Private Letter Ruling
202330002
Released July 28, 2023
Approved
Tax-free spin-off of one business line, funded by a debt-for-equity exchange with investment banks
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.
Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.
About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.
View official IRS release (PDF)
Plain-English summary
A publicly traded parent company (Distributing) wanted to separate one of its
four business lines into a new standalone public company (Controlled) without
triggering corporate or shareholder-level tax. It did this through the classic
"spin-off" structure: Distributing contributed the assets of that business to
Controlled in exchange for Controlled stock (a reorganization under section
368(a)(1)(D)), then distributed the Controlled stock to its own shareholders
under section 355. The deal also used a "debt-for-equity exchange," in which
Controlled took on new debt and Distributing used retained Controlled shares to
pay off old third-party debt by handing the shares to investment banks, with
true-up or forward pricing mechanisms to set final value. The IRS issued 19
rulings confirming the tax-free treatment: no gain or loss to Distributing,
Controlled, or the shareholders on the contribution and distribution (sections
361, 1032, 355), carryover basis and holding periods, and that an intermediate
merger qualifies as a section 332 liquidation. As always, the IRS did not rule
on the business-purpose, device, or section 355(e) "anti-Morris-Trust"
questions, which are left to examination.
Ruling snapshot
- Question: Do the contribution, distribution, and related debt-for-equity exchange qualify as a tax-free section 368(a)(1)(D)/355 spin-off?
- Outcome: Approved (19 rulings; favorable)
- Key authorities: IRC §§ 355, 368(a)(1)(D), 361, 357, 362, 358, 1223, 312(h), 332, 1032, 1504
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 202330002 Third Party Communication: None
Release Date: 7/28/2023 Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-00, 368.00-
00, 368.04-00, 361.00-00, Person To Contact:
361.02-02 ------------------------------, ID No. -----------
Telephone Number:
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Distributing = --------------------------------------
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Controlled = ---------------------------------------
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New DRE = ----------------------------------
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DRE 1 = ----------------------------------
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Business A = -----------------------------------------------------------------------------------
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Sub 1 Third Party Debt = -----------------------------------------------------------------------------------
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DRE 1 Third Party Debt = -----------------------------------------------------------------------------------
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Controlled Equity = -----------------------------------------------------------------------------------
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Intercompany Sub 5 = -----------------------------------------------------------------------------------
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Potential Business D = -----------------------------------------------------------------------------------
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Refinancing Debt = -----------------------------------------------------------------------------------
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Distributing = -----------------------------------------------------------------------------------
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Dear -------------:
This letter responds to your representatives’ letter, dated December 20, 2022, as
supplemented by subsequent information and documentation (the “Ruling Request”),
requesting rulings on certain federal income tax consequences of a series of transactions
(the “Proposed Transaction” defined below). The material information submitted in the
Ruling Request is summarized below.
This letter is issued pursuant to Rev. Proc. 2022-10, 2022-6 I.R.B 473, and 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 section 355 and section
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 332
of the Code. This office expresses no opinion as to any issue not specifically addressed
by the rulings below.
The rulings contained in this letter are based on facts and representations submitted by
the taxpayer and accompanied by a penalties of perjury statement executed by an
appropriate party. This office has not verified any of the materials submitted in support of
the 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 (as 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).
PLR-100336-23 8
Summary of Facts
Distributing, a publicly traded corporation, is the parent of a group of domestic entities
and the common parent of an affiliated group of corporations that join in filing a
consolidated U.S. federal income tax return (the “Distributing Group”). As of Date 1,
Distributing has a single class of voting common stock issued and outstanding. The
Distributing Group currently conducts Business A, Business B, Business C, and Business
D.
Distributing directly owns 100% of the stock of Sub 1 and 100% of the equity interests in
DRE 1;
DRE 1 owns 100% of the stock of Sub 2 and 100% of the equity interests in DRE 2 and
DRE 3;
DRE 2 owns 100% of the stock of Sub 3 and DRE 3 owns 100% of the stock of Sub 4;
Sub 1 owns 100% of the equity interests of DRE 4 and 100% of the stock of Sub 5, Sub
6, and Sub 7;
DRE 4 owns 100% of the stock of Sub 8 and Sub 9; and
Sub 5 owns 100% of the stock of Sub 10. In turn, Sub 10 owns 100% of the stock of Sub
11, which owns approximately x shares of Distributing’s outstanding common stock
representing approximately y percent of the total number of shares of Distributing stock
outstanding as of Date 1.
