A corporation's tax-free spin-off of one of its two businesses into a new subsidiary qualifies as a "D" reorganization

Plain-English summary

A corporation runs two separate businesses (Business A and Business B) and wants to split them apart for business reasons. It plans to form a new corporation (Controlled), move Business B's assets and liabilities into it in exchange for all of Controlled's stock, and then hand that stock out to its own shareholders pro rata (a "spin-off"). The company asked the IRS to confirm the standard tax-free treatment. The IRS ruled that the contribution plus the distribution together are a reorganization under section 368(a)(1)(D), that neither the distributing company nor the new subsidiary recognizes gain or loss, and that the shareholders recognize no gain or loss on receiving the Controlled stock under section 355(a). It also confirmed the usual carryover rules for basis, holding period, and earnings and profits. Notably, the IRS did not rule on the "business purpose," "device," or anti-abuse tests of section 355, leaving those to be verified on audit. This is a routine corporate separation ruling that lets a two-business company divide into two without a tax hit.

Ruling snapshot

• Question: Does a corporation's contribution of one business to a newly formed subsidiary, followed by a pro rata distribution of that subsidiary's stock, qualify as a tax-free reorganization and spin-off?
• Outcome: Approved (ruled a tax-free section 368(a)(1)(D) reorganization / section 355 distribution; business-purpose, device, and section 355(e) plan tests not addressed).
• Key authorities: IRC §§ 355, 368(a)(1)(D); §§ 357, 361, 1032, 362, 358, 1223, 312; Rev. Proc. 2017-52.

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202208012                                             Third Party Communication: None
 Release Date: 2/25/2022                                       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-116458-21
                                                               Date:
                                                               November 29, 2021




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

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

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

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

This letter responds to your authorized representative’s letter received August 12, 2021,
requesting rulings on certain federal income tax consequences of a proposed
transaction (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, regarding one
or more "Covered Transactions" under sections 355 and 368 of the Internal Revenue
Code (the "Code"). This office expresses no opinion as 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 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
PLR-116458-21                                 2

distributing corporation or the controlled corporation or both, see section 355(a)(1)(B)
and Treas. Reg. § 1.355-2(d); or (iii) is part of a plan (or series of related transaction)
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. § 1.355-8T. See section
355(e)(2)(A)(ii) and Treas. Reg. § 1.355-7.

                                   Summary of Facts

Distributing is a corporation engaged in Business A and Business B and has submitted .
financial information in accordance with Rev. Proc. 2017-52 indicating that each of
Business A and Business B has had gross receipts and operating expenses
representing the active conduct of a trade or business for each of the past five years.
For what are represented to be valid business reasons, Distributing proposes to
separate Business B from Business A in the following steps:

1. Distributing will form a new corporation (“Controlled”) and contribute the assets of
   Business B to Controlled in exchange for all of the issued and outstanding stock of
   Controlled and the assumption of liabilities related to Business B by Controlled (the
   “Contribution”).

2. Distributing will distribute the Controlled stock received in Step 1 to its shareholders
   on a pro rata basis (the “Distribution”).

                                    Representations

Except as set forth below, Distributing has made all the representations section 3 of the
Appendix to Revenue Procedure 2017-52.

a) Parent has made the following alternative representations: 3(a); 8(a); 11(a); 15(b);
   22(a); 31(a); 41(a).

b) Parent has not made the following representations, which do not apply to the
   Proposed Transaction: 7; 24; 25; 36; 37; 38; 39; 40

                                         Rulings

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

1. The Contribution and Distribution together will constitute a reorganization within the
   meaning of section 368(a)(1)(D) of the Code. Distributing and Controlled will each be
   a "party to a reorganization" within the meaning of section 368(b).

2. Distributing will not recognize gain or loss on the Contribution. Sections 357(a) and
   361(a).
PLR-116458-21                                 3

3. Controlled will not recognize gain or loss on the Contribution. Section 1032(a).

4. Controlled’s basis in each asset received in the Contribution will be the same as the
   basis of the asset in the hands of the Distributing immediately before the
   Contribution. Section 362(b).

5. Controlled’s holding period in each asset received in the Contribution will include the
   period during which Distribution held the asset. Section 1223(2).

6. Distributing will not recognize gain or loss on the Distribution. Section 361(c).

7. The shareholders of Distribution will not recognize gain or loss (and no amount
   otherwise will be includable in their income) upon receipt of Controlled stock in the
   Distribution. Section 355(a).

8. The aggregate basis of the Distributing stock and the Controlled stock in the hands
   of each shareholder immediately after the Distribution will equal the aggregate basis
   of the Distributing stock held by such shareholder immediately before the
   Distribution, allocated between the Distributing stock and the Controlled stock in
   proportion to the fair market value of each immediately following the Distribution in
   accordance with Treas. Reg. §1.358-2(a). Section 358(a)(1) and (b).

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

10. Earnings and profits, if any, will be allocated between Distributing and Controlled in
    accordance with section 312(h) and Treas. Reg. §1.312-10(a).

                                          Caveat

No opinion is expressed about the tax treatment of the Proposed Transaction under
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 above rulings.

                                  Procedural Statements

The letter ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the
Code provides that it may not be sued 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-116458-21) of this ruling letter.
PLR-116458-21                                    4

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

                                    Sincerely,




                                    Austin Diamond-Jones,
                                    Senior Technician Reviewer, Branch 1
                                    Office of Associate Chief Counsel (Corporate)




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