Retained stock and delayed debt exchanges preserve corporate separation treatment

Plain-English summary

A publicly traded corporation proposed separating one of its three businesses into a newly formed controlled corporation. It would contribute the business to the controlled corporation, distribute at least a redacted percentage of the controlled stock, and potentially retain the remainder temporarily to support an orderly separation and suitable capital structures. The plan also included exchanges of controlled securities or stock for historic or new debt, use of controlled-corporation cash for debt payments or shareholder distributions, and later disposition of retained stock. The IRS ruled that retaining the remaining stock for no more than five years would not prevent qualification under Sections 355 and 368(a)(1)(D) or create a prohibited tax-avoidance plan. It also ruled that specified delayed stock dispositions, the cash purge, and debt exchanges completed within the redacted period would be treated as occurring under the reorganization plan for Section 361 purposes. The IRS did not rule on later distributions, whether the controlled debt instruments were securities, or cash received above the defined controlled-cash amount.

Ruling snapshot

• Question: Will temporary retention and later disposition of controlled stock, together with related cash and debt exchanges, receive the requested Sections 355, 361, and 368 treatment?
• Outcome: Approved, subject to the stated timing limits, representations, and caveats
• Key authorities: IRC §§ 355, 357, 361(b)-(c), and 368(a)(1)(D); Treas. Reg. §§ 1.355-7(h)(10), 1.368-2(g), and 1.1275-4

Full text (IRS public release)

 Internal Revenue Service                                        Department of the Treasury
                                                                 Washington, DC 20224

 Number: 202139006                                               Third Party Communication: None
 Release Date: 10/1/2021                                         Date of Communication: Not Applicable
 Index Numbers: 355.01-00, 361.02-02,
               368.04-00                                         Person To Contact:
                                                                 ---------------------, ID No. -----------------
 ------------------------------------------------------------    Telephone Number:
 ----------------------------                                    --------------------
 -------------------                                             Refer Reply To:
 ------------------------------------------                      CC:CORP:B03
 -------------------------------------                           PLR-108824-21
 In Re:                                                          Date:
                                                                 July 06, 2021




Legend

Distributing                        =        ------------------.
                                             -----------------------

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

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

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

Business C                          =        ---------------------------------

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

Convertible Notes 1                 =        ------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
                                             --------------------

Convertible Notes 2                 =        ------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
                   ---------------------------

Senior Notes                        =         -----------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------

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

PLR-108824-21                                   2

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

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

d                           =      ---

e                           =      ------

f                           =      ------

g                           =      ---

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

This letter responds to your letter dated April 14, 2021, and subsequent
correspondence, submitted on behalf of Distributing, its affiliates, and its shareholders,
requesting rulings on certain federal income tax consequences of a series of
transactions (the “Proposed Transaction”). The material information submitted in that
request and subsequent correspondence 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, and section 6.02(3)(b) of Rev.
Proc. 2021-1, 2021-1 I.R.B.1, regarding one or more significant issues under sections
355, 357, and 361 of the Internal Revenue Code (the “Code”). 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
on examination.

This office expresses no opinion as to the overall tax consequences of the transactions
described in this letter or as to any issue not specifically addressed by the rulings below.

                                   Summary of Facts

Distributing, a publicly traded domestic corporation, is the parent company of a
worldwide group of foreign and domestic entities (the “Distributing Group”). Distributing
and its domestic affiliates join in the filing of a consolidated U.S. federal income tax
return. At the time of the Proposed Transaction, Distributing will have a single class of
voting common stock issued and outstanding (the “Distributing Common Stock”). The
Distributing Group has been actively engaged in three businesses, Business A,
Business B, and Business C.

Immediately before the Proposed Transaction will be undertaken, Distributing directly
will own all the issued and outstanding equity interests in newly formed domestic

       PLR-108824-21                                 3

       corporation (“Controlled”) and will own directly Sub1, a domestic limited liability
       company that is disregarded as separate from Distributing for U.S. federal income tax
       purposes, which in turn directly or indirectly will hold all the assets, liabilities, and
       entities that constitute Business C.

       As of Date 1, Distributing had two issues of convertible notes (i) Convertible Notes 1 in
       an aggregate principal amount of a, and (ii) Convertible Notes 2 in an aggregate
       principal amount of b (together with the Convertible Notes 1, the “Convertible Notes”).
       Distributing also has outstanding c in Senior Notes (together with the Convertible Notes,
       the “Historic Debt”).

