Tax-free Type D reorganization and section 355 spin-off separating a business line from a consolidated group

Plain-English summary

A publicly traded foreign parent company sits atop a worldwide group that includes a US subsidiary (Distributing) heading a consolidated tax group with several business lines. The group wanted to split off one business (conducted through a partnership) into a separate company and hand that company up to the foreign parent. To do this, Distributing would contribute intercompany notes to its Controlled subsidiary for cash, then distribute all of Controlled's stock to the foreign parent. The taxpayer asked the IRS to confirm the split would be tax-free. The IRS ruled that the contribution and distribution together qualify as a tax-free reorganization under section 368(a)(1)(D) combined with a section 355 spin-off. As a result, Distributing recognizes no gain or loss on the contribution (section 361(a)) or the distribution (section 361(c)), Controlled recognizes none on receipt (section 1032(a)), and the foreign parent recognizes none on receiving the Controlled stock (section 355(a)). Basis and holding periods carry over, and earnings and profits are split between the two companies. Section 355 is the main tool that lets a corporation divide its businesses without a corporate-level or shareholder-level tax, so favorable rulings like this one are central to large corporate separations. The rulings are narrow: the IRS made no determination on whether the deal has a valid business purpose and expressed no opinion on most of the surrounding steps.

Ruling snapshot

• Question: Will Distributing's contribution of property to Controlled followed by the distribution of Controlled stock to Foreign Parent qualify as a tax-free reorganization and section 355 spin-off?
• Outcome: approved
• Key authorities: IRC §§ 368(a)(1)(D), 355, 361, 362, 1032, 1223, 312; Rev. Proc. 2017-52; Rev. Proc. 2018-53

Full text (IRS public release)

Internal Revenue Service                                         Department of the Treasury
                                                                 Washington, DC 20224

Number: 202505001                                                Third Party Communication: None
Release Date: 1/31/2025                                          Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-00,
              361.00-00, 368.00-00,                              Person To Contact:
              368.04-00                                          ---------------, ID No. -----------------
                                                                 Telephone Number:
---------------------                                            --------------------
---------------------------------------                          Refer Reply To:
-------------------------------------------------------          CC:CORP:B03
-----------------------------------------------                  PLR-104244-24
---------------------------------------------                    Date:
                                                                 October 31, 2024




Foreign Parent         =     -------------------------------------------
                             -------------------------------
                             --------------------------

Distributing           =     --------------------------------------------------------
                             -------------------------------
                             -----------------------

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

DC 1                   =     ----------------------------------
                             -------------------------------
                             -----------------------

DC 2                   =     ---------------------------------
                             -------------------------------
                             -----------------------

FC 1                   =     ---------------------------------------------------------------------
                             -------------------------------------------------------------------------------------
                             ------------
                             --------------------------

FC 2                   =     -------------------------------------------------------------------
                             -------------------------------------------------------------------------------------
                             ------------
                             --------------------------
PLR-104244-24                                  2


FC 3            =   ---------------------------------------
                    -------------------------------------------------------------------
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FC 4            =   -------------------------------------------------------------------
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                    ------------
                    --------------------------

FC 5            =   -------------------------------------------
                    -------------------------------------------------------------------------------------
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                    --------------------------

FC 6            =   -----------------------------------
                    -------------------------------------------------------------------------------------
                    ---------
                    --------------------------

FC 7            =   ----------------------------------------------------
                    -------------------------------------------------------------------------------------
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                    --------------------------

Holdco          =   -------------------------------------------------------------------------------------
                    ---------------------
                    ------------------------------

LLC 1           =   ------------------------------------------------------
                    ------------------------------------------------
                    -----------------------

LLC 1           =   -------------------------------------------------------------------------------------
Management          -------------------------------------------------------------------------------------
                    ------

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

Sub 2           =   ----------------------------------
                    -------------------------------
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PLR-104244-24                                   3

Business A      =   --------------------------------------------------------

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

Business C      =   ----------------------------------------------

Country A       =   ----------

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

a               =   ---

b               =   ---

c               =   --

d               =   --------------

e               =   --------------

f               =   --------------

g               =   --------------

h               =   --------------

i               =   --------------

j               =   --------------

k               =   --------------

Year 1          =   -------

Year 2          =   -------

Year 3          =   -------

Continuing      =   (i)       ----------------------------------------------------------------------------
Relationships                 ----------------------------------------------------------------------------
                              ----------------------------------------------------------------------------
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                    (ii)      ----------------------------------------------------------------------------
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PLR-104244-24                                4



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

This letter responds to your letter dated March 4, 2024, as supplemented by
subsequent information and documentation, requesting rulings on certain federal
income tax consequences of a series of transactions (the “Proposed Transaction,” as
described 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/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
Foreign Parent and Distributing, 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 is subject to verification on examination.

