Private Letter Ruling
202404005
Released January 26, 2024
Approved
Cross-border business separation qualifies as two tax-free reorganizations
Apply this to your situation
This page covers one taxpayer's ruling from 2024, 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 foreign parent planned to separate two business lines from two others through a series of foreign and domestic transactions. The plan included a Country B “butterfly” transaction that moved one foreign subsidiary, followed by contributions to a new domestic holding company and a distribution of that holding company’s stock to the foreign parent. The IRS ruled that the foreign-subsidiary distribution, together with a debt capitalization, and the domestic holding-company distribution, together with its related contribution, would each qualify as a reorganization under sections 368(a)(1)(D) and 355. The ruling also provided nonrecognition treatment, carryover basis and holding periods, and allocations of earnings and profits for specified steps. It did not decide whether the distributions satisfied the business-purpose, device, or section 355(e) acquisition-plan requirements, and it expressed no view on the amalgamation or later holding-company merger.
Ruling snapshot
- Question: Would the planned foreign-subsidiary and holding-company distributions qualify as tax-free divisive reorganizations?
- Outcome: approved
- Key authorities: IRC §§ 312(h), 355, 361, 362, 368(a)(1)(D), 1032, 1223; Treas. Reg. §§ 1.312-10, 1.355-2, 1.355-7, 1.355-8T, 1.367(b)-5
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 202404005 Third Party Communication: None
Release Date: 1/26/2024 Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-00,
368.00-00, 368.04-00 Person To Contact:
------------------------, ID No. -----------------
------------ Telephone Number:
---------------------------------------------- --------------------
---------------------------- Refer Reply To:
----------------------------- CC:CORP:B03
PLR-113441-23
Date:
October 27, 2023
Legend
Foreign Parent = -------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-----------------------
Sub 1 = -------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-----------------------
Sub 2 = -------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-----------------------
Sub 3 = -------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-----------------------
FSub 1 = -------------------------------------------------------------------------------
--------------------------------
FSub 2 = -------------------------------------------------------------------------------
-------------------------------
HoldCo = -------------------------------------------------------------------------------
------------------------------
New FSub 2 = -------------------------------------------------------------------------------
----------------------------
PLR-113441-23 2
Business A1 = -------------------------------------------------------------------------------
------------------------------------------------------------------
Business A2 = -------------------------------------------------------------------------------
---------------------------------------------------------
Business B1 = -------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
----------------------------------------
Business B2 = -------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------
Country A = --------
Country B = ----------
Continuing = -------------------------------------------------------------------------------
Relationships -------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
PLR-113441-23 3
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
PLR-113441-23 4
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
------------------------------------------------------------
Dear ------------:
This letter responds to your letter dated June 30, 2023, requesting rulings on certain
federal income tax consequences of a series of proposed transactions (the “Proposed
Transactions”), as supplemented by your letters dated August 16, 2023, September 20,
2023, and October 17, 2023. The information provided in those letters is summarized
below.
This letter is issued pursuant to Rev. Proc. 2017-52, 2017-41 I.R.B. 283, regarding two
“Covered Transactions” under section 355 and section 368 of the Internal Revenue
Code (the “Code”); section 6.03(2)(b) of Rev. Proc. 2023-1, 2023-1 I.R.B. 1, regarding
one significant issue under section 355; and Rev. Proc. 2022-10, 2022-6 I.R.B. 473.
This office expresses no opinion as to any issue not specifically addressed by the
rulings below.
The rulings provided in this letter are based on facts and representations submitted by
PLR-113441-23 5
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 on examination.
This office has made no determination regarding whether each of the FSub 2
Distribution and HoldCo Distribution (each defined below): (i) satisfies the business
purpose requirement of Treas. Reg. § 1.355-2(b); (ii) is used primarily 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. § 1.355-8T (see section 355(e)(2)(A)(ii) and Treas. Reg. §
1.355-7). This office also has made no determination regarding the U.S. federal income
tax treatment of the Amalgamation or the HoldCo Merger (each defined below).
Summary of Facts
Foreign Parent is a publicly traded Country A corporation and is the parent of a
worldwide group of entities that is engaged in several businesses, including Business
A1, Business A2, Business B1, and Business B2 (the “Company”). The direct and
indirect domestic and foreign subsidiaries of Foreign Parent relevant to the Proposed
Transactions are described below.
Foreign Parent owns all of the issued and outstanding stock of Sub 1, a domestic
corporation. Sub 1 is the parent of an affiliated group of corporations that files a
consolidated return for U.S. federal income tax purposes. Foreign Parent also owns all
of the issued and outstanding stock of Sub 2, a domestic corporation.
Sub 1 owns all of the issued and outstanding stock of each of Sub 3, a domestic
corporation, and FSub 1, a Country B entity that is treated as a corporation for U.S.
federal income tax purposes. FSub 1, in turn, owns all of the issued and outstanding
stock of FSub 2, a Country B entity that is treated as a corporation for U.S. federal
income tax purposes.