Sub 2, Sub 3, and Sub 4 are the principal Distributing Group members that conduct
Business A. Sub 5 is the parent of a subgroup of entities that conduct Business B. Sub 6
is the parent of a subgroup of entities that conduct Business D. Sub 7 is the parent of a
subgroup of entities that conduct Business C.
For purposes of satisfying the active trade or business requirements of section 355(b)
with respect to the Distribution, Distributing and members of its “separate affiliated group”
within the meaning of Section 355(b)(3) (the “Distributing SAG”) will rely on Business A
and Controlled and members of its separate affiliated group (the “Controlled SAG”) will
rely on Business B. Distributing has submitted financial information in accordance with
Rev. Proc. 2017-52 indicating that Business A and Business B have had gross income
and employee wages representing the active conduct of a trade or business for each of
the past five years.
In connection with the Initial Distribution (defined below), some of the Distributing Equity
Awards are expected to convert into Controlled Equity Awards.
PLR-100336-23 9
As of Date 2, the Distributing Group had the following debt outstanding (collectively, the
“Third Party Debt”): (a) the Sub 1 Third Party Debt and (b) DRE 1 Third Party Debt.
References to Third Party Debt, and references to Sub 1 Third Party Debt, include
references to any Refinancing Debt and to any Sub 1 Third Party Debt assumed by New
DRE in the Merger (defined below). The Distributing Group will not segregate or otherwise
trace the proceeds of any Refinancing Debt.
Proposed Transaction
In connection with the Contribution (defined below), members of the Distributing Group
may engage in additional internal separation transactions to assure that assets and
liabilities are appropriately aligned with the Distributing Group or Controlled SAG, as the
case may be, following the Proposed Transaction.
For what are represented to be valid corporate business purposes, Distributing proposes
to separate Business B from its other businesses through the following steps, one or more
of which have been completed, subject to the Potential Business D Impacts (the
“Proposed Transaction”).
Step 1: Distributing forms Controlled, a corporation with a single class of common stock
outstanding.
Step 1.1: Sub 1 forms New Sub as a corporation or limited liability company (taxed as a
corporation) with a single class of equity outstanding and Sub 1 contributes the minimum
capital required to form a new captive insurance company to New Sub. Certain liabilities
and assets associated with Business B are transferred from Sub 9 to New Sub.
Step 2: Distributing may contribute cash to Controlled to the extent the required escrow
is greater than the net proceeds of the bond issuance, both as described in Step 3 (the
“Cash Contribution”).
Distributing’s contribution of cash, if any, to Controlled in Step 2 is expected to be
relatively small in comparison to the amount borrowed in Step 3.
Step 3: Controlled issues bonds (the “Bonds”), if desired, and deposits the proceeds,
along with cash from Step 2, into an escrow account (the “Escrow Account”).
Alternatively, or in addition, Controlled may obtain a financing commitment with respect
to one or more term loans (collectively, the “Term Loan”) and/or revolving credit facilities
(the “Revolver”, and together with the Term Loan, the “Bank Facilities”). The timing of this
step will depend on capital market conditions, and may occur at any time prior to Step 9.
Step 4: Distributing forms New DRE, a limited liability company disregarded as an entity
separate from Distributing for U.S. federal income tax purposes. This step may occur prior
to Step 2 or 3.
Step 5: Sub 1 merges with and into New DRE, with New DRE surviving (the “Merger”).
PLR-100336-23 10
Step 6: Sub 8 transfers (i) certain real property, IT assets, and other miscellaneous
assets, if any (“collectively the Sub 8 Asset Transfers”), in one or more transactions to
which section 1001 applies and (ii) cash to Sub 5 in settlement of certain intercompany
balances. The Sub 8 Asset Transfers may occur at any time prior to Step 7.
Step 7: New DRE distributes the stock of Sub 5 and any other assets held by New DRE
related to Business B, including the equity of New Sub but excluding any Intercompany
Sub 5 Receivables to be repaid in Step 11 below (collectively, the “New DRE Business B
Assets”), to Distributing.
