Spun-off company's stock stays "employer securities" for the net unrealized appreciation tax break, with the reinvestment window extended to 180 days

Plain-English summary

A publicly traded company runs a 401(k)/ESOP retirement plan whose participants
hold the company's stock. When employees take employer stock out of such a plan,
a special rule (net unrealized appreciation, or NUA, under Section 402(e)) lets
them defer tax on the built-in gain until they later sell the shares. The company
spun off part of its business into a new public company, so the plan suddenly
held shares of both the original employer and the spun-off company. It asked the
IRS to confirm the tax mechanics. The IRS ruled favorably on all five requests:
(1) the spun-off company's shares still count as "securities of the employer
corporation" eligible for NUA treatment; (2) the participants' cost basis is split
between the two stocks by relative value under the Section 358 spinoff rules;
(3) and (4) selling the spun-off shares and reinvesting the proceeds back into
the original employer's stock (even with a brief parking of cash in short-term
investments) is a tax-free "exchange" of employer securities under Section 402(j)
that does not disturb the NUA calculation; and (5) using the IRS's authority
under Section 402(j)(2)(B), the normal 90-day reinvestment window is extended to
up to 180 days because an orderly sale of the thinly traded spun-off stock may
take longer. The upshot: plan participants keep their NUA tax deferral through
the spinoff and the wind-down of the spun-off shares.

Ruling snapshot

• Question: After a spinoff, do the spun-off company's shares held in the
  401(k)/ESOP qualify as "employer securities" for net unrealized appreciation,
  how is basis allocated, does selling and reinvesting them count as a
  tax-neutral Section 402(j) exchange, and can the 90-day reinvestment window be
  extended to 180 days?
• Outcome: Approved (all five rulings granted)
• Key authorities: IRC §§ 402(e), 402(j), 358, 424(f); Treas. Reg.
  §§ 1.402(a)-1(b), 1.358-2(a)(2); Rev. Rul. 73-29

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202210004                                              Third Party Communication: None
 Release Date: 3/11/2022                                        Date of Communication: Not Applicable
 Index Number: 402.07-00
                                                                Person To Contact:
 ------------------------------                                 --------------, ID No. -----------------
 ------------------------------------------------------------   Telephone Number:
 ----------------------------------                             --------------------
 ----------------------------                                   Refer Reply To:
                                                                CC:EEE:EB:QP3
                                                                PLR-112806-21
                                                                Date:
                                                                December 10, 2021

 Company A  = ---------------------------------------------------------------------------------------------
              ---------------------------------------------------------------------------------------------
              --------------------------------
 Company B = ---------------------------------------------------------------------------------------------
              ---------------------------------------------------------------------------------------------
              -------------------------------
 Company C = ---------------------------------------------------------------------------------------------
              ---------------------------------------------------------------------------------------------
              ------------------------------------------------
 Entity E   = ---------------------------------------------------------------------------------------------
              ---------------------------------------------------------------------------------------------
              ------------------------------------------------
 Business H = --------------------------------------------------------
 Advisor K  = ----------------------------------------------
 Plan M     = ----------------------------
 Fund Q     = ---------------------
 Fund R     = ----------------------------------------------
 Date 1     = ------------------------
 Date 2     = -------------------------
 Date 3     = ---------------------------
 Date 4     = ---------------------------
 x          = ------
 y          = ------
 z          = -----


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

This is in response to your letter dated May 11, 2021, submitted by your authorized
representative, supplemented by correspondence dated October 19, 2021, and
November 29, 2021, on behalf of Company A, in which you request rulings under
sections 402(e) and 402(j) of the Internal Revenue Code.
PLR-112806-21                               2

The following facts and representations have been submitted under penalties of perjury
in support of the rulings requested:

Company A, a publicly traded company, maintains Plan M, a profit-sharing plan
intended to be qualified under section 401(a), that includes a qualified cash or deferred
arrangement under section 401(k) and an employee stock ownership plan under
section 4975(e)(7). One investment option under Plan M is Fund Q, which is invested
primarily in Company A common stock. Fund Q is intended to qualify as an employee
stock ownership plan under sections 401(a) and 4975(e)(7). Plan M is the subject of a
favorable determination letter dated Date 1, indicating that Plan M is qualified under
section 401(a) and satisfies the requirements of section 4975(e)(7). Plan M uses the
average cost method described in § 1.402(a)-1(b)(2)(ii)(d)(1) to determine the cost basis
of the shares of Company A common stock in Fund Q.