This office has made no determination regarding whether the Proposed Transaction
satisfies the business purpose requirement of § 1.355-2(b).

                                   Summary of Facts

Foreign Parent, a publicly traded Country A corporation, is the ultimate parent of a
worldwide group that includes both domestic and foreign entities. Distributing is the
parent company of an affiliated group of corporations that files a consolidated US
federal income tax return (“Distributing Group”). The Distributing Group is engaged in
multiple businesses, including Business A, Business B and Business C.

Foreign Parent wholly owns Distributing, DC 1, DC 2, FC 1 and FC 2. Each of
Distributing, DC 1 and DC 2 is a domestic corporation while each of FC 1 and FC 2 is a
foreign corporation. Distributing wholly owns Controlled. Controlled wholly owns Sub 1
and Sub 2, as well as owns a% of the issued and outstanding equity interests in LLC 1,
a limited liability company classified as a partnership for U.S. federal income tax
purposes. Unrelated third parties, including LLC 1 Management, own the remaining
issued and outstanding equity interests in LLC 1.

Foreign Parent and Distributing’s wholly-owned subsidiary respectively own b% and c%
of FC 3, a foreign corporation that indirectly wholly owns FC 4, a foreign subsidiary that
directly wholly owns FC 5. Moreover, FC 3 indirectly wholly owns FC 6, a foreign
subsidiary that directly wholly owns FC 7.
PLR-104244-24                                 5

Foreign Parent and Distributing propose to undertake a series of transactions to
separate the Controlled Business from the Distributing Group pursuant to a plan of
reorganization.

For purposes of satisfying the active trade or business requirements of section 355(b)
with respect to the Distribution (defined below), Distributing and the members of its
“separate affiliated group” as defined in section 355(b)(3) will rely on the U.S. business
operations of Business A and Business B (“Distributing Business”), and Controlled will
rely on the U.S. business operations of Business C conducted by LLC 1 (“Controlled
Business”). Financial information has been submitted in accordance with Rev. Proc.
2017-52 indicating that each of the Distributing Business and Controlled Business has
had gross receipts and operating expenses representing the active conduct of a trade or
business for each of the past five years.

Immediately prior to the Proposed Transaction, Foreign Parent and certain of its
subsidiaries will have approximately $d of outstanding net indebtedness to external
lenders in the form of a revolving credit facility due in Year 1 and senior notes due in
Year 2 and Year 3. Of such amount, Distributing will owe external lenders at least $e in
the form of a revolving credit facility.

Further, Controlled will owe to Foreign Parent a net indebtedness of approximately $f,
while DC 1, DC 2 and FC 2 will owe a net indebtedness to Distributing of approximately
$g, $h and $i, respectively (“Related Party Loan”). Finally, Distributing will owe a net
indebtedness of approximately $j to Controlled.

                                 Proposed Transaction

For what are represented to be valid corporate business purposes, Distributing
proposed to engage in the following transaction to separate Controlled from the
Distributing Group (the “Proposed Transaction”):

Step 1: LLC 1 will make a pro rata distribution of cash and/or notes receivable to
Controlled and its other members.

Step 2: Controlled will distribute to Distributing a note receivable owed by Distributing to
Controlled and may distribute additional cash and/or notes receivable.

Step 3: DC 1, DC 2 and FC 2 will offset their respective Related Party Loan payables
with Distributing.

Step 4: Controlled will be added to the existing credit facility to which Foreign Parent
and Distributing are parties, and Controlled will draw down on such credit facility an
amount of cash equal to the Related Party Loan.
PLR-104244-24                                  6

Step 5: Distributing will contribute its intercompany notes receivable owed by DC 1, DC
2, and FC 2 to Controlled in exchange for an amount of cash equal to the Related Party
Loan (the “First Controlled Contribution”).

Step 6: Distributing will distribute all of the issued and outstanding equity interests in
Controlled to Foreign Parent (the “Distribution”).

Step 7: Within 30 days from the date of Distribution, Distributing will use at least $k of
the cash received from Controlled to satisfy: (1) an outstanding intercompany payable
owed to Foreign Parent, and Foreign Parent, in turn, will use the cash received from
Distributing to satisfy third-party debt; and (2) a portion of Distributing’s obligations
under its revolving credit facility.

Step 8: FC 4 will sell all the issued and outstanding equity interests in FC 5 to FC 1 (or a
newly formed subsidiary directly or indirectly owned by FC 1) in exchange for cash or a
note.