Step 8: Distributing contributes (i) the New DRE Business B Assets, and (ii) certain assets
held by Distributing related to Business B (collectively, the “Transferred Assets”) to
Controlled in constructive exchange for additional Controlled common stock to be issued
pursuant to Step 8.1 and the assumption of liabilities, if any, associated with the
Transferred Assets (the “Assumed Liabilities” and such contribution, together with the
Cash Contribution, the “Contribution”). In connection with the Contribution, certain
employees are transferred from Distributing to Controlled.
Step 8.1: Distributing will cause Controlled to issue additional Controlled common stock
through a recapitalization or other form of issuance such that the amount of Controlled
common stock outstanding is sufficient for the Initial Distribution, the Specified
Distribution, and any Retention.
Step 9: Controlled receives the cash from the Escrow Account and may draw down on
the Bank Facilities, if desired (collectively, the “Debt Proceeds”).
Step 10: Controlled lends or contributes the Debt Proceeds to Sub 5 in an amount not
exceeding the aggregate issue price of the Bonds and Bank Facilities.
Step 11: Sub 5 repays the Intercompany Sub 5 Receivables owing to New DRE in an
amount equal to the amount transferred to Sub 5 in Step 10 less any working capital
needs (the “Net Debt Proceeds”). New DRE will not segregate or otherwise trace the use
of the Net Debt Proceeds received in this Step 11. Sub 5 may make additional repayments
of the Intercompany Sub 5 Receivables with other intercompany receivables due to Sub
5.
Step 12: New DRE repays Sub 1 Third Party Debt, including principal, interest, premium
(if any), and associated fees, with the Net Debt Proceeds received in Step 11. It is
possible that Step 12 may occur after Step 13, depending on the specific Sub 1 Third
Party Debt to be repaid, the prepayment provisions thereof, and the circumstances
existing at the time.
Step 13: Distributing distributes at least a percent (a number in excess of 80 percent) of
its Controlled stock pro rata to its shareholders other than Sub 11 (collectively, the
“Distributing Shareholders” and such distribution, the “Initial Distribution”), and distributes
Controlled stock to Sub 11 in the Specified Distribution. Distributing plans to retain up to
PLR-100336-23 11
b percent of its Controlled stock (the “Retention” and such shares, the “Remaining
Shares”).
Collectively, the Initial Distribution, the Debt-for-Equity Exchange (defined below), and
any Clean-up Distribution (defined below) constitute the “Distribution”, and together with
the Contribution, the “Spin-Off.”
Step 13.1: To the extent that the Sub 1 Third Party Debt exceeds or is expected to exceed
the Net Debt Proceeds, any remaining debt (the “Remaining Sub 1 Third Party Debt”) will
be refinanced by either New DRE or Distributing (i.e., the proceeds from such refinancing
will be used to repay the Remaining Sub 1 Third Party Debt). This step may occur any
time after the Merger. Any refinancing by Distributing directly through its own revolving
credit facility, term loans, or bonds is referred to as the “Distributing Refinancing,” and
such refinanced debt is referred to as the “Distributing Refinanced Debt” and is included
in Refinancing Debt.
Step 13.2: After the Initial Distribution, Sub 5 and Controlled will change their names. This
step may instead occur immediately before the Initial Distribution.
Step 14: If Remaining Sub 1 Third Party Debt will be refinanced by New DRE and not
Distributing, Distributing contributes all or a portion of the Remaining Shares, if any, to
New DRE.
Step 15: Within c months of the Initial Distribution, New DRE (or Distributing in the case
of a Distributing Refinancing) issues short-term debt (“Short Term Debt”), with a maturity
date of less than c months, to one or more investment banks (the “Investment Banks”)
based upon the anticipated fair market value of the Remaining Shares. New DRE (or
Distributing in the case of a Distributing Refinancing) uses the Short Term Debt proceeds
to repay the Remaining Sub 1 Third Party Debt or Distributing Refinanced Debt (as
applicable), including principal, interest, premium (if any), and associated fees. The total
amount of Sub 1 Third Party Debt, Remaining Sub 1 Third Party Debt and/or Distributing
Refinanced Debt repaid in Step 12 and Step 15 will not exceed the amount of Sub 1 Third
Party Debt outstanding on Date 2.
