Private Letter Ruling
202248008
Released December 2, 2022
Approved
Temporary retention of spun-company shares does not show a tax-avoidance plan
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This page covers one taxpayer's ruling from 2022, which can't be cited as precedent. Ezel answers your situation under the current Code and IRS guidance, with citations.
Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.
About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.
View official IRS release (PDF)
Plain-English summary
A publicly traded foreign corporation planned to separate one business after first selling a minority stake in the operating subsidiary through an initial public offering. The separation used share exchanges, note setoffs, liquidations, and two foreign-law amalgamations, after which the parent might temporarily retain a small percentage of the new spun company’s shares. The parent represented that the retention served a real business purpose tied to deleveraging and market conditions. It would sell the retained shares as soon as warranted and no later than five years, vote them proportionately with other shareholders, and limit overlapping directors to a minority of the spun company’s board. The IRS ruled only on the significant retention issue, concluding that retaining the shares would not be part of a principal-purpose tax-avoidance plan under section 355(a)(1)(D)(ii). It expressed no view on the transaction’s overall qualification.
Ruling snapshot
- Question: Would the parent’s temporary retention of a minority block of the spun company’s shares indicate a principal-purpose tax-avoidance plan?
- Outcome: approved, no tax-avoidance plan based on the stated representations
- Key authorities: IRC § 355(a)(1)(D)(ii); Treas. Reg. § 1.355-2(e); Rev. Procs. 2022-1 and 2022-10
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 202248008 Third Party Communication: None
Release Date: 12/2/2022 Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-00,
368.00-00, 355.05-01 Person To Contact:
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----------------------------------------- ID No. -----------------
-------------------------- Telephone Number:
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------------------------------------ Refer Reply To:
CC:CORP:BO2
PLR-110938-22
Date:
September 06, 2022
Legend
Distributing = -------------------------------------------------------------
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Sub 1 = -----------------------------------------------------------------------
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Sub 2 = ------------------------------------------------------------------------
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New Sub 2 = ------------------------------------------------------------------------
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PLR-110938-22 2
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Sub 3 = -----------------------------------------------------------------------
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FCo 1 = ----------------------------------------------------------
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FCo 2 = ----------------------------------------------------------
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AmalCo = ------------------------------------------------------------------------
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Business A = ------------------------------------------------------------
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Business B = ------------------------------------------------------------------------
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PLR-110938-22 3
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Country A = ----------
Sub 2 IPO = ------------------------------------------------------------------------
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Transaction = ------------------------------------------------------------------------
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Exchange A = ------------------------------------
Exchange B = ---------------------------------
Business Objectives = ------------------------------------------------------------------------
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Date 1 = ----------------------
Date 2 = ------------------
Date 3 = ----------------------
a = ---
b = -------------------------
c = -------------------------
PLR-110938-22 4
d = -------------------------
e = ---
f = ------------------------
g = ---
Dear --------------:
This letter responds to the June 1, 2022 letter, submitted on behalf of Distributing by its
authorized representatives, requesting a ruling on a significant federal income tax issue
arising from a series of proposed transactions described below. The information
submitted in that request and in subsequent correspondence is summarized below.
This letter is issued pursuant to section 4.03 of Rev. Proc. 2022-10, 2022-6 I.R.B. 473
and section 6.03(2)(b) of Rev. Proc. 2022-1, 2022-1 I.R.B. 1, regarding one or more
significant issues under section 355 of the Internal Revenue Code (“Code”). The ruling
contained in this letter only addresses one or more significant issues involved in the
transactions described below. This office expresses no opinion as to the overall tax
consequences of such transactions or regarding any issue not specifically addressed by
the ruling below.
The ruling contained in this letter is 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 a ruling. However, such materials are subject to verification on
examination.
Summary of Facts
Distributing is a publicly traded Country A corporation and the common parent of a
worldwide group of affiliated entities (the “Distributing Group”), which, as of Date 1,
included its wholly owned subsidiaries Sub 1 and Sub 2, each a Country A corporation.
Distributing has a single class of voting common stock issued and outstanding, which is
widely held and traded on Exchange A and Exchange B. The Distributing Group has
been actively engaged in Business A and Business B. Sub 2 conducts Business A,
while Distributing, through its other affiliates, conducts Business B. For what have been
represented to be valid business reasons, Distributing wishes to separate Business A
from Business B.
Distributing also desired to monetize a percent or less of its Sub 2 common stock
through the Sub 2 IPO in order to raise proceeds to repay its debt. For purposes of
effectuating the Sub 2 IPO and the Proposed Transaction, Distributing had formed Sub
PLR-110938-22 5
1. Prior to the Sub 2 IPO and the Proposed Transaction, Sub 1 had no assets, liabilities,
tax attributes, or business activities. In the Sub 2 IPO, Sub 1 served solely as an
intermediary between Distributing and third-party banks. After the Sub 2 IPO, Sub 1
engaged and was intended to engage solely in activities related to the Proposed
Transaction.
