Accelerated share repurchase gets open-market device analysis

Plain-English summary

After a public company spun off a business, it proposed an accelerated share repurchase through financial institutions. The institutions would borrow shares, sell an initial block to the company, acquire additional shares during a pricing period, and deliver a final true-up amount. The company represented that the repurchase had a business purpose, involved widely held stock and unrelated market participants, was not intended to change any particular owner's percentage, and—together with earlier repurchases—would remain below 20 percent of outstanding stock. The IRS ruled that, for the Section 355 device test, the transaction receives the same analysis as a comparable open-market repurchase.

Ruling snapshot

• Question: How is the proposed accelerated share repurchase analyzed under the Section 355 device rules?
• Outcome: Approved. It is analyzed like an otherwise similar open-market repurchase.
• Key authorities: IRC § 355(a)(1)(B); Treas. Reg. § 1.355-2(d); Rev. Proc. 2020-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202113007 Third Party Communication: None
Release Date: 4/2/2021 Date of Communication: Not Applicable
Index Number: 355.06-00
Person To Contact:
---------------------------- -------------------, ID No. -----------------
-------------------------------- Telephone Number:
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----------------------------------------- Refer Reply To:
CC:CORP:B05
PLR-119795-20
Date:
January 04, 2021

                                                 Legend

Distributing = --------------------------------
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Controlled = ----------------

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

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

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

Date 1 = ----------------------

Date 2 = -----------------

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

Date 4 = ------------------------------------------------------------------------

Date 5 = ------------------------------------------------------------------------

a = ---------

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

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

d = --
PLR-119795-20 2

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

This letter responds to your letter dated September 4, 2020, as supplemented by
subsequent information and documentation, requesting a ruling on the federal income
tax consequences of the Proposed Transaction (defined below). The information
submitted in that letter and subsequent correspondence is summarized below.

This letter is issued pursuant to section 6.03(2) of Rev. Proc. 2020-1, 2020-1 I.R.B. 1,
regarding one or more significant issues under section 355 of the Internal Revenue
Code (the “Code”), and section 3.01(62) of Rev. Proc. 2020-3, 2020-1 I.R.B. 131, with
respect to a significant issue under section 355(a)(1)(B) and Treas. Reg. § 1.355-2(d)
pertaining to device. The rulings contained in this letter are based on information 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 the ruling. Verification of the
information, representations, and other data may be required as part of the audit
process.

                                Summary of Facts

Distributing is State A corporation, the stock of which is publicly traded and widely held.
Distributing operates Business A and, prior to Date 1, operated Business B. On Date 1,
Distributing formed Controlled, a State A corporation. Distributing contributed assets
and liabilities to Controlled representing the operations of Business B. On Date 2,
Distributing distributed all of the stock of Controlled to Distributing’s shareholders (the
“Spin-Off”).

On Date 3, Date 4, and Date 5, Distributing made an open market repurchase of a, b,
and c shares of Distributing stock, respectively (the “Open Market Repurchases”). The
Open Market Repurchases represent less than d% of Distributing stock outstanding.

                             Proposed Transaction

Distributing proposes to engage in the following transaction (collectively, the steps
comprise the “Proposed Transaction”):

1. Distributing and one or more investment banks, brokers, or other financial
   institutions (the “Financial Institutions”) will enter into an agreement pursuant to
   which Distributing agrees to pay a specified amount of cash (“Aggregate
   Repurchase Amount”) to purchase Distributing common stock from the Financial
   Institutions.

PLR-119795-20 3

2. The Financial Institutions will borrow shares of Distributing common stock in the
  public stock loan market.

3. The Financial Institutions will sell the shares borrowed in Step 2 to Distributing in
  a single transaction (the “Initial Stock Sale”) for an aggregate amount equal to an
  agreed percentage of the Aggregate Repurchase Amount, and at an initial price
  equal to the closing price of Distributing common stock on the date of such sale.

4. After a specified period of time has elapsed (the “True-Up Period”), during which
  the Financial Institutions will borrow or acquire additional shares of Distributing
  stock in the public markets, the Financial Institutions will deliver to Distributing a
  number of additional shares of Distributing stock such that the total number of
  shares delivered to Distributing (including the shares delivered in the Initial Stock
  Sale) is equal to the Aggregate Repurchase Amount divided by the arithmetic
  mean of the volume weighted average price of the Distributing stock for each day
  during the True-Up Period, as adjusted to reflect a pre-agreed discount (such
  additional shares, the “True-Up Stock”).

5. Following the Initial Stock Sale and/or the delivery of the True-Up Stock, the
  Financial Institutions will purchase shares of Distributing stock in the open market
  to settle the borrowings described above.

                                Representations

With respect to the Spin-Off and the Proposed Transaction, Distributing has made the
following representations:

a) Not taking into account the Proposed Transaction, the Spin-Off qualified as a
transaction that was generally tax-free to Distributing and its shareholders under
sections 355, 361, and 368(a)(1)(D).

b) From the time of the Spin-Off, Distributing has had no plan or intention to effect
any share repurchase, other than potential repurchases that would satisfy the
following criteria: there is a sufficient corporate business purpose for the stock
purchase; the stock to be purchased is widely held; and the aggregate amount of
stock purchases would not equal or exceed 20 percent of the outstanding
Distributing stock.

c) The persons that sell or lend Distributing stock to the Financial Institutions in
connection with the Proposed Transaction will be third parties unrelated to
Distributing. The price Distributing pays for the repurchased stock will be
negotiated with the Financial Institutions on an arm’s-length basis. Distributing
will not know the identity of any lender or seller of its stock to the Financial
Institutions.
PLR-119795-20 4

d) The Spin-Off was consummated for a corporate business purpose.

e) The Proposed Transaction will be consummated for a corporate business
purpose.

f) The Proposed Transaction is not motivated to any extent by a desire
to increase or decrease the ownership percentage of any particular shareholder
or group of shareholders.

g) Distributing will not know with certainty the identity of any shareholder from which
stock is borrowed or purchased by any Financial Institution that participates in
the Proposed Transaction.

h) The aggregate amount of stock purchased or acquired through the Proposed
Transaction and the Open Market Repurchases will not equal or exceed 20
percent of the outstanding stock of Distributing.

                                       Ruling

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

For purposes of section 355(a)(1)(B) and Treas. Reg. §1.355-2(d), the Proposed
Transaction will be subject to the same analysis as an otherwise similar repurchase by
Distributing of its stock on the open market.

                                      Caveats

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax treatment of the Proposed Transaction under other provisions of the Code or
regulations or the tax treatment of any condition existing at the time of, or effects
resulting from, the Proposed Transaction that is not specifically addressed by this letter.
Specifically, we express no opinion on whether the Spin-Off qualifies under sections
355, 361 and 368(a)(1)(D).

                             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.
PLR-119795-20 5

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

                                                Sincerely,

                                                _Susan E. Massey______________
                                                Susan E. Massey
                                                Branch Chief, Branch 3
                                                Office of Associate Chief Counsel (Corporate)

cc:

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