       The Convertible Notes 1 are contingent payment debt instruments under section
       1.1275-4 that have an adjusted issue price that reflects original issue discount accruals
       based on the comparable yield method (reduced by cash interest).

       Distributing is obligated to satisfy its obligations under the Convertible Notes in cash if
       the holders of the Convertible Notes do not exercise their conversion rights. To the
       extent holders of the Convertible Notes exercise their conversion rights (which is likely
       to occur if Distributing gives notice of its intention to redeem the Convertible Notes),
       Distributing may satisfy the conversions with cash, Distributing Common Stock, or a
       combination thereof. The amount due upon settlement of conversions, or required to be
       paid upon any repurchase, of the Convertible Notes will reflect the amount by which the
       conversion feature of the Convertible Notes has current value.

                                        Proposed Transaction

       Distributing intends to engage in the Proposed Transaction described below to separate
       Business C from Business A and Business B. In the description of the Proposed
       Transaction below, any repayment or retirement of Historic Debt includes payments of
       principal, interest, market premiums, premiums attributable to the conversion feature of
       the Convertible Notes, and associated legal fees.

(i)       Distributing may issue debt, including a new credit facility (the “New Debt 1”), to one
          or more financial institutions (the “Banks”) for cash and will hold the cash proceeds
          of the borrowing in general accounts. Before or contemporaneously with the
          Distribution, Distributing will use an amount of cash equal to any New Debt 1 to
          repay partially or fully some of the Historic Debt.

(ii)      Distributing will enter into an Exchange Agreement (as defined later in this
          paragraph) with the Banks pursuant to which Distributing will agree to transfer
          Controlled Securities (as defined below) to the Banks in exchange for (and in
          retirement and repayment of) all or a portion of any New Debt 1 and/or the Historic
          Debt. The Exchange Agreement will not be entered into any earlier than the day
          after the day on which the Banks acquire the Distributing Exchange Debt. (as
          defined in step (iv), below) The term “Exchange Agreement” means an agreement

        PLR-108824-21                               4

          between the Banks and Distributing pursuant to which Distributing will agree to
          transfer Controlled Securities and/or Controlled Common Stock (as defined in step
          (iii), below) to the Banks in exchange for, and in retirement and repayment of, all or a
          portion of the Distributing Exchange Debt. The exchange ratio for that exchange will
          be fixed on the date the Exchange Agreement is entered into with the Banks.
(iii)     Distributing will contribute to Controlled all of the equity interests in Sub1 (the
          “Contribution”) in exchange for (i) all of the issued and outstanding shares of
          Controlled’s only class of voting common stock (the “Controlled Common Stock”), (ii)
          cash proceeds from a third-party borrowing by Controlled in an amount not greater
          than the basis of the assets contributed to Controlled net of any liabilities assumed in
          the Contribution (if any, the “Controlled Cash”), and (iii) certain seven-year debt
          instruments or term loans (if any, the “Controlled Securities”). Distributing will hold
          any Controlled Cash in general accounts. It is possible that Distributing will receive
          an additional amount of cash proceeds from Controlled in excess of the amount of
          Controlled Cash.

(iv)      Distributing will distribute at least e percent of the Controlled Common Stock to its
          shareholders pro rata in accordance with their stock ownership.

 (v)      Contemporaneously with the Distribution, Distributing will transfer any Controlled
          Securities to creditors, which may include the Banks, in exchange for (and in
          retirement of) a portion of any New Debt 1 and/or the Historic Debt (if any, the “Debt-
          for-Debt Exchange”). Distributing understands that, after any Debt-for-Debt
          Exchange, the Banks will sell any Controlled Securities to third-party investors for
          cash pursuant to an offering memorandum.

(vi)      Within d months following the Distribution, Distributing will transfer all of the shares
          of the Controlled Stock not distributed in the Distribution (the “Remainder Stock”) to
          (a) its shareholders (the “Delayed Stock Distribution”) or pursuant to a registered
          exchange offer (the “Stock Exchange”) and/or (b) creditors, which may include the
          Banks, in exchange for (and in retirement of) a portion of the Historic Debt or newly
          issued debt (if any, the “New Debt 2”), the proceeds of which Distributing will use to
          repay the Historic Debt pursuant to the same steps as the Debt-for-Debt Exchange
          (such exchange, the “Debt-for-Equity Exchange” and, together with the Debt-for-
          Debt Exchange, the “Debt Exchanges,” and such portion of the Historic Debt and/or
          any New Debt 2, together with the portion of the Historic Debt and/or any New Debt
          1 exchanged in the Debt-for-Debt Exchange, if any, the “Distributing Exchange
          Debt”). Distributing understands that, in the event of any Debt-for-Equity Exchange
          involving one or more Banks, the Banks will thereafter sell their shares of the
          Controlled Stock to third-party investors for cash. Any Delayed Stock Distribution,
          Stock Exchange, and/or Debt-for-Equity Exchange are referred to collectively as the
          “Delayed Distributions.”

