A public company's external spin-off of a business, funded with debt monetization, qualifies as a tax-free section 368(a)(1)(D) reorganization and section 355 distribution
Apply this to your situation
This page covers one taxpayer's ruling from 2023, which can't be cited as precedent. Ezel answers your situation under the current Code and IRS guidance, with citations.
Plain-English summary
A publicly traded parent company wanted to split one of its businesses into a separate public company and hand that new company's stock to its own shareholders (a classic "spin-off"). To do it tax-free while also paying down its own debt, the parent used a common monetization playbook: the new subsidiary (Controlled) borrowed cash and issued its own debt securities to the parent, the parent used that cash and later refinancing loans to retire parent debt and buy back shares (a "cash boot purge"), and the parent swapped the subsidiary's securities and any retained shares to banks in "debt-for-debt" and "debt-for-equity" exchanges. The IRS issued 21 favorable rulings confirming the whole transaction is a tax-free divisive "Type D" reorganization under section 368(a)(1)(D): neither the parent nor the subsidiary recognizes gain on the contribution, shareholders recognize no gain or loss when they receive the new stock under section 355(a), and basis, holding periods, and earnings and profits carry over and split appropriately. The IRS also blessed the debt monetization steps under section 361 and confirmed post-spin share buybacks are not "device" evidence. As usual under Rev. Proc. 2017-52, the IRS did not rule on business purpose, device, or the section 355(e) 50-percent-acquisition question. Large companies splitting up and deleveraging at the same time rely on rulings like this.
Ruling snapshot
- Question: Does a public company's external spin-off, combined with debt monetization (cash boot purge and debt-for-debt/debt-for-equity exchanges), qualify as a tax-free reorganization and distribution under sections 355 and 368(a)(1)(D)?
- Outcome: approved (21 favorable rulings; nonrecognition confirmed)
- Key authorities: IRC §§ 355, 368(a)(1)(D), 361 (including 361(b)(3), 361(c)), 357(a), 358, 362(b), 1032(a), 1223, 312(h), 1504; Treas. Reg. §§ 1.358-2(a), 1.312-10(a), 1.355-2(d), 1.355-7; Rev. Proc. 2017-52 and 2018-53; Arrowsmith v. Commissioner, 344 U.S. 6 (1952); Rev. Rul. 83-73
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 202304005 Third Party Communication: None
Release Date: 1/27/2023 Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-00,
355.01-01, 361.00-00, Person To Contact:
368.00-00, 368.04-00 -----------------------------, ID No. ------------
Telephone Number:
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----------------------------------- Refer Reply To:
-------------------- CC:CORP:B01
---------------------------- PLR-109822-22
Date:
November 01, 2022
Legend
Distributing = ------------------------------------------------------------------------------
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Controlled = ------------------------------------------------------------------------------
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LLC1 = ------------------------------------------------------------------------------
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Sub1 = ------------------------------------------------------------------------------
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State A = -------------
State B = -------------
State C = ----------
Business A = ------------------------------------------
Business B = --------------------------------
Business C = ------------------------
Date 1 = ---------------------
a = --
b = ---
c = ---
d = ---
e = --
f = --
Distributing Debt = ------------------------------------------------------------------------------
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Deferred Payment = ------------------------------------------------------------------------------
Obligation ------------------------------------------------------------------------------
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Bridge Debt = ------------------------------------------------------------------------------
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Continuing = ------------------------------------------------------------------------------
Arrangements ------------------------------------------------------------------------------
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Preparatory Internal = ------------------------------------------------------------------------------
Transactions ------------------------------------------------------------------------------
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Overlapping = ------------------------------------------------------------------------------
Directors ----------------------
Banks = ------------------------------------------------------------------------------
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Dear ----------------------:
This letter responds to your letter dated May 16, 2022, requesting rulings on certain
federal tax consequences of a series of transactions (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, as amplified
and modified by Rev. Proc. 2018-53, 2018-43 I.R.B. 667, 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. 2022-1, 2022-1 I.R.B. 1,
regarding one or more significant issues under section 355 of the Code. This Office
expresses no opinion as to any issues 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 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 Transaction (as
defined below): (i) satisfies the business purpose requirement of Treas. Reg. section
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. section 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 controlled corporation, within the meaning of Treas. Reg.
section 1.355-8 (see section 355(e)(2)(A)(ii) and Treas. Reg. section 1.355-7).
