IRS approves tax-free treatment for a corporate spin-off

Plain-English summary

A publicly traded corporation proposed separating one business into a newly formed controlled corporation. The plan included internal asset transfers, a contribution of subsidiary stock to the new corporation, an exchange of controlled-company debt for distributing-company debt, and a pro rata distribution of all controlled-company stock to existing shareholders. The IRS ruled that the contribution and distribution would qualify as a Type D reorganization and that the specified transfers, debt exchange, and stock distribution would not trigger gain or loss to the corporations or shareholders. It also ruled on carryover basis, holding periods, shareholder basis allocation, and earnings-and-profits allocation. The IRS did not determine whether the transaction met the business-purpose and non-device requirements or whether it was part of a plan involving a 50-percent acquisition.

Ruling snapshot

• Question: Would the proposed contribution, debt exchange, and pro rata spin-off receive the requested tax-free reorganization treatment?
• Outcome: Approved.
• Key authorities: IRC §§ 355, 357, 358, 361, 362, 368(a)(1)(D), 1032, and 1223

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202127003
Release Date: 7/9/2021

[Third Party Communication:
Date of Communication: Month DD, YYYY]

Index Number: 368.04-00, 355.01-00

Person To Contact:
------------------, ID No. -----------------

Telephone Number:

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

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

Refer Reply To:
CC:CORP:B03
PLR-123650-20

Date:
April 14, 2021

Legend

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

Controlled = ------

Business 1 = ------------------------

Business 2 = ----------------------------------------------------

Sub1 = -----------------------------

Sub2 = ---------------------------------------------

Sub3 = ----------------------------------

Y% = ---------

Z% = ---------

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

PLR-123650-20 2

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

LLC1 = ----------------------------------------

Company1 = -----------------------------

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

$a = --------------------

$b = -----------------

$c = -------------

$d = ---------------

Period1 = ----------

Period2 = ----------

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

This letter responds to your letter dated October 16, 2020, as supplemented on April 6,
2021, requesting rulings under section 355 and related provisions of the Internal
Revenue Code and related regulations with respect to a series of proposed transactions
(the “Proposed Transaction”). The material information submitted is summarized below.

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 a Transactional
Ruling for a Covered Transaction under sections 355 and 368 of the Internal Revenue
Code.

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. This office has not verified any of the material
submitted in support of the request for rulings. The material, and other data is subject to
verification on examination.

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

PLR-123650-20 3

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

Distributing is a publicly traded State A corporation and is the common parent of a
group of domestic affiliated corporations ("Distributing Group") that join in the filing of a
consolidated U.S. federal income tax return. Distributing has a single class of voting
common stock issued and outstanding ("Distributing Stock"). Distributing and its
subsidiaries are engaged in Business 1 (“Distributing Business") and Business 2,
("Controlled Business"). The following describes the relevant corporate structure of the
Distributing Group immediately before the Proposed Transaction (defined
subsequently). Except as otherwise described, each entity is treated as a corporation
for U.S. federal income tax purposes.

Distributing owns directly all the issued and outstanding stock of Sub1, a State B
corporation. Sub1 owns Y% interest in LLC1, a State B limited liability company, treated
as a partnership for U.S. federal income tax purposes. The remaining Z% is owned
by Company1, an unrelated entity. Sub1 also owns all the issued and outstanding stock
of Sub2, a State B corporation and Sub3, a State B corporation.

As of Date 1, Distributing had $a of long-term debt to unrelated parties outstanding
("Historic Distributing Debt").

For purposes of satisfying the active trade or business requirements of section 355(b)
with respect to the Distribution (defined below), Distributing and the members of its
"separate affiliated group" as defined in section 355(b)(3)(B) will rely on the Distributing
Business, and Controlled and the members of its "separate affiliated group" as defined
in section 355(b)(3)(B) will rely on the Controlled Business. Financial information has
been submitted in accordance with Rev. Proc. 2017-52 indicating that each of the
Distributing Business and Controlled Business has had gross receipts and operating
expenses representing the active conduct of a trade or business for each of the past
five years.