(vii)     Within d months following the Distribution, Distributing will use an amount of cash

         PLR-108824-21                                 5

            from its general accounts equal to the amount of any Controlled Cash to pay the
            Historic Debt and/or a portion of any New Debt 1, make distributions to Distributing’s
            shareholders, and/or repurchase shares of Distributing Common Stock (the “Cash
            Purge”).

(viii)      If Distributing determines that market and general economic conditions and sound
            business judgment do not support the disposition of all or any portion of any
            Remainder Stock, as described above, during the d months immediately following
            the Distribution, Distributing will dispose of any remaining shares of Remainder
            Stock in pro rata distributions to, and/or stock repurchases from, shareholders, to
            creditors to retire debt, or to third parties in exchange for cash as soon as
            practicable, taking into account market and general economic conditions and sound
            business judgment, but in no event later than five years after the Distribution.

         Distributing’s delayed distribution of Remainder Stock, described above, is intended to
         facilitate the orderly distribution of Controlled Stock and establish an effective and
         appropriate capital structure for both Distributing and Controlled, including by reducing
         Distributing’s liabilities and strengthening its balance sheet in the most efficient manner.
         These reasons will be referred to as the “Retention Business Purpose.”

         Distributing and Controlled will enter into an agreement that sets forth the terms of the
         Proposed Transaction and will be adopted by Distributing and Controlled as a “plan of
         reorganization” within the meaning of section 368 of the Code and section 1.368-2(g) of
         the regulations.

                                              Representations

         Except as otherwise provided below, Distributing has made all the representations
         provided in Section 3 of Rev. Proc. 2018-53 with respect to the Proposed Transaction.
         For purposes of the other representations, which Distributing has modified as set forth
         below, terms used but not otherwise defined in this letter have the meanings set forth in
         Rev. Proc. 2018-53:

         Distributing has made the following modified representations:

                Definition of Historic Debt: The Convertible Notes 1 are contingent payment debt
                instruments under section 1.1275-4 that have an adjusted issue price that
                reflects original issue discount accruals based on the comparable yield (reduced
                by cash interest). Distributing is obligated to satisfy its obligations under the
                Convertible Notes in cash if the holders of the Convertible Notes do not exercise
                their conversion rights. The Convertible Notes may be satisfied, on conversion,
                with cash, Distributing Common Stock, or a combination thereof. The amount
                due upon settlement of conversions or required to be paid upon any repurchase
                of the Convertible Notes, will reflect the amount by which the conversion feature
                of the Convertible Notes has current value.

PLR-108824-21                                6


     Representation 3: The holders of any Distributing Exchange Debt will not hold
     the debt for the benefit of Distributing, Controlled, or any Related Person. The
     Banks will not acquire any Historic Debt included in any Distributing Exchange
     Debt from Distributing, Controlled, or any Related Person. Neither Distributing,
     nor Controlled, nor any Related Person will participate in any profit gained by the
     Banks upon an exchange of Controlled Securities, nor will any such profit be
     limited by agreement or other arrangement. The value of any Controlled
     Securities received by the Banks in satisfaction of any Distributing Exchange
     Debt will be determined pursuant to arm’s-length negotiations.

     Representation 4: Distributing incurred the Historic Debt that will be assumed,
     satisfied, or refinanced with the proceeds of any New Debt 1, and/or any New
     Debt 2 (a) before the request for any relevant ruling was submitted and (b) no
     later than 60 days before the earliest of the following dates: (i) the date of the
     “first public announcement” (as defined in section 1.355-7(h)(10)) of the
     Distribution or a similar transaction, (ii) the date of the entry by Distributing into a
     binding agreement to engage in the Distribution or a similar transaction, and
     (iii) the date of approval of the Distribution or a similar transaction by the board of
     directors of Distributing.

