Corporate business separation qualified as a tax-free spin-off

Plain-English summary

A publicly traded corporation proposed separating one business into a newly formed controlled corporation while retaining its other businesses. The plan included asset contributions, external borrowing, a cash transfer, a subsidiary merger, a pro rata stock distribution, debt and shareholder payments, and a temporary retention of some controlled-company stock. Based on extensive representations, the IRS ruled that the separation qualified as a reorganization and tax-free distribution under Sections 355 and 368(a)(1)(D), with related nonrecognition, basis, holding-period, and earnings-and-profits consequences. The IRS also ruled that the temporary retained stock and specified post-distribution payments would not defeat the transaction's qualification, but did not rule on the business-purpose, device, or Section 355(e) acquisition-plan requirements.

Ruling snapshot

• Question: Would the proposed business separation and related financing steps qualify for nonrecognition as a Section 355 spin-off and Section 368 reorganization?
• Outcome: approved
• Key authorities: IRC §§ 355, 357, 358, 361, 362, 368; Rev. Proc. 2017-52; Rev. Proc. 2018-53

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202424004                                             Third Party Communication: None
 Release Date: 6/14/2024                                       Date of Communication: Not Applicable
 Index Number: 355.01-00, 368.00-00,
               361.00-00                                       Person To Contact:
                                                               -------------------, ID No. -----------------
 ----------------------                                        Telephone Number:
 ------------------                                            --------------------
 -------------------------------------                         Refer Reply To:
 ---------------------------------------                       CC:CORP:B01
                                                               PLR-105847-23
                                                               Date:
                                                               December 20, 2023




Legend


Distributing                                = -------------------
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Controlled                                  = -----------------------------------
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DRE 1                                       = ---------------
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DRE 2                                       = ---------------------------------------
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Sub 1                                       =    ---------------
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Sub 2                                        = -------------------------------------------------------------------
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Business A                                  = --------------------------------
PLR-105847-23                           2

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

Retained Businesses        = -------------------------------------------------------------------
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Third-Party Debt           = -------------------------------------------------------------------
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Litigation Obligations     = -------------------------------------------------------------------
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Ordinary Course
Liabilities                = -------------------------------------------------------------------
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Internal Refinanced Debt   = -------------------------------------------------------------------
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Refinanced Debt            = -------------------------------------------------------------------
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Share Repurchases          = -------------------------------------------------------------------
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Quarterly Dividends        = -------------------------------------------------------------------
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Other Substantial Adverse
Financial Consequences      = -------------------------------------------------------------------
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Transaction Agreements      = -------------------------------------------------------------------
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Controlled Equity Awards    = -------------------------------------------------------------------
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PLR-105847-23                              4

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IP Agreements                 = -------------------------------------------------------------------
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Post-Distribution Quarterly
Dividends                     = -------------------------------------------------------------------
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Post-Distribution Share
Repurchases                   = -------------------------------------------------------------------
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Principal Payments            = -------------------------------------------------------------------
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Interest Payments             = -------------------------------------------------------------------
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Premium Payments              = -------------------------------------------------------------------
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Date 1                        = ------------------

Date 2                        = -----------------------

Date 3                        = -----------------------
PLR-105847-23                                  5


a                                   = ------

b                                   = -----

c                                   = ---

d                                   = ---

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

This letter responds to your representative’s letter dated March 15, 2023, on behalf of
Distributing, as supplemented by subsequent information and documentation,
requesting rulings on certain federal income tax consequences of a series of
transactions (the “Proposed Transactions”). The material information provided in that
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” under sections 355 and 368 of the Internal Revenue Code (the
“Code”). This office expresses no opinion as to any issue not specifically addressed by
the rulings below.

The rulings contained in this letter are based upon information 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 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 a 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 relevant distributing corporation or
the controlled corporation, or any predecessor or successor of such distributing
corporation or controlled corporation, within the meaning of Treas. Reg. §1.355-8 (see
section 355(e) and Treas. Reg. §1.355-7).