Distributing will not segregate or otherwise trace the use of the cash proceeds of the
Short-Term Debt. The repayment of Remaining Sub 1 Third Party Debt may occur on the
same day as the issuance of the Short-Term Debt or may occur at a later date no later
than c months following such issuance. Steps 15 and 16 may occur in a single tranche or
more than one tranche over the c month period after the Initial Distribution. Any references
to Sub 1 Third Party Debt and/or Refinancing Debt include references to Short-Term
Debt.
Step 16: At least one day after the issuance of the Short Term Debt, Distributing and the
Investment Banks will enter into an exchange agreement (the “Debt-for-Equity Exchange
Agreement”) pursuant to which New DRE (or Distributing in the case of a Distributing
Refinancing) exchanges some or all of the Remaining Shares (the “Transferred Shares”)
PLR-100336-23 12
in satisfaction of the Short Term Debt held by the Investment Banks (the “Debt-for-Equity
Exchange”).
Under the Debt-for-Equity Exchange Agreement, Distributing and the Investment Banks
may include a variable pricing mechanism with respect to the disposition of the
Transferred Shares (collectively, the “Variable Pricing Agreements”). In all cases, the
Debt-for-Equity Exchange Agreement, including the Variable Pricing Agreements, will be
entered into and the Transferred Shares will be transferred to the Investment Banks in
satisfaction of the Short Term Debt within c months of the Initial Distribution.
The Variable Pricing Agreements are expected to take the form of either a True-Up
Payment (defined below) or a Forward Exchange Agreement (defined below).
If the pricing mechanism for the Transferred Shares takes the form of a True-Up Payment,
then either the Investment Banks will make a payment to Distributing or Distributing will
make a payment to the Investment Banks (each a “True-Up Payment).
(a) While the exchange ratio for the Debt-for-Equity Exchange will be fixed on the date
that the parties enter into the Debt-for-Equity Exchange Agreement (the “Initial
Price”), the True-Up Payment is expected to be based on the difference between
(i) the reference price, as determined below, (the “Reference Price”) and (ii) the
Initial Price.
(b) The Reference Price is the average daily volume-weighted average price per share
of Controlled shares beginning one day after the Debt-for-Equity Exchange,
through a subsequent specified date no later than c months after the Initial
Distribution, plus or minus an agreed upon spread. The latest permissible period
of time used to determine the Reference Price will be set such that in no event will
any True-Up Payment occur more than c months after the date of the Initial
Distribution.
(c) If the Initial Price exceeds the Reference Price, Distributing or New DRE will pay
the Investment Banks (the “Distributing True-Up Payment”).
(d) If the Reference Price exceeds the Initial Price, the Investment Banks will pay
Distributing or New DRE. Any True-Up Payment made by the Investment Banks
to Distributing may be made in cash (the “Bank True-Up Cash Payment”) or the
surrender of Third Party Debt (the “True-Up Debt Settlement”). Additionally, in the
case of a True-Up Debt Settlement, the Investment Banks will acquire the Third
Party Debt as a principal acting for its own account.
Alternatively, under the Debt-for-Equity Exchange Agreement, Distributing and the
Investment Banks may enter into a forward exchange agreement (“Forward Exchange
Agreement”), pursuant to which:
(a) The Investment Banks would agree to acquire the Transferred Shares from
Distributing at the end of a period not to exceed c months following the Initial
Distribution (such period, the “Measurement Period” and such acquisition date, the
“Forward Exchange Closing Date”), in exchange for the Exchange Value (defined
PLR-100336-23 13
below), provided that the Measurement Period shall end no later than c months
following the date of the Initial Distribution. The Exchange Value is an amount per
share equal to the average daily volume-weighted average price per share of
Controlled shares over the Measurement Period, plus or minus an agreed upon
spread (the “Exchange Value”).
(b) On the Forward Exchange Closing Date, the Investment Banks would deliver the
Exchange Value to Distributing through a full or partial offset of Distributing's
obligation to pay the outstanding principal amount on the Short-Term Debt (which
may have up to a c month term in a scenario in which a Forward Exchange
Agreement is pursued).