Summary of Facts
Distributing is a publicly traded State A corporation and the parent company of a
worldwide group of domestic and foreign affiliates and is the common parent of an
affiliated group of corporations electing to file a consolidated U.S. federal income tax
return. Distributing is engaged in Business A and Business B (including Business C
which operates as a division of Business B) directly and through its domestic and
foreign subsidiaries.
At the time of the Proposed Transaction, Distributing will have a single class of common
stock issued and a classes of preferred stock issued and outstanding. Also,
Distributing will wholly own (through entities disregarded as separate from Distributing)
all of the outstanding equity interests in LLC1, a State B limited liability company, and
Sub1, a State C corporation.
As of Date 1, Distributing had Distributing Debt outstanding as well as a Deferred
Payment Obligation. Distributing may incur Bridge Debt prior to the Distribution (defined
below) or within b months following the Distribution to refinance some of the Distributing
Debt.
For purposes of satisfying the active trade or business requirements of section 355(b)
with respect to the External Spin-Off, Distributing and the members of its “separate
affiliated group” as defined in section 355(b)(3)(B) have relied on Business A, and
Controlled and the members of its “separate affiliated group” as defined in section
355(b)(3)(B) have relied on Business C. Financial information has been submitted in
accordance with Rev. Proc. 2017-52 indicating that each of Business A and Business C
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
In preparation for the Proposed Transaction, Distributing has undertaken and will
undertake the Preparatory Internal Transactions to separate Business B from Business
A. After the Preparatory Internal Transactions are completed, Distributing will own all of
the outstanding equity interests in Controlled, a State B limited liability company
disregarded as separate from Distributing for US federal tax purposes. Controlled will
directly and indirectly (through domestic and foreign subsidiaries) own domestic and
foreign assets associated with Business B.
For what are represented to be valid business purposes, Distributing proposes to
engage in the following transactions (the “Proposed Transaction”) to separate Business
B from Business A.
Step 1: Controlled will elect to be classified as a corporation for US federal tax
purposes, as a result of which Distributing will hold all of the common stock of
Controlled. Controlled will convert under State B law to a State B corporation.
Step 2: Controlled will borrow cash from one or more third-party lenders (the “Controlled
Debt”).
Step 3: Controlled will distribute cash in an amount not to exceed the Controlled Debt to
Distributing (the “Controlled Distributed Debt Proceeds”) and issue debt securities of
Controlled to Distributing (the “Controlled Securities”) (Steps 1, 2, and 3 together the
“Contribution”). Distributing will not segregate the Controlled Distributed Debt Proceeds
in a separate bank account or otherwise. Distributing will use an amount of cash equal
to or greater than the amount of the Controlled Distributed Debt Proceeds to (i) satisfy
Distributing Debt and/or Bridge Debt; (ii) make payments with respect to the Deferred
Payment Obligation; (iii) make distributions to Distributing shareholders; (iv) repurchase
shares of Distributing common or preferred stock including in the open market or
through an accelerated share repurchase (“ASR”); and/or (v) repay ordinary course
liabilities (together, the “Cash Boot Purge”). Distributing may satisfy some of the
Distributing Debt prior to the Distribution.
Under the plan of the External Spin-Off, the Preparatory Internal Transactions may not
have been completed at the time Controlled incurs the Controlled Debt, issues the
Controlled Securities, or distributes the Controlled Distributed Debt Proceeds. In such
case, the election by Controlled to be classified as a corporation for US federal tax
purposes will be made effective prior to any such transactions, and Distributing will have
committed to complete, or will have completed, the Preparatory Internal Transactions.
