IRS blesses a large tax-free spin-off separating two business lines from a public company
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 company that heads a worldwide group ran four business lines
across a deep web of domestic and foreign subsidiaries. It wanted to split off
two of those lines (Business A and Business D) from the other two (Business B and
Business C) and hand shareholders stock in a newly formed company that would hold
the separated businesses. This "Separation" was carried out through a long chain
of internal reorganizations and stock distributions, ending in a pro rata spin-off
of the new company's stock to the parent's shareholders. The deal also involved
using the new company's borrowed cash and debt securities to pay down the
parent's existing debt (a "debt purge" and "debt-for-debt exchanges"). The
company asked the IRS to confirm the transaction is tax-free under Code sections
355 (spin-offs) and 368 (reorganizations). The IRS issued 26 rulings granting
the requested nonrecognition treatment: the contributions and distributions
qualify as "D" reorganizations, neither the corporations nor the shareholders
recognize gain or loss, and the assets, basis, holding periods, and earnings and
profits carry over in the usual way. Consistent with its ruling policy, the IRS
did not rule on the deal's business purpose, whether it is a disguised dividend
"device," or whether it is part of a plan to sell a 50% interest.
Ruling snapshot
- Question: Do the internal reorganizations and the spin-off separating two
business lines qualify for tax-free treatment under IRC §§ 355 and 368,
including the related debt-for-debt exchanges? - Outcome: Approved. 26 rulings granting nonrecognition and standard
carryover treatment. - Key authorities: IRC §§ 355, 361, 368(a)(1)(D), 357, 358, 362, 1032,
1223, 1248(f), 312(h); Rev. Proc. 2017-52; Rev. Proc. 2018-53.
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 202322006 Third Party Communication: None
Release Date: 6/2/2023 Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-00,
361.00-00, 361.02-02, Person To Contact:
368.00-00, 368.04-00 -------------------------------
ID No. -----------------
------------------------ Telephone Number:
---------------------------------------------- --------------------
--------------------------- Refer Reply To:
--------------------------------- CC:CORP:02
------------------------------- PLR-116841-22
Date:
March 06, 2023
LEGEND
External = ---------------------------------------------------------------------------------------
Distributing ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
----
Predecessor = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
Internal = ---------------------------------------------------------------------------------------
Distributing 1 ---------------------------------------------------------------------------------------
-------------------------
Internal = ---------------------------------------------------------------------------------------
Distributing 2 ---------------------------------------------------------------------------------------
-------------------------
External = ---------------------------------------------------------------------------------------
Controlled ---------------------------------------------------------------------------------------
-------------------------
Internal = ---------------------------------------------------------------------------------------
Controlled ---------------------------------------------------------------------------------------
-------------------------
PLR-116841-22 2
DRE 1 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
DRE 2 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
DRE 3 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------
DRE 4 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
DRE 5 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
DRE 6 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
DRE 7 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
DRE 8 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
DRE 9 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
DRE10 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
DRE 11 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
PLR-116841-22 3
DRE 12 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
DRE 13 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
DRE 14 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
DRE 15 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
DRE 16 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
DRE 17 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
Sub 1 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
--------------------------
Sub 2 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
Sub 3 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
Sub 4 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
Sub 5 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
PLR-116841-22 4
Sub 6 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
Sub 7 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
Sub 8 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
--------------------------
Sub 9 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Sub 10 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-----------------------------
Sub 11 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
FSub 1 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
---
FSub 2 = ---------------------------------------------------------------------------------------
------------------------------------------------------
FSub 3 = ---------------------------------------------------------------------------------------
------------------------------------------------------
FSub 4 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
FSub 5 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
----------------------------
FSub 6 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
PLR-116841-22 5
FSub 7 = ---------------------------------------------------------------------------------------
-------------------------------------------
FSub 8 = ---------------------------------------------------------------------------------------
-----------------------------------------------------
FSub 9 = ---------------------------------------------------------------------------------------
----------------------------------
FSub 10 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
External = ---------------------------------------------------------------------------------------
Distributing Debt ---------------------------------------------------------------------------------------
------------------
Date 1 = -----------------------
Date 2 = ------------------