(c) If the Exchange Value exceeds the outstanding principal amount of the Short-Term
Debt, then the Investment Banks will either pay to Distributing or New DRE, cash
in an amount equal to the excess over the outstanding principal amount of the
Short Term Debt (the “Bank Forward Contract Cash Payment”, together with the
Bank True-Up Cash Payment, the “Bank Cash Payment”) or the Investment Banks
will purchase on the open market all or a portion of the Third Party Debt and
surrender the Third Party Debt in extinguishment thereof (the “Forward Contract
Debt Settlement”, together with the True-Up Debt Settlement, the “Debt
Settlement”).
(d) If the outstanding principal amount of the Short-Term Debt exceeds the Exchange
Value, then Distributing or New DRE will pay to the Investment Banks an amount
of cash equal to such excess (the “Distributing Forward Contract Payment,”
together with the Distributing True-Up Payment, the “Distributing Shortfall
Payment”).
(e) During the Measurement Period, Distributing might pledge the Transferred Shares
as collateral to secure Distributing’s obligations under the Forward Exchange
Agreement, which shares the Investment Banks would hold in a pledge account.
Alternatively, during the Measurement Period, Distributing might not pledge such
Transferred Shares, and in such a case, it might or might not hold the Transferred
Shares at one or more securities accounts with one or more of the Investment
Banks.
(f) The Investment Banks may receive the right to sell, lend, pledge, assign, invest,
use, commingle or otherwise dispose of, or otherwise use in its business
(“Rehypothecate”) the Transferred Shares during the period they would otherwise
be held in the pledge account, provided that, if the Investment Banks exercise such
right with respect to any of the Transferred Shares, the Investment Banks generally
would be required to replace such Transferred Shares with other shares of
Controlled stock on or before the Forward Exchange Closing Date, except to the
extent the parties agree to offset the replacement value of the Transferred Shares
against the Short-Term Debt.
Step 17: Distributing distributes all or a portion of the Remaining Shares not exchanged
in the Debt-for-Equity Exchange via either a pro rata distribution to the Distributing
Shareholders (the “Clean-up Spin-Off Distribution”) and/or as part of a non-pro rata
exchange offer for Distributing’s shares (the “Clean-up Split-off Distribution”, together with
PLR-100336-23 14
the Clean-up Spin-Off Distribution, the “Clean-up Distribution”). The Clean-up
Distribution, if any, will occur within c months after the Initial Distribution. Alternatively,
Distributing may sell all or a portion of the Remaining Shares to third-party investors, no
later than five years after the Initial Distribution in a taxable disposition.
In connection with the Proposed Transaction, Distributing and Controlled (or their
respective affiliates, if applicable) will enter into certain Continuing Arrangements. In
addition, Controlled may issue Controlled Equity Awards, pursuant to the conversion of
Distributing Equity Awards or otherwise.
Representations
Merger Representations
1. Assuming that the transfer of the New DRE Business B Assets by Distributing to
Controlled in the Contribution is not a prohibited reincorporation of Sub 1’s assets,
the Merger will be a transaction to which Section 332 will apply.
2. Other than the Contribution, the Merger will not be preceded or followed by the
reincorporation in, or transfer or sale to, a recipient corporation, of more than 30
percent of the businesses or assets of Sub 1, if persons who hold, directly or
indirectly, more than 20 percent in value of the stock of Sub 1 also hold, directly or
indirectly, more than 20 percent of the stock of such recipient corporation.
Rev. Proc. 2017-52 Representations
Except as set forth below, Distributing makes all of the representations in Section 3 of the
Appendix to Rev. Proc. 2017-52 in the form set forth therein.
Distributing did not make the following representations, which do not apply to the
Proposed Transaction: 19, 20, 24, 25, 39 and 40.
Distributing makes the following alternative representations: 3(a), 22(a), 31(a), and 41(a).
Distributing has made the following modified representations:
1. With respect to Representations 1, 4, 12, 15(b), 21, 27, 28, 30, and 36 Distributing
makes such representation, except that any reference to the “Distribution” refers
to the “Initial Distribution,” and with respect to Representation 21, any reference to
the “transaction” refers to the “Initial Distribution.”
2. Representation 2: In the Initial Distribution, Distributing will distribute to the
Distributing Shareholders on the same day at least a percent of the stock of
Controlled outstanding immediately before the Initial Distribution (determined
PLR-100336-23 15
without regard to any Equity Awards and any Controlled shares underlying, or
issued following the Initial Distribution pursuant to, any Equity Awards).
