IRS rules a publicly traded parent's spin-off separating two businesses qualifies as a tax-free section 355/368(a)(1)(D) reorganization

Plain-English summary

A publicly traded parent corporation wants to split its two lines of business into two separate public companies. To do it, the parent (Distributing) forms a new subsidiary (Controlled), contributes cash and the entities that run one business to Controlled in exchange for Controlled stock, then distributes that Controlled stock to its own shareholders (a "spin-off"). The taxpayer asked the IRS to confirm the tax treatment. The IRS issued 13 rulings holding the contribution-and-distribution together qualify as a tax-free reorganization under IRC § 368(a)(1)(D) and § 355: the parent recognizes no gain on the contribution or the distribution, the new subsidiary takes carryover basis, and the shareholders generally recognize no gain and split their old basis between the two stocks. The letter also confirms that two earlier corporate-to-LLC conversions still count as complete liquidations under § 332. As is standard, the IRS expressly did not rule on the business-purpose, device, or § 355(e) "plan" questions, or on any § 897 (foreign real property) consequences. This is the routine advance blessing a large company gets before executing a spin-off.

Ruling snapshot

• Question: Do the parent's contribution and spin-off distribution qualify as a tax-free § 368(a)(1)(D)/§ 355 reorganization?
• Outcome: Approved (13 rulings favorable; standard business-purpose/device/§ 355(e)/§ 897 issues not addressed)
• Key authorities: IRC §§ 355, 368(a)(1)(D), 361, 357, 358, 362, 1032, 1223, 312(h), 332; Rev. Proc. 2017-52; Rev. Proc. 2021-1

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 202227008                                              Third Party Communication: None
Release Date: 7/8/2022                                         Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-00,
              368.00-00, 368.04-00                             Person To Contact:
                                                               ----------------------------,
------------------------------------------------------------   ID No. -----------------
--------------------------                                     Telephone Number:
--------------------------                                     --------------------
-------------------------                                      Refer Reply To:
                                                               CC:CORP:2
                                                               PLR-124128-21
                                                               Date:
                                                               April 01, 2022


                                                   Legend

Distributing          = -----------------------------------------------------------------------------------------
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Controlled            = -----------------------------------------------------------------------------------------
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DRE 1                 = -----------------------------------------------------------------------------------------
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DRE 2                 = -----------------------------------------------------------------------------------------
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DRE 3                 = -----------------------------------------------------------------------------------------
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DRE 4                 = -----------------------------------------------------------------------------------------
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DRE 5                 = -----------------------------------------------------------------------------------------
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DRE 6           = -----------------------------------------------------------------------------------------
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DRE 7           = -----------------------------------------------------------------------------------------
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DRE 8           = -----------------------------------------------------------------------------------------
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DRE 9           = -----------------------------------------------------------------------------------------
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DRE 10          = -----------------------------------------------------------------------------------------
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DRE 11          = -----------------------------------------------------------------------------------------
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DRE 12          = -----------------------------------------------------------------------------------------
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PRS 1           = -----------------------------------------------------------------------------------------
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PRS 2           = -----------------------------------------------------------------------------------------
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PRS 3           = -----------------------------------------------------------------------------------------
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PRS 4           = -----------------------------------------------------------------------------------------
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Date 1          = -------------------------

 Date 2              = -----------------------

 Date 3              = -----------------------

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

 Continuing          = -----------------------------------------------------------------------------------------
 Agreements            -----------------------------------------------------------------------------------------
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                       -----

 a                   = ------

 b                   = ------

 c                   = ---

 d                   = --------------

 e                   = ---------

 f                   = ----

 g                   = ------



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

This letter responds to your authorized representatives’ letter dated November 23,
2021, as supplemented by subsequent information and documentation, requesting
rulings on certain federal tax consequences of a series of transactions (the “Proposed
Transaction,” as defined below). The material information submitted in that letter 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”) 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 section 332 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 upon 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 material 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 (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
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 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 corporation
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). In addition, no opinion is expressed
regarding the consequences to any person under section 897 as a result of the
transactions described below, including but not limited to (i) whether any gain is
recognized under section 897, (ii) whether Distributing was at any time a United States
real property holding corporation during the five-year period immediately preceding the
date of the Distribution, and (iii) whether Distributing has a withholding obligation under
section 1445.

                                           Facts

Distributing is a publicly traded domestic corporation and the parent of an affiliated
group of corporations that file a consolidated return for U.S. federal income tax
purposes. Distributing has two classes of voting stock issued and outstanding:
Distributing Class A and Distributing Class B (collectively, the “Distributing stock”). The
two classes have different voting rights but identical economic rights.

Distributing owns all of the interests in DRE 1, DRE 2, and DRE 3, each an eligible
entity (within the meaning of Treas. Reg. § 301.7701-3(a)) that is disregarded as
separate from its owner for federal income tax purposes (a “disregarded entity”). DRE 1
was previously a corporation but converted to a limited liability company on Date 1
(“Conversion 1”).

DRE 1 owns all of the interests in DRE 4, DRE 5, and DRE 6, each a disregarded entity.
DRE 6 was previously a corporation but converted to a limited liability company on Date
2 (“Conversion 2” and, together with Conversion 1, the “Conversions”).

DRE 3 owns all of the interests in DRE 7, DRE 8, DRE 9, and DRE 10, each a
disregarded entity.

DRE 6 owns all of the interest in DRE 11, a disregarded entity.

DRE 6 and DRE 11 own all of the interests in DRE 12, a disregarded entity.