Step 4: Distributing will distribute at least c percent of the common stock of Controlled
pro rata to its holders of common stock or pursuant to an exchange by Distributing in
redemption of its shares (the “Distribution”). Distributing may retain up to d percent of
the common stock of Controlled (the “Remainder Shares”).
Step 5: Prior to or following the Distribution, the following steps may occur (collectively,
the “Debt-for-Debt Exchange”):
(a) One or more Banks will make a loan to Distributing (the “First Refinancing Debt”) in
an amount based on the anticipated fair market value of the Controlled Securities to be
issued in the Contribution. The First Refinancing Debt proceeds will not be segregated
in a separate bank account or otherwise. Within b months following the Distribution,
Distributing will use an amount equal to the proceeds of the First Refinancing Debt to
pay principal, interest or premium on Distributing Debt, the Deferred Payment
Obligation, and/or the Bridge Debt. Distributing may satisfy some of the Distributing
Debt prior to the Distribution.
(b) At least e days after issuance of the First Refinancing Debt, Distributing will enter
into an exchange agreement with the Bank pursuant to which Distributing will transfer
Controlled Securities to the Bank in exchange for (and in retirement of) some or all of
the First Refinancing Debt (the “Debt-for-Debt Exchange Agreement”). The pricing of
the Controlled Securities and the exchange ratio for the Debt-for-Debt Exchange will be
fixed on the date on which the Debt-for-Debt Exchange Agreement is entered into.
After Distributing and the Bank enter into the Debt-for-Debt Exchange Agreement,
Distributing will deliver the Controlled Securities to the Bank in satisfaction of the First
Refinancing Debt. In all cases, the Debt-for-Debt Exchange Agreement will be entered
into and the Controlled Securities will be transferred to the Bank in satisfaction of the
First Refinancing Debt within b months following the date of the Distribution.
It is currently expected that the Debt-for-Debt Exchange will be executed prior to the
Distribution. However, depending on market conditions, Distributing may hold the
Controlled Securities and incur the First Refinancing Debt and enter into the Debt-for-
Debt Exchange Agreement after the Distribution. In any event, the Debt-for-Debt
Exchange Agreement will be entered into and the Controlled Securities will be
transferred to Bank in satisfaction of the First Refinancing Debt no later than b months
following the Distribution.
Step 6: Following the Distribution, the following steps may occur if Distributing retains
the Remainder Shares (collectively, the “Debt-for-Equity Exchange,” and together with
the Debt-for-Debt Exchange, the “Debt Exchanges”):
(a) The Bank will make a loan to Distributing (the “Second Refinancing Debt”) in an
amount based on the anticipated fair market value of the Remainder Shares in the
public offering or private placement described in Step 6(b). The Second Refinancing
Debt proceeds will not be segregated in a separate bank account or otherwise. Within b
months following the date of the Distribution, Distributing will use an amount equal to
the proceeds of the Second Refinancing Debt to pay principal, interest or premium on
the Distributing Debt, the Deferred Payment Obligation, and/or the Bridge Debt.
(b) At least e days after issuance of the Second Refinancing Debt, Distributing will enter
into an exchange agreement with the Bank pursuant to which Distributing will transfer
some or all of the Remainder Shares to the Bank in exchange for (and in retirement of)
some or all of the Second Refinancing Debt (the “Debt-for-Equity Exchange
Agreement”). The pricing of the Remainder Shares and the exchange ratio for the
Debt-for-Equity Exchange will be fixed on the date on which the Debt-for-Debt
Exchange Agreement is entered into.
After Distributing and the Bank enter into the Debt-for-Equity Exchange Agreement,
Distributing will deliver the Remainder Shares to the Bank in satisfaction of the Second
Refinancing Debt. In all cases, the Debt-for-Equity Exchange Agreement will be
entered into and the Remainder Shares will be transferred to the Bank in satisfaction of
the Second Refinancing Debt within b months following the Distribution.