On Date 2, Distributing, through Sub 1, completed an IPO of b percent of the stock of
Sub 2. Immediately after the Sub 2 IPO, Distributing owned all of the stock of Sub 1 and
c percent of the outstanding stock of Sub 2. Public shareholders of Sub 2 owned the
remaining b percent of its outstanding stock.
On Date 3, Distributing transferred c percent of the common stock of Sub 2 to Sub 1 for
additional shares of Sub 1 stock (“Sub 1 Contribution”). On Date 3, immediately after
the Sub 1 Contribution, Sub 1 contributed d percent of the shares of Sub 2 to its wholly
owned subsidiary, Sub 3, a newly formed Country A corporation (“Sub 3 Contribution”).
Following the Sub 3 Contribution, Sub 1 will continue to own directly, and through Sub
3, c percent of the stock of Sub 2 for a period of time during which the Proposed
Transaction is subject to shareholder and court approvals under Country A law. Sub 3’s
formation and the Sub 3 Contribution were undertaken for purposes of satisfying the
Business Objectives. In furtherance of the Business Objectives, it is expected that Sub
3 will engage in the Transaction, but at the time of Sub 3’s liquidation, described below,
Sub 3 will not have any material assets or liabilities other than its shares of Sub 2 stock.
Before the Proposed Transaction, it is expected that Sub 3 will liquidate and distribute
all its assets and liabilities, including its Sub 2 stock, to Sub 1 so that Sub 1 will directly
own c percent of Sub 2. To further Distributing’s deleveraging objectives, it is expected
that Sub 1 will attempt to sell some Sub 2 stock. To the extent that Sub 1 does not sell
enough Sub 2 stock such that Sub 1 will own more than the minimum e percent of Sub
2 stock to satisfy the control requirement of section 368(c), prior to the Proposed
Transaction, Sub 1 will transfer all or a portion of the excess Sub 2 stock it holds over its
e percent ownership to Distributing, i.e., Sub 1 will transfer up to f percent of its Sub 2
stock to Distributing.
Prior to the Proposed Transaction, in order to further its strategic objective of raising
cash to deleverage and strengthen its balance sheet, Distributing also intends to make
an effort to sell some or all of the f percent of the Sub 2 common stock received from
Sub 1. By the time the Proposed Transaction is completed, if Distributing has been
unable to sell all such Sub 2 shares due to market conditions or otherwise, Distributing
will need to retain up to f percent of the outstanding common stock of Sub 2 (or its
successor). Distributing would then continue its efforts to sell such stock in a prudent
manner and in accordance with the representations set forth below.
Proposed Transaction
PLR-110938-22 6
In order to separate Business A from Business B, Distributing, Sub 2 and other
Distributing affiliates have entered into certain agreements, pursuant to which,
Distributing, subject to the satisfaction of certain conditions, has the right to complete
the Proposed Transaction. The Proposed Transaction consists of Phase 1 and Phase 2,
both of which encompass a series of sequential steps occurring on the same day,
substantially simultaneously, but in a specified order, as follows:
Phase 1
(i) Distributing will repurchase any of its common shares held by dissenting
shareholders. Sub 2 will repurchase any of its common shares held by
dissenting shareholders.
(ii) Distributing will amend its articles of incorporation to create two new
classes of common shares: Distributing New Common Shares and
Distributing Special Shares.
(iii) Each Distributing common share will be exchanged for one Distributing
New Common Share and a specified number of Distributing Special
Shares.
(iv) Each Distributing Special Share will be transferred to FCo 1, a Country A
corporation, in exchange for a specified number of FCo 1 common shares.
Prior to the completion of the Proposed Transaction, FCo 1 does not have
any shares outstanding, will not have any assets or liabilities, and will not
engage in any business activity other than in connection with the
Proposed Transaction.
(v) Distributing will transfer all of its Sub 1 stock to FCo 2, a Country A
corporation wholly owned by FCo 1, in exchange for an equal number of
FCo 2 common shares. Prior to the completion of the Proposed
Transaction, FCo 2 will not have any assets or liabilities, and will not
engage in any business activity other than in connection with the
Proposed Transaction.
(vi) Distributing will purchase for cancellation the Distributing Special Shares
held by FCo 1 by issuing to FCo 1 a promissory note having a principal
amount and fair market value equal to the aggregate fair market value of
the Distributing Special Shares repurchased (the “Distributing Repurchase
Note”).