Company A undertook a series of internal restructuring transactions to separate
Business H. As a result of the internal restructuring, the U.S. assets and liabilities of
Business H, the U.S. operations of Business H, and a substantial majority of the
subsidiaries operating the non-U.S. operations of Business H were held by Company C,
a wholly owned indirect subsidiary of Entity E, which was, in turn, a wholly owned entity
of Company A. Thereafter, Company A converted Entity E to Company B, the controlled
corporation in the spinoff.

On Date 2, Company A spun off x% of the common stock of Company B to
Company A's public common stock shareholders (Spinoff). Company A employees in
Business H were transferred to Company C prior to the Spinoff and were no longer
within Company A's controlled group within the meaning of section 414(b), (c), (m),
or (o) following the Spinoff. Company A intends to dispose of the retained y% of
Company B common stock within z days following the Spinoff in satisfaction of
Company A debt obligations.

In connection with the Spinoff, Plan M, as a shareholder of Company A common stock
through Fund Q, acquired Company B common stock, resulting in Plan M participants
having investments in both Company A common stock and Company B common stock.
On Date 3, the fiduciary of Plan M retained Advisor K to serve as an independent
fiduciary with respect to the Company B common stock that was acquired by Plan M in
connection with the Spinoff. Within five days following the Spinoff, Fund R was formed,
and the shares of Company B common stock held by Fund Q were transferred to
Fund R. Plan M participants are permitted to trade units out of Fund R under the normal
Plan M trading rules and reinvest the proceeds in Fund Q or any other Plan M
investment alternative, but Plan M participants are not permitted to make any new
investments in Fund R.

Advisor K has full responsibility with respect to the Company B common stock received
by Plan M held in Fund R. Advisor K indicated that it is likely to decide to sell the
Company B common stock by liquidating the Company B common stock within
PLR-112806-21                               3

approximately one year from the formation of Fund R. It is expected that Advisor K will
temporarily invest the proceeds from the sales of Company B common stock in cash
and other short-term investments, holding these investments in Fund R. The sales
proceeds will then be reinvested in another Plan M investment alternative, which may
include Fund Q.

Advisor K prepared a report that explains that the sale of Company B common stock
and reinvestment in Company A common stock within Fund Q may exceed 90 days.
Advisor K stated that when constructing a sales strategy, the variables it considers
include the size of the non-employer stock fund and the average daily trading volume of
the common stock held in the fund, noting that it tries to minimize the market impact of
its sales activity, which generally means keeping directed sales to less than 15% of the
common stock's average daily trading volume. The report notes that the following two
situations may cause a final sales period to exceed 90 days: (1) a depressed trading
volume over a long period of time after the commencement of the final sales period, and
(2) a market event that occurs in the middle of the final sales period which may cause
Advisor K to delay its sales process for an extended period of time. The report also
notes that Company A retained y% of the shares of Company B common stock, which
means that the trading volume of Company B common stock will be lower than would
be the case if 100% of the shares were distributed. Based on Advisor K's assessment of
these factors and recognizing possible market volatilities, Advisor K thinks it would be
advisable to have the time limit for reinvesting Company B common stock into Company
A common stock extended beyond 90 days to up to 180 days from the date of sale of
Company B common stock.

