Brief retention of de minimis formation shares does not disturb spin-off rulings

Plain-English summary

A corporate parent requested a supplemental ruling concerning a previously approved series of transactions under Sections 355 and 368. After distributing the stock of an external controlled corporation, the parent would temporarily retain a de minimis block of formation shares for foreign-tax reasons. It represented that it would not vote those shares and would sell them to the public on a stock exchange as soon as practicable, no later than a redacted number of days after the distribution. A minority of directors would overlap between the two companies during the brief holding period for a stated business purpose. The IRS ruled that the supplemental facts did not adversely affect the prior rulings and that the temporary retention was not part of a plan principally aimed at avoiding federal income tax under Section 355(a)(1)(D)(ii).

Ruling snapshot

• Question: Would the parent's brief retention of de minimis formation shares after the distribution disturb its prior spin-off rulings or violate Section 355's control-distribution rule?
• Outcome: Approved: the prior rulings remained effective, and the temporary retention was not a tax-avoidance plan under Section 355(a)(1)(D)(ii).
• Key authorities: IRC §§ 355, 368; Treas. Reg. §§ 1.355-2, 1.355-7, 1.355-8; Rev. Proc. 2017-52; Rev. Proc. 2020-1

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202123006 Third Party Communication: None
Release Date: 6/11/2021 Date of Communication: Not Applicable
Index Numbers: 355.00-00, 361.00-00,
368.04-00 Person To Contact:
--------------------, ID No. -----------------
------------------------------------------------------ Telephone Number:
---------------------------------------- --------------------
------------------------------------ Refer Reply To:
------------------------------ CC:CORP:B03
PLR-126868-20
Date:
March 15, 2021

Legend

Distributing Parent = [redacted]

External Controlled = [redacted]

Controlled = [redacted]

Business A = [redacted]

Business B = [redacted]

Country A = [redacted]

Continuing Arrangements = [redacted]

o = [redacted]

p = [redacted]

q = [redacted]

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

This letter responds to your letter dated November 20, 2020, and supplemented by an
additional letter dated February 5, 2021, submitted on behalf of Distributing Parent, its
affiliates, and its shareholders, requesting a supplemental ruling to the private letter
ruling dated June 9, 2020 (PLR-129376-19) (the “Prior Ruling”). The material
information submitted for consideration is summarized below. Capitalized or underlined
terms not defined in this letter have the meanings assigned to them in the Prior Ruling.

This letter is issued pursuant to section 3.05 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 a
supplemental ruling on one or more Covered Transactions under section 355 and/or
section 368 of the Internal Revenue Code (the “Code”) and pursuant to section 6.03 of
Rev. Proc. 2020-1, 2020-1 I.R.B. 1 regarding one or more significant issues under
section 355 of the Code that only address one or more discrete legal issues involved in
the transaction.

The rulings contained in this letter are based on facts and representations submitted by
the taxpayer and accompanied by a penalties 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.

This office has made no determination regarding whether the Proposed Transactions:
(i) satisfy the business purpose requirement of Treas. Reg. § 1.355-2(b); (ii) are used
principally as a device for the distribution of the earnings and profits of the distributing
corporations or the controlled corporation or both (see section 355(a)(1)(B) and Treas.
Reg. § 1.355-2(d)); or (iii) are 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 corporations or the controlled
corporations, within the meaning of Treas. Reg. § 1.355-8 (see section 355(e)(2)(A)(ii)
and Treas. Reg. § 1.355-7).

                               Supplemental Facts

The material facts as described in the Prior Ruling are unchanged, except as described
below.

In Step 8 of the Proposed Transactions described in the Prior Ruling, Distributing Parent
formed External Controlled on Date A, and received o shares of External Controlled (the
“Formation Shares”). Following the External Distribution in Step 14, Distributing Parent
will still own the Formation shares for certain Country A tax law reasons (the “Formation
Shares Retention”). Distributing Parent will sell the Formation Shares to the public on a
stock exchange as soon as practically possible after the External Distribution, but in no
event later than p days after the External Distribution. The Formation Shares make up a
de minimis percentage (approximately q percent) of the total issued and outstanding
shares of External Controlled.

Additional information has also been submitted regarding Business A, Business B, and
the Continuing Arrangements between Distributing Parent and External Controlled.

                                 Representations

Distributing Parent has made the following representations with respect to the
Supplemental Facts:

1. Distributing Parent reaffirms all of the material information submitted in connection
   with, and all the representations contained in, the Prior Ruling, as modified and
   supplemented by the representations and information herein.

Distributing Parent has made the following additional representations:

2. The Formation Shares Retention will not be in pursuance of a plan having as one of
   its principal purposes the avoidance of federal income tax and will be motivated by the
   business purpose described herein.

3. Distributing Parent is unable to represent that there will be no overlapping directors of
   Distributing Parent and External Controlled during the period that Distributing Parent
   owns the Formation Shares. However, the overlapping directors, which are described in
   the Prior Ruling, constitute a minority of each board of directors and serve a corporate
   business purpose. The overlap of directors is not inconsistent with any other corporate
   business purposes of the External Distribution.

4. Distributing Parent will sell the Formation Shares to the public on a stock exchange
   as soon as practically possible after the External Distribution, but in no event later than
   p days after the External Distribution.

5. Following the External Distribution, Distributing Parent will not vote, or cause to be
   voted, any of the Formation Shares during the period in which it holds such shares.

                                     Rulings
   

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

1. The Supplemental Facts submitted will not adversely affect any of the rulings in the
   Prior Ruling, and those rulings will remain in full force and effect.

2. Distributing Parent’s continuing ownership of the Formation Shares until their
   disposal (as soon as practically possible after the External Distribution, but in no event
   later than p days after the External Distribution), will not be in pursuance of a plan
   having as one of its principal purposes the avoidance of federal income tax for purposes
   of section 355(a)(1)(D)(ii).

                                     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 the tax treatment
of any conditions existing at the time of, or effects resulting from, the Proposed
Transactions 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.

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

A copy of this ruling letter must be attached to any federal 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 (PLR-126868-20) of this letter ruling.

                                                Sincerely,


                                                ___________________________
                                                Brian R. Loss
                                                Office of Associate Chief Counsel (Corporate)
                                                Senior Technician Reviewer, Branch 4

cc -------------------
----------------------------------------
--------------------------
-------------------------------

  -------------------------------------------------
  ------------------------------