Step 7: If Distributing retains the Remainder Shares and does not enter into the Debt-
for-Equity Exchange with all of the Remainder Shares during the b months following the
Distribution, Distributing will (i) distribute some or all of the Remainder Shares within b
months of the date of the Distribution pro rata to its public common shareholders (a
“Clean-Up Spin”) or pursuant to an exchange offer in redemption of shares (a “Clean-Up
Split”), and/or (ii) sell some or all of the Remainder Shares in one or more public or
private sales as soon as warranted, taking into account the business purpose for the
retention, market and general economic conditions, and sound business judgement, but
in no event later than f years after the date of the Distribution.
The Contribution, the Distribution, the Cash Boot Purge, the Debt-Exchanges, the
repayment of Distributing Debt, the Deferred Payment Obligation, and/or Bridge Debt
with the proceeds of the Controlled Distributed Debt Proceeds, First Refinancing Debt
and/or Second Refinancing Debt, and any Clean-Up Spin or Clean-Up Split are
collectively referred to as the “External Spin-Off.”
Following the Distribution certain individuals will serve as members or officers of the
board of Distributing and Controlled (the “Overlapping Directors”). The Overlapping
Directors will constitute a minority of Controlled’s board of directors. Under Controlled’s
governing documents, the Overlapping Directors will be subject to reelection as
directors of Controlled by Controlled’s shareholders following Distribution in a manner
consistent with those of Controlled’s other directors.
In connection with the Distribution, Distributing and/or certain of its subsidiaries, on the
one hand, and Controlled and/or certain of its subsidiaries, on the other hand, will enter
into Continuing Arrangements.
Representations
The following representations have been made with respect to the External Spin-Off:
Except as set forth below, Distributing has made all of the representations in section 3
of the Appendix to Rev. Proc. 2017-52, 2017-41 I.R.B. 283.
Distributing has made the following alternative representations:
Representations 3(a), 11(a), 15(a), 31(a), and 41(a)
Distributing has not made the following representations, which do not apply to the
External Spin-Off:
Representations 24, 25, and 40
Distributing has not made the following representations, but provided the required
explanations:
Representation 37
Distributing has made the following modified representations:
Representation 2: In the Distribution, Distributing will distribute at least c percent of the
stock of Controlled.
Representation 4: Other than the Controlled Securities, no indebtedness owed by
Controlled to Distributing after the Distribution will constitute stock or securities of
Controlled or any other entity.
Representation 5: To the extent the Distribution is effected as a pro rata dividend, other
than Controlled stock transferred in the Debt-for-Equity Exchange and Controlled
Securities transferred in the Debt-for-Debt Exchange, none of the Controlled stock,
Controlled Securities, or Property other than stock and securities of Controlled (“Other
Property”) to be distributed in the Distribution will be received in any capacity other than
that of a shareholder of Distributing.
Representation 6: To the extent the Distribution is effected as a pro rata dividend, no
shareholder of Distributing will surrender Distributing stock in the Distribution.
Representation 7: To the extent the Distribution is effected as an exchange offer in
redemption of outstanding shares of Distributing, the fair market value of Controlled
stock, Controlled Securities, or Other Property to be received by each shareholder of
Distributing that surrenders Distributing stock will be approximately equal to the fair
market value of Distributing stock surrendered by the shareholder in the transaction.
Representation 8(b): Distributing has securities outstanding, but it will not distribute
Controlled stock, Controlled Securities or Other Property to any holder of such
securities in the Distribution, in satisfaction thereof, except potentially pursuant to the
Cash Boot Purge, the Debt-for-Equity Exchange, or the Debt-for-Debt Exchange.
Representation 22(b): With respect to Property being transferred by Distributing to
Controlled as part of the External Spin-Off for which an investment credit determined
under section 46 has been (or will be) claimed, the income tax obligation for the taxable
year in which the Property is transferred will be adjusted pursuant to section 50(a)(1) or
(a)(2) as required to reflect an early disposition of the Property.
Representation 23: Other than potentially as a result of the Continuing Arrangements,
the External Spin-Off does not involve and will not result in a situation in which one
party recognizes income, but another party recognizes the deductions associated with
such income or a situation in which one party owns Property, but another party
recognizes the income associated with such Property.
Representation 32: Except for the Controlled Securities, debt potentially incurred under
the Continuing Arrangements or ordinary course payables and receivables, no
intercorporate debt will exist between Distributing and Controlled at the time of, or
subsequent to, the Distribution.
Representation 33: Except as contemplated by the Continuing Arrangements, payments
made in connection with all continuing transactions, if any, between Distributing and
Controlled after the Distribution will be for fair market value based on arm’s-length
terms.
Representation 45: Distributing will not dispose of any Controlled stock in anticipation of
the External Spin-off, other than potentially pursuant to the Debt-for-Equity Exchange.
Representation 46: Other than potentially pursuant to the Controlled Debt, Controlled
will not issue stock or securities to a person other than Distributing in anticipation of the
External Spin-Off.
Except as set forth below, Distributing has made all of the representations in section
3.04 of Rev. Proc. 2018-53, 2018-43 I.R.B. 667.
Distributing has made the following modified representation:
Representation 3: The holder(s) of the Bridge Debt may be a Related Person to
Distributing. The holder of the Distributing Debt that will be assumed or satisfied will not
hold the debt for the benefit of Distributing, Controlled, or any Related Person. The
holder(s) of the Bridge Debt, the First Refinancing Debt and the Second Refinancing
Debt will not hold such debt for the benefit of Distributing, Controlled, or any Related
Person (other than any Related Person that is itself the holder of the Bridge Debt).
None of Distributing, Controlled, or any related person (within the meaning of section
267(b) and 707(b)(1) and including the holders of the Bridge Debt) will participate in any
profit gained by the Bank upon an exchange of §361 Consideration; nor will any such
profit be limited by agreement or other arrangement. The value of the §361
Consideration received by the Bank in satisfaction of the First Refinancing Debt (or a
portion thereof) and the Second Refinancing Debt (or a portion thereof) will be
determined pursuant to arm’s-length negotiations.
Representation 4: Distributing incurred the Distributing Debt that will be assumed or
satisfied with the Bridge Debt, the First Refinancing Debt, or the Second Refinancing
Debt (a) before the request for any relevant ruling is submitted and (b) no later than 60
days before the earliest of the following dates: (i) the date of the first public
announcement (as defined in Treasury Regulations section 1.355-7(h)(10)) of the
External Spin-Off or a similar transaction, (ii) the date of the entry by Distributing into a
binding agreement to engage in the External Spin-Off or a similar transaction, and (iii)
the date of approval of the External Spin-Off or a similar transaction by the Distributing
Board.
Representation 6: There are one or more substantial business reasons for any delay in
satisfying the Distributing Debt pursuant to the Cash Boot Purge, the Debt-for- Debt
Exchange, or the Debt-for-Equity Exchange beyond 30 days after the date of the
Distribution. All the Distributing Debt that will be satisfied pursuant to the Cash Boot
Purge, the Debt-for-Debt Exchange, or the Debt-for-Equity Exchange will be satisfied no
later than b months after the Distribution Date. All of the First Refinancing Debt that will
be satisfied with Controlled Securities will be satisfied no later than b months after the
Distribution Date. All of the Second Refinancing Debt that will be satisfied with
Controlled stock will be satisfied no later than b months after the Distribution Date. All
of the Bridge Debt that will be satisfied with proceeds of the First Refinancing Debt will
be satisfied no later than b months after the Distribution Date. All of the Bridge Debt
that will be satisfied with proceeds of the Second Refinancing Debt will be satisfied no
later than b months after the Distribution Date.
In addition, Distributing has made the following representations:
(1) Any payment of Distributing Debt made by Distributing prior to the date of the
Distribution will be made pursuant to the plan of reorganization that includes the
External Spin-Off.
