Tax-free section 355/368(a)(1)(D) public spin-off of a worldwide group's Controlled Business into a new standalone company

Plain-English summary

A publicly traded parent company (Distributing) that runs two businesses through a worldwide group of subsidiaries wants to separate them, spinning off one business (the Controlled Business) into a new standalone public company (Controlled). The IRS ruled that the plan qualifies as a tax-free divisive reorganization under §§ 368(a)(1)(D) and 355, the classic "spin-off." In the core steps, the parent group restructures through a series of check-the-box conversions and tax-free § 332 liquidations, contributes the Controlled Business assets to Controlled in exchange for Controlled stock and cash that Controlled borrowed, and then distributes at least 80% of Controlled's voting stock pro-rata to the parent's public shareholders. The IRS issued 17 rulings: neither the parent, the new company, nor the public shareholders recognize gain or loss on the contribution and distribution; shareholders allocate their old basis between the two stocks; and cash used to pay down the parent's third-party debt (the "Boot Purge") and an "Equity-for-Debt Exchange" (handing some retained Controlled stock to banks to retire debt) are treated as part of the reorganization plan. The parent may keep a sub-20% stake (the "Retained Stock") for up to five years without spoiling the tax treatment, and a deferred intercompany gain from an earlier internal transfer is redetermined to be excluded from income. As is standard for these rulings, the IRS expressly did not rule on the major anti-abuse questions: whether the spin-off has a valid business purpose, whether it is a "device" to distribute earnings and profits, or whether it triggers the § 355(e) anti-Morris-Trust rule. This matters because a qualifying § 355 spin-off lets a large company separate a business and hand it to shareholders without a corporate-level or shareholder-level tax.

Ruling snapshot

• Question: Does the proposed separation qualify as a tax-free § 368(a)(1)(D)/§ 355 spin-off of the Controlled Business into a new public company, with the related contributions, distributions, debt exchanges, and liquidations receiving nonrecognition treatment?
• Outcome: Approved (17 rulings granting tax-free treatment; the IRS expressly did not rule on business purpose, device, or § 355(e))
• Key authorities: IRC §§ 355, 368(a)(1)(D), 361, 357, 362, 358, 332, 312(h); Treas. Reg. §§ 1.355-2, 1.1502-13; Rev. Procs. 2017-52, 2018-53

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202152010 Third Party Communication: None
Release Date: 12/30/2021 Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-00,
361.00-00, 368.04-00 Person To Contact:
------------------------, ID No. -----------------
---------------------------------------------------- Telephone Number:
--------------------------------------------------------- --------------------
------------------------------------ Refer Reply To:
-------------------------------- CC:CORP:B01
PLR-108823-21
Date:
October 04, 2021

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FSub 1 = ----------------------------------------------------------------------------
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FCorp 1 = ----------------------------------------------------------------------------
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FCorp 2 = ----------------------------------------------------------------------------
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Country B = ---------

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PLR-108823-21 4

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

Year 1 = -------

Year 2 = -------

Year 3 = -------

Year 4 = -------

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

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PLR-108823-21 5

f = --

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

This letter responds to your letter dated April 14, 2021, as supplemented by additional
letters dated August 23, 2021 and September 20, 2021, submitted on behalf of
Distributing, its affiliates, and its shareholders, requesting rulings under section 355 and
related provisions of the Internal Revenue Code (the “Code”) and related regulations
with respect to a series of proposed transactions (the “Proposed Transactions”). 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, regarding one or more
“Covered Transactions” under section 355 and/or section 368 of the Code and pursuant
to section 6.03(2) of Rev. Proc. 2021-1, 2021-1 I.R.B. 1, regarding one or more
significant issues under sections 332, 337, and 355 of the Code. This Office expresses
no opinion 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 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
corporation 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
corporation, within the meaning of Treas. Reg. § 1.355-8 (see section 355(e)(2)(A)(ii)
and Treas. Reg. § 1.355-7).
PLR-108823-21 6

                                Summary of Facts

Distributing, a publicly traded State A 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 (the
“Distributing U.S. Group”). At the time of the Proposed Transactions, Distributing will
have a single class of voting common stock issued and outstanding. The Distributing
Group has been actively engaged in two businesses, the Distributing Business and the
Controlled Business.

