Extending post-spinoff transition arrangements does not disturb a prior tax-free separation ruling

Plain-English summary

A corporation that had earlier spun off one of its businesses into a separate public company received a favorable IRS ruling in 2021 that the separation qualified as a tax-free distribution under Section 355 and a related reorganization under Section 368. After the spin-off, the two companies found that the newly independent business could not stand fully on its own by the originally agreed dates: it needed more time to build its own IT and business systems, to move to its own brand and regulatory registrations in various countries, and to keep certain supply and facility services running. The company asked the IRS for a supplemental ruling that extending these transition arrangements, plus a foreign subsidiary's election to be treated as a disregarded entity (handled as a tax-free liquidation under Sections 332 and 337), would not undo the earlier tax-free treatment. The IRS agreed: the operational extensions and the entity-classification election do not affect the prior rulings, which remain in full force. This is useful because it shows the IRS will accommodate real-world delays in separating two businesses without jeopardizing a spin-off's tax-free status, so long as arrangements are at arm's length and last no longer than needed.

Ruling snapshot

• Question: Do post-separation "Operational Extensions" and a subsidiary's entity-classification election affect the rulings in the taxpayer's prior § 355/§ 368 spin-off letter ruling?
• Outcome: approved (supplemental ruling; prior rulings unaffected)
• Key authorities: IRC §§ 355, 368, 332, 337; Rev. Proc. 2017-52 (as amplified and modified by Rev. Proc. 2018-53)

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 202425001                                            Third Party Communication: None
Release Date: 6/21/2024                                      Date of Communication: Not Applicable
Index Number: 355.00-00, 368.04-00
                                                             Person To Contact:
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---------------------------------------                      ID No. -----------------
--------------------------------------------                 Telephone Number:
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-----------------------------------------                    Refer Reply To:
                                                             CC:CORP:B01
                                                             PLR-104413-24
                                                             Date:
                                                             March 22, 2024




                                                 LEGEND

Distributing            = -------------------------------------------------------------------------------------
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Controlled 1            = -------------------------------------------------------------------------------------
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Facility A              = -------------------------------------------------------------------------------------
Services                  -------------------------------------------------------------------------------------
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Transition              = -------------------------------------------------------------------------------------
Services                  -------------------------------------------------------------------------------------
Agreements                ----------------------------------------------------------------------

Product C               = ----------------------------------------------------------------------

Product C               = -------------------------------------------------------------------------------------
Supply                    -------------------------------------------------------------------------------------
Agreement                 -------------------------------------------------------------------------------------
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PLR-104413-24                                            2

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 Date A                  = ---------------------

 Date B                  = ---------------------

 Date C                  = ---------------------

 Date D                  = ---------------------

 Date E                  = -------------------

 Date F                  = -----------------------

 Jurisdiction C          = ------

 Jurisdiction D          = ---------

 Jurisdiction E          = ---------

 q                       = ---

 r                       = ---

 s                       = --

 t                       = --

 Facility A              = -------------------------------------------------------------------------------------
 Events                    -------------------------------------------------------------------------------------
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                           ---------------

Dear ----------------:
PLR-104413-24                                  3


This letter responds to your letter dated February 13, 2024, as supplemented by
subsequent information and documentation, submitted on behalf of Distributing, its
affiliates, and its shareholders, requesting a supplemental ruling to the private letter
ruling (PLR-110954-21) dated December 17, 2021, (the "Prior Letter Ruling") on certain
Federal income tax consequences of a series of transactions (the "Transactions"). The
material information submitted in that request and subsequent correspondence is
summarized below. Capitalized or underlined terms not defined in this letter have the
meanings assigned to them in the Prior Letter Ruling.

This letter is issued pursuant to section 3.05 of 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
supplemental ruling on one or more Covered Transactions under section 355 and/or
section 368 of the Internal Revenue Code (the "Code"). This office expresses no opinion
as to any issue not specifically addressed by the rulings below.

The rulings contained in this letter are based 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 the Transactions: (i) satisfied
the business purpose requirement of Treas. Reg. § 1.355-2(b); (ii) was 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).

                                 SUPPLEMENTAL FACTS

The facts described in the Prior Letter Ruling are unchanged, except as described
below.

Operational Extensions

As described in the Prior Letter Ruling, in connection with the Transactions that
occurred to separate the Controlled Business from the Distributing Group (the
"Separation"), Distributing (and/or one or more of Distributing's direct or indirect
subsidiaries) and Controlled 1 (and/or one or more of Controlled 1's direct or indirect
subsidiaries) entered into agreements (the "Post-Separation Agreements") intended to
PLR-104413-24                                   4

govern certain of their relationships (and that of their respective subsidiaries) following
consummation of the Transactions and to manage an orderly transition in the operation
of the Controlled Business.

