Business separation and merger receive tax-free reorganization treatment

Plain-English summary

A public company proposed separating one business into a controlled corporation, distributing the controlled stock to shareholders through a spin-off or split-off, and then combining that business with an unrelated public company through two mergers. The IRS granted 15 rulings covering the contribution, distribution, shareholder basis and holding periods, earnings and profits, and an internal merger. Among other conclusions, the contribution and distribution qualify as a Section 368(a)(1)(D) reorganization, the parties generally recognize no gain or loss, and the internal merger qualifies under Section 368(a)(1)(A). The ruling depends on extensive representations and does not decide several broader Section 355 requirements.

Ruling snapshot

• Question: What federal income tax consequences follow from the proposed business separation, stock distribution, and related mergers?
• Outcome: Approved. The IRS granted the requested reorganization, nonrecognition, basis, holding-period, and related rulings.
• Key authorities: IRC §§ 312, 355, 357, 358, 361, 362, 368, 1032, and 1223; Rev. Proc. 2017-52; Rev. Proc. 2018-53

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202114017 Third Party Communication: None
Release Date: 4/9/2021 Date of Communication: Not Applicable
Index Number: 355.10-00
Person To Contact:
------------------------ -----------------------, ID No. ---------------
-------------------------------------------- Telephone Number:
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-------------------- Refer Reply To:
--------------------------------- CC:CORP:2
PLR-119360-20
Date:
January 12, 2021

            TY:

Distributing = ----------------------------------
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Combination = ----------------------------------------------------
Partner -----------------------
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Internal = -------------------------------------------------------
Distributing -----------------------
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Internal = -----------------------------------------------------------------------------------
Controlled ------------------------------------

Controlled = -------------------------------------
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Merger Sub I = ------------------------------------
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Merger Sub II = -------------------------------------
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Subsidiary A ----------------------------------------------------------------
PLR-119360-20 2

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PRS 1 = -------------------------------------------------
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Business A = ---------------------------------------------

Retained = -----------------------------------------------------------------------------------
Business -------------

Term Loan = -----------------------------------------------------------------------------------
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Year A Notes = -----------------------------------------------------------------------------------
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External = -----------------------------------------------------------------------------------
Refinancing Debt -----------------------------------------------------------------------------------
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Historic = -----------------------------------------------------------------------------------
Commercial -----------------------------------------------------------------------------------
Paper -----------------------------------------------------------------------------------
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Internal = -----------------------------------------------------------------------------------
Refinancing -----------------------------------------------------------------------------------
Debts -----------------------------------------------------------------------------------
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PLR-119360-20 3

Qualifying = -----------------------------------------------------------------------------------
Distributing Debt -----------------------------------------------------------------------------------
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State A = -------------

State B = -------------

Specified Date = -----------------------

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

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

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

Month 1 = --------------------

Month 2 = -------------

Transition = -----------------------------------------------------------------------------------
Services -----------------------------------------------------------------------------------
Agreement -----------------------------------------------------------------------------------
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Lease = -----------------------------------------------------------------------------------
Agreements -----------------------------------------------------------------------------------
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PLR-119360-20 4

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Supply = -----------------------------------------------------------------------------------
Agreements -----------------------------------------------------------------------------------
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Site Services = -----------------------------------------------------------------------------------
Agreements -----------------------------------------------------------------------------------
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IP Arrangements = -----------------------------------------------------------------------------------
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Merger = -----------------------------------------------------------------------------------
Agreement -----------------------------------------------------------------------------

a = -------------

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

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

d = ------

e = ------
PLR-119360-20 5

f = ---

g = ---

h = ---

i = --

j = -----------------------------------------------------------------------------------
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k = --

l = --

m = ---

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

This letter responds to your representative’s letter dated May 22, 2020, on behalf of
Distributing, its affiliates and its shareholders, as supplemented by subsequent
information and documentation, requesting rulings on certain federal income tax
consequences of a series of partially completed transactions (the “Proposed
Transaction”). The material information provided in that letter and subsequent
correspondence is summarized below.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty 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. 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 Sections 355 and 368 of the Internal Revenue Code (the
“Code”) and pursuant to section 6.03(2) of Rev. Proc. 2020-1, 2020-01 I.R.B. 1,
regarding one or more significant issues under Sections 332, 351, 355 or 368 of the
Code. An additional ruling is issued pursuant to section 6.03(2) of Rev. Proc. 2020-1,
2020-01 I.R.B. 1, and only addresses one or more discrete legal issues involved in a
related transaction.

