Business separation qualifies as a tax-free Type D spin-off

Plain-English summary

A publicly traded foreign parent planned to separate one business from another by contributing subsidiaries, receivables, and business assets to a controlled corporation and distributing all controlled-corporation stock pro rata to its shareholders. The IRS ruled that the contribution and distribution would qualify as a tax-free Type D reorganization and section 355 distribution. It also granted the expected nonrecognition, carryover-basis, holding-period, and earnings-and-profits consequences for the corporations and shareholders. The ruling depended on detailed representations concerning business assets, future acquisitions, share repurchases, and post-distribution plans. The IRS made no determination whether the distribution satisfies the regulatory business-purpose requirement and expressed no opinion on preparatory or later internal contributions.

Ruling snapshot

• Question: Will the proposed contribution and pro rata distribution qualify as a tax-free Type D reorganization and section 355 spin-off?
• Outcome: Approved, subject to the stated facts and representations
• Key authorities: IRC §§ 355, 361, 362, and 368(a)(1)(D); Rev. Proc. 2017-52; Rev. Proc. 2024-24

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202521019 Third Party Communication: None
Release Date: 5/23/2025 Date of Communication: Not Applicable
Index Number: 355.01-00, 368.04-00
Person To Contact:
-------------------- ------------------, ID No. -----------------
-------------- Telephone Number:
------------------------------ --------------------
-------------------------- Refer Reply To:
CC:CORP:1
PLR-121170-24
Date:
February 27, 2025

Legend

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

Controlled --------------
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FSub 1 = -------------------------------------------------------
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FSub 2 = -----------------------------------------------
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FSub 3 = ---------------------------------------
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US Sub = -----------------------------------------
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State A = -------------

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

PLR-121170-24 2

Business A = --------------------------------------------------------------
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Business B = --------------------------------------------------------------
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Continuing Arrangements = --------------------------------------------------------------
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Intercompany Loan = --------------------------------------------------------------
Receivables --------------------------------------------------------------
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Preparatory Internal = --------------------------------------------------------------
Transactions --------------------------------------------------------------
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PLR-121170-24 3

Transaction Agreements = --------------------------------------------------------------
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a = ---

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

This letter responds to your representatives’ letter dated November 15, 2024, 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 Transaction”). The material information provided 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, as amplified and modified by Rev. Proc. 2024-24, 2024-21 I.R.B.
1214, 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 upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

This office has made no determination regarding whether the Distribution (as defined
below) satisfies the business purpose requirement of Treas. Reg. §1.355-2(b).

                               Summary of Facts

Distributing, a publicly traded corporation organized under the laws of Country A, is the
parent company of a worldwide group of domestic and foreign affiliates (the “Distributing
Worldwide Group”). The Distributing Worldwide Group is engaged in Business A and
Business B. Distributing proposes to undertake the Proposed Transaction to separate
Business B from Business A pursuant to one overall plan of reorganization.

                              Proposed Transaction

In preparation for the Proposed Transaction, Distributing will undertake Preparatory
Internal Transactions to position Business B to be separated from Business A. After the
Preparatory Internal Transactions, Distributing will own: (i) all of the stock in (a)
Controlled, an entity organized under the laws of Country A, (b) FSub 1, an entity
organized under the laws of Country A, (c) FSub 2, an entity organized under the laws
of Country A, (d) FSub 3, an entity organized under the laws of Country A, (d) US Sub,
a State A corporation, (ii) Intercompany Loan Receivables, and (ii) Business B assets.

PLR-121170-24 4

For what is represented to be a valid business purpose, Distributing proposes to engage
in the following transactions (the “Proposed Transaction”) to separate Business B from
Business A. Following the Proposed Transaction, Distributing will conduct Business A
and Controlled will conduct Business B.

Step 1: Distributing will contribute the following to Controlled in exchange for no
consideration: (i) all of the stock of FSub 1, FSub 2, FSub 3, and US Sub; (ii)
Intercompany Loan Receivables; and (iii) Business B assets (the “Contribution”).

Step 2: Distributing will distribute all of the stock of Controlled pro rata to its public
shareholders (the “Distribution”).

Following the Distribution, the stock of Controlled will be listed on one or more stock
exchanges.

Post-Transaction Contributions

Following the Proposed Transaction, Controlled will contribute certain financing
activities, Intercompany Loan Receivables, and certain assets to entities in its post-
transaction affiliated group (“Post-Transaction Contributions”).

Continuing Arrangements and Transaction Agreements

In connection with the Proposed Transaction, Distributing and Controlled (or their
respective affiliates) will enter into certain Continuing Arrangements and Transaction
Agreements.

Share Repurchases

Distributing has an existing open market share repurchase program. Following the
Proposed Transaction, Controlled will institute a similar open market share repurchase
program and an accelerated share repurchase (“ASR”) program.

                                  Representations

The following representation has been made with respect to the Preparatory Internal
Transactions:

a) The Intercompany Loan Receivables are treated as indebtedness for US federal
income taxes purposes.