External = ---------------------------------------------------------------------------------------
Controlled ---------------------------------------------------------------------------------------
Business ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
------------------------------------------------
Non-External = ---------------------------------------------------------------------------------------
Controlled ---------------------------------------------------------------------------------------
Business ---------------------------------------------------------------------------------------
-------------------------
Business A = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------
Business B = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-----------------------------------
Business C = ---------------------------------------------------------------------------------------
------------------------------------------------------------------
PLR-116841-22 6
Business D = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------
a = --------
b = ------
c = ---
d = --
e = --------
f = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
g = ---
h = ----
i = ----
j = ---
k = ------
l = --------
m = ------
n = --
o = ---
p = ------
q = ---
Dear --------------:
This letter responds to your authorized representatives’ letter dated August 31, 2022, as
supplemented by subsequent letters and documentation (the “Ruling Request”),
requesting rulings on certain federal income tax consequences of the Proposed
PLR-116841-22 7
Transactions (as 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, as amplified
and modified by Rev. Proc. 2018-53, 2018-43 I.R.B. 667, regarding one or more
“Covered Transactions” and one or more significant issues under section 355 and
section 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 Distributions (as defined
below): (i) satisfy the business purpose requirement of Treas. Reg. § 1.355-2(b); (ii) are
used principally as a device for the distribution of the earnings and profits of any
distributing corporation or controlled corporation or both (see section 355(a)(1)(B) and
Treas. Reg. § 1.355-2(d)); or (iii) are 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 any distributing corporation or any
controlled corporation, or any predecessor of a distributing corporation or a 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
External Distributing, a publicly traded corporation, is the parent of a worldwide group of
domestic and foreign affiliates (the “External Distributing Group”). External Distributing
and its domestic affiliates join in filing a consolidated U.S. federal income tax return.
External Distributing has a single class of voting common stock outstanding (the
“External Distributing Common Stock”).
External Distributing is the successor to Predecessor, all the assets and liabilities of
which External Distributing obtained on Date 2 in a transaction which you have
represented qualified as a reorganization within the meaning of section 368(a)(1)(F).
References to External Distributing include Predecessor prior to that reorganization.
Prior to the Proposed Transactions, External Distributing and its subsidiaries will be
engaged in the External Controlled Business (including Business B and Business C)
and the Non-External Controlled Business (including Business A and Business D). The
relevant ownership structure of the External Distributing Group immediately prior to the
Proposed Transactions is described below.
PLR-116841-22 8
External Distributing directly owns all the outstanding stock of Internal Distributing 2,
Sub 1, Sub 2, Sub 3, Sub 4, and Sub 5, as well as a% of the outstanding equity of
Internal Distributing 1, which is classified as a corporation for federal tax purposes.
Sub 1 directly owns b% of the outstanding equity of Internal Distributing 1. Sub 2
directly owns all the outstanding stock of Sub 6. Sub 6 directly owns all the outstanding
stock of Sub 7 and FSub 1, which is classified as a corporation for federal tax purposes,
as well as all the outstanding equity of DRE 1, DRE 2, and c% of the outstanding shares
in DRE 3, each of which is classified as an entity disregarded as separate from its
owner for federal tax purposes. DRE 2 directly owns the remaining d% of the
outstanding shares in DRE 3. DRE 1 directly owns all the outstanding shares of FSub 2,
which is classified as a corporation for federal tax purposes. Entities including Sub 2,
Sub 6, Sub 7, FSub 1, and the Business D Entities (as defined below) are each
engaged in Business A.
Internal Distributing 2 directly owns all the outstanding stock of Sub 8 and Sub 9, as well
as the remaining e% of the outstanding equity of Internal Distributing 1. Sub 8 directly
owns all the outstanding stock of Sub 10 and Sub 11. Sub 10, in turn, directly owns all
the outstanding stock of FSub 3, which is classified as a corporation for federal tax
purposes. Sub 9 directly owns all the outstanding equity of FSub 4, which is classified
as a corporation for federal tax purposes. FSub 4 directly owns f% of the outstanding
shares in DRE 10. Sub 10, Sub 11, and FSub 3 are each engaged in Business B.
Internal Distributing 1 directly owns all the outstanding shares of DRE 4, g% of the
outstanding shares of DRE 5, h% of the outstanding equity of DRE 6, each of which is
classified as an entity disregarded as separate from its owner for federal tax purposes,
and i% of the outstanding equity of DRE 7, which is classified as either an entity
disregarded as separate from its owner or a partnership for federal tax purposes. DRE 4
directly owns all the outstanding shares of DRE 8, which is classified as an entity
disregarded as separate from its owner for federal tax purposes. DRE 8 directly owns all
the outstanding equity in Internal Controlled and DRE 9, each of which is currently
classified as an entity disregarded as separate from its owner for federal tax purposes,
as well as the remaining j% of the outstanding shares of DRE 5. DRE 5 directly owns
the remaining k% of the outstanding equity in DRE 6, as well as the remaining l% of the
outstanding shares in DRE 10, which is classified as either an entity disregarded as
separate from its owner or a partnership for federal tax purposes. DRE 10 directly owns
all the outstanding shares in DRE 11, which is classified as an entity disregarded as
separate from its owner for federal tax purposes. DRE 11 directly owns all the
outstanding equity in FSub 5, which is classified as a corporation for federal tax
purposes, as well as all the outstanding equity in DRE 12, which is classified as an
entity disregarded as separate from its owner for federal tax purposes, and the
remaining m% of DRE 7. DRE 6, DRE 7, FSub 5, DRE 10, and DRE 12, as well as
branches of DRE 9 and DRE 10, are each engaged in Business C.