(2) Except for the Overlapping Directors, none of Distributing Parent’s directors or
officers will serve as directors or officers of Controlled as long as Distributing Parent
retains the Retained Shares.
(3) Distributing’s retention of Remainder Shares is for the business purpose of
facilitating the Debt-for-Equity Exchange following the Distribution, or otherwise to repay
Distributing Debt or other obligations and improve Distributing’s capital structure.
(4) Distributing will vote, or cause to be voted, any Remainder Shares in proportion to
the votes cast by Controlled’s other shareholders, and Distributing may grant a proxy to
Controlled to effectuate such voting.
(5) With respect to any repurchase of shares of the common or preferred stock of
Distributing or Controlled, as applicable, after the Distribution Date,
including potentially in the open market or through an ASR (a “Post-Closing Share
Repurchase”), Distributing represents that:
(a) Any Post-Closing Share Repurchase will be motivated by a business
purpose, and the stock that will be repurchased by Distributing or Controlled, as
applicable, or acquired by a counterparty pursuant to an ASR, will be widely held.
(b) To the extent that any Post-Closing Share Repurchases are made on the
open market (including through a Rule 10b5-1 plan, a purchase in compliance with Rule
10b-18, or a tender offer), Distributing or Controlled, as applicable, does not expect to
know the identity of any shareholder from which stock will be repurchased. To the
extent that any Post-Closing Share Repurchases are made through an ASR,
Distributing or Controlled, as applicable, does not expect to know with certainty the
identity of any shareholder from which stock is borrowed or purchased by each
counterparty that participates in such ASR.
(c) There is no plan or intention that the aggregate amount of stock purchased or
acquired through Post-Closing Share Repurchases will equal or exceed d percent of the
outstanding stock of Distributing or Controlled, as applicable.
(d) No Post-Closing Share Repurchase will be motivated to any extent by a
desire to increase or decrease the ownership percentage of any particular shareholder
or group of shareholders.
Rulings
Based solely upon the information submitted and the representations made, we rule as
follows on the Proposed Transaction:
-
The Contribution, together with the Distribution (and any Clean-Up Spin or Clean-Up
Split), will be 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). -
Distributing will recognize no gain or loss on the Contribution. Sections 361(a),
361(b), and 357(a). -
Controlled will recognize no gain or loss on the Contribution. Section 1032(a).
-
Controlled’s basis in each asset received from Distributing in the Contribution will be
the same as the basis of the asset in the hands of Distributing immediately before the
Contribution. Section 362(b). -
Controlled’s holding period for each asset received in the Contribution will include the
period during which Distributing held such asset. Section 1223(2). -
Distributing shareholders will recognize no gain or loss (and no amount will be
includible in income) upon the receipt of Controlled stock in the Distribution or any
Clean-Up Spin or Clean-Up Split under section 355(a). -
Distributing will recognize no gain or loss upon the Distribution or any Clean-Up Spin
or Clean-Up Split. Section 361(c). -
The Controlled Distributed Debt Proceeds will be treated as being distributed
pursuant to the plan of reorganization for purposes of sections 361(b)(1)(A) and
361(b)(3). -
The payment of Distributing Debt prior to the Distribution will not preclude its
qualification as a payment to a creditor for purposes of section 361(b)(3) or section
361(c)(3). -
Sub1 will be treated as a creditor of Distributing to the extent of the Deferred
Payment Obligation payments for purposes of section 361(b)(3). -
Distributing will recognize no gain or loss on any Debt Exchanges, other than (i)
deductions attributable to the fact that Distributing Debt may be redeemed at a
premium, (ii) income attributable to the fact that Distributing Debt may be redeemed at a
discount, and (iii) interest expense accrued with respect to Distributing Debt. Section
361(c). -
The aggregate basis of the Distributing common stock and the Controlled stock in
the hands of Distributing’s public shareholders immediately after the External Spin-Off
(including any fractional share interest in Controlled stock to which a shareholder may
be entitled) will be the same as the aggregate basis of the Distributing common stock
held by Distributing’s public shareholders immediately before the Distribution, allocated