For purposes of satisfying the active trade or business requirement of section 355(b), (i)
with respect to the FSub 2 Distribution (as defined below), FSub 1, as the distributing
entity, will rely on Business A2, and FSub 2, as the controlled entity, will rely on
Business B2, as conducted directly and/or by members of their respective “separate
affiliated group” as defined in section 355(b)(3)(B); and (ii) with respect to the HoldCo
Distribution (as defined below), Sub 1, as the distributing entity, will rely on Business
A1, and HoldCo, as the controlled entity, will rely on Business B1, as conducted directly
and/or by members of their respective “separate affiliated group” as defined in section
355(b)(3)(B).
PLR-113441-23 6
Financial information has been submitted indicating that Business A1, Business A2,
Business B1, and Business B2 each has had gross receipts and operating expenses
representing the active conduct of a trade or business for each of the past five years.
The Proposed Transactions
For what are represented to be valid business purposes, the Company intends to
separate Business B1 and Business B2 from Business A1 and Business A2 in the
Proposed Transactions.
1. FSub 1 will capitalize all or a portion of the intercompany obligations owed by
FSub 2 to FSub 1 (the “FSub 2 Debt Capitalization”). Any such obligation not
capitalized will be paid off in cash prior to the Country B Butterfly described
below.
2. Sub 1 will incorporate a new entity (“NewCo”), a Country B entity that will be
disregarded as separate from its owner for U.S. federal income tax purposes.
NewCo will be authorized to issue both common and preferred shares.
3. The following transaction steps under the tax laws of Country B are necessary to
separate FSub 2 from FSub 1 (the “Country B Butterfly”):
a. FSub 1 will reorganize its share capital to create a new class of common
shares, and redeemable and retractable fixed value preferred shares. Sub
1 will exchange the common shares it holds of FSub 1 for new common
shares of FSub 1 and fixed value preferred shares of FSub 1 (“FSub 1
PS”). FSub 1 PS will be redeemable and retractable for a value equal to
the fair market value (“FMV”) of the shares of FSub 2.
b. Sub 1 will contribute FSub 1 PS to NewCo for consideration of additional
common shares of NewCo.
c. FSub 1 will contribute the shares of FSub 2 to NewCo. In consideration,
NewCo will issue fixed value preferred shares (“NewCo PS”) to FSub 1.
NewCo PS will be redeemable and retractable for an amount equal to the
FMV of the shares of FSub 2.
d. FSub 1 will redeem FSub 1 PS issued to NewCo for a non-interest-
bearing note denominated in Country B currency (“Note 1”). NewCo will
redeem NewCo PS issued to FSub 1 for a non-interest-bearing note
denominated in Country B currency (“Note 2”).
e. Note 1 will be offset against Note 2. Both notes will then be cancelled.
These transaction steps will constitute the “FSub 2 Distribution.”
4. NewCo and FSub 2 will amalgamate to collectively form a new entity (such new
PLR-113441-23 7
entity, “New FSub 2,” and such transaction, the “Amalgamation”).
5. Sub 1 will incorporate HoldCo, a domestic corporation.
6. Sub 1 will contribute New FSub 2 and Sub 3 to HoldCo in exchange for shares of
HoldCo (the “HoldCo Contribution”).
7. Sub 1 will distribute the shares of HoldCo to Foreign Parent (the “HoldCo
Distribution”).
8. Sub 2 will merge with and into HoldCo with HoldCo surviving (the “HoldCo
Merger”).
Following the Proposed Transaction, Business B1 and Business B2, on the one hand,
and Business A1 and Business A2, on the other hand, will operate as separate
businesses, but Sub 1 (and/or one or more of its direct or indirect subsidiaries) and
HoldCo (and/or one or more of its direct or indirect subsidiaries) will have certain
Continuing Relationships.
Representations
The Company has made the following representations with respect to the Proposed
Transactions:
FSub 2 Distribution
With respect to the FSub 2 Distribution, except as set forth below, the Company has
made all the representations in section 3 of the Appendix to Rev. Proc. 2017-52.
(a) The Company has not made the following representations, which do not apply to
the FSub 2 Distribution: Representations 7; 17-20; 24; 25; 35; 36-39.
(b) The Company has not made the following reresentations but provided the
required explanations: Representations 34; 40.
(c) The Company has made the following alternative representations:
Representations 3(a); 8(a); 11(a); 15(a); 22(a); 31(a); 41(a).
(d) The Company has made the following modified representations and provided the
required explanations: Representations 32; 43.
Modified Representation 32: Other than as a result of the Continuing
Relationships, no intercorporate debt will exist between FSub 1 and FSub 2 at
the time of, or subsequent to, the distribution of FSub 2 stock.