On Date 4, Company A received a private letter ruling from the Office of Associate Chief
Counsel (Corporate), ruling that Company A common stock shareholders will recognize
no gain or loss (and no amount will be includible in income) upon the receipt of
Company B common stock in the Spinoff under section 355(a) and that the aggregate
basis of Company A shares of common stock and Company B shares of common stock
in the hands of Company A's public shareholders immediately after the Spinoff will be
the same as the aggregate basis of the Company A common stock held by
Company A's public shareholders immediately before the Spinoff, allocated between
Company A common stock and Company B common stock in proportion to the fair
market value of each in accordance with § 1.358-2(a)(2).

Rulings Requested

Based on the facts and representations, the following rulings are requested:

    1. Shares of Company B common stock acquired by Plan M for the benefit of
      Plan M participants (whether current employees, former employees, or
      beneficiaries) as a result of the Spinoff constitute "securities of the employer
      corporation" for purposes of section 402(e) and the exclusion of net unrealized
      appreciation from income under section 402(e).
PLR-112806-21                                4


    2. For purposes of determining net unrealized appreciation under section 402(e),
      the basis of the Company A common stock and Company B common stock held
      by Plan M immediately after the Spinoff will be determined by allocating the
      section 402 basis in the shares of Company A common stock immediately before
      the Spinoff between the Company A shares of common stock and the
      Company B shares of common stock immediately after the Spinoff in proportion
      to their relative fair market value, in accordance with the rules of section 358.

    3. With respect to any Plan M participant who elects to divest from Fund R and
      immediately reinvest the proceeds in Company A common stock through
      Fund Q, such sale and reinvestment shall constitute an exchange of "securities
      of the employer corporation" for purposes of section 402(j), so that the
      determination of net unrealized appreciation shall be made without regard to
      such sale.

    4. With respect to any Plan M participant who is divested from Company B common
      stock in connection with the termination or liquidation of Fund R by Company A
      or Plan M fiduciaries and reinvested in Company A stock through Fund Q, such
      sale and reinvestment shall constitute an exchange of "securities of the employer
      corporation" for purposes of section 402(j), so that the determination of net
      unrealized appreciation shall be made without regard to such sale and without
      regard to any temporary investment of Company B stock sales proceeds in
      short-term investments.

    5. Pursuant to the authority granted by section 402(j)(2)(B), if Plan M undertakes
      the sale of some or all of the Company B shares of common stock, the 90-day
      period for reinvesting the Company B common stock sales proceeds in
      Company A common stock through Fund Q shall be extended up to 180 days
      from the date of sale.

Law and Analysis

Section 402(e)(4)(A) provides, in pertinent part, that for purposes of sections 402(a) and
72, in the case of a distribution other than a lump sum distribution, the amount actually
distributed to any distributee from a trust described in section 402(a) shall not include
any net unrealized appreciation in securities of the employer corporation attributable to
amounts contributed by the employee.

Section 402(e)(4)(B) states, in pertinent part, that for purposes of sections 402(a) and
72, in the case of any lump sum distribution which includes securities of the employer
corporation, there shall be excluded from gross income the net unrealized appreciation
attributable to that part of the distribution which consists of securities of the employer
corporation.
PLR-112806-21                                 5

Section 402(e)(4)(E)(ii) provides, in pertinent part, that for purposes of section 402(e),
the term "securities of the employer corporation" includes securities of a parent or
subsidiary corporation (as defined in subsections (e) and (f) of section 424) of the
employer corporation.

Section 1.402(a)-1(b)(2)(i) provides that, with respect to a trust described in
section 401(a) that is tax exempt under section 501(a), the amount of net unrealized
appreciation in securities of the employer corporation that are distributed by the trust is
the excess of the market value of such securities at the time of distribution over the cost
or other basis of such securities to the trust.

Section 1.402(a)-1(b)(2)(ii) sets forth the manner in which the cost or other basis to the
trust of a distributed security of the employer corporation is calculated for the purpose of
determining the net unrealized appreciation on such security.

Section 1.402(a)-1(b)(3) sets forth certain special rules for determining the net
unrealized appreciation on securities of the employer corporation that are attributable to
employee contributions.

