Tax-free treatment approved for multinational business spin-off

Plain-English summary

A foreign public company proposed separating one business into a new publicly traded company. Before the pro rata spin-off, U.S. group members would move specified operating assets into a U.S. subsidiary, and the parent would transfer the separated business to the new company. Based on the submitted facts and representations, the IRS ruled that the parent and its shareholders would generally recognize no gain or income from the distribution, with standard basis, holding-period, and earnings-and-profits consequences. It also ruled that possible retention of shares through special-purpose entities would not violate the section 355 tax-avoidance rule on the stated facts. Gain on specified depreciable or amortizable asset transfers would not become ordinary income under section 1239 because the parties would not remain related after the transaction.

Ruling snapshot

• Question: What federal tax consequences apply to the proposed multinational business spin-off and its preparatory asset transfers?
• Outcome: Approved on the seven specific ruled issues
• Key authorities: IRC §§ 312, 355, 358, 361, 1223, and 1239; Treas. Reg. §§ 1.312-10, 1.355-2, 1.358-2, and 1.1502-13

Full text (IRS public release)

Internal Revenue Service                                    Department of the Treasury
                                                            Washington, DC 20224

Number: 202347004                                           Third Party Communication: None
Release Date: 11/24/2023                                    Date of Communication: Not Applicable
Index Number: 355.01-00
                                                            Person To Contact:
---------------------                                       -----------------, ID No. -----------------
-------------------------------------------                 Telephone Number:
----------------                                            ---------------------
--------------------                                        Refer Reply To:
----------------------------------------                    CC:CORP:1
                                                            PLR-102903-23
                                                            Date:
                                                            June 02, 2023




Legend

Parent                                        =   ----------------------------------------------------
                                                  ----------------------------------------------------
                                                  ------------------------

Controlled                                    =   ----------------------------------------------------
                                                  ----------------------------------------------------
                                                  ------------------------

DRE 1                                         =   ----------------------------------
                                                  ------------------------------------------------

US Parent                                     =   ----------------------------
                                                  --------------------------------
                                                  -----------------------

US Sub 1                                      =   ---------------------------------------
                                                  -------------------------------
                                                  ------------------------

US Sub 2                                      =   ---------------------------------------------------
                                                  -------------------------------
                                                  ------------------------

US OpCo                                       =   ----------------
                                                  -------------------------------
                                                  ------------------------
PLR-102903-23                       2


State A                    =   -------------

State B                    =   -------------

Country Z                  =   ----------------

Parent Business            =   ------------------------------------

Controlled Business        =   ----------------------------------------------------
                               --------------

Specified Assets           =   ----------------------------------------------------
                               ----------------------------------------------------
                               ----------------------------------------------------
                               ----------------------------------------------------
                               ----------------------------------------------------
                               ----------------------------------------------------
                               ----------------------------------------------------
                               ---------------------------------------

Applicable Foreign Law     =   ----------------------------------------------------
Requirement                    ----------------------------------------------------
                               -------------------------------------------------

x                          =   --

Special Purpose Entities   =   ----------------------------------------------------
                               ----


Purposes                   =   ----------------------------------------------------
                               ----------------------------------------------------
                               ----------------------------------------------------
                               ----------------------------------------------------
                               ----------------------------------------------------
                               ----------------------------------------------------
                               ----------------------------------------------------
                               ----------------------------------------------------
                               ----------------------------------------------------
                               ----------------------------------------------------
                               ----------------------------------------------------
                               ----------------------
PLR-102903-23                                 3


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

This letter responds to your letter dated February 6, 2023, and subsequent
correspondence, on behalf of Parent and its subsidiaries requesting rulings on certain
U.S. federal income tax consequences of a series of proposed transactions (collectively,
the “Proposed Transaction”). The material information submitted in that request and
subsequent correspondence is summarized below.

This letter is issued pursuant to Rev. Proc. 2023-1, 2023-1 I.R.B. 1, 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 a Transactional Ruling
for a Covered Transaction. 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 request for rulings. Verification of the information, representations and other data
may be required as part of the audit process.

This office has made no determination regarding whether each of the distributions in the
Proposed Transaction: (i) satisfies the business purpose requirement of Treas. Reg.
§ 1.355-2(b); (ii) is used principally as a device for the distribution of the earnings and
profits of the distributing corporation or the controlled corporation or both (see section
355(a)(1)(B) and Treas. Reg. § 1.355-2(d)); or (iii) is part of a plan (or series of related
transactions) pursuant to which one or more persons will acquire directly or indirectly
stock representing a 50-percent or greater interest in the distributing corporation or the
controlled corporation, or any predecessor or successor of the distributing corporation or
the controlled corporation, within the meaning of Treas. Reg. § 1.355-8 (see section
355(e)(2)(A)(ii) and Treas. Reg. § 1.355-7).

                                    SUMMARY OF FACTS

Parent is a Country Z publicly traded corporation with subsidiaries in multiple countries
engaged in the Parent Business and the Controlled Business.

Controlled is a newly formed Country Z corporation that will become the publicly traded
holding company for the Controlled Business.

US OpCo, a State A corporation, is an operating company that holds substantially all of
the US portion of the Controlled Business (the “US Controlled Business”). US Sub 1
owns all of the stock of US OpCo.

US Sub 1, a State B corporation, is primarily a holding company that holds subsidiaries
PLR-102903-23                                 4

operating the US portion of the Parent Business and Controlled Business. US Sub 1
owns all the interests in DRE 1, a State A entity that is a disregarded entity, and all of
the stock of US Sub 2, a State A corporation. DRE 1 and US Sub 2 hold certain
Specified Assets related to the US Controlled Business. US Sub 1, US Sub 2 and US
OpCo are all members of the same US affiliated group of which US Parent is the
common parent (the “US Affiliated Group”). US Parent owns all of the stock of US Sub

1. Parent indirectly owns all of the stock of US Parent.

For what are represented to be valid business purposes, Parent has decided to separate
the Controlled Business from the Parent Business into a stand-alone publicly traded
corporation.
                                PROPOSED TRANSACTION

       (i)    Each of DRE 1 and US Sub 2 will distribute the Specified Assets each
       holds to US Sub 1, and US Sub 1 will contribute the Specified Assets to US
       OpCo (together, the “Specified Asset Transfer”). Following the Specified Asset
       Transfer, US Sub 1 will sell all of the shares of US OpCo to Parent in exchange
       for cash or a note equal to the fair market value of such US OpCo shares. These
       transactions will occur only after Parent has complied with the Applicable Foreign
       Law Requirement and very shortly prior to the Spinoff.

       (ii)    Parent will transfer to Controlled interests in entities conducting the
       Controlled Business (including US OpCo) and, possibly, cash, in exchange for
       Controlled stock, and non-US subsidiaries of Parent will transfer to non-US
       subsidiaries of Controlled interests in non-US entities or assets conducting the
       Controlled Business in exchange for cash (the “Controlled Transfer”). The
       Controlled Transfer will occur in a series of related transactions occurring in the
       calendar year of the Spinoff and prior to the Spinoff, and, with respect to US
       OpCo, will occur only after the transactions described in clause (i) have occurred.

       In all cases, neither the entities transferred nor any of the material assets thereof
       will have been acquired during the five-year period immediately preceding the
       Spinoff in a transaction in which gain or loss was recognized in whole or in part,
       except in connection with transfers between members of an affiliated group
       (within the meaning of Treas. Reg. § 1.355-3(b)(4)(iv)) or in connection with the
       expansion of an existing five-year trade or business.

       (iii)   Following the Controlled Transfer, Parent will distribute all of the shares of
       Controlled to its shareholders pro rata (the “Distribution”; the Controlled Transfer
       and the Distribution are collectively referred to as the “Spinoff”).

       Parent and its subsidiaries also expect to have certain continuing relationships
       with Controlled and its subsidiaries in order to facilitate the Spinoff (the
       “Continuing Relationships”). The areas that these relationships may cover
       include (a) manufacturing facilities that will produce products for both the Parent
PLR-102903-23                                5

      Business and the Controlled Business; (b) research and development; (c) certain
      commercialization agreements; (d) distribution functions shared by the two
      businesses; (e) shared contracts; (f) limited promotional activities; (g) regulatory
      cooperation; (h) certain non-core business functions; (i) trademarks and other
      intellectual property; (j) delayed transfers; (k) books and records; and (l)
      indemnification and litigation. Any relationship in place for more than 24 months
      will be on terms similar to those used in third-party transactions.

      About x percent of Parent shares are held by Special Purpose Entities. The
      Special Purpose Entities are separate legal entities with no shareholders or other
      residual economic beneficiaries and are formed for specific Purposes. Parent
      has no direct economic interest in the assets, liabilities, or income of the Special
      Purpose Entities and does not exercise direct control over them. However, under
      Country Z corporate law, the shares are considered treasury shares of Parent for
      general corporate purposes. The Special Purpose Entities will receive Controlled
      stock as shareholders of Parent, but the Special Purpose Entities may
      independently decide to retain or dispose of their Controlled shares. The Special
      Purpose Entities are foreign entities that are not subject to US federal income
      tax.

                                    Representations

Except as otherwise set forth below, Parent makes all the Representations in Section 3
of the Appendix to Rev. Proc. 2017-52, treating Controlled as “Controlled” and Parent as
“Distributing”.

      (1) Distributing has made the following alternative representations: 3(a), 11(a),
      15(a), 22(a), 31(a) and 41(a).

      (2) Distributing has not made the following representations, which do not apply
      to the proposed transactions: 7, 19, 20, 24, 25 and 40.

      (3)   Distributing has made the following modified representations:

             Representation 2: Except to the extent the Controlled stock distributed to
             the Foundations is treated as retained by Distributing, in the Distribution,
             Distributing will distribute on the same day all the stock and securities of
             Controlled that it holds immediately before the Distribution.