Modified Representation 43: For purposes of Treas. Reg. § 1.367(b)-5(c), Sub
PLR-113441-23 8
1’s predistribution amount with respect to FSub 1 and FSub 2 will not exceed
Sub 1’s postdistribution amount with respect to FSub 1 and FSub 2, or, if the
predistribution amount does exceed the postdistribution amount, Sub 1 will
reduce its basis, or include an amount in income as a deemed dividend, to the
extent provided in Treas. Reg. § 1.367(b)-5(c)(2).
HoldCo Distribution
With respect to the HoldCo Distribution, except as set forth below, the Company has
made all the representations in section 3 of the Appendix to Rev. Proc. 2017-52.
(a) The Company has not made the following representations, which do not apply to
the HoldCo Distribution: Representations 7; 17-20; 24; 25; 35.
(b) The Company has not made the following reresentations but provided the
required explanations: Representations 34; 40.
(c) The Company has made the following alternative representations:
Representations 3(a); 8(a); 11(a); 15(a); 22(a); 31(a); 41(a).
(d) The Company has made the following modified representation and provided the
required explanation: Representation 32.
Modified Representation 32: Other than as a result of the Continuing
Relationships, no intercorporate debt will exist between Sub 1 and HoldCo at the
time of, or subsequent to, the distribution of HoldCo stock.
Rulings
Based solely on the information and representations submitted, we rule as follows:
Country B Butterfly
1. For U.S. federal income tax purposes, the steps of the Country B Butterfly will
together be treated as if FSub 1 distributed all of the stock of FSub 2 to Sub 1
(i.e., the FSub 2 Distribution).
FSub 2 Distribution
2. The FSub 2 Distribution, together with the FSub 2 Debt Capitalization, will qualify
as a reorganization under sections 368(a)(1)(D) and 355. FSub 1 and FSub 2 will
each be a “party to a reorganization” within the meaning of section 368(b).
3. No gain or loss will be recognized by FSub 1 upon the FSub 2 Debt
Capitalization. Section 361(a).
4. No gain or loss will be recognized by FSub 2 upon the FSub 2 Debt
PLR-113441-23 9
Capitalization. Section 1032(a).
5. No gain or loss will be recognized by—and no amount will be included in the
income of—Sub 1 upon the receipt of FSub 2 stock in the FSub 2 Distribution.
Section 355(a).
6. No gain or loss will be recognized by FSub 1 on its distribution of FSub 2 stock to
Sub 1. Section 361(c).
7. The holding period of the FSub 2 stock received by Sub 1 in the FSub 2
Distribution will include the holding period of the FSub 1 stock with respect to
which the distribution of the FSub 2 stock was made, provided the FSub 1 stock
was held as a capital asset on the date of the FSub 2 Distribution. Section
1223(1).
8. Earnings and profits will be allocated between FSub 1 and FSub 2 in accordance
with section 312(h) and Treas. Reg. § 1.312-10(a).
HoldCo Distribution
9. The HoldCo Distribution, together with the HoldCo Contributiion, will qualify as a
reorganization under sections 368(a)(1)(D) and 355. Sub 1 and HoldCo will each
be a “party to a reorganization” within the meaning of section 368(b).
10. No gain or loss will be recognized by Sub 1 upon the HoldCo Contribution.
Section 361(a).
11. No gain or loss will be recognized by HoldCo upon the HoldCo Contribution.
Section 1032(a).
12. HoldCo’s basis in the stock of New FSub 2 and Sub 3 received in the HoldCo
Contribution will be equal to the basis of such stock in the hands of Sub 1
immediately before the HoldCo Contribution. Section 362(b).
13. The holding period in the stock of New FSub 2 and Sub 3 received in the HoldCo
Contribution will include the period during which such assets were held by Sub 1.
Section 1223(2).
14. No gain or loss will be recognized by—and no amounts will be included in the
income of—Foreign Parent upon the receipt of HoldCo stock in the HoldCo
Distribution. Section 355(a).
15. No gain or loss will be recognized by Sub 1 on its distribution of HoldCo stock to
Foreign Parent. Section 361(c).
16. The holding period of the HoldCo stock received by Foreign Parent in the HoldCo
Distribution will include the holding period of the Sub 1 stock with respect to
which the distribution of the HoldCo stock was made, provided the Sub 1 stock
was held as a capital asset on the date of the HoldCo Distribution. Section
1223(1).
17. Earnings and profits will be allocated between Sub 1 and HoldCo in accordance
PLR-113441-23 10
with section 312(h) and Treas. Reg. §§ 1.312-10(a) and 1.1502-33.
Caveats
Except as expressly provided herein, no opinion is expressed or implied concerning the
tax treatment of the Proposed Transactions under any other provision of the Code or
the regulations, or the tax treatment of any conditions existing at the time of, or effects
resulting from, the Proposed Transactions 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) of the Code
provides that it may not be used or cited as precedent.
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 this
letter ruling.
In accordance with the power of attorney on file with this office, a copy of this ruling
letter is being sent to your authorized representatives.
Sincerely,
Samuel G. Trammell
Samuel G. Trammell
Senior Counsel, Branch 2
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 2024, 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.