This office has made no determination regarding the overall tax consequences of the
Internal Transactions (as defined below), except as specifically addressed by the rulings
PLR-119360-20 6

below, on whether the Internal Distribution or the Distribution (each 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 Section 355(a)(1)(B) and Treas.
Reg. § 1.355-2(d)); or (iii) is part of a plan (or a 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 relevant distributing corporation or the controlled
corporation, or any predecessor or successor of such distributing corporation or
controlled corporation, within the meaning of Treas. Reg. § 1.355-8 (see Section 355(e)
and Treas. Reg. § 1.355-7).

                                Summary of Facts

Distributing is a publicly traded State A corporation that is the common parent of an
affiliated group of corporations whose includible corporations join in the filing of a
consolidated group for U.S. federal income tax return purposes, and the parent of a
worldwide group of foreign and domestic entities. Distributing directly and indirectly is
engaged in both the Retained Business and Business A.

Immediately prior to step 1 of the Proposed Transaction, Distributing will (i) directly and
indirectly, own the outstanding equity interests of certain entities which will conduct
Distributing’s Business A (the “Business A Entities”), and (ii) directly own the
outstanding equity interests of Internal Distributing, a State A limited liability company
that is classified as a corporation for U.S. federal income tax purposes.

Members of the Distributing consolidated group also fully own the interests in PRS 1, a
partnership that is an operating company and the cash pool header for Distributing’s
domestic operating entities.

Combination Partner is a publicly traded State B corporation that is unrelated to
Distributing that is engaged in a business portfolio complementary to Business A.

Distributing has completed certain steps, and proposes to complete the remainder, of a
series of transactions in order to separate and combine its Business A with Combination
Partner’s business.

Financial information has been submitted with respect to certain portions of Business A
and the Retained Business in accordance with Rev. Proc. 2017-52 representing the
active conduct of a trade or business for each of the past five years.

As of the Specified Date, Distributing had amounts outstanding under the (i) Term Loan,
and the (ii) Year A Notes. After the Specified Date, Distributing incurred External
Refinancing Debt to finance the repayment of the Year A Notes. Distributing also
incurred the Internal Refinancing Debts in order to pay down its Historic Commercial
Paper Balance.
PLR-119360-20 7

                             Proposed Transaction

For what are represented to be valid business purposes, Distributing proposes to
engage in the following steps which have been partially consummated, the Proposed
Transaction.

1. On Date 1, Distributing formed Controlled, a State A corporation. On Date 2,
   Combination Partner formed (a) Merger Sub I, a wholly owned subsidiary
   corporation of Combination Partner and (b) Merger Sub II, a limited liability
   company wholly owned by Combination Partner that is disregarded as separate
   from Combination Partner for U.S. federal income tax purposes.

2. Prior to making the Special Cash Distribution, as defined below, Controlled has
   borrowed or will borrow approximately $a from third-party lenders (“Controlled
   Financing”).

3. On Date 3, Subsidiary A, a subsidiary of Internal Distributing, will form Internal
   Controlled, a U.S. corporation. Subsidiary A will then distribute Internal
   Controlled to Internal Distributing.

4. Internal Distributing will contribute all assets relating to Business A (other than
   the stock of Internal Controlled itself) to Internal Controlled in exchange for
   Internal Controlled stock and the assumption of liabilities associated with
   Business A (the “Internal Contribution”).

5. Internal Distributing will distribute all of the issued and outstanding stock of
   Internal Controlled to Distributing (the “Internal Distribution”).

6. On the same day as the Internal Distribution, Internal Controlled will merge with
   and into Controlled, with Controlled surviving. Distributing will receive stock of
   Controlled as consideration for the merger (the “Internal Merger” and, together
   with the Internal Contribution and the Internal Distribution, the “Internal
   Transactions”).