3. Representation 5: Other than the Remaining Shares transferred in the Debt-for-
Equity Exchange, none of the Controlled stock, Controlled securities, or Other
Property to be distributed in the Distribution will be received in any capacity other
than that of a shareholder of Distributing (e.g., as a creditor or employee).
4. Representation 6: No Distributing Shareholder will surrender Distributing stock in
the Distribution, other than in the Clean-up Split-off, if any.
5. Representation 8(b): Distributing may have 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 in
satisfaction of a portion of the Third Party Debt pursuant to the Debt Settlement, if
any.
6. Representation 11(a): Following the Initial Distribution, Distributing or the
Distributing SAG and Controlled or the Controlled SAG each will continue,
independently and with its separate employees, the active conduct of the business
on which it relies to meet the active trade or business requirement of Section
355(b), except with respect to activities performed pursuant to the Continuing
Arrangements.
7. Representation 32: No intercorporate debt will exist between Distributing and
Controlled at the time of, or subsequent to, the Initial Distribution of Controlled
stock, except for any debt arising under the Continuing Arrangements and/or
ordinary course payables and receivables.
8. Representation 33: Payments made in connection with all continuing transactions,
if any, between Distributing and Controlled after the Initial Distribution will be for
fair market value based on arm's-length terms, except as otherwise described in
connection with the Continuing Arrangements.
9. Representation 34: Other than pursuant to the Continuing Arrangements,
Distributing and Controlled each will pay its own expenses, if any, incurred in
connection with the Distribution.
10. Representation 35: The payment of cash in lieu of fractional shares of Controlled
is solely for the purpose of avoiding the expense and inconvenience of issuing
fractional shares and does not represent separately bargained-for consideration.
The fractional share interests of each Distributing Shareholder will be aggregated
PLR-100336-23 16
and no Distributing Shareholder of record will receive cash in an amount equal to
or greater than the value of one full share of Controlled (with the possible exception
of shareholders who hold Controlled stock in multiple accounts or with multiple
brokers).
11. Representation 37: Other than certain property transferred pursuant to the Sub 8
Asset Transfers, there is no loss subject to § 1.1502-13 that will be taken into
account as a result of a transaction related to the Distribution.
12. Representation 45: Other than pursuant to the Specified Distribution, Distributing
will not dispose of any Controlled stock in anticipation of the Distribution.
13. Representation 46: Other than any issuance of the Bonds, Controlled will not issue
stock or securities to a person other than Distributing in anticipation of the
Distribution.
Rev. Proc. 2018-53 Representations
With respect to the representations provided in section 3 of Rev. Proc. 2018-53,
Distributing makes each such representation, modified as provided below.
With respect to Representations 2 and 5, Distributing makes such representation, except
that any reference to the “Distributing Debt” shall refer to the “Third Party Debt.”
1. Representation 1: For U.S. federal income tax purposes, Distributing is in
substance the obligor of any Assumed Liabilities constituting Distributing Debt
(within the meaning of Rev. Proc. 2018-53) that will be assumed in the Contribution
and the Third Party Debt that will be satisfied in the Debt-for-Equity Exchange.
2. Representation 3:
a. The holder of any Assumed Liabilities constituting Distributing Debt (within the
meaning of Rev. Proc. 2018-53) that will be assumed in the Contribution and
the Third Party Debt that will be satisfied in the Debt-for-Equity Exchange will
not hold the debt for the benefit of Distributing, Controlled, or any Related
Person.
b. In the event of a Debt Settlement made in the form of Third Party Debt, the
Investment Banks will not acquire such Third Party Debt from Distributing,
Controlled, or any Related Person.
c. Neither Distributing, nor Controlled, nor any Related Person will participate in
any profit gained by the Investment Banks upon an exchange of § 361
Consideration; nor will any such profit be limited by agreement or other
PLR-100336-23 17
arrangement, except as otherwise provided pursuant to the Debt-for-Equity
Exchange Agreement.
d. The value of the § 361 Consideration received by the Investment Banks in
satisfaction of the Third Party Debt will not exceed the amount to which the
holder is entitled under the terms of the Third Party Debt, except as otherwise
provided pursuant to the Debt-for-Equity Exchange Agreement.
