In a spin-off, temporarily retaining Controlled stock is not a tax-avoidance plan under Section 355(a)(1)(D)(ii)

Plain-English summary

A publicly traded parent corporation (Distributing) planned a spin-off to separate two businesses. It would convert a wholly owned LLC (Controlled) into a corporation, distribute at least 80 percent of Controlled's stock to its shareholders pro rata, and keep the rest (the "Retained Shares") to sell for cash as soon as practical, and in no event more than five years, after the distribution. Section 355 can make such a distribution tax-free, but the law scrutinizes stock the parent keeps: retaining control-level stock can be treated as part of a plan whose principal purpose is to avoid tax under section 355(a)(1)(D)(ii). Relying on the company's representations (a valid business purpose for keeping the shares, disposal as soon as warranted and within five years, voting the retained shares in proportion to other shareholders, and only a minority of overlapping directors), the IRS ruled that Distributing's continued ownership of the Retained Shares until sale will not be pursuant to a plan having tax avoidance as a principal purpose. The letter rules only on that one significant issue, not on the overall tax treatment of the spin-off.

Ruling snapshot

• Question: Will the parent's temporary retention of Controlled stock after a spin-off (to be sold within five years) be treated as part of a plan whose principal purpose is avoiding federal income tax under section 355(a)(1)(D)(ii)?
• Outcome: Approved (favorable ruling: the retention is not in pursuance of a tax-avoidance plan)
• Key authorities: IRC § 355(a)(1)(D)(ii); IRC § 368(a)(1)(D); Rev. Proc. 2017-52, as amplified and modified by Rev. Proc. 2018-53

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202149006 Third Party Communication: None
Release Date: 12/10/2021 Date of Communication: Not Applicable
Index Numbers: 355.01-00, 368.04-00
Person To Contact:
---------------------- ---------------------, ID No. -----------------
--------------------------------------------- Telephone Number:
-------------------------------- ---------------------
------------------------ Refer Reply To:
------------------------------------ CC:CORP:B03
PLR-107007-21
Date:
September 09, 2021

Legend

Distributing = --------------------------------------------------------------------------------------------
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Controlled = --------------------------------------------------------------------------------------------
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Business A = ---------------------------------

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

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

Individuals = --------------------------------------------------------------------------------------------
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---------------

             = --------------------------------------------------------------------------------------------
               --------------------------------------------------------------------------------------------
               ----------------------------------

             = --------------------------------------------------------------------------------------------
               --------------------------------------------------------------------------------------------
               ---------------

a = ------

b = ------
 PLR-107007-21 2

   c               = ---


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

  This letter responds to the letter from your authorized representative dated March 22,
  2021, and subsequent correspondence, submitted on behalf of Distributing, requesting
  rulings on certain federal income tax consequences of a transaction described below
  (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 6.03(2) of Rev.
  Proc. 2021-1, 2021-1 I.R.B.1, regarding one or more significant issues under sections
  355 of the Internal Revenue Code (the “Code”). The ruling contained in this letter only
  addresses one or more significant issues involved in the Proposed Transaction. 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.

  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.

                                      Summary of Facts

  Distributing is a publicly traded State A corporation and the common parent of an
  affiliated group (the “Distributing Group”). 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
  Business A and Business B.

  Distributing owns all the issued and outstanding equity interests in a domestic LLC,
  (“Controlled”) that is disregarded as separate from Distributing for U.S. federal income
  tax purposes. Controlled operates Business A through its subsidiaries.

                                    Proposed Transaction

  Distributing intends to engage in the Proposed Transaction described below to separate
  Business A from Business B.

(i) Pursuant to state law, Controlled will be converted into a State A corporation.
Business A will be deemed to be contributed to Controlled (the “Deemed
Contribution”).
 PLR-107007-21 3

(ii) Distributing will distribute at least a (greater than 80 percent) of Controlled stock to
its shareholders, pro rata (the “Distribution”).

(iii) Distributing may retain up to b shares of Controlled stock (“Retained Shares”) and
sell the Retained Shares into the public market or through privately negotiated
transactions with third parties in exchange for cash as soon as reasonably practical
after the Distribution. It is expected that the sale of Retained Shares will take place
within c months after the Distribution but in no event longer than five years after the
Distribution.

    Following the Distribution, certain Individuals will serve as both a director of Distributing
    and a director of Controlled. The Individuals will constitute a minority of Controlled’s board
    of directors and under Controlled’s governing documents will be subject to an election for
    director of Controlled by the Controlled shareholders following the distribution in a manner
    consistent with those of Controlled’s other directors.

                                          Representations

    Distributing has made the following representations:

    (a) The Deemed Contribution, taken together with the Distribution, will qualify as a
        reorganization within the meaning of section 368(a)(1)(D) of the Code.

    (b) A sufficient business purpose exists for the retention of the Retained Shares.

    (c) Other than the Individuals, none of Distributing’s directors or officers will serve as
        directors or officers of Controlled while Distributing retains the Retained Shares.

    (d) The Retained Shares will be disposed of as soon as a disposition is warranted
        consistent with the Retained Shares business purpose, but, in any event, not later
        than five years after the Distribution.

    (e) Distributing will vote the Retained Shares in proportion to the votes cast by
        Controlled’s other shareholders.
                                              Ruling

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

           Distributing’s continued ownership of any Retained Shares until its disposition, in
           no event later than five years after the Distribution, 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).

                                               Caveats

PLR-107007-21 4

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 ruling.

                             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-107007-21) 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,



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

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