Under § 1.402(a)-1(d)(2), neither employee salary deferrals made pursuant to a cash or
deferred arrangement nor matching contributions are treated as employee contributions
for purposes of section 402(e)(4).

In Rev. Rul. 73-29, 1973-1 CB 198, securities of an employer corporation held by its
qualified plan were transferred to the qualified trust of an unrelated corporation when
the first employer sold part of its business and transferred some of its employees to an
unrelated corporation. The Internal Revenue Service held that shares of stock of the
seller corporation distributed from the buyer's qualified trust to employees of the buyer
corporation who were former employees of the seller corporation were securities of the
employer corporation and will always be securities of the employer corporation even
after those shares and the employees in whose accounts they were held were
transferred to an unrelated corporation.

Section 402(j) provides, in pertinent part, that for the purposes of section 402(e)(4), in
the case of any transaction in which either (A) the plan trustee exchanges the plan's
securities of the employer corporation for other such securities or (B) the plan trustee
disposes of securities of the employer corporation and uses the proceeds of such
disposition to acquire securities of the employer corporation within 90 days (or such
longer period as the Secretary of the Treasury may prescribe), the determination of net
unrealized appreciation shall be made without regard to such transaction.

Company B was a wholly owned subsidiary of Company A before and at the time of the
Spinoff. Section 424(f) provides, in part, that the term "subsidiary corporation" means
any corporation (other than the employer corporation) in an unbroken chain of
corporations beginning with the employer corporation if each of the corporations other
PLR-112806-21                                6

than the last corporation in the unbroken chain owns stock possessing 50 percent or
more of the total combined voting power of all classes of stock in one of the other
corporations in such chain. Section 402(e)(4)(E)(ii) provides that the term "securities of
the employer corporation" includes securities of a parent or subsidiary corporation (as
defined in subsections (e) and (f) of section 424). Because Company B was a wholly
owned subsidiary of the "employer corporation" before and at the time of the Spinoff,
those shares of Company B common stock constitute "securities of the employer
corporation" within the meaning of section 402(e)(4)(E).

Pursuant to and simultaneously with the Spinoff, Company B ceased to be a subsidiary
of Company A. However, the shares of Company B common stock distributed to Plan M
pursuant to the Spinoff represent part of the pre-Spinoff value of Company A common
stock.

The distribution of the shares of Company B common stock with respect to the shares
of Company A common stock held by Plan M is similar to the facts in Rev. Rul. 73-29
because the securities of an employer corporation (in this case, the shares of
Company B common stock) held by the qualified plan of a related corporation (in this
case, Company A) are ultimately held by the qualified plan of an unrelated corporation
(Company A, after the Spinoff was consummated). In Rev. Rul. 73-29, shares of stock
of the seller corporation transferred to the buyer's qualified trust as part of the
transaction and then distributed from the buyer's qualified trust to employees of the
buyer corporation who were former employees of the seller corporation were securities
of the employer corporation at the time contributed and remained employer securities
even after those shares and the employees in whose account they were held were
transferred to an unrelated corporation.

Therefore, the shares of Company B common stock acquired by Plan M for the benefit
of Plan M participants (whether current employees, former employees, or beneficiaries)
as a result of the Spinoff constitute "securities of the employer corporation" for purposes
of section 402(e) and the exclusion of net unrealized appreciation from income under
section 402(e).

Company A received a private letter ruling from the Office of Associate Chief Counsel
(Corporate) ruling that Company A common stock shareholders will recognize no gain
or loss (and no amount will be includible in income) upon the receipt of shares of
Company B common stock in the Spinoff under section 355(a) and that the aggregate
basis of shares of Company A common stock and shares of Company B common stock
in the hands of Company A's public shareholders immediately after the Spinoff will be
the same as the aggregate basis of the Company A common stock held by
Company A's public shareholders immediately before the Spinoff, allocated between the
shares of Company A common stock and the shares of Company B common stock in
proportion to the fair market value of each in accordance with § 1.358-2(a)(2).
PLR-112806-21                                 7

Section 1.402(a)-1(b)(2)(i) provides that the amount of net unrealized appreciation in
securities of the employer corporation that are distributed by the trust is the excess of
the market value of such securities at the time of the distribution over the cost or other
basis of such securities to the trust.