(vii) FCo 2 will purchase for cancellation the FCo 2 common shares held by
Distributing by issuing to Distributing a promissory note having a principal
amount and fair market value equal to the aggregate fair market value of
the FCo 2 common shares repurchased (the “FCo 2 Repurchase Note”).
(viii) FCo 2 will liquidate under Country A law and distribute all of its assets,
rights, and properties to FCo 1, including its interest in Sub 1 and its
liabilities under the FCo 2 Repurchase Note.
(ix) The Distributing Repurchase Note will be set off against the FCo 2
Repurchase Note.
PLR-110938-22 7
After Phase 1, the non-dissenting holders of Distributing common stock, in addition to
continuing to own their shares of Distributing common stock, will own all of the
outstanding shares of common stock of FCo 1. FCo 1 will own all of the stock of Sub 1.
Sub 1 will continue to own at least e percent of the outstanding common stock of Sub 2.
Distributing may continue to own f percent or less of the outstanding Sub 2 common
stock and public stockholders will continue to own b percent of the outstanding Sub 2
common stock.
Phase 2
(x) Immediately after the completion of Phase 1, FCo 1 and Sub 1 will
amalgamate (“First Amalgamation”) under Country A law, pursuant to
which FCo 1 and Sub 1 will cease to exist as separate legal entities under
Country A law, and AmalCo, a new Country A federal corporation, will
result. The FCo 1 common stock held by Distributing shareholders will be
converted into all of the common stock of AmalCo, and AmalCo will own at
least e percent of Sub 2 stock.
(xi) Immediately after the First Amalgamation, AmalCo and Sub 2 will
amalgamate (“Second Amalgamation”) under Country A law to form New
Sub 2, a new Country A federal corporation. The stock of AmalCo held by
Distributing stockholders will be converted into a number of shares of
common stock of New Sub 2 equal to the number of shares of Sub 2
common stock held by AmalCo immediately before the completion of the
Second Amalgamation, i.e., at least e percent of the New Sub 2 stock.
The shares of Sub 2 stock held by Distributing and the Sub 2 public
shareholders will be converted into a number of shares of New Sub 2
stock equal to the number of shares of Sub 2 common stock owned by
them immediately before completion of the Second Amalgamation.
After Phase 2 and the completion of the Proposed Transaction, Distributing may retain
up to f percent of New Sub 2 common stock (“Retained Shares”). Distributing will not
retain any options on the New Sub 2 common stock. Distributing stockholders will own
at least e percent of the outstanding New Sub 2 common stock, constituting control
within the meaning of section 368(c). Public stockholders will continue to own at least b
percent of the outstanding common stock of New Sub 2.
Following the Proposed Transaction, in order to satisfy Country A law and to
accommodate the business needs of New Sub 2, it is expected that two individuals
(“Overlapping Directors”) will serve as both directors of Distributing and directors of New
Sub 2. The Overlapping Directors will constitute a minority (or g percent) of New Sub 2's
board of directors. Following the Proposed Transaction, under New Sub 2's governing
documents, the Overlapping Directors will be subject to an election to the board of New
Sub 2 by the New Sub 2 stockholders, in a manner consistent with the election of New
Sub 2's other directors.
Representations
PLR-110938-22 8
Distributing has made the following representations:
(a) The Proposed Transaction will include a distribution under section 355 of the
Code.
(b) Each Amalgamation will qualify, separately or together with the other
Amalgamation, as a transaction described in section 381(a) of the Code.
(c) A sufficient business purpose exists for the retention of the Retained Shares.
(d) Other than the Overlapping Directors, none of Distributing's directors or
officers will serve as directors or officers of New Sub 2 as long as Distributing
retains the Retained Shares.
(e) 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 Proposed Transaction.
(f) Distributing will vote the Retained Shares in proportion to the votes cast by
New Sub 2's other shareholders.
Ruling
Based solely on the information submitted and the representations set forth above, we
rule as follows:
The retention by Distributing of the Retained Shares will not be 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) and Treas. Reg. §1.355-2(e).
Caveat
Except as expressly provided in this letter, no opinion is expressed or implied
concerning the tax treatment of the Proposed Transaction under any provisions of the
Code and regulations, or the tax treatment of any conditions existing at the time of, or
effects resulting from, the Proposed Transaction that are not specifically addressed 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.
PLR-110938-22 9
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 and control number of this
letter ruling.
Pursuant to the Power of Attorney on file with this office, copies of this letter are being
sent to your authorized representatives.
Sincerely,
Petya V. Kirilova
Petya V. Kirilova
Assistant to the Branch Chief, Branch 5
Office of the Associate Chief Counsel (Corporate)
cc:
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