7. Pursuant to a plan of reorganization adopted by Distributing and Controlled (the
   “Plan of Reorganization”), Distributing has contributed or will contribute
   approximately $b in order to fund certain costs of Controlled (e.g., borrowing fees
   associated with external borrowings), the Business A Entities directly owned by
   Distributing, and other related assets to Controlled in exchange for (i) shares of
   Controlled stock, (ii) the assumption of related liabilities, and (iii) approximately
   $c of the proceeds of the Controlled Financing, subject to certain adjustments
   (the “Special Cash Distribution” and such exchange, the “Contribution”).
   Following the issuance of Controlled stock, Distributing will own 100 percent of
   the issued and outstanding Controlled stock.
   PLR-119360-20 8

8. Pursuant to the Plan of Reorganization, on the Distribution Date, Distributing will
   distribute all of the issued and outstanding stock of Controlled to Distributing
   shareholders either via a pro rata distribution (the “Spin-off Distribution”) or a
   non-pro rata exchange offer of a certain percentage of the Controlled stock (the
   “Exchange Offer”), followed by a pro rata distribution of the remaining Controlled
   stock (the “Clean-up Spin” and, together with the Exchange Offer, the “Split-off
   Distribution”). The Spin-off Distribution and the Split-off Distribution are referred
   to, in the alternative, as the “Distribution”).

9. Immediately after the Distribution, Merger Sub I will merge with and into
   Controlled, with Controlled surviving (the “First Merger”). Each outstanding share
   of Controlled stock (except for shares of Controlled stock held as treasury stock
   by Distributing, which will be cancelled) will be converted into the right to receive
   a number of shares of Combination Partner common stock (except for cash paid
   in lieu of fractional Combination Partner shares) equal to the exchange ratio set
   forth in the Merger Agreement. Immediately after the First Merger, approximately
   d percent of the outstanding shares of Combination Partner common stock is
   expected to be held by pre-Combination holders of shares of Controlled stock
   and approximately e percent of the outstanding shares of Combination Partner
   common stock are expected to be held by pre-Combination Combination Partner
   stockholders. Following the First Merger, all obligations of Controlled, including
   those under the Controlled Financing, will be guaranteed by the Combination
   Partner.

10. No fewer than f (or, in some circumstances, g) days after the First Merger
    (unless otherwise agreed by the parties), Controlled, now a wholly owned
    subsidiary of Combination Partner, will merge with and into Merger Sub II, with
    Merger Sub II surviving as an entity disregarded for U.S. federal income tax
    purposes from its sole owner, Combination Partner (“Second Merger” and
    together with the First Merger, the “Combination”).

11. Distributing will use the proceeds of the Special Cash Distribution to make
    payments to various creditors and shareholders; the material payments are:
    a. Repayment of the Term Loan.
    b. Repayment of the External Refinancing Debt.
    c. Repayment of the Internal Refinancing Debts.
    d. Interest due no later than h months after the Distribution on the Qualifying
    Distributing Debt (“Interest Payments”).
    e. The next i regular quarterly dividends ending no later than h months after
    the Distribution, expected to be approximately j in the aggregate.
    f. Open market repurchases of Distributing shares through a previously
    established or newly authorized share repurchase program and may
    engage in an accelerated share repurchase program for the period ending
    no later than h months after the Distribution.
    PLR-119360-20 9

In connection with the Proposed Transaction, Distributing, Combination Partner and
Controlled have entered into and will enter into agreements (the “Post-Separation
Agreements”) intended to govern their relationship (and that of their respective
subsidiaries) following the consummation of the Combination. The specific agreements
include the Transition Services Agreement, the Lease Agreements, the Site
Services Agreements, the Supply Agreements, and certain additional agreements
implementing the IP Arrangements.

Following the Combination, Combination Partner’s initial board of directors is expected
to be comprised of k current directors from Combination Partner and l Distributing
director appointees. At Combination Partner’s annual meeting in the year following the
year in which the Combination occurs, all l of Distributing’s director appointees and l of
Combination Partner’s current directors will stand for election and Combination
Partner’s board of directors will take all necessary actions to set the size of the board at
m members. Pursuant to Combination Partner’s governing documents, the
Combination Partner board of directors is empowered to manage the corporation’s
business, except with respect to certain matters traditionally reserved to shareholders.

                                 Representations

Except with respect to representations 20, 24, 25, 35, 40, which are inapplicable, and
those representations modified below, Distributing has made all of the representations
provided in section of the appendix to Rev. Proc. 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(a),
22(a), 31(a), and 41(a).

1. Distributing has made Representation 2 except that Distributing will either
   (1) distribute 100 percent of outstanding shares of Controlled stock pro rata to its
   shareholders pursuant to the Spin-off Distribution or (2) transfer a certain
   percentage of the outstanding shares of Controlled stock to its shareholders in
   exchange for shares of Distributing stock, followed by a pro-rata distribution of
   the remaining shares pursuant to the Split-off Distribution.