Ownership Structure

The following summary describes the relevant ownership structure of the Distributing
Group immediately prior to the Proposed Transactions. Except as described below,
each entity is treated as a corporation for U.S. federal income tax purposes.

Distributing directly owns all of the issued and outstanding stock of Sub 1. Sub 1
indirectly owns all of the issued and outstanding stock of both Sub 2 and Sub 3 through
a domestic eligible entity (within the meaning of Treas. Reg. § 301.7701-3(a)) that is
disregarded as an entity separate from its owner for U.S. federal income tax purposes
(a “disregarded entity”). Sub 1, Sub 2, and Sub 3 are each domestic corporations and
members of the Distributing U.S. Group that conduct the Distributing Business. Each of
Sub 2 and Sub 3 own all of the issued and outstanding membership interests in a
number of disregarded entities that conduct the Distributing Business.

Distributing also directly owns all of the issued and outstanding stock of Sub 4. Sub 4
directly owns all of the issued and outstanding stock of Sub 5 which, in turn, directly
owns all of the issued and outstanding stock of Sub 6. Sub 4 and Sub 5 are each
domestic corporations and members of the Distributing U.S. Group. Sub 6 is a domestic
entity treated as a corporation for U.S. federal income tax purposes and a member of
the Distributing U.S. Group.

Sub 6 directly owns: (i) all of the issued and outstanding stock of FSub 1, a Country A
entity that is treated as a disregarded entity for U.S. federal income tax purposes; (ii) all
of the issued and outstanding stock of FCorp 1, a Country B entity that is treated as a
corporation for U.S. federal income tax purposes; and (iii) all of the issued and
outstanding stock of Controlled, a State A corporation formed by Sub 6 on Date 1.

FSub 1 directly and indirectly owns a number of domestic and foreign entities that are
treated as disregarded entities for U.S. federal income tax purposes. FSub 1 also:
(i) directly owns all of the issued and outstanding stock of a foreign entity that is treated
as a corporation for U.S. federal income tax purposes; (ii) indirectly owns all of the
issued and outstanding stock of two foreign entities that are treated as corporations for
U.S. federal income tax purposes; and (iii) indirectly owns all of the issued and
outstanding stock of two domestic corporations for U.S. federal income tax purposes
PLR-108823-21 7

that are not members of the Distributing U.S. Group. FSub 1, FCorp 1, and the
disregarded entities directly and indirectly held by FSub 1, collectively, operate the
Controlled Business.

Prior to Distributing’s last fiscal quarter-end prior to the date that Distributing’s board of
directors first had discussions with respect to the Proposed Transactions, Distributing
had approximately $a of existing debt owed to unrelated third-party banks (the
“Distributing Debt”).

For purposes of satisfying the active trade or business requirements of section 355(b)
with respect to the Public Spin-off (as 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. Distributing has
submitted financial information in accordance with Rev. Proc. 2017-52 indicating that
both the Distributing Business and Controlled Business have had gross receipts and
operating expenses representing the active conduct of a trade or business for each of
the past five years.

Prior Intercompany Transactions

In Year 1, Distributing directly owned all of the issued and outstanding stock of both Sub
5 and FCorp 2, a Country C entity treated as a corporation for U.S. federal income tax
purposes. Distributing contributed all of the issued and outstanding stock of FCorp 2 to
Sub 5 in exchange for Sub 5 stock and a note receivable, in a qualifying section 351
exchange (the “FCorp 2 Transaction”). Under section 351(b), Distributing would have
recognized gain, if any, in an amount not in excess of the fair market value of the note
receivable. Pursuant to the intercompany transaction rules of Treas. Reg. § 1.1502-13,
the recognition of gain with respect to the FCorp 2 Transaction was deferred (the
“Intercompany Gain”).

In Year 2, Distributing formed Sub 4 and contributed all of the issued and outstanding
stock of Sub 5 to Sub 4 solely in exchange for stock of Sub 4 in a tax-free section 351
exchange.