Internal Controlled directly owns all the outstanding equity of FSub 6, which is classified
as a corporation for federal tax purposes, as well as DRE 13, which is classified as an
PLR-116841-22 9
entity disregarded as separate from its owner for federal tax purposes. FSub 6 directly
owns all the outstanding equity of DRE 14, which is classified as an entity disregarded
as separate from its owner for federal tax purposes. DRE 14, in turn, owns all the
outstanding equity of DRE 15, which is classified as an entity disregarded as separate
from its owner for federal tax purposes. DRE 15 owns all the outstanding equity of
DRE 16, which is classified as an entity disregarded as separate from its owner for
federal tax purposes, as well as n% of the outstanding equity of FSub 7, which is
classified as a corporation for federal tax purposes. DRE 16 owns all the outstanding
equity of FSub 8, which is classified as a corporation for federal tax purposes, and the
remaining o% of the outstanding equity of FSub 7, as well as all the outstanding equity
in DRE 17, which is classified as an entity disregarded as separate from its owner for
federal tax purposes. DRE 13 owns all the outstanding equity of FSub 9, which is
classified as a corporation for federal tax purposes. FSub 9 owns all the outstanding
equity of FSub 10, which is classified as a corporation for federal tax purposes. DRE 15,
DRE 16, DRE 17, FSub 7, and FSub 8 are each engaged in Business D (the
“Business D Entities”).
As of Date 1, which was 60 days prior to the first public announcement of the
Separation (as defined below), External Distributing had amounts outstanding under the
External Distributing Debt, which was not issued in anticipation of the Proposed
Transactions.
For purposes of satisfying the active trade or business requirements of section 355(b)
with respect to each of the Distributions, financial information has been submitted in
accordance with Rev. Proc. 2017-52 indicating that each of Business A, Business B,
Business C, and Business D has had gross receipts and operating expenses
representing the active conduct of a trade or business for each of the past five years.
PROPOSED TRANSACTIONS
For what are represented to be valid corporate business purposes, the External
Distributing Group proposes to engage in the following transactions (the “Proposed
Transactions”), some of which have already been consummated, to separate Business
A and Business D from Business B and Business C (the “Separation”).
Step 1: External Distributing formed External Controlled as a wholly owned
subsidiary.
Step 2: External Distributing contributed its a% equity interest in Internal
Distributing 1 to Internal Distributing 2 (the “Internal Distributing Contribution”).
Step 3: External Distributing contributed Sub 1 to Internal Distributing 2 (the
“Sub 1 Contribution”). Sub 1 subsequently made an election to be classified as a
disregarded entity for federal income tax purposes (the “Sub 1 Election”). The Sub 1
Election, together with the Sub 1 Contribution is intended to qualify as an acquisition by
PLR-116841-22 10
Internal Distributing 2 of the assets of Sub 1, in exchange for the deemed issuance of
stock of Sub 1 (such contribution and election, the “Sub 1 Reorganization”).
Step 4: Sub 1 transferred p% of its equity interest in Internal Distributing 1 to
Internal Distributing 2.
Step 5: Internal Distributing 1 sold certain intellectual property rights from
disregarded entities owned directly or indirectly by Internal Distributing 1 to Sub 6.
Step 6: Internal Controlled will elect to be classified as a corporation for federal
tax purposes. For federal income tax purposes, Internal Distributing 1 will be deemed to
contribute to Internal Controlled all the assets held directly and indirectly by Internal
Controlled in exchange for (i) all the stock of Internal Controlled (the “Internal Controlled
Stock”), and (ii) the assumption of liabilities related to the transferred assets (the “First
Internal Controlled Contribution”).
Step 7: Internal Distributing 1 will distribute approximately c% of the Internal
Controlled Stock to Internal Distributing 2 and the remaining approximately d% of the
Internal Controlled Stock to Sub 1 (the “First Internal Controlled Distribution”).