Among other agreements, the Post-Separation Agreements include (i) the Transition
Services Agreements that relate to the provision by Distributing to Controlled 1 (and
vice versa) of certain customary limited transition services consistent with commonly
shared services, including, but not limited to, those related to information technology,
procurement, customer service, quality and regulatory affairs, accounting, human
resources, and distribution and logistics; (ii) agreements related to assets, liabilities, and
regulatory authorizations that could not be legally transferred prior to the Transactions;
and (iii) certain manufacturing, supply, services, lease, intellectual property, and other
related agreements intended to achieve a successful separation of the Controlled
Business, including the Facility A and Facility B Agreements and the Brand Licensing
Agreement.

Controlled 1 has encountered certain unforeseen developments and limitations in
seeking to establish its own independent enterprise resource planning ("ERP") system
necessary to rely on its own independent information technology, procurement, quality
and regulatory affairs, business affairs, tax, and treasury functions. Specifically, such
developments include (i) the failure of certain key baseline assumptions to be correct,
including assumptions that underestimated the complexity of ERP system design and
implementation, difficulties in operationalizing ERP systems in certain non-U.S.
jurisdictions, and the inability to migrate data from certain Distributing ERP systems to
Controlled 1 ERP systems; (ii) the identification of certain critical issues and limitations
that arose after the External Distribution that impacted Controlled 1's ability to cause its
ERP system to "go live" at expected dates, including lagging governmental and
regulatory approvals, delays to account setup by Controlled 1's customers with
Controlled 1's ERP system, and limitations in the timing of ERP transition posed by
external financial reporting requirements; and (iii) identification of limitations relating to a
third-party logistics provider that Controlled 1 had hired to provide certain services
related to the ERP system (and implementation thereof). As a result of such
developments, Controlled 1 cannot commercially feasibly complete by Date A the
establishment of these standalone functions, and therefore must rely on certain
transition services provided by Distributing beyond Date A, the date by which
Distributing and Controlled 1 had originally agreed that all transition services provided
under the Transition Services Agreements would terminate. Accordingly, Distributing
and Controlled 1 will agree to extend the term of the Transition Services Agreements
with respect to certain transition services such that those services would be provided for
a longer period of time following the External Distribution (such extensions, the
"Transition Services Extensions"). The period of time for which the applicable transition
services will be extended varies, depending on the particular service in question, but in
no event will be longer than is necessary to achieve a successful separation of the
Controlled Business and, other than as it relates to Transition Services provided relating
to Jurisdiction C, in no event will be longer than q months following the date of the
PLR-104413-24                                 5

External Distribution (i.e., a maximum r-month extension beyond Date A).

Distributing and Controlled 1 also will extend the term of certain Post-Separation
Agreements that relate to assets, liabilities, and regulatory authorizations that could not
be transferred prior to the Transactions (the "Delayed Transfer Extensions"). It is
expected that the Delayed Transfer Extensions will terminate upon or following the
termination of the Transition Services Extensions but in no event will be longer than is
necessary to achieve a successful separation of the Controlled Business.

Additionally, Controlled continues to use Distributing's brand on Controlled Business
products and needs to continue using certain of Distributing's licenses and registrations
to conduct the Controlled Business. Such need arose from certain developments,
including (i) complications arising from a country-by-country regulatory approval
strategy that is dependent on first completing a successful transition onto Controlled 1's
independent ERP system in that country; (ii) complexities and variance of multi-step
processes required before products displaying Controlled 1's brand or name can be
sold in a particular country; (iii) delays related to the use of single stock keeping units
("SKUs") for a particular product across countries, a fact that necessitates achieving
regulatory approvals across all relevant jurisdictions (certain of which may have long
lead times for regulatory approvals) before selling such product in any of the countries
in which the SKU is used; (iv) constraints in the number of regulatory bodies capable of
providing critical markings needed for products to be sold in certain jurisdictions using
solely Controlled 1's brand; and (v) resource constraints and turnover related to the
ability to complete the design, specifications, verifications, and approvals of Controlled
1's labels. Accordingly, Controlled 1 and its subsidiaries will continue to use
Distributing's brand, licenses, and registrations for a period extending beyond Date A
(the "Brand Licensing and Registrations Extension"). The Brand Licensing and
Registrations Extension will generally extend no longer than Date B but, in the case of
the use of Distributing's brand, licenses, and registrations for all SKUs relating to
Jurisdiction C, Jurisdiction D, and Jurisdiction E, which collectively represent
approximately s% of Controlled 1's gross revenue, the Brand Licensing and Registration
Extension will extend beyond Date B (but in no event will be longer than is necessary to
achieve a successful separation of the Controlled Business).