In Year 3, Sub 5 directly owned all of the issued and outstanding stock of: (i) FSub 1,
which was then treated as a corporation for U.S. federal income tax purposes; and (ii)
FCorp 3, a Country A entity treated as a corporation for U.S. federal income tax
purposes. Sub 5 transferred all of the issued and outstanding stock of FCorp 2 to FCorp

3. As part of the same plan, FCorp 2 made an election to be treated as a disregarded
   entity for U.S. federal income tax purposes (the “FCorp 2 Reorganization”). The FCorp 2
   Reorganization was treated as a tax-free reorganization under section 368(a)(1)(D).
   After this transaction, which resulted in the deemed liquidation of FCorp 2, the stock of
   FCorp 3 became a successor asset, as defined in Treas. Reg. § 1.1502-13(j)(1), with
   respect to the Intercompany Gain.
   PLR-108823-21 8

Following the FCorp 2 Reorganization, Sub 5 transferred all of the issued and
outstanding stock of FCorp 3 to FSub 1. As part of the same plan, FCorp 3 made an
election to be treated as a disregarded entity for U.S. federal income tax purposes. This
transaction was treated as a tax-free reorganization under section 368(a)(1)(D). After
this transaction, which resulted in a deemed liquidation of FCorp 3, the stock of FSub 1
became a successor asset, as defined in Treas. Reg. § 1.1502-13(j)(1), with respect to
the Intercompany Gain.

In Year 4, Sub 5 formed Sub 6 and transferred all of the issued and outstanding stock of
FSub 1 to Sub 6. As part of the same plan, FSub 1 made an election to be treated as a
disregarded entity for U.S. federal income tax purposes. This transaction was treated as
a tax-free reorganization under section 368(a)(1)(F). After this transaction, which
resulted in a deemed liquidation of FSub 1, the stock of Sub 6 became a successor
asset, as defined in Treas. Reg. § 1.1502-13(j)(1), with respect to the Intercompany
Gain. Accordingly, immediately prior to the Proposed Transactions, there exists a
deferred intercompany transaction between Distributing (the selling member) and Sub 5
(the buying member), with respect to the Sub 6 stock (the successor asset) (i.e., the
Intercompany Gain).

Proposed Transactions

For what are represented to be valid business reasons, Distributing proposes to
separate the Distributing Business and Controlled Business. The relevant steps of the
Proposed Transactions are set forth below.

Step 1: Sub 4 converts to an LLC that will be treated as a disregarded entity for U.S.
federal income tax purposes.

Step 2: Sub 5 converts to an LLC that will be treated as a disregarded entity for U.S.
federal income tax purposes.

Step 3: Sub 6 makes a check-the-box election to be treated as a disregarded entity for
U.S. federal income tax purposes (the “Sub 6 Election”).

Step 4: Controlled borrows up to $b of new debt from third parties.

Step 5: FCorp 1 and/or FSub 1 distributes approximately $c up the chain, through the
disregarded entities, to Distributing, which Distributing uses to pay down a portion of the
Distributing Debt.

Step 6: Sub 6 contributes all of the issued and outstanding stock of FCorp 1 and all of
the issued and outstanding membership interests of FSub 1 to Controlled in exchange
for Controlled stock and the $b borrowed by Controlled in Step 4 (the “Controlled Cash”)
(collectively, the “Controlled Contribution”).
PLR-108823-21 9

Step 7: Sub 6 distributes all of the issued and outstanding stock of Controlled up the
chain, through the disregarded entities, to Distributing.

Step 8: Distributing distributes shares of Controlled stock representing at least d (a
number greater than 80) percent of the total combined voting power of all Controlled
stock pro-rata to Distributing’s public shareholders (the “Public Spin-off”). Within 12
months following the Public Spin-off, Distributing may transfer shares of Controlled
stock representing up to e (a number less than 20) percent of the total combined voting
power of all Controlled Stock (the “Retained Stock”) to one or more unrelated third-party
banks in exchange for (and in retirement of) a portion of Distributing’s debt (the “Equity-
for-Debt Exchange”). Any Retained Stock not transferred in the Equity-for-Debt
exchange will be disposed of in a taxable disposition (the “Retention”). Within 30 days
following the Public Spin-off, Distributing will use the Controlled Cash to repay
outstanding Distributing Debt (the “Boot Purge”).

In connection with the Public Spin-off, Distributing and Controlled, collectively with their
affiliates, will enter into certain agreements that will continue after the completion of the
Public Spin-off in order to effect an orderly transition of Controlled to a standalone public
company, including transitional services agreements (the “Transition Services
Agreements”), a separation and distribution agreement, and a tax matters agreement
(collectively, the “Continuing Arrangements”). The Transition Services Agreements will
be on a cost or cost-plus basis and will last no longer than g months after the Public
Spin-off.