Step 8: Sub 1 will distribute to Internal Distributing 2 all the Internal Controlled
Stock that it receives from Internal Distributing 1 in the First Internal Controlled
Distribution.
Step 9: Internal Distributing 2 will distribute the Internal Controlled Stock that it
receives from Internal Distributing 1 and Sub 1 to External Distributing (the “Second
Internal Controlled Distribution”).
Step 10: Certain intercompany payables and receivables existing between
External Distributing (and/or one or more of its direct or indirect subsidiaries after the
External Distribution (as defined below)) and External Controlled (and/or one or more of
its direct or indirect subsidiaries after the External Distribution) will be eliminated through
transactions including distributions, cancellations, extinguishments, and/or repayments.
Following such distributions, cancellations, extinguishments, and/or repayments, it is
anticipated that a significant amount of intercompany payables owed by External
Distributing to one or more of direct or indirect subsidiaries of External Controlled will
remain outstanding (the “Outstanding Intercompany Payables”).
Step 11: External Distributing will contribute to External Controlled (i) all the stock
of Internal Distributing 2 and other directly held entities engaged in the External
Controlled Business, and (ii) certain other assets related to the External Controlled
Business in exchange for (i) the issuance of shares of External Controlled (the “External
Controlled Stock”), (ii) the assumption of the Outstanding Intercompany Payables, and
(iii) either (A) debt instruments of External Controlled that qualify as securities within the
meaning of section 361(a) (such securities, “External Controlled Securities”) or (B) the
PLR-116841-22 11
External Controlled Proceeds (as defined below) in cash, which will not be kept in a
segregated or otherwise separate account (such contribution, the “External Controlled
Contribution”).
Step 12: External Controlled may borrow cash pursuant to (i) issuances of debt
instruments to third-party investors in the capital markets, and/or (ii) borrowings under
new credit facilities entered into with one or more third-party financial institutions (the
“Debt Issuances”).
Step 13: In a pro rata distribution, External Distributing will distribute all the
External Controlled Stock to holders of External Distributing Common Stock (the
“External Distribution,” and together with the First Internal Controlled Distribution and
the Second Internal Controlled Distribution, the “Distributions”).
Step 14: To the extent External Controlled distributes to External Distributing
some or all the net proceeds from the Debt Issuances (the amount so distributed, the
“External Controlled Proceeds”), External Distributing will use an amount of cash (which
may come from its general accounts) equal to or greater than the amount of the
External Controlled Proceeds to repay the outstanding External Distributing Debt (such
repayment, the “External Controlled Proceeds Purge”). The External Controlled
Proceeds Purge will be completed as expeditiously as is commercially reasonable and
in any event within q months after the External Distribution.
Step 15: To the extent External Controlled issues External Controlled Securities
in the External Controlled Contribution, External Distributing may exchange all the
External Controlled Securities for certain External Distributing Debt (the exchanged
External Distributing Debt, the “External Distributing Exchange Debt,” and such
exchanges, the “Debt-for-Debt Exchanges”), such that External Distributing will no
longer hold any External Controlled Securities following the completion of such
exchanges. The Debt-for-Debt Exchanges, if any, will be completed as expeditiously as
is commercially reasonable and in any event within q months after the External
Distribution.
If External Distributing disposes of any External Controlled Securities in the Debt-for-
Debt Exchanges, External Distributing may either (i) enter into such exchange directly
with one or more existing holders of the External Distributing Exchange Debt (a “Direct
Debt-for-Debt Exchange”), or (ii) enter into such exchange with various investment
banks (the “Exchange Banks”) that will purchase the External Distributing Exchange
Debt on the open market at least one day before the date of the of the Debt-for-Debt
Exchanges (an “Intermediated Debt-for-Debt Exchange”). Alternatively, External
Distributing may enter into one or more short-term refinancing arrangements, where
External Distributing will (i) borrow cash on a short-term basis (the “Bridge Financing”)
from an investment bank (the “Financing Bank”) and (ii) use the proceeds of the Bridge
Financing to repay the External Distributing Exchange Debt. At least one day after
entering into the Bridge Financing and either before or after the repayment of the
PLR-116841-22 12
External Distributing Exchange Debt, External Distributing will enter into an agreement
to exchange any External Controlled Securities with the Financing Bank in repayment of
the Bridge Financing (a “Bridge Financed Debt-for-Debt Exchange”).