             Representation 8: If Distributing has any securities outstanding,
             Distributing will not distribute Controlled stock, Controlled securities or
             Other Property to any holder of any such Distributing securities in the
             Distribution, in satisfaction thereof.

             Representation 33: Except as contemplated by the Continuing
PLR-102903-23                               6

           Relationships, payments made in connection with all continuing
           transactions, if any, between Distributing and Controlled after the
           Distribution will be for fair market value based on arm’s-length terms.

           Representation 43: To the extent either Distributing or Controlled is
           treated as a controlled foreign corporation within the meaning of section
           957(a) as a result of section 958(b), no affiliate of Distributing is or will be
           required to include an amount in income with respect to either Distributing
           or Controlled under section 951(a).

           Representation 44: The Distribution is not part of a plan (or series of
           related transactions) resulting in any foreign corporation being treated as a
           “surrogate foreign corporation” within the meaning of section
           7874(a)(2)(B)(ii) or a domestic corporation as a result of section 7874(b).

           Representation 46: Controlled will not issue stock to a person other than
           Distributing in anticipation of the Distribution. Controlled will not issue
           securities to a person other than Distributing in anticipation of the
           Distribution, other than debt issued to third parties, the proceeds of which
           will be used to retire intercompany debt held by Distributing or subsidiaries
           of Distributing or otherwise in the ordinary course of business.

     (4) Distributing has made the following modified representations regarding the
     potential retention of Controlled shares by the Special Purpose Entities:

           (a) The establishment of the Special Purpose Entities and their
               capitalization with Distributing shares occurred prior to any discussions
               regarding the Proposed Transaction and did not otherwise occur in
               pursuance of a plan having as one of its principal purposes the
               avoidance of US federal income tax.

           (b) Board Members’ fiduciary duties to the Special Purpose Entities will
               not permit the Special Purpose Entities to waive their rights to receive,
               or otherwise avoid receiving, Controlled shares with respect to the
               Distributing shares they hold in the Distribution.

           (c) Distributing will undertake in a manner consistent with Country Z law to
               encourage the Special Purpose Entities to dispose of Controlled
               shares in a commercially reasonable manner as soon as possible but
               in no event later than five years after the Distribution.

           (d) None of Distributing’s directors or officers will serve as directors or
               officers of Controlled.

           (e) Distributing will not exercise control or influence over the Special
PLR-102903-23                               7

                Purpose Entities’ voting decisions with respect to any Controlled
                shares held by the Special Purpose Entities.

     (5)   Distributing has made the following representation regarding the Specified
     Asset Transfer:

            (a)     Immediately after the Proposed Transaction, Controlled and any of
            its direct or indirect subsidiaries (including US OpCo) will not be related
            within the meaning of section 1239(b) and (c) to Parent or any member of
            the US Affiliated Group, including US Sub 1 or US Sub 2.

                                       RULINGS

       Based solely on the information and representations submitted, we rule as
follows regarding the Proposed Transaction:

      1.    No gain or loss will be recognized by Parent on the Distribution.
Section 361(c).

       2.     No gain or loss will be recognized by (and no amount otherwise will be
included in the income of) the shareholders of Parent as a result of the Spinoff
(section 355(a)(1)).

       3.     Each Parent shareholder’s basis in Parent stock and Controlled stock
following the Spinoff will equal such shareholder’s basis in the stock of Parent it held
immediately prior to the Spinoff, allocated between the stock of Parent and
Controlled in proportion to their relative fair market values (section 358(c) and Treas.
Reg. § 1.358-2(a)(2)).

      4.      The holding period of the Controlled shares received by each
shareholder of Parent in the Spinoff will include the holding period of the Parent
shares with respect to which the Spinoff will be made, provided that such Parent
shares are held as capital assets on the date of the Spinoff (section 1223(1)).

      5.    As provided in section 312(h), proper allocation of earnings and profits
between Parent and Controlled will be made under Treas. Reg. § 1.312-10(a).

       6.      To the extent that Controlled shares received by the Special Purpose
Entities are treated as retained by Parent, such retention will not be in pursuance of
a plan having as one of its principal purposes the avoidance of US federal income
tax within the meaning of section 355(a)(1)(D)(ii) and Treas. Reg. § 1.355-2(e).

      7.      Any gain recognized by US Sub 1 or US Sub 2 on the Specified Asset
Transfer of its depreciable and amortizable property will not be treated as ordinary
income under Section 1239. See Reg. § 1.1502-13(d)(1)(ii)(A)(1).
PLR-102903-23                                 8


                                          CAVEATS

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
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.

In accordance with the Power of Attorney on file with this office, copies of this letter are
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,


                                       Gerald B. Fleming
                                       Gerald B. Fleming
                                       Senior Technician Reviewer, Branch 2
                                       (Corporate)




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