Following the Public Spin-off, Distributing and Controlled will operate as independent
companies having separate boards of directors. The separate boards of directors will
have no overlapping membership with the exception of one overlapping board member
serving as a chairman of Distributing and Controlled (the “Overlapping Board Member”).
The Overlapping Board Member will serve in this capacity to accommodate each
company's need for the member’s unique industry experience, to reassure investors,
and to provide a sense of business continuity. The Overlapping Board Member will not
be an officer or employee involved in the day-to-day operations of Distributing or
Controlled. The Overlapping Board Member will be elected for a term of f years, will not
be eligible for re-election, and will at all times have a minority voting power with respect
to each of the boards of Distributing and Controlled.

                                 Representations

The following representations have been made with respect to the Proposed
Transactions.

Except as set forth below, Distributing has made all the representations in section 3 of
the Appendix to Rev. Proc. 2017-52 with respect to the Proposed Transactions:
PLR-108823-21 10

1. Distributing has made the following alternative representations: 3(a), 8(a), 11(a),
   15(b), 22(a), 31(a), 41(a).

2. Distributing has not made the following representations, which do not apply to the
   Public Spin-off: 7, 20, 24, 25, 39, 40.

3. Distributing has made the following modified representations:

   Representation 2: Other than the Retained Stock, Distributing will distribute on
   the same day all of the stock and securities of Controlled that it holds
   immediately before the Public Spin-Off.

   Representation 5: None of the Controlled stock to be distributed in the Public
   Spin-off will be received in any capacity other than that of a shareholder of
   Distributing.

   Representation 33: Payments made in connection with the Transition Services
   Agreement, between Distributing and Controlled after the Public Spin-off, will be
   based on a cost or cost-plus basis.

Except as set forth below, Distributing has made all the representations in section 3.04
of Rev. Proc. 2018-53 with respect to the Public Spin-off:

4. Distributing has not made the following representation with respect to the Boot Purge,
   because it does not apply to the Public Spin-off: 6.

5. Distributing has not made the following representation with respect to the Equity-for-
   Debt Exchange, but provided the required explanation: 6.

6. Distributing has made the following modified representations:

   Representation 4: Distributing incurred the Distributing Debt that will be assumed
   or satisfied (i)(a) before the request for any relevant ruling is submitted and (b) no
   later than 60 days before the earliest of the following dates: (1) the date of the
   first public announcement (as defined in Treas. Reg. § 1.355-7(h)(10)) of the
   Proposed Transactions or a similar transaction; (2) the date of the entry by
   Distributing into a binding agreement to engage in the Proposed Transactions or
   a similar transaction; and (3) the date of approval of the Proposed Transactions
   or a similar transaction by the board of directors of Distributing; or (ii) on a date
   later than such date described in clause (i) and the proceeds of such debt will be
   used to repay Distributing Debt incurred prior to the relevant date described in
   clause (i).

Distributing has made the following additional representations:
PLR-108823-21 11

7. The Sub 4 conversion and the Sub 5 conversion, in Steps 1 and 2, respectively, will
   each qualify as a tax-free liquidation under section 332.

8. Other than the transfer of Sub 6’s assets by Distributing to Controlled in the
   Controlled Contribution, the Sub 6 Election will otherwise qualify as a tax-free liquidation
   under section 332. Neither Distributing nor Controlled has any plan or intention to
   transfer, in the aggregate, more than h percent of the fair market value of the respective
   assets of Sub 6 to another corporation.

9. Distributing’s basis in the Sub 6 stock will be eliminated in the Sub 6 Election without
   the recognition of gain or loss (and such eliminated basis will not be reflected in the
   basis in any successor asset within the meaning of Treas. Reg. § 1.1502-13(j)(1)).

10. The Distributing U.S. Group’s consolidated tax returns have not reflected the effects
    of the FCorp 2 Transaction.

11. With respect to the FCorp 2 Transaction, the Distributing U.S. Group has not
    derived, and no taxpayer will derive, any federal income tax benefit from the
    intercompany transaction that gave rise to the intercompany gain or the redetermination
    of the intercompany gain, including any adjustment to the basis in member stock under
    Treas. Reg. § 1.1502-32.

12. The Retention of the Retained Stock by Distributing after the Public Spin-off will not
    be part of a plan having as one of its principal purposes the avoidance of Federal
    income tax.