                                    Summary of Facts

Distributing is a publicly traded domestic corporation, the common parent of a
consolidated group for U.S. federal income tax purposes, and the parent company of a
worldwide group of foreign and domestic entities (the “Distributing Worldwide Group”).
PLR-105847-23                                6

The Distributing Worldwide Group, which includes Sub 1 and Sub 2, has multiple
business segments, including Business A and Business B.
Distributing is directly engaged in, and holds operating assets related to, the Retained
Business (including Business A), and Business B. In addition, Distributing holds
interests in certain subsidiaries that are engaged in, or that hold operating assets
related to, Business B, such as Sub 1.

Distributing proposes to undertake a series of transactions to separate Business B from
the Retained Businesses pursuant to a plan of reorganization (the “Plan of
Reorganization”).

Distributing had Third-Party Debt, Litigation Obligations, and Ordinary Course Liabilities
(collectively, “Distributing Relevant Debt”) outstanding as of Date 1. Distributing will
establish one or more trusts to satisfy certain Litigation Obligations (each, a “Settlement
Fund”). References to any Distributing Relevant Debt include references to Refinanced
Debt and Internal Refinanced Debt. Distributing will not segregate or otherwise trace the
proceeds of any Refinanced Debt.

For purposes of satisfying the active trade or business requirements of section 355(b)
with respect to the Distribution, Distributing and the members of its “separate affiliated
group” as defined in 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. Financial information has been submitted in accordance with Rev.
Proc. 2017-52 indicating that each of Business A and Business B has had gross
receipts and operating expenses representing the active conduct of a trade or business
for each of the past five years.

                                 Proposed Transaction

For what are represented to be valid business reasons, Distributing proposes to
undertake the following Proposed Transactions, the steps of which may occur in a
different order than described below, and some of the steps of which have already been
completed:

1. On Date 2, Distributing formed Controlled, a domestic corporation.

2. On Date 3, Controlled formed DRE 1, a domestic limited liability company
disregarded as separate from Controlled for U.S. federal income tax purposes (a
“disregarded entity”).

3. On Date 3, Distributing formed DRE 2, a disregarded entity.

4. Controlled will borrow cash from unrelated third-party lender(s) (the “External
Borrowing”). The External Borrowing may consist of a combination of notes, term loans,
and/or revolving credit facilities. Some or all of the External Borrowing may occur prior
PLR-105847-23                                  7

to the External Contribution (as defined below) and Controlled Cash Transfer (as
defined below). In that event, the proceeds of the External Borrowing would be held by
Controlled pending the External Contribution and Controlled Cash Transfer until certain
conditions for the Distribution have been satisfied, either in an escrow account or
otherwise with Distributing providing a limited guarantee of repayment of the External
Borrowing (which guarantee would terminate by the time of the Distribution). If the
Distribution were abandoned or otherwise delayed beyond a date set forth in the legal
documentation governing the External Borrowing, the External Borrowing would be
prepaid or redeemed by Controlled either out of the proceeds of the External Borrowing
(which may be escrowed) or funds contributed to Controlled by Distributing prior to its
maturity, and such prepayment or redemption may be accompanied by a prepayment
premium.

5. Distributing will transfer to Sub 2, in exchange for stock in Sub 2, certain directly held
intellectual property related to Business B.

6. Distributing will transfer to DRE 2 assets related to Business B, including (a) all of the
outstanding stock of Sub 2 and other corporations conducting Business B and (b)
directly held Business B assets, in exchange for a percent of the equity interests in DRE
2 and DRE 2’s assumption of liabilities related to Business B (if any).

7. Distributing will transfer to Controlled all of the equity interests in DRE 2 (and
potentially other assets or stock) in exchange for (a) Controlled common stock and (b)
cash up to an amount equal to the cash borrowed in the External Borrowing (such cash,
plus any cash transferred by Controlled to Distributing pursuant to the Cash Adjustment
(as defined below) and minus any cash transferred by Distributing to Controlled
pursuant to the Cash Adjustment, the “Controlled Cash,” the transfer of the Controlled
Cash, the “Controlled Cash Transfer,” and this Step 7 collectively the “External
Contribution”). The Transaction Agreements implementing the External Contribution are
expected to include a post-closing cash adjustment (the “Cash Adjustment”).
Distributing will not be required to segregate or otherwise trace the Controlled Cash.