In connection with the Proposed Transactions, External Distributing (and/or one or more
of its direct or indirect subsidiaries) and External Controlled (and/or one or more of its
direct or indirect subsidiaries) will enter into agreements (the “Post-Separation
Agreements”) intended to govern certain of their relationships (and those of their
respective subsidiaries) following the consummation of the Proposed Transactions, and
to manage an orderly transition in the operation of the External Controlled Business.
The Post-Separation Agreements will include provisions governing the allocation of
various items, including liabilities resulting from the operations of External Distributing’s
and External Controlled’s respective businesses, as well as certain customary
agreements with External Controlled regarding tax and employee matters. The Post-
Separation Agreements will also include (i) intellectual property cross-license
agreements; (ii) transition and logistical services agreements, providing for the provision
by External Distributing and External Controlled to each other of certain customary,
limited transition services, consistent with commonly shared services, including but not
limited to those related to information technology, procurement, customer service,
quality and regulatory affairs, accounting, human resources, and distribution and
logistics; and (iii) certain material continuing, planned, or intended transactions between
External Distributing (and/or one or more of its direct or indirect subsidiaries) and
External Controlled (and/or one or more of its direct or indirect subsidiaries) following
the External Distribution.
The terms of such Post-Separation Agreements will provide for a specified period of
time depending on the type and scope of services to be provided (which may be
extended in certain circumstances). In the case of Post-Separation Agreements
providing for transition services, such services will generally be intended to last no
longer than is necessary to achieve a successful separation of the External Controlled
Business, and any associated charges for such services will generally be intended to
allow the service provider to recover only direct and indirect costs. The Post-Separation
Agreements will further provide that the costs associated with a limited number of real
property leases held by External Distributing after the External Distribution may be on-
charged to External Controlled without profit to External Distributing.
Following the External Distribution, members of the Distributing board of directors will in
no case constitute a majority of the board of directors of External Controlled.
REPRESENTATIONS
The following representations have been made with respect to the Proposed
Transactions:
PLR-116841-22 13
1. Except as otherwise provided below, External Distributing has made each
of the representations provided in Section 3 of the Appendix to Rev. Proc.
2017-52 with respect to the First Internal Controlled Distribution, the
Second Internal Controlled Distribution, and the External Distribution. For
purposes of the representations below, terms used but not otherwise
defined herein have the meanings set forth in Rev. Proc. 2017-52.
(a) With respect to the First Internal Controlled Distribution:
(i) External Distributing has made the following alternative
representations: Representations 3(a), 8(a), 11(a), 15(a),
22(a), 31(a), and 41(a).
(ii) External Distributing has not made the following
representations: Representations 7, 19, 20, 24, 25, 36, 37,
38, 39, 40, and 43 (but provided the required explanations).
(iii) External Distributing has made the following modified
representations:
(1) Representation 32: No intercorporate debt will exist
between Internal Distributing 1 and Internal Controlled
at the time of, or subsequent to, the First Internal
Controlled Distribution, except for (i) short-term
accounts payable and accounts receivable arising
subsequent to the First Internal Controlled Distribution
under the Post-Separation Agreements; (ii) certain
intercompany payables and receivables, which will be
subsequently eliminated through transactions
including distributions, cancellations, extinguishments,
and/or repayments.
(2) Representation 33: Payments made in connection
with all continuing transactions (other than payments
for certain services to be provided on a temporary
basis following the First Internal Controlled
Distribution) between Internal Distributing 1 and
Internal Controlled, if any, after the First Internal
Controlled Distribution will be for fair market value
based on arm’s-length terms.
(b) With respect to the Second Internal Controlled Distribution:
(i) External Distributing has made the following alternative
representations: Representations 8(a), 11(a), 15(a), 22(a),
31(a), and 41(a).
PLR-116841-22 14
(ii) External Distributing has not made the following
representations: Representations 3, 7, 18, 19, 20, 24, 25, 36,
38, 39, 40, and 43 (but provided the required explanations).
(iii) External Distributing has made the following modified
representations:
(1) Representation 32: No intercorporate debt will exist
between Internal Distributing 2 and Internal Controlled
at the time of, or subsequent to, the Second Internal
Controlled Distribution, except for (i) short-term
accounts payable and accounts receivable arising
subsequent to the Second Internal Controlled
Distribution under the Post-Separation Agreements;
(ii) certain intercompany payables and receivables,
which will be subsequently eliminated thorough
transactions including distributions, cancellations,
extinguishments, and/or repayments.
(2) Representation 33: Payments made in connection
with all continuing transactions (other than payments
for certain services to be provided on a temporary
basis following the Second Internal Controlled
Distribution) between Internal Distributing 2 and
Internal Controlled, if any, after the Second Internal
Controlled Distribution will be for fair market value
based on arm’s-length terms.