     Representation 5: The historic average will be determined as an f-quarter
     average before the approval of the Distribution by Distributing’s Board of
     Directors, except that the “historic average” of the total adjusted issue price for
     the Convertible Notes will be calculated by treating, without duplication, the
     accretion in adjusted issue price of Convertible Notes 1 due to the unpaid original
     issue discount under section 1.1275-4 and the “in-the-money” amount
     attributable to the conversion feature of the Convertible Notes, in each case at
     the time of settlement, as having been in existence for the entire f-quarter period.

     Representation 6: There are one or more substantial business reasons for any
     delay in satisfying the Historic Debt, any New Debt 1, and any other Distributing
     Exchange Debt with the Delayed Distributions and the Cash Purge beyond 30
     days after the date of the Distribution. In addition, there are one or more
     substantial business reasons for any delay in the distributions described as the
     Delayed Distributions and the Cash Purge beyond 180 days after the date of the
     Distribution, including prevailing market conditions, recommendations from
     Distributing’s financial advisors in regard to the orderly establishment of
     Distributing’s capital structure, and general economic conditions, and all such
     distributions will be completed no later than d months after the date of the
     Distribution.

     Representation 7: Distributing will not replace any Distributing Exchange Debt
     with previously committed borrowing, other than borrowing to finance acquisitions
     unrelated to the Distribution pursuant to a revolving credit agreement or similar

PLR-108824-21                                  7

       arrangement. Such a revolving credit agreement or similar arrangement would
       have been entered into whether or not Distributing decided to engage in the
       Distribution. Distributing historically has expanded its business, in part, through
       acquisitions financed with lines of credit. It has completed more than g
       acquisitions in the preceding 5 years.

       Distributing has made the following additional representation:

       The Controlled Securities issued to Distributing in the Contribution will qualify as
       “securities” within the meaning of section 361(a).

Distributing has made the following representations with respect to the Remainder
Stock:

(a) In no event will the retention of the Remainder Stock prevent Distributing from
    distributing in the Distribution an amount of Controlled stock that represents control
    within the meaning of section 368(c).

(b) None of Distributing’s directors or officers will serve as directors or officers of
    Controlled as long as Distributing retains the Remainder Stock.

(c) Distributing’s plan to retain the Remainder Stock is motivated by the Retention
    Business Purpose.

(d) The Remainder Stock will be disposed of as soon as a disposition is warranted
    consistent with the Retention Business Purpose, but, in any event, not later than five
    years after the Distribution.

(e) Distributing will vote the Remainder Stock in proportion to the votes cast by
    Controlled’s other shareholders.

                                           Rulings

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

       (1) Distributing’s continued ownership of any Remainder Stock until its
           disposition, in no event later than five years after the Distribution, will not
           adversely affect the qualification of the Proposed Transaction under sections
           355 and 368(a)(1)(D) and will not be in pursuance of a plan having as one of
           its principal purposes the avoidance of U.S. federal income tax for purposes
           of section 355(a)(1)(D)(ii).

       (2) Any Delayed Stock Distribution, Stock Exchange, or distributions of
           Remainder Stock to repay Distributing Exchange Debt that occur within d

PLR-108824-21                                 8

          months following the Distribution will be treated as occurring pursuant to the
          plan of reorganization for purposes of sections 361(b) and (c).

       (3) The Cash Purge within d months after the Distribution will be treated as
           occurring pursuant to the plan of reorganization for purposes of sections
           361(b) and (c).

       (4) Each Debt Exchange within d months after the Distribution will be treated as a
           distribution to shareholders or creditors of Distributing for purposes of section
           361(c).

                                          Caveats

No opinion is expressed as to whether distributions after d months from the date of the
Distribution will be treated as pursuant to the plan of reorganization. No opinion is
expressed as to whether the Controlled Securities are treated as securities under any
provision of the Code or regulations. No opinion is expressed as to the tax effects of
cash received by Distributing from Controlled to the extent such cash received is greater
than the Controlled Cash.

Except as expressly provided in this letter, no opinion is expressed or implied
concerning 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 is not specifically covered by the
above rulings.

                                 Procedural Statements

This letter 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 returns that provides the date on and control number
(PLR-108824-21) of this letter ruling.

Pursuant to a Power of Attorney on file with this office, copies of this letter are being
sent to your authorized representatives.

                                           Sincerely,


                                           Douglas C. Bates, Chief, Branch 4
                                           Office of Associate Chief Counsel (Corporate)
cc: