Domestic business separation qualifies as a tax-free reorganization and distributions

Plain-English summary

A foreign-parented corporate group proposed separating a domestic subsidiary that conducted one business from domestic affiliates conducting another business. Before the separation, an intermediate subsidiary would contribute an intercompany receivable to the controlled subsidiary, then distribute that subsidiary's stock to the domestic parent. The domestic parent would next distribute the controlled subsidiary's stock to a foreign parent in the ownership chain, followed by additional foreign-group steps. The IRS ruled that the receivable contribution and first distribution qualify as a section 368(a)(1)(D) reorganization and section 355 distribution, with no gain or loss to the specified parties. It also ruled that the second stock distribution produces no gain or income to the domestic or foreign parent, and prescribed basis, holding-period, and earnings-and-profits treatment for both distributions. The IRS expressly did not determine whether the transactions satisfy the regulatory business-purpose requirement.

Ruling snapshot

• Question: What are the tax consequences of the receivable contribution and the first two stock distributions in the proposed business separation?
• Outcome: Approved for 13 specified reorganization, nonrecognition, basis, holding-period, and earnings-and-profits rulings
• Key authorities: IRC §§ 312(h), 355, 358, 361, 368(a)(1)(D), 1032, 1223; Treas. Reg. §§ 1.312-10, 1.355-2, 1.358-2, 1.1502-33

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202445011 Third Party Communication: None
Release Date: 11/8/2024 Date of Communication: Not Applicable
Index Number: 368.04-00, 355.00-00
Person To Contact:
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Refer Reply To:
CC:CORP:B05
PLR-103755-24
Date:
August 02, 2024

Foreign Parent = --------------------------------------------------------------------------
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FSub1 = --------------------------------------------------------------------------
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FSub2 = --------------------------------------------------------------------------
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FSub3 = --------------------------------------------------------------------------
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FSub4 = --------------------------------------------------------------------------
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Parent = --------------------------------------------------------------------------
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Sub1 = --------------------------------------------------------------------------
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Sub2 = --------------------------------------------------------------------------
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Sub3 = --------------------------------------------------------------------------
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PLR-103755-24 2

DRE = --------------------------------------------------------------------------
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Business A = ---------------------------
Business B = ---------------------------
Country A = ---------------------
Intercompany Receivable = --------------------------------------------------------------------------
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Treaty = --------------------------------------------------------------------------
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x = ----------
y = ----------

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

This letter responds to your authorized representatives’ letter dated February 23, 2024,
as supplemented by subsequent information and documentation, requesting rulings on
certain federal income tax consequences of the Proposed Transactions (as defined
below). The material information submitted in that request and subsequent
correspondence is summarized below.

This letter is issued pursuant to Rev. Proc. 2024-1, 2024-1 I.R.B. 1, and Rev. Proc.
2017-52, 2017-41 I.R.B. 283, regarding one or more “Covered Transactions” under
section 355 and 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 Proposed Transactions
satisfy the business purpose requirement of Treas. Reg. § 1.355-2(b).

                                Summary of Facts

Foreign Parent is the global parent of a worldwide group of various legal entities (the
“Foreign Parent Group”). Foreign Parent wholly owns FSub1 and FSub2. FSub1 wholly
owns FSub3, which in turns wholly owns FSub4. Each of Foreign Parent, FSub1, FSub2,
FSub3, and FSub4 is a foreign entity classified as a corporation for U.S. federal income
tax purposes. FSub4 wholly owns Parent.

PLR-103755-24 3

Parent is a domestic corporation and the common parent of an affiliated group of
corporations that file a consolidated return for U.S. federal income tax purposes (the
“Parent Group”).

Parent wholly owns Sub1, a domestic corporation with multiple classes of stock
outstanding. Sub1 wholly owns Sub2 and Sub3, each of which is a domestic corporation.
Sub1 holds the Intercompany Receivable owed by Sub2.

Sub2 owns all of the interests in DRE, a domestic limited liability company that is
disregarded as separate from its owner for federal income tax purposes.

Sub2, directly and through DRE, is engaged in Business A.

Sub3 is directly engaged in Business B.

Parent, Sub1, Sub2, and Sub3, in addition to other eligible affiliated domestic
corporations, join in the filing of the Parent Group’s consolidated U.S. federal income tax
return.

With the exception of services provided by certain shared back-office functions, Sub2 and
Sub3 have each engaged in the conduct of Business A and Business B, respectively, with
their own employees.

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 Transactions

For what are represented to be valid corporate business purposes, the members of the
Foreign Parent Group described above will engage in the following transactions
(collectively, the “Proposed Transactions”):

1. FSub4 will change its legal name under the laws of Country A.

2. Sub1 will convert all of its outstanding equity into a single class of common
   equity.

3. Sub1 will contribute the Intercompany Receivable to Sub2 as a contribution to
   capital (the “Capital Contribution”).

4. Sub1 will distribute all of the stock of Sub2 to Parent (the “First Distribution”).

5. Parent will distribute all of the stock of Sub2 to FSub4 (the “Second Distribution”).

6. FSub4 will distribute all of the stock of Parent to FSub3 (the “Third Distribution”).

PLR-103755-24 4

7. FSub3 will distribute all of the stock of FSub4 to FSub1 (the “Fourth
   Distribution”).

8. FSub1 will distribute all of the stock of FSub4 to Foreign Parent (the “Fifth
   Distribution”).

9. Foreign Parent will contribute all of the stock of FSub4 to FSub2 in exchange for
   common shares.

Parent and Sub2 will enter into a transition services agreement (the “TSA”), pursuant to
which x employees of Parent will continue to provide Sub2 with services relating to
certain back-office functions. The TSA will specify that such services will be provided for
the two-year period following the completion of the First Distribution and the Second
Distribution, in exchange for the payment by Sub2 to Parent of arm’s-length service
fees.

                                 Representations

First Distribution:

With respect to the First Distribution, except as otherwise set forth below, Parent has
made all of the representations in section 3 of the Appendix to Rev. Proc. 2017-52.

Parent has made the following alternative representations:

   Representations 3(a), 8(a), 22(a), 31(a), and 41(a).

Parent has not made the following representations, which do not apply to the First
Distribution:

   Representations 7, 19, 20, 24, 25, and 35.

In lieu of Representations 14 and 15, Parent has made the following representations:

   Additional Representation 1: Immediately after the First Distribution, the fair
   market value of the business assets of each of Sub1 and Sub2 will be greater
   than 80 percent of the fair market value of its total assets. For this purpose, the
   term “business assets” of a corporation means its gross assets used in one or
   more businesses. Such assets include cash and cash equivalents held as a
   reasonable amount of working capital for one or more businesses. Such assets
   also include assets required (by binding commitment or legal requirement) to be
   held to provide for exigencies related to a business or for regulatory purposes
   with respect to a business.

   Additional Representation 2: There is no plan or intention by the shareholders or
   security holders of Sub1 to sell, exchange, transfer by gift, or otherwise dispose
   of any of their stock in, or securities of, either Sub1 or Sub2 after the transaction.

PLR-103755-24 5

  Additional Representation 3: There is no plan or intention by Sub1 or Sub2,
  directly or through any related person (within the meaning of section 267(b) or
  section 707(b)(1)), to purchase any of its outstanding stock after the transaction.

  Additional Representation 4: There is no plan or intention to liquidate either Sub1
  or Sub2, to merge either corporation with any other corporation, or to sell or
  otherwise dispose of the assets of either corporation after the transaction, except
  in the ordinary course of business.

In lieu of Representation 29, Parent has made the following representation:

  Additional Representation 5: There was and will be no agreement,
  understanding, arrangement, or substantial negotiations at any point during the
  two-year period ending on the date of the First Distribution regarding an
  acquisition of either Sub1 or Sub2 (including a predecessor or successor within
  the meaning of Treas. Reg. § 1.355-8) or a similar acquisition.

Parent is unable to make the following representations with respect to the First
Distribution but has provided the required explanations:

  Representation 40, and

  Representation 42 (with respect to Sub2).

Parent has made the following modified representations:

  Representation 11(a): Except for in connection with the continuing arrangements
  covered by the TSA, following the First Distribution, Sub1 or the DSAG and Sub2
  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 § 355(b).

  Representation 32: Except as may arise as a result of the continuing
  arrangements covered by the TSA, no intercorporate debt will exist between
  each of Sub1 and Sub2 at the time of, or subsequent to, the First Distribution.

Second Distribution:

With respect to the Second Distribution, except as otherwise set forth below, Parent has
made all of the representations in section 3 of the Appendix to Rev. Proc. 2017-52.

Parent has made the following alternative representations:

  Representations 8(a), 22(a), 31(a), and 41(a).

Parent has not made the following representations, which do not apply to the Second
Distribution:

PLR-103755-24 6

  Representations 7, 18, 19, 20, 24, 25, and 35.

In lieu of Representations 14 and 15, Parent has made the following representations:

  Additional Representation 6: Immediately after the Second Distribution, the fair
  market value of the business assets of each of Parent and Sub2 will be greater
  than 80 percent of the fair market value of its total assets. For this purpose, the
  term “business assets” of a corporation means its gross assets used in one or
  more businesses. Such assets include cash and cash equivalents held as a
  reasonable amount of working capital for one or more businesses. Such assets
  also include assets required (by binding commitment or legal requirement) to be
  held to provide for exigencies related to a business or for regulatory purposes
  with respect to a business.

  Additional Representation 7: There is no plan or intention by the shareholders or
  security holders of Parent to sell, exchange, transfer by gift, or otherwise dispose
  of any of their stock in, or securities of, either Parent or Sub2 after the
  transaction.

  Additional Representation 8: There is no plan or intention by Parent or Sub2,
  directly or through any related person (within the meaning of section 267(b) or
  section 707(b)(1)), to purchase any of its outstanding stock after the transaction.

  Additional Representation 9: There is no plan or intention to liquidate either
  Parent or Sub2, to merge either corporation with any other corporation, or to sell
  or otherwise dispose of the assets of either corporation after the transaction,
  except in the ordinary course of business.

In lieu of Representation 29, Parent has made the following representation:

  Additional Representation 10: There was and will be no agreement,
  understanding, arrangement, or substantial negotiations at any point during the
  two-year period ending on the date of the Second Distribution regarding an
  acquisition of either Parent or Sub2 (including a predecessor or successor within
  the meaning of Treas. Reg. § 1.355-8) or a similar acquisition.

Parent is unable to make the following representations with respect to the Second
Distribution but has provided the required explanations:

  Representation 40, and

  Representation 42 (with respect to Sub2).

Parent has made the following modified representations:

  Representation 3(a): Other than the First Distribution, Parent has not and
  will not engage in a transaction, in anticipation of the Second Distribution,

PLR-103755-24 7

  in which either (i) Parent obtained or will obtain control (as defined in
  section 368(c)) of Sub2 (including a recapitalization into control (as
  defined in section 368(c)) but excluding a transaction that includes the
  formation of Sub2), or (ii) a corporation of which Parent is not in control
  (as defined in section 368(c)) became or will become a member of the
  SAG of which Sub2 would be the common parent.

  Representation 11(a): Except for in connection with the continuing
  arrangements covered by the TSA, following the Second Distribution,
  Parent or the DSAG and Sub2 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 § 355(b).

  Representation 32: Except as may arise as a result of the continuing
  arrangements covered by the TSA, no intercorporate debt will exist
  between each of Parent and Sub2 at the time of, or subsequent to, the
  Second Distribution.

Additional Representation:

In addition to the above, Parent makes the following representation related to the
Proposed Transactions:

  Additional Representation 11: Pursuant to the Treaty, dividend
  distributions from Parent to FSub4 qualify for a y-percent U.S. dividend
  withholding tax rate.

                                     Rulings

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

1. The Capital Contribution, followed by the First Distribution, will qualify as a
   reorganization under sections 368(a)(1)(D) and 355. Sub1 and Sub2 each will be
   “a party to a reorganization” within the meaning of section 368(b).

2. Sub1 will not recognize gain or loss on the Capital Contribution (section 361(a)).

3. Sub2 will not recognize gain or loss on the Capital Contribution (section 1032(a)).

4. Parent will not recognize gain or loss (and no amount will be included in the
   income of Parent) on the First Distribution (section 355(a)).

5. Sub1 will not recognize gain or loss on the distribution of the Sub2 stock in the
   First Distribution (section 361(c)).

PLR-103755-24 8

6. Immediately following the First Distribution, the aggregate basis that Parent had
   in the shares of Sub1 stock immediately before the First Distribution will be
   allocated between the shares of Sub1 stock with respect to which the First
   Distribution is made and the shares of Sub2 stock received with respect to the
   shares of Sub1 stock in proportion to the fair market value of each (section
   358(b)(2) and (c); Treas. Reg. § 1.358-2(a)).

7. The holding period of the Sub2 stock received by Parent in the First Distribution
   will include the holding period of the Sub1 stock held by Parent, provided that
   such Sub1 stock is held as a capital asset on the date of the First Distribution
   (section 1223(1)).

8. Earnings and profits (“E&P”), if any, will be allocated between Sub1 and Sub2 in
   accordance with section 312(h) and Treas. Reg. §§ 1.312-10(a) and 1.1502-
   33(e)(3).

9. FSub4 will recognize no gain or loss (and no amount will be included in the
   income of FSub4) on the Second Distribution (section 355(a)).

10. Parent will recognize no gain or loss (and no amount will be included in the
    income of Parent) on the Second Distribution (section 355(c)).

11. Immediately following the Second Distribution, the aggregate basis that FSub4
    had in the shares of Parent stock immediately before the Second Distribution will
    be allocated between the shares of Parent stock with respect to which the
    Second Distribution is made and the shares of Sub2 stock received with respect
    to the shares of Parent stock in proportion to the fair market value of each
    (section 358(b)(2) and (c); Treas. Reg. § 1.358-2(a)).

12. The holding period of the Sub2 stock received by FSub4 in the Second
    Distribution will include the holding period of the Parent stock held by FSub4 with
    respect to which the Second Distribution will be made, provided that such Parent
    stock is held as a capital asset on the date of the Second Distribution (section
    1223(1)).

13. E&P, if any, will be allocated between Parent and Sub2 in accordance with
    section 312(h) and Treas. Reg. §§ 1.312-10(b) and 1.1502-33(e)(3).

                                    Caveats
    

Except as expressly provided herein, no opinion is expressed or implied about the tax
treatment of the Proposed Transactions under any provision of the Code and
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.

PLR-103755-24 9

                                      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 ruling must be attached to any federal 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-103755-24) of this letter ruling.

Pursuant to the power of attorney on file with this office, copies of this letter are being
sent to your authorized representatives.

                                                   Sincerely,


                                                   ____________________________________
                                                   Katherine Zhang
                                                   Senior Counsel, Branch 5
                                                   Office of Associate Chief Counsel (Corporate)

cc:

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