3. Representation 4: Except with regard to the Refinancing Debt (including the Short-
Term Debt), Sub 1 or Distributing incurred the Third Party Debt that will be repaid
in Step 15 or exchanged in Step 16 (the "Historic 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 §
1.355-7(h)(10)) of the Divisive Reorganization or a similar transaction, (ii) the date
of the entry by Distributing into a binding agreement to engage in the Divisive
Reorganization or a similar transaction, and (iii) the date of approval of the Divisive
Reorganization or a similar transaction by the board of directors of Distributing
(currently expected to be Date 3) (the "Relevant Dates"). Distributing incurred any
Historic Debt that was Sub 1 Third Party Debt for U.S. federal income tax purposes
as a result of the Merger.
4. Representation 6: There are one or more substantial business reasons for any
delay in satisfying Third Party Debt with § 361 Consideration beyond 30 days after
the date of the first distribution of Controlled stock to Distributing's Shareholders.
All the Third Party Debt that will be satisfied with § 361 Consideration will be
satisfied as soon as practicable following the Initial Distribution and, in any event,
no later than c months after the Initial Distribution.
5. Representation 7: Distributing will not replace any of the Assumed Liabilities
constituting Distributing Debt (within the meaning of Rev. Proc. 2018-53) that will
be assumed in the Contribution or any Third Party Debt, or Refinancing Debt
(including Short Term Debt) that will be satisfied in the Debt-for-Equity Exchange
with previously committed borrowing, other than borrowing in the ordinary course
of business pursuant to a revolving credit agreement or similar arrangement.
Other Representations
1. Distributing's retention of any Remaining Shares is motivated by the Retention
Business Purpose.
2. None of Distributing's directors or officers will serve as directors or officers of
Controlled as long as Distributing retains any Remaining Shares.
3. The Remaining Shares will be disposed of as soon as a disposition is warranted
consistent with the Retention Business Purpose, but, in any event, not later than
five years from the Initial Distribution.
PLR-100336-23 18
4. Distributing will vote, or cause to be voted, any Remaining Shares in proportion to
the votes cast by Controlled's other shareholders.
5. Distributing will recognize an amount of gain on any Bank Cash Payment from the
Investment Banks to Distributing equal to the lesser of (a) the amount of cash
received or (b) the amount of gain that would have been realized if a proportionate
amount of the Transferred Shares had been sold in a taxable transaction.
6. Distributing will treat any Distributing Shortfall Payment from Distributing to the
Investment Banks as made in exchange for the Short-Term Debt.
Rulings
Based solely on the information submitted and the representations set forth above, we
rule as follows:
The Merger
1. The transfer of the New DRE Business B Assets by Distributing to Controlled in
the Contribution will not preclude the Merger from qualifying as a “complete
liquidation” within the meaning of Section 332.
The Spin-Off
2. The Contribution, together with the Distribution, will be a “reorganization” within the
meaning of sections 368(a)(1)(D) and 355. Distributing and Controlled will each be
a “party to a reorganization” within the meaning of Section 368(b).
3. Distributing will recognize no gain or loss on the Contribution. Sections 361(a) and
357(a).
4. Controlled will recognize no gain or loss on the Contribution. Section 1032(a).
5. 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).
6. Controlled’s holding period for each asset received in the Contribution will include
the period during which Distributing held such asset. Section 1223(2).
7. The Distributing Shareholders will recognize no gain or loss (and no amount will
be includible in income) upon the receipt of Controlled stock in the Initial
Distribution or any Clean-Up Distribution under Section 355(a).
8. Distributing will recognize no gain or loss upon the Initial Distribution or any Clean-
Up Distribution. Section 361(c).
PLR-100336-23 19
9. Distributing will recognize no gain or loss, or deductions or items of income, on the
Debt-for-Equity Exchange, other than (i) an amount of gain on any Bank Cash
Payment equal to the lesser of: (a) the amount of cash received, or (b) the amount
of gain that would have been realized if a proportionate amount of the Transferred
Shares had been sold in a taxable transaction, (ii) deductions attributable to the
fact that the Short-Term Debt (or Third Party Debt, if any, transferred by the
Investment Banks as a Debt Settlement) may be redeemed at a premium, (iii)
income attributable to the fact that the Short-Term Debt (or any such Third Party
Debt) may be redeemed at a discount, and (iv) interest expense accrued with
respect to the Short-Term Debt (or any such Third Party Debt). Section 361(c).