Therefore, for purposes of determining net unrealized appreciation under
section 402(e), the basis of the shares of Company A common stock and shares of
Company B common stock held by Plan M immediately after the Spinoff is determined
by allocating the section 402 basis in the shares of Company A common stock
immediately before the Spinoff between the shares of Company A common stock and
the shares of Company B common stock immediately after the Spinoff in proportion to
their relative fair market value, in accordance with § 1.358-2(a)(2).

Section 402(j) provides, in pertinent part, that for purposes of section 402(e)(4), in the
case of any transaction in which either (A) the plan trustee exchanges the plan's
securities of the employer corporation for other such securities or (B) the plan trustee
disposes of securities of the employer corporation and uses the proceeds of such
disposition to acquire securities of the employer corporation within 90 days (or such
longer period as the Secretary of the Treasury may prescribe), the determination of net
unrealized appreciation shall be made without regard to such transaction. In the present
case, to the extent there is a disposition of Company B common stock followed by the
immediate reinvestment of the proceeds in Company A common stock, such exchange
or disposition will constitute an exchange of "securities of the employer corporation" for
purposes of section 402(j)(2) so that the determination of net unrealized appreciation
shall be made without regard to such exchange or disposition.

As discussed above, we have concluded that the shares of Company B common stock
received by Plan M as a result of the Spinoff are securities of the employer corporation
as defined in section 402(e). The disposition of Company B common stock followed by
the reinvestment of the proceeds in Company A common stock is thus a disposition of
securities of the employer corporation followed by a reinvestment of the proceeds in
securities of the employer corporation.

Therefore, to the extent any Plan M participant who is divested from Company B
common stock in connection with the termination or liquidation of Fund R by
Company A or Plan M fiduciaries and reinvested in Company A common stock through
Fund Q, such sale and reinvestment shall constitute an exchange of "securities of the
employer corporation" for purposes of section 402(j), so that the determination of net
unrealized appreciation shall be made without regard to such sale, provided that the
transactions are completed withing the required time frame. According to the
submission of your authorized representative, interim investments of the proceeds from
Plan M's sales of shares of Company B common stock may be made in cash or other
short-term investments. As discussed below, the period for the reinvestment of these
proceeds in Company A common stock may be as long as 180 days. Because of the
PLR-112806-21                                 8

length of time which may be needed to implement the reinvestment, we do not find that
the placement of the proceeds into an interim investment alters this conclusion.

Section 402(j), by its terms alone, does not expressly permit participant-directed
transactions. The legislative history (see Senate Report No. 99-313, at 1040 (1986)),
however, indicates that section 402(j) applies to transactions that are in the exercise of
fiduciary duty or are required by the Employee Retirement Income Security Act of 1974
and requires a participant-directed trustee to act in accordance with participant
directions. Therefore, it is appropriate for participant-directed dispositions and
acquisitions of employer securities to be covered by section 402(j), provided that the
transactions are completed within the required time frame.

Therefore, with respect to any Plan M participant who elects to divest from Fund R and
immediately reinvest the proceeds in Company A common stock through Fund Q, such
sale and reinvestment would constitute an exchange of "securities of the employer
corporation" for purposes of section 402(j), so that the determination of net unrealized
appreciation would be made without regard to such sale.

Your authorized representative has submitted a report prepared by Advisor K that
explains that the sale of Company B common stock and reinvestment in Company A
common stock may exceed 90 days and that it thinks it would be advisable to have the
time limit for reinvesting Company B common stock into Company A common stock
extended beyond 90 days to up to 180 days from the date of sale of Company B
common stock. Advisor K's assessment was based on several factors that it identified in
its report, including that (1) it tries to minimize the market impact of its sales activity,
which generally means keeping directed sales to less than 15% of the common stock's
average daily trading volume; (2) there may be a depressed trading volume over a long
period of time after the commencement of the final sales period; (3) a market event that
occurs in the middle of the final sales period may cause the sales process to be delayed
for an extended period of time; and (4) Company A retained y% of the shares of
Company B common stock, which means that the trading volume of Company B
common stock will be lower than would be the case if 100% of the shares were
distributed. Because prudent management of the reinvestment may require a period of
time longer than the 90 days provided in section 402(j)(2)(B), an extension of the 90-day
reinvestment period is not unreasonable under the facts and circumstances described
above.

