted in connection with the
supplemental ruling request and the representations modified below, Distributing and
Controlled reaffirm all of the material information submitted in connection with, and each
representation contained in, the Prior Ruling Letter.

                                    Rev. Proc. 2017-52

      Distributing makes the following modified representation with respect to the
representations in section 3 of the Appendix to Revenue Procedure 2017-52:

1. 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, except for payments contemplated by certain
   Continuing Arrangements made no more than i months after the Distribution (it being
   understood that for purposes of this representation, negotiated arrangements
   between Distributing and Controlled that are priced on a “cost plus” basis are being
   treated as priced at fair market value).

                                    Rev. Proc. 2018-53

      Distributing makes the following modified representations with respect to the
representations in section 3 of Revenue Procedure 2018-53:

2. Representation 4: Other than the Specified Distributing Debt, Distributing incurred
   the Distributing Debt that will be assumed or satisfied (i) (A) before November 14,
   2018, the date of the letter requesting the Prior Ruling Letter, and (B) no later than
   60 days before the earliest of the following dates: (x) the date of the first public
   announcement (as defined in Treas. Reg. § 1.355-7(h)(10)) of the Separation or a
   similar transaction, (y) the date of the entry by Distributing into a binding agreement
   to engage in the Separation or a similar transaction, and (z) the date of approval of
   the Separation or a similar transaction by the Distributing board of directors, or (ii) on
   a date later than any such date described in clause (i) and the proceeds of such
   Distributing Debt were used to repay Distributing Debt incurred prior to the relevant
   date described in clause (i) (“Distributing Refinancing Debt”) or were used to repay
   or refinance (including through successive refinancings) Distributing Refinancing
   Debt.
PLR-121703-19                                   8

3. Representation 6: There are one or more substantial business reasons for any delay
   in satisfying Distributing Debt with the Post-Closing Cash Proceeds beyond 30 days
   after the date of the Distribution. The Post-Closing Cash Proceeds will be deposited
   into a segregated bank account and will be used solely as described in Step (vii)
   above, in each case, within 30 days of their receipt by Distributing.

   Additionally, Distributing and Controlled make the following representations with
respect to the Post-Closing Controlled Share Repurchases:

4. Any Post-Closing Controlled Share Repurchase will have a sufficient business
   purpose.

5. For any Post-Closing Controlled Share Repurchase, the stock to be purchased by
   Controlled, or acquired by a Counterparty pursuant to a Controlled Accelerated
   Share Repurchase Program, will have been widely held.

6. Any acquisition of Controlled shares in a Post-Closing Controlled Share Repurchase
   by Controlled, other than through a Controlled Accelerated Share Repurchase
   Program, will be made in the open market or, with respect to a Post-Closing
   Controlled Share Repurchase effected through a Controlled Accelerated Share
   Repurchase Program, will be made from a Counterparty which will subsequently
   purchase Controlled shares on the open market.

7. There is no plan or intention that the aggregate amount of stock purchased or
   acquired through Post-Closing Controlled Share Repurchases will equal or exceed
   20 percent of the outstanding stock of Controlled.

                                          RULINGS

      Based on the information submitted and representations set forth above and
submitted in connection with the Prior Ruling Letter:

 (i)    The Post-Closing Payments will be treated as occurring immediately prior to the
        Distribution and, in the case of any Post-Closing Cash Proceeds received by
        Distributing from Controlled, will constitute “other property or money” described in
        section 361(b).

(ii)    Each Pension Plan will be treated as a creditor of Distributing to the extent of the
        Pension Plan Amount with respect to that Pension Plan for purposes of section
        361(b)(3).

(iii)   Rulings 2 and 4 in the Prior Ruling Letter are hereby modified to read as follows:

        2. Other than with respect to any use of the Cash Proceeds to repay or
        repurchase Specified Distributing Debt, as to which no ruling is being issued,
        Distributing will recognize no gain or loss (i) on its receipt of the Controlled Stock,
PLR-121703-19                                 9

       the Cash Proceeds, and the Post-Closing Cash Proceeds; or (ii) the assumption
       by Controlled of any liabilities of Distributing in connection with the
       Contribution. Sections 361(a), 361(b) and 357(a).

       4. Except to the extent that Distributing recognizes gain with respect to any use
       of the Cash Proceeds to repay or repurchase Specified Distributing Debt, as to
       which no ruling is being issued, the basis of Controlled in each asset received
       from Distributing in the Contribution will equal the basis of the asset in the hands
       of Distributing immediately before the Contribution. Section 362(b).

(iv)   For purposes of testing the effect of any Post-Closing Controlled Share
       Repurchase made by Controlled under section 355(e), a Post-Closing Controlled
       Share Repurchase will be treated as being made from all public shareholders of
       Controlled common stock (other than any “controlling shareholder” or “ten-
       percent shareholder” within the meaning of Treas. Reg. § 1.355-7(h)(3) and (14))
       on a pro rata basis.

(v)    The Post-Closing Controlled Share Repurchases will not constitute “evidence of
       device” within the meaning of Treas. Reg. § 1.355-2(d)(1).

(vi)   Except to the extent provided or reserved in the additional and modified rulings
       above, the supplemental facts and changes to the proposed transaction
       described above will have no adverse impact on the Prior Ruling Letter, which,
       as supplemented and modified by these rulings, will remain in full force and
       effect.

                                        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. No opinion is expressed or implied concerning the application of section
361(b) to Distributing’s receipt of the Initial Cash Proceeds and the Post-Closing Cash
Proceeds to the extent they are used to repay or repurchase any of the Specified
Distributing Debt, and no opinion is expressed or implied concerning any collateral
effect on Controlled’s basis under section 362(b) in assets received from Distributing
due to such repayment or repurchase.

                             PROCEDURAL STATEMENTS

      This 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.
PLR-121703-19                                  10

       A copy of this ruling letter must be attached to the federal income tax return of
each party involved in the Proposed Transactions for the taxable year(s) in which the
Proposed Transactions are completed. Alternatively, a taxpayer filing its return
electronically may satisfy this requirement by attaching a statement to its return that
provides the date and control number of this letter ruling.

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

                                           Sincerely,



                                           J.P. Stemwedel
                                           Assistant to the Branch Chief (Branch 4)
                                           Office of Associate Chief Counsel (Corporate)




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