8. Sub 1 will merge with and into DRE 1 with DRE 1 surviving in a transaction intended
to qualify as a reorganization under section 368(a)(1)(A) (the “Sub 1 Merger”). Pursuant
to the Sub 1 Merger, Distributing, as sole shareholder of Sub 1, will receive Controlled
common stock (or a combination of Controlled common stock and cash) with value
equal to the value of Sub 1 stock.

9. Distributing will distribute at least a percent of the Controlled common stock to its
shareholders as a pro rata distribution (the “Distribution” and together with the External
Contribution, the “External Spin-off”). The shares of Controlled common stock not
distributed in the Distribution are referred to as the “Retained Stock” (such retention, the
“Retention”).

10. Within one year of the Distribution, Distributing will make payments to various
PLR-105847-23                                  8

creditors in satisfaction of all or a portion of Distributing Relevant Debt, and/or to
shareholders in the form of Share Repurchases or Quarterly Dividends, in an aggregate
amount equal to the Controlled Cash (the “Cash Boot Purge”).

11. Distributing will dispose of the Retained Stock through sales of the Retained Stock
to third-party investors (not later than b years after the Distribution).

In the absence of the Retention, Distributing believes (i) Distributing would be required
to incur incremental indebtedness at a significant cost and on potentially less favorable
terms and (ii) Distributing would incur Other Substantial Adverse Financial
Consequences (the “Retention Business Purpose”).

Following the Distribution, Distributing will continue to conduct Business A and
Controlled will conduct Business B. In connection with the Proposed Transactions,
Distributing and Controlled (or their respective affiliates, if applicable) will enter into
certain Transaction Agreements. In addition, Controlled may issue Controlled Equity
Awards.

In connection with the Proposed Transactions, (i) certain subsidiaries of the Distributing
Worldwide Group (which hold assets relating to both the Retained Businesses and
Business B) are expected to sell Business B assets (and certain employees of such
subsidiaries may also transfer) directly to certain subsidiaries of Controlled in taxable
transactions and (ii) certain subsidiaries of the Controlled Worldwide Group (which hold
assets relating to both the Retained Businesses and Business B) are expected to sell
assets of the Retained Businesses to certain subsidiaries of Distributing in taxable
transactions (collectively, the “Direct Asset Sales”). It is expected that most of the Direct
Asset Sales will occur prior to the Distribution; however, some of the Direct Asset Sales
might occur following the Distribution. It is possible that certain other internal
restructuring transactions occurring in the U.S. and/or certain foreign jurisdictions
separating Business B from the Retained Businesses may also be delayed for
regulatory, operational, local country, or other reasons. In such case, the transfer of the
Business B assets and/or liabilities involved in such delayed transfers to Controlled or a
subsidiary thereof may occur following the External Contribution and Controlled Cash
Transfer and, potentially, following the Distribution.

                                      Representations

The following representations have been made with respect to the Proposed
Transactions:

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

Distributing has made the following alternative representations: 3(a), 22(a), 31(a) and
41(a).
PLR-105847-23                                 9


Distributing has not made the following representations, which do not apply to the
Proposed Transaction: 20, 24, 25, 39 and 40.

Distributing has made the following modified representations:

1. Representation 2: Other than the Retained Stock, Distributing will distribute on the
same day all of the stock and securities of Controlled that it holds immediately before
the Distribution.

2. Representation 8(b): Distributing has 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. It is possible that, pursuant to the Cash Boot
Purge, all or a portion of the Controlled Cash may be transferred to one or more holders
of Distributing Relevant Debt (including Refinanced Debt) that constitutes a security in
exchange therefor.

3. Representation 11(a): Following the 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 Transaction Agreements.

4. Representation 21: Immediately after the Distribution, the fair market value of the
assets of each of Distributing and Controlled will exceed the amount of its liabilities.

5. Representation 23: Other than a mismatch or arrangement (if any) that will not result
in a material distortion of income, the transaction does not involve and will not result in a
situation in which one party recognizes income but another party recognizes the
deductions associated with such income or a situation in which one party owns property
but another party recognizes the income associated with such property.

6. Representation 32: No intercorporate debt will exist between Distributing and
Controlled at the time of, or subsequent to, the Distribution of Controlled stock, except
for any amounts payable under the Transaction Agreements and trade payables arising
in the ordinary course of business.