10. Any Debt Settlement paid within c months of the Initial Distribution will be treated
as part of the Debt-for-Equity Exchange. Section 361(c).
11. The aggregate basis of the Distributing common stock and the Controlled stock in
the hands of any Distributing Shareholder receiving Controlled stock in the Initial
Distribution or any Clean-Up Spin-Off Distribution (including any fractional share
interest in Controlled stock to which a shareholder may be entitled) will equal the
aggregate basis of the Distributing common stock held by such Distributing
Shareholder immediately before the Initial Distribution or Clean-Up Spin-Off
Distribution, respectively, allocated between Distributing stock and Controlled
stock in proportion to the fair market value of each in accordance with Treas. Reg.
§ 1.358-2(a)(2). Section 358(a) through (c).
12. The aggregate basis of the Controlled stock in the hands of any Distributing
Shareholder who exchanges Distributing stock for Controlled stock (including any
fractional share interest in Controlled stock to which a shareholder may be entitled)
in a Clean-up Split-off Distribution, if any, will be the same as the basis of the
Distributing stock surrendered in each such exchange and will be allocated among
the shares received in the manner described in Reg. § 1.358-2(a). Section
358(a)(1) and (b)(1).
13. The holding period of the Controlled stock received by each Distributing
Shareholder in the Initial Distribution or Clean-Up Distribution (including any
fractional share interest in Controlled stock to which shareholders may be entitled)
will include the holding period of the Distributing common stock held by each
Distributing Shareholder with respect to which the Initial Distribution or any Clean-
Up Distribution will be made, provided that the Distributing common stock is held
as a capital asset on the date of the Initial Distribution or Clean-Up Distribution,
respectively. Section 1223(1).
14. Earnings and profits will be allocated between Distributing and Controlled in
accordance with Section 312(h) and Treas. Reg. §§ 1.312-10(a) and 1.1502-33(e).
15. Distributing’s continuing ownership of any Remaining Shares until Distributing’s
disposition no later than five years after the Initial Distribution will not adversely
PLR-100336-23 20
impact the qualification of the Contribution and Distribution 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 U.S. federal income tax for purposes of section
355(a)(1)(D)(ii) and Treas. Reg. § 1.355-2(e).
16. 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 Initial Distribution or for a taxable year beginning before
and ending after the Initial Distribution, and (ii) will not become fixed and
ascertainable until after the Initial Distribution will be characterized in a manner
consistent with the proper treatment if such payments or transfers had occurred
immediately before the Initial Distribution pursuant to the Spin-Off. See Arrowsmith
v. Commissioner, 344 U.S. 6 (1952) and Revenue Ruling 83-73, 1983-1 C.B. 84.
17. The receipt by any Distributing Shareholder of cash in lieu of fractional shares, if
any, of Controlled stock will be treated for U.S. federal income tax purposes as if
the fractional shares had been distributed to the Distributing 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 11), 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
provided in Ruling 13.
18. Following the Initial 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 U.S. federal income tax return
with Controlled as the common parent.
19. Equity Awards currently outstanding and any Equity Awards issued in connection
with or after the Initial Distribution (and any Controlled shares underlying, or issued
following the Initial Distribution pursuant to, any such Equity Awards) will not be
taken into account (i.e., will not be included in the numerator or the denominator)
for purposes of determining whether Distributing distributed an amount of
Controlled stock constituting control under section 368(c).
Caveats
Except as expressly provided herein, no opinion is expressed or implied as to: (i) the tax
treatment of any Continuing Arrangement that is not entered into on an arm’s-length or
cost-plus basis, or (ii) the tax treatment of the Proposed Transaction under any provision
of the Code and regulations or the tax treatment of any conditions existing at the time of,
PLR-100336-23 21
or effects resulting from the Proposed Transaction that are not specifically covered by the
above rulings.
Procedural Statements
This ruling is directed only to the taxpayer requesting 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 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 return that provides the date and control number of the letter
ruling.
Sincerely,
_____________________________________
Richard K. Passales
Senior Counsel, Branch 4
Office of Associate Chief Counsel (Corporate)
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