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

PLR-121170-24 5

Rev. Proc. 2017-52

Except as set forth below, Distributing has made all the representations in section 3 of
the Appendix to Rev. Proc. 2017-52 except as modified by Rev. Proc. 2024-24.

a) Distributing has made the following alternative representations: Representations
3(a); 8(b); 11(a); 22(a); 31(a); and 41(a).

b) Distributing has not made the following representations, which do not apply to the
Proposed Transaction: Representations 24; 25; 36; 37; 38; 39; and 40.

c) Distributing has made the following modified representations:

  Representations in lieu of Representations 14, 15 and 29:

      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 corporation means its gross assets used in
         one or more businesses and all members of such corporation’s separate
         affiliated group (within the meaning of section 355(b)(3)(B)) are treated as
         one corporation. 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 shareholders or security holders of
         Distributing to sell, exchange, transfer by gift, or otherwise dispose of any
         of their stock in, or securities of, either Distributing or Controlled after 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
         Proposed Transaction, other than through stock purchases meeting the
         requirements set forth below:

             i. With respect to any repurchase of shares of stock of Distributing or
                Controlled, as applicable, after the Distribution, including potentially
                in the open market or through an ASR of Controlled (and together
                with any other repurchase, a “Post-Distribution Repurchase”):

                    1. Any Post-Distribution Repurchase will be motivated by a
                       business purpose, and the stock that will be repurchased by

PLR-121170-24 6

                        Distributing or Controlled, or acquired by a counterparty
                        pursuant to an ASR of Controlled, will be widely held;

                    2. To the extent that any Post-Distribution Repurchase is made
                       on the open market (including through a U.S. Securities and
                       Exchange Commission (“SEC”) Rule 10b5-1 plan under the
                       Securities Exchange Act of 1934 (15 U.S.C. 78j) (“Exchange
                       Act”), a purchase in compliance with SEC Rule 10b-18 of the
                       Exchange Act, or a tender offer), Distributing or Controlled,
                       as applicable, does not expect to know the identity of any
                       shareholder from which stock will be repurchased. To the
                       extent that any Post-Distribution Repurchase is made
                       through an ASR, Controlled does not expect to know with
                       certainty the identity of any shareholder from which stock is
                       borrowed or purchased by each counterparty that
                       participates in such ASR;

                    3. There is no plan or intention that the aggregate amount of
                       stock purchased or acquired through Post-Distribution
                       Repurchase will equal or exceed a percent of the
                       outstanding stock of Distributing or Controlled, as applicable;
                       and

                    4. No Post-Distribution Repurchase will be motivated to any
                       extent by a desire to increase or decrease the ownership
                       percentage of any particular shareholder or group of
                       shareholders.

      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 Proposed Transaction,
         except in the ordinary course of business.

      e. There was 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 Treas. Reg. §
         1.355-8) or a similar acquisition.

Rev. Proc. 2024-24

Except as set forth below, Distributing has made all the representations in sections 3.03
through 3.05 of Rev. Proc. 2024-24.

PLR-121170-24 7

a) Distributing has made the following alternative representation in section 3.03(2)
of Rev. Proc. 2024-24: Alternative Representation 1A.

b) Distributing has not made the following representations in section 3.03 of Rev.
Proc. 2024-24, which do not apply to the Proposed Transaction: Representations
2, 3, 4, 5, 6, 13, 15A and 15B, 16, 17A and 17B, 18, 19, 20, 21, 22, 23, 25, 26,
27, 28, 29, 30, 31, 32, 33, 34, 35, and 36.

                                     Rulings

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

1. The Proposed Transaction will qualify as a tax-free reorganization and
   distribution pursuant to section 368(a)(1)(D) and section 355. Distributing and
   Controlled will each be a “party to a reorganization” within the meaning of section
   368(b).

2. Distributing will recognize no gain or loss on the Contribution. Section 361(a).

3. Controlled will recognize no gain or loss on the Contribution. Section 1032(a).

4. Controlled’s basis in each asset received in the Contribution will be the same as
   the basis of the asset in the hands of Distributing immediately before the
   Contribution. Section 362(b).

5. Controlled’s holding period in each asset received in the Contribution will include
   the period during which Distributing held the asset. Section 1223(2).

6. Distributing’s shareholders will recognize no gain or loss (and no amount will be
   includible in their income) on the receipt of Controlled stock in the Distribution.
   Section 355(a)(1).

7. Distributing will recognize no gain or loss on the Distribution. Sections 355(c),
   361(c).

8. The holding period of the Controlled stock received by Distributing’s shareholders
   in the Distribution will include the holding period of the Distributing stock 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. Earnings and profits, if any, will be allocated between Distributing and Controlled
   in accordance with section 312(h) and Treas. Reg. §1.312-10(a).

PLR-121170-24 8

                                      Caveats

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax treatment of the Proposed Transaction under any provision of the Code and
regulations or the tax treatment of any condition existing at the time of, or effects
resulting from, the Proposed Transaction that is not specifically covered by the above
rulings.

No opinion is expressed or implied concerning the tax treatment of, and tax
consequences from, the Preparatory Internal Transactions and Post-Transaction
Contributions under any provision of the Code or regulations or the tax treatment of any
condition existing at the time of, or effects resulting from, the Preparatory Internal
Transactions and Post-Transaction Contributions.

                             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.

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

                                   Sincerely,


                                   ______________________________
                                   Petya V. Kirilova
                                   Assistant to the Branch Chief, Branch 5
                                   (Corporate)

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