7. Representation 33: Payments made in connection with all continuing transactions, if
any, between Distributing and Controlled after the Distribution will either: (i) be made
pursuant to the Transaction Agreements or (ii) be for fair market value based on arm’s-
length terms.

8. 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
PLR-105847-23                                  10

share interests of each Distributing shareholder will be aggregated 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
Distributing stock in multiple accounts or with multiple brokers).

9. Representation 37: No net losses are expected to be recognized for U.S. federal
income tax purposes as a result of the Proposed Transactions. While it is possible that
a U.S. taxable loss will be recognized by Distributing’s direct or indirect subsidiaries with
respect to the sale of certain individual assets in the Direct Asset Sales, none of the
Direct Asset Sales will be motivated by a desire to recognize a U.S. tax loss; such
taxable losses, if any, are expected to be immaterial; and it is expected that the
Distributing Worldwide Group will recognize a net taxable gain on the Direct Asset Sales
as a whole. While it is possible that a U.S. taxable loss will be recognized by Distributing
upon any sale of any Retained Stock to third-party investors in any taxable dispositions,
any such sale is not motivated by a desire to recognize a U.S. tax loss and there is no
expectation of the incurrence of such losses.

10. Representation 46: Controlled will not issue stock or securities to a person other
than Distributing in anticipation of the Distribution, except to the extent that any of the
External Borrowing constitutes a security.

Except as set forth below, Distributing has made all of the representations in section
3.04 of Rev. Proc. 2018-53.

Distributing has made the following modified representations:

1. Representation 2: No holder of Distributing Debt that will be assumed or satisfied is a
Related Person, other than a holder of the Internal Refinanced Debt.

2. Representation 4: Other than with respect to the Litigation Obligations, the Ordinary
Course Liabilities, and any Refinanced Debt, Distributing incurred the Distributing Debt:
(a) before the request for any relevant ruling was submitted and (b) no later than c days
before the earliest of the following dates: (i) the date of the first public announcement
(as defined in Treas. Reg. §1.355-7(h)(10)) of the Proposed Transactions or a similar
transaction, (ii) the date of the entry by Distributing into a binding agreement to engage
in the Proposed Transactions or a similar transaction, and (iii) the date of approval of
the Proposed Transactions or a similar transaction by the board of directors of
Distributing.

3. Representation 6: There are one or more substantial business reasons for any delay
in satisfying Distributing Debt with section 361 Consideration (as defined in Rev. Proc.
2018-53) beyond d days after the date of the Distribution.

Distributing has made the following additional representations:
PLR-105847-23                                   11

1. The Retention is motivated by the Retention Business Purpose.

2. None of Distributing’s directors or officers will serve as directors or officers of
Controlled so long as Distributing retains any Retained Stock.

3. The Retained Stock will be disposed of as soon as a disposition is warranted
consistent with the Retention Business Purpose, but, in any event, not later than b years
after the Distribution.

4. Distributing will vote, or cause to be voted, any Retained Stock in proportion to the
votes cast by Controlled’s other shareholders.

                                           Rulings

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

1. The External Spin-off will be a “reorganization” within the meaning of sections 355
and 368(a)(1)(D). Distributing and Controlled will each be “a party to a reorganization”
within the meaning of section 368(b).

2. Section 355(a)(3)(B) will not treat as “other property” any part of the Controlled
common stock actually or deemed issued by Controlled to Distributing pursuant to the
External Contribution in exchange for intellectual property rights pursuant to the IP
Agreements.

3. No gain or loss will be recognized by Distributing on the External Contribution.
Section 361(a); section 361(b); section 357(a).

4. Distributing’s basis in the Controlled common stock received in the External
Contribution will equal Distributing’s basis in the property transferred pursuant to the
External Contribution, decreased by the amount of Controlled Cash received from
Controlled and any liabilities assumed or deemed assumed by Controlled in the
External Contribution. Section 358(a)(1); section 358(d)(1).

5. No gain or loss will be recognized by Controlled on the External Contribution. Section
1032(a).

6. Controlled’s basis in each asset received from Distributing in the External
Contribution will equal the basis of that asset in the hands of Distributing immediately
before the External Contribution. Section 362(b).