Step 9: FC 6 will sell all the issued and outstanding equity interests in FC 7 to FC 1 (or a
newly formed subsidiary directly or indirectly owned by FC 1) in exchange for cash or a
note.

Step 10: Foreign Parent is expected to contribute additional assets associated with
Business C, if any, to Controlled (the “Second Controlled Contribution”).

Step 11: Foreign Parent will form Holdco as a Country A unlimited liability company that
will initially be treated as a disregarded entity for U.S. federal income tax purposes
under the default provisions of § 301.7701-3(b)(2)(i)(C) and contribute the issued and
outstanding equity interests in each of Controlled, DC 1, DC 2, FC 1 and FC 2 to Holdco
in exchange for Holdco equity.

Step 12: Holdco will assign all of its equity interests in DC 1 and DC 2 to Controlled.
Immediately following such assignments, DC 1 and DC 2 will each convert into a limited
liability company under state law and thereafter be disregarded as separate from
Controlled for U.S. federal income tax purposes (the assignment of the DC 1 equity
interests, together with the conversion of DC 1 into a limited liability company, the “DC 1
Reorganization” and the assignment of DC 2 equity interests, together with the
conversion of DC 2 into a limited liability company, the “DC 2 Reorganization”).

In addition, Controlled is expected to cause Sub 1 and Sub 2 to either merge or
liquidate into Controlled or convert into limited liability companies under state law (and
thereafter be disregarded as separate from Controlled for U.S. federal income tax
purposes) (the “Sub 1 and Sub 2 Mergers and Liquidations”).

Step 13: Controlled (and, to the extent Sub 1 and Sub 2 are not merged out of
existence, Sub 1 and Sub 2), DC 1, DC 2, FC 1, FC 2, and LLC 1 Management will
PLR-104244-24                                7

enter into an agreement pursuant to which the parties share in the economics of the
underlying operating entities and assets supporting Business C (“Contractual
Partnership”). Each will be deemed to contribute its interest in the relevant operating
entity and in the relevant assets to the newly formed Contractual Partnership in
exchange for an equity interest in the Contractual Partnership and the assumption by
the Contractual Partnership of liabilities, if any.

Step 14: Holdco will file a check-the-box election to be treated as a corporation for U.S.
federal income tax purposes (the “Holdco CTB Election”).

Following the Distribution, Distributing and Controlled will operate independently of one
another. To the extent they will have Continuing Relationships, such continuing
arrangements were or will be based on arm’s length terms and conditions, including
arm’s length pricing. All such relationships are not inconsistent with the separation of
Controlled from the Distributing Group.

                                    Representations

Except as set forth below, Foreign Parent on behalf of its wholly owned subsidiaries,
Distributing and Controlled, has made all of the representations in section 3 of the
Appendix to Rev. Proc. 2017-52 with respect to the Proposed Transaction.

1. Foreign Parent has made the following alternative representations: 3(a), 8(b), 11(a),
   15(a), 22(a), 31(a), and 41(a).

2. Foreign Parent has not made the following representations, which do not apply to the
   Proposed Transaction: 7, 24, 25 and 35.

3. Foreign Parent has not made Representation 40, but has provided the required
   explanation.

4. Foreign Parent has made the following modified representations:

  Representation 19: To the extent of any gain in the property transferred by
  Distributing to Controlled prior to the Distribution, any Other Property issued or
  transferred by Controlled to Distributing in pursuance of the plan of reorganization will
  be transferred by Distributing to its shareholders in pursuance of the plan of
  reorganization or to its creditors in connection with the reorganization.

5. Foreign Parent has made the following additional representations in lieu of
Representations 14 and 15 in Rev. Proc. 2017-52:

     (a) Immediately after the Distribution, the fair market value of the business assets
  of each of Distributing and Controlled will be greater than 80 percent of the fair
  market value of its total assets. For this purpose, the term “business assets” of a
PLR-104244-24                                 8

  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.

     (b) There is no plan or intention by the shareholder(s) or securityholder(s) of
  Distributing to sell, exchange, transfer by gift, or otherwise dispose of any of its (their)
  stock in, or securities of, either Distributing or Controlled after the Distribution, except
  pursuant to the steps of the Proposed Transaction.

    (c) There is no plan or intention by Distributing or Controlled, 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 Distribution.

     (d) There is no plan or intention to liquidate either Distributing or Controlled, to
  merge either corporation with any other corporation, or to sell or otherwise dispose of
  the assets of either corporation after the Distribution, except in the ordinary course of
  business.