(c) With respect to the External Distribution:
(i) External Distributing will make the following alternative
representations: Representations 3(a), 11(a), 15(a), 22(a),
31(a), 41(a).
(ii) External Distributing has not made the following
representations: Representations 4, 7, 24, 25, and 40 (but
provided the required explanations).
(iii) External Distributing has made the following modified
representations:
(1) Representation 2: External Distributing will (i)
distribute to its stockholders, on the same day,
External Controlled Stock representing 100 percent of
(A) the total voting power of all classes of External
Controlled Stock entitled to vote, (B) the total number
PLR-116841-22 15
of shares of each other (i.e., nonvoting) class of
External Controlled Stock, if any, and (ii) transfer to
External Distributing’s creditors, pursuant to the same
plan, (A) the External Controlled Proceeds, if any, and
(B) all of the External Controlled Securities, if any,
that it holds immediately before the External
Distribution.
(2) Representation 8: External Distributing has securities
outstanding, and it may distribute the External
Controlled Proceeds and the External Controlled
Securities to one or more holders of such securities,
in connection with the External Distribution, in
satisfaction thereof.
(3) Representation 18: The fair market value of the
assets transferred by External Distributing to External
Controlled will exceed the sum of (i) the total amount
of any liabilities of External Distributing actually or
deemed assumed (within the meaning of section
357(d)) by External Controlled (the “External Debt
Assumption”), and (ii) the total amount of any money
and the fair market value of other property, if any,
received by External Distributing from External
Controlled and transferred to External Distributing’s
shareholders and creditors.
(4) Representation 32: No intercorporate debt will exist
between External Distributing and External Controlled
at the time of, or subsequent to, the External
Distribution, except for (i) External Controlled
Securities, if any, that will be transferred to creditors
in Debt-for-Debt Exchanges and (ii) short-term
accounts payable and accounts receivable arising
subsequent to the External Distribution under the
Post-Separation Agreements.
(5) Representation 33: Payments made in connection
with all continuing transactions (other than payments
for certain services to be provided on a temporary
basis following the External Distribution and payments
in connection with certain real property leases)
between External Distributing and External
Controlled, if any, after the External Distribution will
be for fair market value based on arm’s-length terms.
PLR-116841-22 16
(6) Representation 46: External Controlled will not issue
stock or securities to a person other than External
Distributing in anticipation of the External Distribution,
with the possible exception of the issuances of debt
instruments by External Controlled to third-party
investors in the capital markets pursuant to the Debt
Issuances, which instruments may constitute External
Controlled Securities.
2. External Distributing has made each of the following representations
provided in section 3.04 of Rev. Proc. 2018-53. For purposes of the
representations below, terms used but not otherwise defined herein have
the meanings set forth in Rev. Proc. 2018-53.
(a) With respect to the First Internal Controlled Contribution and the
First Internal Controlled Distribution:
(i) External Distributing has not made Representation 6 (but
provided the required explanations).
(ii) External Distributing has not made Representations 2, 3,
and 4 with respect to the deemed assumption of the Internal
Distributing 1 liabilities by Internal Controlled (but provided
the required explanations).
(b) With respect to the External Controlled Contribution and the
External Distribution:
(i) External Distributing has not made Representations 6 (but
provided the required explanations).
(ii) External Distributing has made Representation 2 with
respect to the External Distributing Debt. External
Distributing has not made Representation 2 with respect to
the External Debt Assumption (but provided the required
explanations).
(iii) External Distributing has made Representation 3 with
respect to the External Distributing Debt to the extent repaid
in an External Controlled Proceeds Purge. External
Distributing has not made Representation 3 with respect to
the External Debt Assumption (but provided the required
explanations). With respect to External Distributing Debt that
may be satisfied in the External Controlled Proceeds Purge
or the Debt-for-Debt Exchanges, External Distributing has
made the following additional representation: The holder of
PLR-116841-22 17
the External Distributing Debt that will be assumed or
satisfied will not hold the debt for the benefit of External
Distributing, External Controlled, or any Related Person.
With respect to any Intermediated Debt-for-Debt Exchanges,
the Exchange Banks will not acquire External Distributing
Exchange Debt from External Distributing, External
Controlled, or any Related Person. Neither External
Distributing, nor External Controlled, nor any Related Person
will participate in any profit gained by the Exchange Banks
upon an exchange of Section 361 Consideration; nor will any
such profit be limited by agreement or other arrangement.
The value of the Section 361 Consideration received by the
Exchange Banks in satisfaction of the External Distributing
Exchange Debt will be determined pursuant to arm’s length
negotiations.
(iv) External Distributing has made Representation 4 with
respect to the External Distributing Debt. External
Distributing has not made Representation 4 with respect to
External Debt Assumption (but provided the required
explanations). External Distributing has further made the
following representation: The proceeds of the Bridge
Financing, if any, will be used to repay the External
Distributing Debt.
(c) External Distributing has not made any Representations provided in
Section 3.04 of Rev. Proc. 2018-53 with respect to the Second
Internal Controlled Distribution.
(d) External Distributing has made the following additional
representations:
(i) The External Controlled Securities, if any, are “securities”
within the meaning of section 361(a).
(ii) Consistent with the rulings below, the Internal Distributing
Contribution qualifies as either a transfer described in
section 351 or a reorganization described in section
368(a)(1)(B) and the Sub 1 Reorganization qualifies as a
reorganization described in section 368(a)(1)(D).
RULINGS
Based solely on the information submitted and the representations set forth above, we
rule as follows:
PLR-116841-22 18
The First Internal Controlled Contribution and the First Internal Controlled Distribution
1. The First Internal Controlled Contribution, together with the First Internal
Controlled Distribution, will be a reorganization within the meaning of
section 368(a)(1)(D). Internal Distributing 1 and Internal Controlled will
each be “a party to a reorganization” under section 368(b).
2. No gain or loss will be recognized by Internal Distributing 1 on the First
Internal Controlled Contribution. Section 361(a).
3. No gain or loss will be recognized by Internal Controlled on the First
Internal Controlled Contribution. Section 1032(a).
4. The basis in each asset received by Internal Controlled in the First Internal
Controlled Contribution will equal the basis of that asset in the hands of
Internal Distributing 1 immediately before the transfer. Section 362(b).
5. The holding period in each asset received by Internal Controlled in the
First Internal Controlled Contribution will include the period during which
that asset was held by Internal Distributing 1. Section 1223(2).
6. No gain or loss will be recognized by Internal Distributing 1 upon the
distribution of the Internal Controlled Stock in the First Internal Controlled
Distribution. Section 361(c).
7. No gain or loss will be recognized by (and no amount will be included in
the income of) Internal Distributing 2 upon the receipt of Internal
Controlled Stock in the First Internal Controlled Distribution. Section
355(a).
8. The holding period of Internal Distributing 2 in the Internal Controlled
Stock received in the First Internal Controlled Distribution will include the
holding period of the Internal Distributing 1 stock held by Internal
Distributing 2 with respect to which the distribution of the Internal
Controlled Stock is made, provided that such Internal Distributing 1 stock
is held as a capital asset on the date of the First Internal Controlled
Distribution. Section 1223(1).
9. Earnings and profits of Internal Distributing 1, if any, will be allocated
between Internal Distributing 1 and Internal Controlled in accordance with
section 312(h) and Treas. Reg. § 1.312-10(a).
PLR-116841-22 19
The Second Internal Controlled Distribution
10. No gain or loss will be recognized by (and no amount will be included in
the income of) Internal Distributing 2 upon the distribution of Internal
Controlled Stock in the Second Internal Controlled Distribution, except to
the extent provided for pursuant to section 1248(f). Section 355(c);
Section 1248(f).
11. No gain or loss will be recognized by (and no amount will be included in
the income of) External Distributing upon the receipt of Internal Controlled
Stock in the Second Internal Controlled Distribution. Section 355(a).
12. The holding period of External Distributing in the Internal Controlled Stock
received in the Second Internal Controlled Distribution will include the
holding period of the Internal Distributing 2 stock held by External
Distributing with respect to which the distribution of the Internal Controlled
Stock is made, provided that such Internal Distributing 2 stock is held as a
capital asset on the date of the Second Internal Controlled Distribution and
except to the extent provided for pursuant to section 1248(f). Section
1223(1); Section 1248(f); Treas. Reg. § 1.1248(f)-2.
13. Earnings and profits of Internal Distributing 2, if any, will be allocated
between Internal Distributing 2 and Internal Controlled in accordance with
section 312(h) and Treas. Reg. § 1.312-10(a).
The External Controlled Contribution and the External Distribution
14. The External Controlled Contribution, together with the External
Distribution, will be a reorganization within the meaning of Section
368(a)(1)(D). External Distributing and External Controlled will each be “a
party to a reorganization” under section 368(b).