Therefore, if Plan M undertakes the sale of some or all of the shares of Company B
common stock, the 90-day period for reinvesting the Company B common stock sales
proceeds in Company A common stock through Fund Q shall be extended up to 180
days from the date of sale.

Rulings

Therefore, with respect to your ruling requests, we conclude that:
PLR-112806-21                                 9


    1. Shares of Company B common stock acquired by Plan M for the benefit of
      Plan M participants (whether current employees, former employees, or
      beneficiaries) as a result of the Spinoff constitute "securities of the employer
      corporation" for purposes of section 402(e) and the exclusion of net unrealized
      appreciation from income under section 402(e).

    2. For purposes of determining net unrealized appreciation under section 402(e),
      the basis of the shares of Company A common stock and shares of Company B
      common stock held by Plan M immediately after the Spinoff will be determined by
      allocating the section 402 basis in the shares of Company A common stock
      immediately before the Spinoff between the shares of Company A common stock
      and the shares of Company B common stock immediately after the Spinoff in
      proportion to their relative fair market value, in accordance with the rules of
      section 358.

    3. With respect to any Plan M participant who elects to divest from Fund R and
      immediately reinvest the proceeds in Company A common stock through
      Fund Q, such sale and reinvestment shall constitute an exchange of "securities
      of the employer corporation" for purposes of section 402(j), so that the
      determination of net unrealized appreciation shall be made without regard to
      such sale.

    4. With respect to any Plan M participant who is divested from Company B common
      stock in connection with the termination or liquidation of Fund R by Company A
      or Plan M fiduciaries and reinvested in Company A stock through Fund Q, such
      sale and reinvestment shall constitute an exchange of "securities of the employer
      corporation" for purposes of section 402(j), so that the determination of net
      unrealized appreciation shall be made without regard to such sale and without
      regard to any temporary investment of Company B stock sales proceeds in cash
      and other short-term investments.

    5. Pursuant to the authority granted by section 402(j)(2)(B), if Plan M undertakes
      the sale of some or all of the shares of Company B common stock, the 90-day
      period for reinvesting the Company B common stock sales proceeds in
      Company A common stock through Fund Q shall be extended up to 180 days
      from the date of sale.

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, as specified in Rev. Proc. 2021-1, 2021-1 IRB 1,
§ 7.01(16)(b). This office has not verified any of the material submitted in support of the
request for rulings, and such material is subject to verification on examination. The
Associate office will revoke or modify a letter ruling and apply revocation retroactively if
there has been a misstatement or omission of controlling facts; the facts at the time of
PLR-112806-21                                  10

the transaction are materially different from the controlling facts on which the rulings
was based; or, in the case of a transaction involving a continuing action or series of
actions, the controlling facts change during the course of the transaction. See
Rev. Proc. 2021-1, § 11.05.

Except as specifically set forth above, no opinion is expressed or implied concerning the
federal tax consequences of any aspect of any transaction or item discussed or
referenced in this letter ruling.

This ruling letter is based on the assumption that Plan M is qualified under
section 401(a), Fund Q meets the requirements of sections 401(a)(35) and 4975(e)(7),
and Plan M's related trust is tax-exempt under section 501(a) at all relevant times.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) 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.

                                               Sincerely,



                                               ______________________________
                                               John T. Ricotta
                                               Chief, Qualified Plans Branch 3
                                               Office of Associate Chief Counsel
                                               (Employee Benefits, Exempt Organizations,
                                               and Employment Taxes)



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