6. Foreign Parent has made the following additional representation in lieu of
Representation 29 in Rev. Proc. 2017-52:

     (a) There will have been no agreement, understanding, arrangement, or
  substantial negotiations at any point during the two-year period ending on the date of
  the Distribution regarding an acquisition of either Distributing or Controlled (including
  a predecessor or successor within the meaning of § 1.355-8) or a similar acquisition.

Except as set forth below, Foreign Parent on behalf of its wholly owned subsidiaries,
Distributing and Controlled, has made all of the representations in section 3.04 of the
Appendix to Rev. Proc. 2018-53 with respect to the Proposed Transaction.

7. Distributing has not made Representation 6, which does not apply to the Proposed
Transaction.

8. Distributing has made the following modified representations:

  Representation 2: Other than with respect to the satisfaction of intercompany debt
  owed by Distributing to Foreign Parent, no holder of Distributing debt that will be
  assumed or satisfied in connection with the Distribution is a person related to
  Distributing or Controlled within the meaning of sections 267(b) or 707(b)(1) (a
  “Related Person”).

  Representation 3: The holder of Distributing debt that will be assumed or satisfied in
  connection with the Distribution will not hold the debt for the benefit of Distributing,
PLR-104244-24                                 9

  Controlled, or any Related Person (other than with respect to the satisfaction of
  intercompany debt owed by Distributing to Foreign Parent).

Foreign Parent also has made the following additional representations:

9. The fair market value of Distributing’s Related Party Loan receivables that it will
contribute to Controlled in the First Controlled Contribution will each be equal to the
adjusted basis and adjusted issue price of such respective instrument.

10. The Contractual Partnership will be treated as a partnership for U.S. federal income
tax purposes and will file all tax returns consistent with such treatment.

11. The deemed contribution to the Contractual Partnership will qualify as a contribution
to a partnership under section 721(a).

12. The Second Controlled US Contribution will qualify as a contribution to a corporation
under section 351(a).

13. The Holdco CTB Election will qualify as a contribution to a corporation under section
351(a).

14. The DC 1 Reorganization will qualify as a reorganization within the meaning of
section 368(a)(1)(D).

15. The DC 2 Reorganization will qualify as a reorganization within the meaning of
section 368(a)(1)(D).

16. The Sub 1 and Sub 2 Mergers and Liquidations will each qualify as a liquidation to
which sections 332 and 337 apply.

                                         Rulings

Based solely on the information submitted and the representations made, we rule as
follows with respect to the Proposed Transaction:

1. The First Controlled Contribution and Distribution will qualify as a reorganization
under sections 368(a)(1)(D) and 355. Distributing and Controlled will each be a “party
to a reorganization” within the meaning of section 368(b).

2. No gain or loss will be recognized by Distributing upon the transfer of property to
Controlled in the First Controlled Contribution. Section 361(a).

3. No gain or loss will be recognized by Controlled on the receipt of property in the First
Controlled Contribution. Section 1032(a).
PLR-104244-24                                 10

4. Controlled’s basis in the property received in the First Controlled Contribution will
equal the basis of such property in Distributing’s hands immediately before the First
Controlled Contribution. Section 362(b).

5. The holding period of the property transferred by Distributing to Controlled in the First
Controlled Contribution will include the holding period of such property held by
Distributing. Section 1223(2).

6. No gain or loss will be recognized by (and no amount will be included in the income
of) Foreign Parent upon the receipt of Controlled stock in the Distribution. Section
355(a).

7. No gain or loss will be recognized by Distributing upon the Distribution. Section
361(c).

8. The holding period of the Controlled stock received by Foreign Parent in the
Distribution will include the holding period of the Distributing stock held by Foreign
Parent with respect to which the Distribution will be made, provided that such
Distributing stock is held as a capital asset on the date of the Distribution. Section
1223(1).

9. The earnings and profits, if any, will be allocated between Distributing and Controlled
in accordance with section 312(h), and §§ 1.312-10(a) and 1.1502-33(e)(3).

                                          Caveats

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax treatment of the Proposed Transaction under other provisions of the Code or
regulations or the tax treatment of any condition existing at the time of, or effects
resulting from the Proposed Transaction that are not specifically covered by the above
rulings. In particular, no opinion is expressed as to the tax treatment of Step 1 or Steps
8 through 14 of the Proposed Transaction.

                                 Procedural Statements

The 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 returns that provides the date on and control number
(PLR-104244-24) of the letter ruling.
PLR-104244-24                                           11

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

                                               Sincerely,



                                          By: _________________________
                                              Richard K. Passales
                                              Senior Counsel, Branch 4
                                              Office of Associate Chief Counsel (Corporate)



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