15. No gain or loss will be recognized by External Distributing on the External
Controlled Contribution (including with respect to the receipt of the
External Controlled Proceeds) or the External Debt Assumption, except to
the extent that the sum of (i) the total amount of the External Debt
Assumption, and (ii) the total amount of any money and the fair market
value of other property, if any, transferred to External Distributing by
External Controlled exceeds External Distributing’s adjusted basis in the
assets transferred by External Distributing to External Controlled in the
External Controlled Contribution. Section 361(a) and (b); section 357(a).
16. No gain or loss will be recognized by External Controlled on the External
Controlled Contribution. Section 1032(a).
PLR-116841-22 20
17. The basis in each asset received by External Controlled in the External
Controlled Contribution will equal the basis of that asset in the hands of
External Distributing immediately before the transfer. Section 362(b).
18. The holding period in each asset received by External Controlled in the
External Controlled Contribution will include the period during which that
asset was held by External Distributing. Section 1223(2).
19. No gain or loss will be recognized by External Distributing upon the
distribution of the External Controlled Stock in the External Distribution.
Section 361(c).
20. No gain or loss will be recognized by (and no amount will be included in
the income of) holders of External Distributing Common Stock upon the
receipt of External Controlled Stock in the External Distribution. Section
355(a).
21. The aggregate basis of the External Distributing Common Stock and
External Controlled Stock in the hands of a holder of External Distributing
Common Stock immediately after the External Distribution will be the
same as the basis of the External Distributing Common Stock immediately
before the External Distribution on which such distribution was made,
allocated in proportion to the fair market values of the External Distributing
Common Stock and the External Controlled Stock. Section 358(b) and (c);
Treas. Reg. § 1.358-1(a).
22. If a holder of External Distributing Common Stock that purchased or
acquired shares on different dates or at different prices is not able to
identify which particular share of External Controlled Stock is received as
a distribution with respect to a particular share of External Distributing
Common Stock, the holder may designate which particular share of
External Controlled Stock is received as a distribution with respect to a
particular share of External Distributing Common Stock, provided the
designation is consistent with the terms of the External Distribution. Treas.
Reg. § 1.358-2(a)(2).
23. The holding period of each holder of External Distributing Common Stock
in the External Controlled Stock received in the External Distribution will
include the holding period of the External Distributing Common Stock with
respect to which the distribution of the External Controlled Stock is made,
provided that such External Distributing Common Stock is held as a
capital asset on the date of such External Distribution. Section 1223(1).
24. Earnings and profits of External Distributing, if any, will be allocated
between External Distributing and External Controlled in accordance with
PLR-116841-22 21
section 312(h), Treas. Reg. § 1.312-10(a), and Treas. Reg. § 1.1502-
33(e)(3).
Debt Exchanges
25. No gain or loss will be recognized by External Distributing in any Direct
Debt-for-Debt Exchange, any Intermediated Debt-for-Debt Exchange, or
any Bridge Financed Debt-for-Debt Exchange, other than any (i)
deductions attributable to the fact that the External Distributing Exchange
Debt may be redeemed at a premium, (ii) income attributable to the fact
that the External Distributing Exchange Debt may be redeemed at a
discount, and (iii) interest expense accrued with respect to the External
Distributing Exchange Debt. Section 361(c).
Post-Separation Agreements
26. Payments from External Distributing, or any of its affiliates, to External
Controlled, or any of its affiliates, or vice versa, under any continuing
relationships regarding liabilities, indemnities, or other obligations that
(i) have arisen or will arise for a taxable period ending on or before the
External Distribution, and (ii) will not become fixed and ascertainable until
after the External Distribution, will be treated as occurring immediately
before the External Distribution, except for purposes of section 355(g).
CAVEATS
Except as expressly provided herein, no opinion is expressed or implied concerning the
tax treatment of the Proposed Transactions under any other provisions of the Code or
regulations or the tax treatment of any conditions existing at the time of, or effects
resulting from, the Proposed Transactions that are not specifically addressed by this
letter.
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 ruling letter must be attached to any federal 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 (PLR-116841-22) of this ruling letter.
PLR-116841-22 22
In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.
Sincerely,
Jonathan R. Neuville
Senior Technician Reviewer, Branch 1
Office of Associate Chief Counsel (Corporate)
cc:
Get today's answer for your situation
You just read what the IRS ruled for one taxpayer in 2023, and it can't be cited as precedent. Ezel checks the current Internal Revenue Code and IRS guidance and answers your specific situation, with citations.
Opens in Ezel Pro. Every answer cites the authority it relies on.