Proposed Transaction

The following transactions (the "Proposed Transaction") will occur to separate the
Controlled Business from the Distributing Group. The following steps may ultimately be
effected in a different order.

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1. Distributing (and subsidiaries thereof) will settle intercompany balances of
   receivables/payables.

2. Sub1 will contribute all the stock of Sub2 and Sub3 to LLC1 in exchange for
   additional LLC1 units. Following this step, the ownership of Sub1 and Company1 of
   LLC1 will not materially change.

3. LLC1 will incur debt and will make a cash distribution to Company1 of $b.

4. Distributing will form a new State B corporation ("Controlled") with one
   authorized class of common stock ("Controlled Stock").

5. Distributing will issue debt ("New Distributing Debt") to an investment bank
   ("Exchange Bank") for an amount between $c and $d (based on a multiple of
   Controlled’s earnings before interest, taxes, depreciation and amortization). The cash
   proceeds (or an amount equal thereto) will be used, contemporaneously with or prior to
   the Distribution, to pay principal, interest, or premium on Historic Distributing Debt.
   Distributing and the Exchange Bank will enter into the Exchange Agreement (defined
   below).

6. Distributing will contribute to Controlled all the issued and outstanding capital
   stock of Sub1 in exchange for (i) Controlled Stock and (ii) newly issued debt securities
   ("Controlled Securities"), together the “Contribution.”

7. Distributing will enter into an exchange agreement with Exchange Bank
   (“Exchange Agreement”). Pursuant to Exchange Agreement, Distributing will transfer an
   agreed upon amount of Controlled Securities to Exchange Bank in exchange for (and in
   retirement of) New Distributing Debt (together with the repayment of a portion of the
   Historic Distributing Debt, the "Debt Exchange”). The exchange ratio for the Debt
   Exchange will be fixed on the date the Exchange Agreement is entered into. Exchange
   Bank intends to sell Controlled Securities to parties unrelated to Distributing or
   Controlled.

8. Distributing will distribute all Controlled Stock owned by Distributing pro rata
   to Distributing shareholders (the "Distribution").

9. At least one day after the Distribution, Company1 may exchange its equity
   interests in LLC1 for Controlled Stock.

Post-Separation Key Agreements

In connection with the Proposed Transaction, Distributing and Controlled will enter into
certain arrangements that will continue after the completion of the Proposed
Transaction to effect an orderly transition of Controlled to a standalone public company
("Continuing Arrangements"). The Continuing Arrangements include agreements, such

PLR-123650-20 5

as a separation and distribution agreement, a transition services agreement and a tax
matters agreement. All the Continuing Arrangements will be based on arm's-length
terms and conditions, including arm's-length pricing, except for certain arrangements
that may be priced at cost or cost-plus for up to Period1.

Continuing Business Relationship

In addition to the Continuing Arrangements, Distributing (or its affiliates) will have
certain continuing business relationships with Controlled (or its affiliates). The
agreements documenting the terms and conditions for the various services Controlled
(or its affiliates) provides to Distributing (or its affiliates) will be based on arm's-length
terms and payments for the services will be at fair market value. Such agreements are
expected to be in place for at least Period2 from the Proposed Transaction.

Representations

The following representations have been made with respect to the Proposed
Transaction:

Except as otherwise provided below, Distributing has made all the representations
provided in section 3 of the Appendix to Rev. Proc. 2017-52, in the form set forth
therein, as of immediately prior to the Distribution:

1. Distributing has made the following alternative representations set forth in section
   3 of the Appendix to Rev. Proc. 2017-52, as of immediately prior to the Distribution:
   3(a), 11(a), 15(a), 22(a), 31(a) and 41(a).

2. Distributing has not made the following representations, which do not apply: 7,
   17, 19, 24, 25 and 40.

3. Distributing has made the following modified representations:

Representation 5: None of the Controlled Stock, Controlled Securities, or other
property to be distributed in the Distribution will be received in any capacity other
than that of a shareholder or creditor of Distributing.

