A cross-border internal spin-off separating a foreign holding company from its parent chain qualifies as a tax-free section 368(a)(1)(D) reorganization and section 355 distribution

Plain-English summary

A publicly traded multinational wanted to separate one foreign business (held through a chain of foreign entities) from a related foreign holding company, all inside its corporate group. The plan involved a series of steps: an internal merger, several disregarded distributions, a "check-the-box" election turning one foreign entity into a corporation for U.S. tax purposes (creating a deemed contribution of assets), and then a distribution of that entity's stock up the chain, plus a cash distribution funded by new borrowing. The company asked the IRS to confirm the transaction is tax-free. The IRS ruled that the contribution and distribution together form a divisive "Type D" reorganization under section 368(a)(1)(D), so neither the distributing corporation nor the controlled corporation recognizes gain or loss, the receiving shareholder recognizes no income under section 355(a), and basis and holding periods carry over. This is a routine favorable spin-off ruling issued under Rev. Proc. 2017-52, meaning the IRS ruled only on the specific technical points and expressly did not decide the business-purpose, device, or section 355(e) plan questions. Multinationals restructuring foreign subsidiaries care because a misstep could make the whole separation taxable.

Ruling snapshot

• Question: Does an internal cross-border separation (contribution plus distribution of a controlled foreign holding company's stock) qualify for tax-free treatment under sections 355 and 368(a)(1)(D)?
• Outcome: approved (ten favorable rulings; nonrecognition confirmed)
• Key authorities: IRC §§ 355(a), 368(a)(1)(D), 361, 357(a), 358, 362(b), 1032(a), 1223, 312(h); Treas. Reg. §§ 1.358-2(a), 1.312-10(a), 1.367(b)-5(c); Rev. Proc. 2017-52

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202304007 Third Party Communication: None
Release Date: 1/27/2023 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:1
------------------------------ PLR-115618-22
------------------------------------------------------------ Date:
November 02, 2022

Legend

Parent = ---------------------------------------------------------------------------------
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Sub 1 = ---------------------------------------------------------------------------------
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Sub 2 = ---------------------------------------------------------------------------------
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Sub 3 = ---------------------------------------------------------------------------------
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Distributing = ---------------------------------------------------------------------------------
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Sub 4 = ---------------------------------------------------------------------------------
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Sub 5 = ---------------------------------------------------------------------------------
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Controlled = ---------------------------------------------------------------------------------
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Sub 6 = ---------------------------------------------------------------------------------
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Sub 7 = ---------------------------------------------------------------------------------
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Sub 8 = ---------------------------------------------------------------------------------
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State A = -------------

Country A = ----------------------

Country B = ---------------------

Country C = ------------

Country D = ---------

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

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

Business C = -----------------------------

Business D = ------------------------

a = -----------

b = -----------

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

This letter responds to your authorized representatives’ letter dated August 15, 2022, as
supplemented by subsequent information and documentation (the “Ruling Request”),
requesting rulings on certain federal income tax consequences of the Proposed
Transaction (defined below). The material information submitted in the Ruling Request
and subsequent correspondence is summarized below.

This letter is issued pursuant to Rev. Proc. 2017-52, 2017-41 I.R.B. 283, regarding one
or more “Covered Transactions” under sections 355 and 368 of the Internal Revenue

Code (the “Code”). This office expresses no opinion as 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 materials submitted in support
of the Ruling Request. 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).

                                Summary of Facts

Parent, a publicly traded and widely held State A corporation, is the parent of a
worldwide group of domestic and foreign affiliates (the “Parent Worldwide Group”).
Parent and its domestic affiliates join in filing a consolidated U.S. federal income tax
return (the “Parent Consolidated Group”).

The Parent Worldwide Group is engaged in multiple businesses, including Business A,
Business B, Business C, and Business D.

Parent owns all of the stock of Sub 1, a State A corporation and a member of the Parent
Consolidated Group. Sub 1 owns all of the stock of Sub 2 and Sub 3, each a State A
corporation and a member of the Parent Consolidated Group.

Sub 2 and Sub 3 own a percent and b percent, respectively, of the stock of Distributing,
a Country A entity that is treated as a corporation for U.S. federal income tax purposes.
Distributing owns all of the stock of Sub 4, a Country B entity that is disregarded as
separate from its owner for U.S. federal income tax purposes (a “disregarded entity”).

Sub 4 owns all of the stock of Sub 5, a Country B disregarded entity. Sub 5 is engaged
in Business C in Country B. Sub 5 owns all of the stock of Controlled, a Country C
disregarded entity.