between Distributing stock and Controlled stock in proportion to the fair market value of
each in accordance with Treasury Regulations section 1.358-2(a)(2). Section 358(a)-
(c). -
If a holder of Distributing common stock that purchased or acquired shares on
different dates or at different prices is not able to identify which particular share of
Controlled stock is received as a distribution with respect to, or in exchange for, a
particular share of Distributing common stock, the holder may designate which
particular share of Controlled stock is received as a distribution with respect to, or in
exchange for, a particular share of Distributing common stock, provided the designation
is consistent with the terms of the Distribution, Clean-Up Spin, or Clean-Up Split, as
applicable. Treasury Regulations section 1.358- 2(a)(2)(vii). -
The holding period of the Controlled stock received by the Distributing public
shareholders in the Distribution (including any fractional share interest in Controlled
stock to which public shareholders may be entitled) will equal the holding period of the
Distributing common stock with respect to which the distribution of Controlled stock will
be made, provided that the Distributing common stock is held as a capital asset on the
Distribution Date. Section 1223(1). -
Earnings and profits will be allocated between Distributing and Controlled in
accordance with section 312(h) and Treasury Regulations sections 1.312-10(a) and
1.1502-33(e), as applicable. -
Distributing’s continuing ownership of any Remainder Shares until its disposition
within f years after the Distribution will not adversely impact the qualification of the
External Spin-Off under sections 355 and 368(a)(1)(D) and will not be in pursuance of a
plan having as one of its principal purposes the avoidance of US federal income tax for
purposes of section 355(a)(1)(D)(ii). -
Any payments made between any of 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 date of the Distribution or for a taxable year beginning before and ending after the
date of the Distribution and (ii) will not become fixed and ascertainable until after the
Distribution will be characterized in a manner consistent with the proper treatment if
such payments or transfers had occurred immediately before the Distribution. See
Arrowsmith v. Commissioner, 344 U.S. 6 (1952) and Revenue Ruling 83-73, 1983-1
C.B. 84.
-
The receipt by Distributing public shareholders of cash in lieu of fractional shares, if
any, of Controlled stock will be treated for US federal income tax purposes as if the
fractional shares had been distributed to the Distributing public shareholders as part of
the Distribution 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 12), 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 determined in Ruling 14. -
Following the Distribution, Controlled will not be a successor of Distributing for
purposes of section 1504(a)(3). Therefore, Controlled and its direct and indirect
subsidiaries that are “includible corporations” under section 1504(b) and satisfy the
ownership requirements of section 1504(a)(4) will be members of an affiliated group of
corporations eligible to file a consolidated US federal income tax return with Controlled
as the common parent. -
Distributing’s or Controlled’s Post-Closing Share Repurchases will not constitute
“evidence of device” within the meaning of Treasury Regulations section 1.355-2(d)(1). -
To the extent any Post-Closing Share Repurchases are treated as part of a plan (or
series of related transactions) with the Proposed Transaction for purposes of section
355(e), such Post-Closing Share Repurchases will be treated as being made from all
public shareholders (defined as a shareholder who is not a “controlling shareholder” or
“ten-percent shareholder” within the meaning of Treasury Regulations sections 1.355-
7(h)(3) and (14)) of Distributing or Controlled, as applicable, on a pro rata basis for
purposes of testing the effect of such Post-Closing Share Repurchases on the
Proposed Transaction under section 355(e) and Treasury Regulations section 1.355-7.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 the taxpayer who requested 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.
A copy of this ruling letter must be attached to any income tax return for which it is
relevant. Alternatively, a taxpayer filing its return electronically may satisfy this
requirement by attaching a statement to its federal income tax return that sets forth the
date and control number of this ruling letter.
Sincerely,
___________________________
Mark J. Weiss
Chief, Branch 2
Office of Associate Chief Counsel (Corporate)
cc:
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