Representation 8(b): Distributing has securities outstanding and it intends to, in
substance, transfer the Controlled Securities in satisfaction of a portion of
Distributing' s outstanding securities in the Debt Exchange.

Representation 32: No intercorporate debt will exist between Distributing and
Controlled (and their respective affiliates, as applicable) at the time of, or
subsequent to, the Distribution, except for Controlled Securities and ordinary
course payables and receivables arising in connection with any continuing
arrangements.

PLR-123650-20 6

Except as otherwise provided below, Distributing has made all the representations
provided in Rev. Rul. 2018-53 as of immediately prior to the Distribution. For purposes
of the representations below, terms used but not otherwise defined herein have the
meanings set forth in Rev. Proc. 2018-53. "Distributing Debt" means both the Historic
Distributing Debt and the New Distributing Debt:

Distributing has made the following modified representations:

Representation 3: The holder of Distributing Debt that will be assumed or satisfied will
not hold the debt for the benefit of Distributing, Controlled, or any Related Person. With
the exception of New Distributing Debt, the Exchange Bank will not acquire
Distributing Debt from Distributing, Controlled, or any Related Person. None of
Distributing, Controlled, nor any Related Person will participate in any
profit gained by the Exchange Bank upon an exchange of § 361 Consideration; nor will
any such profit be limited by agreement or other arrangement. The amount of the § 361
Consideration received by the Exchange Bank in satisfaction of the Distributing Debt will
be determined pursuant to arm's-length negotiations.

Representation 4: Distributing incurred the Historic Distributing Debt that will be satisfied
with cash proceeds from New Distributing Debt (a) before the request for any relevant
ruling is submitted and no later than 60 days before the earliest of the following dates:
(i) the date of the first public announcement (as defined in § 1.355-7(h)(10)) of the
Divisive Reorganization or a similar transaction, (ii) the date of the entry by Distributing
into a binding agreement to engage in the Divisive Reorganization or a similar
transaction, and (iii) the date of approval of the Divisive Reorganization or a similar
transaction by the board of directors of Distributing, or (b) if such debt was issued more
recently, the proceeds of the issuance of such debt were used to satisfy other debt of
Distributing that was incurred no later than the time described in representation above,
and such debt was not issued in anticipation of, or in connection with the Proposed
Transaction.

Rulings

Based solely on the information and representations submitted, 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. No gain or loss will be recognized by Distributing on the Contribution. (Sections
   361(a), 361(b), and 357(a)).

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

PLR-123650-20 7

4. 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 Contribution.
   (Section 362(b)).

5. 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)).

6. No gain or loss will be recognized by Distributing upon the Distribution and the
   Debt Exchange. (Section 361(c)).

7. No gain or loss will be recognized by (and no amount otherwise will be included in
   the income of) holders of Distributing Stock upon the receipt of Controlled Stock in
   the Distribution. (Section 355(a)).

8. Each Distributing shareholder's aggregate basis in its Distributing Stock and
   Controlled Stock after the Distribution will equal such shareholder's aggregate basis
   in its Distributing Stock immediately prior to the Distribution. (Section 358(a)). The
   basis will be allocated between Distributing Stock and Controlled Stock in proportion
   to the fair market values of each immediately after the Distribution in accordance
   with Treas. Reg. § 1.358-2(a)(2). (Sections 358(a), (b), and (c)).

9. Each Distributing shareholder's holding period in its Controlled Stock will include
   the holding period of the Distributing Stock with respect to which the distribution of
   the Controlled Stock is made; provided that such Distributing Stock is held by such
   Distributing shareholder as a capital asset on the date of the Distribution. (Section
   1223(1)).

10. Earnings and profits of Distributing 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)).

Caveat

No opinion is expressed or implied about the tax treatment of the Proposed Transaction
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 Transaction
that are not specifically covered by the preceding 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.

PLR-123650-20 8

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 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.

Sincerely,

Gerald B. Fleming
Senior Technician Reviewer, Branch 2
Office of Associate Chief Counsel (Corporate)

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