2. Distributing has made Representations 5 and 6 as applied to the Spin-off
   Distribution and Clean-up Spin but such representations are inapplicable to the
   Exchange Offer.

3. Distributing has made Representation 7 as applied to the Exchange Offer but
   such representation is inapplicable to the Spin-off Distribution or the Back-End
   Distribution.

4. Distributing has made Representation 19 provided that the rulings sought below
   are otherwise obtained.
   PLR-119360-20 10

5. Distributing has made Representation 32 except for (i) amounts payable under
   the Post-Separation Agreements and (ii) trade payables arising in the ordinary
   course of business.

6. Distributing has made Representation 33, except with respect to certain
   payments pursuant to the Post-Separation Agreements.

7. Distributing has made Representation 46 with respect to the Controlled stock, but
   not with respect to securities of Controlled, if any, as Controlled will borrow to
   fund the payment of the Special Cash Distribution through a third-party borrowing
   and/or certain senior secured credit facilities.

Except as otherwise provided below, Distributing has made all of the representations
provided in section 3 of Rev. Proc. 2018-53:

1. With respect to Representation 2:

   (a) Distributing has made Representation 2 with respect to the Term Loan,
   the External Refinancing Debt, and the Qualifying Distributing Debt;

   (b) With respect to the Internal Refinancing Debts, Distributing has made the
   following modified representation: The proceeds from the borrowing of the
   Internal Refinancing Debts were used by Distributing to satisfy the Historic
   Commercial Paper Balance. The Historic Commercial Paper Balance was
   not held by a Related Person within the meaning set forth in Rev. Proc.
   2018-53.

2. With respect to Representation 3 and the additional representation described
   therein:

   (a) Distributing has made Representation 3 and the additional representation
   described therein is not relevant with respect to the Term Loan, the
   External Refinancing Debt, and the Qualifying Distributing Debt.

   (b) With respect to the Internal Refinancing Debts, Distributing has made the
   following modified representation: The holder of the Internal Refinancing
   Debts is a Related Person to Distributing. The holders of the Historic
   Commercial Paper Balance did not hold the debt for the benefit of
   Distributing, Controlled or any Related Person. Neither Distributing,
   Controlled, nor any Related Person participated in the profit gained by the
   holders of the Historic Commercial Paper Balances upon the repayment of
   the Historic Commercial Paper Balances.

3. With respect to Representation 4:

   (a) Distributing has made Representation 4 with respect to the Term Loan
   and the Qualifying Distributing Debt.
   PLR-119360-20 11

   (b) With respect to the External Refinancing Debt, Distributing has made the
   following modified representation: The proceeds of the External
   Refinancing Debt were used to satisfy the Year A Notes, which were
   incurred more than 60 days before the Specified Date.

   (c) With respect to the Internal Refinancing Debts, Distributing has made the
   following modified representation: The proceeds of the Internal
   Refinancing Debts were used to satisfy the Historic Commercial Paper
   Balances. The amounts outstanding under the Historic Commercial Paper
   Balances will not exceed the aggregate Historic Commercial Paper
   Balances outstanding under Distributing’s commercial paper program as
   of the submission of this Ruling Request or the dates referred to in such
   representation.

4. Distributing has made Representation 5. For purposes of this Representation,
   Distributing has included as members of Distributing’s SAG for each relevant
   fiscal quarter those entities which were members of Distributing’s SAG as of the
   end of such fiscal quarter.

5. With respect to Representation 6:

   (a) Distributing has not made Representation 6 with respect to the Term Loan
   Repayment or the repayment of the Internal Refinancing Debts, as it is not
   applicable.

   (b) With respect to the Interest Payments, Distributing has made the
   following, modified representation: Distributing will identify the amount of
   Interest Payments (within a reasonable range) to be made with the
   proceeds of the Special Cash Distribution pursuant to the Plan of
   Reorganization. Such Interest Payments will be made within h months of
   the Distribution.

The following additional representations have been made with respect to the Post-
Distribution Share Repurchases and the Combination:

1. The Post-Distribution Share Repurchases will be motivated by a corporate
   business purpose, will be made with respect to widely held shares and will not be
   motivated by a desire to increase or decrease the ownership percentage of any
   particular shareholder or group of shareholders.