Controlled is a holding company and owns all of the stock of Sub 6, a Country C
disregarded entity. Sub 6 owns all of the stock of Sub 7, a Country D disregarded

entity, and Sub 8, a Country C disregarded entity. Controlled, specifically through Sub
6, Sub 7, and Sub 8, conducts Business D in Country C and Country D.

                               Proposed Transaction

For what are represented to be valid business reasons, Distributing intends to engage in
the following transaction to separate Distributing from Controlled (the “Proposed
Transaction”).

1. Sub 2 will merge with and into Sub 3 pursuant to state law (the “Sub 2
   Merger”). The Sub 2 Merger is intended to qualify as a tax-free
   reorganization pursuant to section 368(a).

2. Sub 5 will distribute Controlled to Sub 4 in exchange for no consideration in a
   transaction that will be disregarded for U.S. federal income tax purposes.

3. Sub 4 will distribute Controlled to Distributing in exchange for no
   consideration in a transaction that will be disregarded for U.S. federal income
   tax purposes.

4. Controlled will make an election pursuant to Treas. Reg. § 301.7701-3(c) to
   change its U.S. federal income tax election from a disregarded entity to an
   association (the “Controlled Check-the-Box Election” and, with respect to the
   deemed transactions occurring for U.S. federal income tax purposes as a
   result of the Controlled Check-the-Box Election, the “Contribution”).

5. Distributing will distribute Controlled to Sub 3 in exchange for no
   consideration (the “Distribution”).

6. Controlled will borrow from Parent or a third-party lender to make a cash
   distribution to Sub 3 (the “Cash Distribution”).

In connection with the Proposed Transaction, Distributing and Controlled (or their
respective affiliates, as applicable) will enter into certain continuing arrangements on an
arm’s length basis.

                                Representations

Except as set forth below, Parent has made all the representations in section 3 of the
Appendix to Rev. Proc. 2017-52.

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

2. Parent has not made the following representations, which do not apply to the
   Proposed Transaction: 7; 19; 20; 24; 25; 35; 36; 37; 38; and 39.

Parent was unable to make the following standard representations; however, Parent
has made the following modified representations.

3. Representation 32: No intercorporate debt will exist between Distributing and
   Controlled (and their respective subsidiaries, as applicable) at the time of, or
   subsequent to, the Distribution, except for amounts arising by reason of the
   continuing arrangements or ordinary course receivables and payables.

4. Representation 43: Both Distributing and Controlled will each be a controlled
   foreign corporation (within the meaning of section 957(a)) immediately before
   and after the Distribution, and there will be no plan or intention for any action
   to be taken to prevent Distributing or Controlled from being a controlled
   foreign corporation.

     For purposes of Treas. Reg. § 1.367(b)-5(c), Distributing’s shareholder’s pre-
     distribution amount with respect to both Distributing and Controlled will not
     exceed Distributing’s post-distribution amount with respect to both entities, or,
     if the pre-distribution amount does exceed the post-distribution amount,
     Distributing’s shareholder will reduce its basis, or include an amount in
     income as a deemed dividend, to the extent provided in Treas. Reg.
     § 1.367(b)-5(c)(2).
   

Parent has made the following additional representation.

5. Sub 3 has no plan or intention of contributing the proceeds of the Cash
   Distribution to Distributing.

                                    Rulings
   

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

1. The Contribution and the 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
   361(a) and 357(a).

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

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

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

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

7. Sub 3 will not recognize gain or loss (and no amount will be includible in
   income) upon the receipt of Controlled stock in the Distribution. Section
   355(a).

8. The aggregate basis of the Distributing stock and the Controlled stock in the
   hands of Sub 3 immediately after the Distribution will be the same as the
   aggregate basis of the Distributing stock held by Sub 3 immediately before
   the Distribution, allocated between the stock of Distributing and Controlled in
   proportion to the fair market value of each in accordance with Treas. Reg.
   § 1.358-2(a). Section 358(a)(1) and (b).

9. Sub 3’s holding period in the Controlled stock received in the Distribution will
   include the holding period of the Distributing stock with respect to which the
   distribution is made, provided that the Distributing stock is held as a capital
   asset on the date of the Distribution. Section 1223(1).

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

                                       Caveat
    

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect 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 addressed 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.

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

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 (PLR-
115618-22) of the letter ruling.

                                   Sincerely,

                                   Richard K. Passales
                                   Richard K. Passales
                                   Senior Counsel, Branch 4
                                   Office of Associate Chief Counsel (Corporate)

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