Pursuant to the Facility A and Facility B Agreements, Controlled 1 and its subsidiaries
provide, among other services, the Facility A Services to Distributing and its
subsidiaries. As a result of certain unforeseen developments, including the Facility A
Events, Distributing and Controlled 1 will agree that Controlled 1 and its subsidiaries will
continue to provide the Facility A Services until Date C, instead of Date D, the original
termination date (the "Facility A Services Extension").

Following the External Distribution, Distributing and Controlled 1 entered into the
Product C Supply Agreement (together with the Transition Services Extensions, the
Delayed Transfer Extensions, the Brand Licensing and Registrations Extension, and the
Facility A Services Extension, the "Operational Extensions"), which represented less
PLR-104413-24                                 6

than t% of Controlled 1's overall production volume of Product C during the term of the
Product C Supply Agreement.

Entity Classification Election

As described in the Prior Letter Ruling, in the First Controlled 2 Distribution, FSub 3
distributed approximately k% of the Controlled 2 Stock to FSub 2 and the remaining
approximately l% of the Controlled 2 Stock to DRE 5.

On Date E, FSub 3 elected to be treated as an entity disregarded as separate from its
owner for Federal tax purposes, with retroactive effect as of Date F (the "Entity
Classification Election"). Accordingly, effective Date F, for Federal tax purposes, FSub 3
became disregarded as an entity separate from FSub 2. Distributing treated the deemed
liquidation of FSub 3 resulting from the Entity Classification Election as a complete
liquidation of FSub 3 described in sections 332 and 337. The Entity Classification
Election was made as part of an internal restructuring of the Distributing Group and was
unrelated to the Transactions.

                                  REPRESENTATIONS

Distributing has made the following representation with respect to the Supplemental
Facts:

    1. Distributing reaffirms all the material information submitted in connection with,
      and all the representations contained in, the Prior Letter Ruling, as modified and
      supplemented by the representations and information herein.

Distributing has made the following modified representations pursuant to section 3.04 of
Rev. Proc. 2018-53:

    2. With respect to the External Distribution, instead of the modified Representation
      33 that Distributing made in the Prior Letter Ruling, Distributing represents that
      any payments made in connection with all continuing transactions, if any,
      between Distributing and Controlled 1 after the External Distribution have been
      and will be for fair market value based on arm's-length terms or a mutually
      agreed upon cost-plus pricing arrangement that is commercially reasonable with
      respect to certain Post-Separation Agreements (other than purchases of Product
      C at cost pursuant to the Product C Supply Agreement).

    3. With respect to the First Controlled 2 Distribution, instead of Representation
      11(a) that Distributing made in the Prior Letter Ruling, Distributing makes the
      following modified Representations:

       (a) Following the First Controlled 2 Distribution until the deemed liquidation of
           FSub 3 resulting from the Entity Classification Election, FSub 3 or FSub 3's
PLR-104413-24                                 7

          separate affiliated group continued, independently and with its separate
          employees, the active conduct of the business on which it relied to meet the
          active trade or business requirement of section 355(b).

       (b) Following the deemed liquidation of FSub 3 resulting from the Entity
           Classification Election, FSub 2 or FSub 2's separate affiliated group has
           continued, independently and with its separate employees, the active conduct
           of the business on which FSub 3 relied to meet the active trade or business
           requirement of section 355(b).

                                         RULINGS

Based solely on the information submitted and the representations set forth above, we
rule as follows:

    1. The Operational Extensions and the Entity Classification Election will not affect
      the rulings set forth in the Prior Letter Ruling.

    2. The rulings set forth in the Prior Letter Ruling remain in full force and effect.

                                         CAVEATS

Except as expressly provided in this letter, no opinion is expressed or implied
concerning the tax treatment of the Transactions under any other provisions of the Code
or regulations or the tax treatment of any conditions existing at the time of, or effects
resulting from the Transactions that are not specifically covered by the above ruling. In
particular, no opinion is expressed as to the effective date of the Entity Classification
Election or the qualification of the deemed liquidation of FSub 3 resulting from the Entity
Classification Election as a complete liquidation of FSub 3 under section 332.

                             PROCEDURAL STATEMENTS

This letter 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 (PLR-
104413-24) of this letter ruling.
PLR-104413-24                                            8

In accordance with the Power of Attorney on file with this office, copies of this letter are
being sent to your authorized representatives.

                                                 Sincerely,


                                                 Jonathan R. Neuville
                                                 Jonathan R. Neuville
                                                 Senior Technician Reviewer, Branch 1
                                                 Office of Associate Chief Counsel (Corporate)




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