13. None of Distributing’s directors or officers will serve as directors or officers of
    Controlled as long as Distributing holds the Retained Stock, except for the Overlapping
    Board Member.

14. The Retained Stock will be disposed of as soon as a disposition is warranted
    consistent with the business purpose for the Retention, but in any event no later than
    five years after the Public Spin-off.

15. Distributing will vote the Retained 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. The Controlled Contribution, together with the Public Spin-off, will qualify as a tax-free
   reorganization and distribution pursuant to sections 368(a)(1)(D) and 355. Distributing
   and Controlled will each be a “party to a reorganization” within the meaning of section
   PLR-108823-21 12

368(b).

2. No gain or loss will be recognized by Distributing on the Controlled Contribution.
   Sections 361(a), 361(b), and 357(a).

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

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

5. The holding period in each asset received by Controlled in the Controlled
   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 (and no amount otherwise will be included in the
   income of) the public shareholders of Distributing upon the receipt of Controlled stock in
   the Public Spin-off. Section 355(a)

7. No gain or loss will be recognized by Distributing upon its distribution of the stock of
   Controlled in the Public Spin-off. Section 361(c).

8. Each Distributing shareholder’s aggregate basis in its Distributing stock and
   Controlled stock after the Public Spin-off will equal such shareholder’s aggregate basis
   in its Distributing stock immediately prior to the Public Spin-off. 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 Public Spin-off in accordance with
   Treas. Reg. § 1.358-2(a)(2). Section 358(a) through (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 Public Spin-off. Section
   1223(1).

10. The receipt by the public shareholders of Distributing of cash in lieu of fractional
    shares, if any, of Controlled stock will be treated for U.S. federal income tax purposes
    as if the fractional shares had been distributed to such shareholders as part of the
    Public Spin-off and then had been disposed of by such shareholders for the amount of
    such cash in a sale or exchange. The gain (or loss) recognized (determined using the
    basis allocated to the fractional shares in Ruling 8), if any, will be treated as capital gain
    (or loss) under section 1001, provided the stock was held as a capital asset by the
    selling shareholder. Such gain (or loss) will be short-term or long-term capital gain (or
    loss) (determined using the holding period provided in Ruling 9).
    PLR-108823-21 13

11. The earnings and profits of Distributing will be allocated between Distributing and
    Controlled in accordance with section 312(h) and Treas. Reg. §§ 1.312-10(a) and
    1.1502-33.

12. The Equity-for-Debt Exchange will be treated as being pursuant to the plan of
    reorganization for purposes of sections 361(c)(3).

13. The Boot Purge will be treated as being pursuant to the plan of reorganization for
    purposes of sections 361(b)(1)(A) and 361(b)(3). Distributing will not be required to
    segregate or otherwise trace the Controlled Cash.

14. The Retention is not in pursuance of a plan having as one of its principal purposes
    the avoidance of U.S. federal income tax within the meaning of section 355(a)(1)(D)(ii).
    The Retention satisfies the requirements of section 355(a)(1)(D)(ii) and Treas. Reg.
    § 1.355-2(e).

15. Upon the deemed liquidations of Sub 4, Sub 5, and Sub 6, resulting from the Sub 4
    conversion, the Sub 5 conversion, and the Sub 6 Election, respectively, the amount of
    the Intercompany Gain from the FCorp 2 Transaction will be redetermined to be
    excluded from gross income under Treas. Reg. § 1.1502-13(c)(6)(ii)(C).

16. The transfer of Sub 6’s assets by Distributing to Controlled in the Controlled
    Contribution will not preclude the Sub 6 Election from otherwise qualifying as a
    “complete liquidation” within the meaning of section 332.

17. Post-distribution payments made between Distributing and Controlled and their
    respective affiliates under any of the Continuing Arrangements regarding liabilities,
    indemnities, or other obligations, that (i) have arisen or will arise for a taxable period
    ending on or before the Public Spin-off or for a taxable period beginning before and
    ending after the Public Spin-off; and (ii) will not become fixed and ascertainable until
    after the Public Spin-off, will be viewed as occurring immediately before the Public Spin-
    off. See Arrowsmith v. Commissioner, 344 U.S. 6 (1952); Rev. Rul. 83-73, 1983-1 C.B.
    84.

                                     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
PLR-108823-21 14

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 letter ruling 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-108823-21) of this letter ruling.

                                       Sincerely,


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

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