DRE 4 owns, indirectly through disregarded entities, an a% (an amount greater than
20% but less than 33.3%) limited partner interest and a general partner interest in PRS
1, an eligible entity that is classified as a partnership for federal income tax purposes (a
“partnership”). DRE 4 also owns, indirectly through disregarded entities, a b% (an
amount greater than 20% but less than 33.3%) limited partner interest and a general
partner interest in PRS 2, a partnership. PRS 1 and PRS 2 own, indirectly through
disregarded entities, all of the issued and outstanding stock of corporations that have
elected to be taxed as real estate investment trusts for federal income tax purposes
(“REITs”). The REITs, indirectly through disregarded entities, own Business B assets.

DRE 11 and DRE 12 own, directly and indirectly through disregarded entities, an
approximately c% (an amount greater than 20% but less than 33.3%) general partner
interest in PRS 3, a partnership. PRS 3 owns Business B assets.

Financial information has been submitted in accordance with Rev. Proc. 2017-52
indicating that each of Business A (conducted directly and indirectly by Distributing) and
Business B (conducted through DRE 4, DRE 8, DRE 9 and DRE 10) each has had
gross receipts and operating expenses representing the active conduct of a trade or
business for each of the past five years.




                                 Proposed Transaction

For what are represented to be valid business reasons, Distributing proposes to engage
in the following steps to separate Business A from Business B, some of which have
been completed (collectively, the “Proposed Transaction”):

   (i)     On Date 3, Distributing formed Controlled. At the time of the Distribution
           (defined below), Controlled will have two classes of voting common stock
           issued and outstanding: Controlled Class A and Controlled Class B
           (collectively, the “Controlled stock”). The two classes have different voting
           rights but identical economic rights.

   (ii)    DRE 1 will distribute all of its interests in DRE 4 and DRE 5 to Distributing;
           DRE 6 will distribute all of its interests in DRE 11 and DRE 12 to Distributing;
           and DRE 3 will distribute all of its interests in DRE 7, DRE 8, DRE 9, and
           DRE 10 to Distributing.

   (iii)   Distributing will contribute to Controlled approximately $d in cash and all of its
           interests in DRE 2, DRE 4, DRE 5, DRE 7, DRE 8, DRE 9, DRE 10, DRE 11,
           and DRE 12 in exchange for Controlled stock (the “Contribution”).

   (iv)    After the Contribution, Distributing will distribute the stock of Controlled to its
           shareholders (the “Distribution”). Distributing generally will make a pro rata
           distribution of Controlled Class A stock to Distributing shareholders, except
           that Distributing shareholders may elect to receive Controlled Class B stock
           instead of Controlled Class A stock. If applicable, cash may be distributed in
           lieu of fractional shares.

After the Proposed Transaction, Distributing and Controlled will have separate boards of
directors, except for one overlapping board member. Each board member will be
elected for a term of e months.

In connection with the Proposed Transaction, Distributing and Controlled will enter into
certain Continuing Agreements.

Distributing and an unrelated third party are in discussions regarding entering into one
or more agreements pursuant to which, immediately after the Distribution, the third party
would exchange its interests in a disregarded entity for approximately f% to g% of
Controlled Class A stock.

                                      Representations

With respect to the Distribution, except as otherwise set forth below, Distributing has
made all the representations in section 3 of the Appendix to Rev. Proc. 2017-52.

Distributing has made the following alternative representations:

      Representations 3(a), 8(b), 11(a), 15(a), 31(a), and 41(a).

Distributing has not made the following representations, which do not apply to the
Distribution:

      Representations 7, 22, 24, and 25.

Distributing has not made Representation 42 (but provided the required explanation).
Additionally, Distributing has made the following representations:

    1. The assets of DRE 6 that Distributing will contribute to Controlled will represent
      less than 30 percent of the gross fair market value of the assets of DRE 6
      immediately before Conversion 1.

    2. The assets of DRE 1 that Distributing will contribute to Controlled will represent
      less than 30 percent of the gross fair market value of the assets of DRE 1
      immediately before Conversion 2.

                                         Rulings

    1. The Contribution and Distribution, together, will constitute a reorganization within
      the meaning of section 368(a)(1)(D). 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).

    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. Except to the extent required under section 897, the shareholders of Distributing
      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. Except to the extent required as a result of section 897, 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. Except to the extent required as a result of section 897, 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) and 1.1502-
       33(e)(3).

    11. A Distributing shareholder that received cash in lieu of a fractional share of
       Controlled stock will recognize gain or loss measured by the difference between
       the basis of the fractional share received and the amount of cash received.
       Section 1001. Any gain or loss will be treated as capital gain or loss, provided the
       fractional share of stock was held as a capital asset on the date of the
       Distribution. Section 1221 and 1222.

    12. 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 Distribution or for a taxable period beginning
       before and ending after the Distribution; and (ii) will not become fixed and
       ascertainable until after the Distribution, will be viewed as occurring immediately
       before the Distribution. See Arrowsmith v. Commissioner, 344 U.S. 6, 73 (1952);
       Rev. Rul. 83-73, 1983-1 C.B. 84.

    13. The contribution to Controlled of certain assets held by DRE 1 and DRE 6
       following the Conversions will not preclude either Conversion 1 or Conversion 2
       from qualifying as a “complete liquidation” within the meaning of section 332.

                                         Caveats
Except as expressly provided herein, no opinion is expressed or implied concerning the
tax treatment of the proposed transaction under any provision of the Code and
regulations or the tax treatment of any condition existing at the time of, or effects
resulting from, the proposed transaction that is 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
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 return that provides the date and control number of the
letter ruling.

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,


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




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