2. The payment of cash in lieu of fractional shares of Combination Partner common
   stock is solely for the purpose of avoiding the expense and inconvenience of
   issuing fractional shares and does not represent separately bargained-for
   consideration. No Distributing shareholder will receive cash in an amount equal
   to or greater than the value of one full share of Combination Partner common
   stock.
   PLR-119360-20 12

3. The Combination will qualify as a reorganization under Section 368(a)(1)(A).

The following additional representations have been made with respect to the Internal
Contribution, Internal Distribution, and Internal Merger:

1. The Internal Contribution and the Internal Distribution will qualify as a transaction
   in which no gain or loss is recognized to Internal Distributing, Internal Controlled,
   or Distributing, and no amount is included in the income of Distributing, under
   Section 368(a)(1)(D) and Section 355.

2. Provided that the Internal Merger will be treated as a merger of Internal
   Controlled into Controlled, the Internal Merger will qualify as a reorganization
   under Section 368(a)(1)(A).

                                    Rulings
   

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

1. The Contribution, together with the Distribution, 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. Section 355(a)(3)(B) will not treat as “other property” any part of the Controlled stock
   actually or deemed issued by Controlled to Distributing pursuant to the Contribution
   in exchange for intellectual property rights pursuant to the IP Arrangements.

3. No gain or loss will be recognized by Distributing on the Contribution (including with
   respect to the Special Cash Distribution). Section 361(a); Section 361(b); Section
   357(a).

4. No gain or loss will be recognized by Controlled on the Contribution. Section
   1032(a).

5. The basis in each asset received by Controlled in the Contribution will equal the
   basis of that asset in the hands of Distributing immediately before the transfer.
   Section 362(b).

6. The holding period in each asset received by Controlled in the Contribution will
   include the period during which the asset was held by Distributing. Section 1223(2).

7. No gain or loss will be recognized by Distributing upon the distribution of the
   Controlled stock in the Distribution. Section 355(c); Section 361(c).

8. No gain or loss will be recognized by holders of Distributing stock upon the receipt of
   Controlled stock in the Distribution. Section 355(a).
   PLR-119360-20 13

9. If a Split-off Distribution is undertaken, the basis of the Controlled stock in the hands
   of a holder of Distributing stock who exchanges Distributing stock for Controlled
   stock in the Exchange Offer immediately after the Distribution will be the same as
   the basis of the Distributing stock exchanged therefor. Section 358(a).

10. To the extent that Controlled stock is distributed to holders of Distributing stock on a
    pro rata basis pursuant to the Spin-off Distribution or the Clean-up Spin, the
    aggregate basis of the Distributing stock and the Controlled stock in the hands of
    such holders immediately after the Spin-off Distribution or the Clean-up Spin will be
    the same as the basis of the Distributing stock immediately before the Spin-off
    Distribution or the Clean-up Spin on which such distribution was made, allocated in
    proportion to the fair market values of the Distributing stock and the Controlled stock.
    Section 358(a).

11. If a holder of Distributing stock that purchased or acquired shares on different dates
    or at different prices is not able to identify which particular share of Controlled stock
    is received in exchange for, or as a distribution with respect to, a particular share of
    Distributing stock, the holder may designate which particular share of Controlled
    stock is received in exchange for, or as a distribution with respect to, a particular
    share of Distributing stock, provided the designation is consistent with the terms of
    the Distribution. Treas. Reg. § 1.358-2(a)(2).

12. The holding period of each holder of Distributing stock in the Controlled stock
    received in the Distribution will include the holding period of the Distributing stock
    exchanged therefor (if a Split-off Distribution is undertaken) or with respect to which
    the distribution of the Controlled stock is made, provided that such Distributing stock
    is held as a capital asset on the date of such Distribution. Section 1223(1).

13. 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(a) and Treas.
    Reg. § 1.1502-33(e)(3).

14. The initial designations of the post-Combination members of the Combination
    Partner board of directors will not affect the determination of the total voting power or
    value of the stock of Controlled acquired within the meaning of Section 355(e).

15. The Internal Merger will be treated as a merger of Internal Controlled into Controlled
    that will qualify as a reorganization under Section 368(a)(1)(A), notwithstanding the
    Combination.

                                      Caveats
    

No opinion is expressed or implied about the tax treatment of the Proposed
Transactions 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. In
PLR-119360-20 14

particular, this office has made no determination whether the transfer of intellectual
property pursuant to the IP Arrangements constitutes a transfer of property. See Rev.
Rul. 69-156, 1969-1 C.B. 101.

                             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,




                                       Mark J. Weiss
                                       Chief, Branch 2
                                       Office of Associate Chief Counsel (Corporate)

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