7. Controlled’s holding period in each asset received from Distributing in the External
Contribution will include the period during which that asset was held by Distributing.
Section 1223(2).
PLR-105847-23                                 12


8. No gain or loss will be recognized by holders of Distributing stock upon the receipt of
Controlled common stock in the Distribution. Section 355(a).

9. The Post-Distribution Quarterly Dividends and Post-Distribution Share Repurchases
will be treated as distributions in pursuance of the Plan of Reorganization under section
361(b)(1).

10. Any Principal Payments, Interest Payments, Premium Payments, and payments of
Ordinary Course Liabilities will be treated as payments to creditors, which payments will
be treated as distributions in pursuance of the Plan of Reorganization under section
361(b)(3).

11. Provided a Settlement Fund qualifies as a qualified settlement fund within the
meaning of section 468B and Treas. Reg. §1.468B-1 or a disputed ownership fund
within the meaning of Treas. Reg. §1.468B-9, such Settlement Fund will be treated as a
creditor of Distributing for purposes of section 361(b)(3). Payments in full or partial
satisfaction of the Litigation Obligations will be treated as distributions in pursuance of
the Plan of Reorganization under section 361(b)(3).

12. No gain or loss will be recognized by Distributing upon the distribution of Controlled
common stock in the Distribution. Section 361(c); section 355(c).

13. The aggregate basis of the Distributing stock and the Controlled common stock in
the hands of Distributing shareholders immediately after the Distribution (including any
fractional share interest in Controlled common stock to which the shareholders may be
entitled) will equal the aggregate basis of the Distributing stock held by Distributing
shareholders immediately before the Distribution, allocated in proportion to the fair
market values of the Distributing stock and the Controlled common stock immediately
following the Distribution in accordance with Treas. Reg. §1.358-2(a)(2). Section 358(a);
section 358(b); section 358(c).

14. The holding period of the Controlled common stock received by Distributing
shareholders in the Distribution (including any fractional share interest in Controlled
common stock to which shareholders may be entitled) will include the holding period of
the Distributing stock with respect to which the distribution of Controlled common stock
was made, provided that the Distributing stock is held as a capital asset on the date of
the Distribution. Section 1223(1).

15. Distributing’s earnings and profits, if any, will be allocated between Distributing and
Controlled in accordance with section 312(h), Treas. Reg. §1.312-10 and Treas. Reg.
§1.1502-33(e).

16. Distributing’s continuing ownership of any Retained Stock until Distributing’s
disposition thereof will not adversely impact the qualification of the External Spin-off
PLR-105847-23                                13

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).

17. The tax consequence for the year in which any Cash Adjustment payment made
between Distributing and Controlled will be characterized in a manner consistent with
the proper treatment if such payment had occurred immediately before the Distribution
pursuant to the External Spin-off. See Arrowsmith v. Commissioner, 344 U.S. 6 (1952)
and Rev. Rul. 83-73, 1983-1 C.B. 84.

18. The receipt by Distributing shareholders of cash in lieu of fractional shares of
Controlled common stock will be treated for U.S. federal income tax purposes as if the
fractional shares had been distributed to 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 to a third party. The gain (or loss) recognized, 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
14.

19. Following the External Spin-off, 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) that 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.

20. Any Equity Awards currently outstanding and any Equity Awards issued in
connection with or after the Distribution (and any Controlled stock underlying, or issued
following the 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

No opinion is expressed about the federal income tax treatment of the Proposed
Transactions under other provisions of the Code or regulations or the federal income 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. In
particular, this office has made no determination whether the transfer of intellectual
property pursuant to the IP Arrangements constitutes a transfer of property. See Rev.
Rul. 69-156, 1969-1 C.B. 101.
PLR-105847-23                                          14

                                             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, a taxpayer filing
its return electronically may satisfy this requirement by attaching a statement to its
return that provides the date on and control number of the letter ruling.

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


                                                    Sincerely,


                                                    __________________________
                                                    Mark Weiss
                                                    Chief, Branch 2
                                                    Office of Associate Chief Counsel (Corporate)


cc:
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