PLR 200033029: a holding company separates Business B from Business C through a Type D spin off

Plain-English summary

Distributing is a publicly traded holding company that conducts three businesses through subsidiaries. It proposed contributing its Sub 2 stock to a new Controlled corporation and distributing the Controlled stock pro rata to Distributing's shareholders, separating Business B from Business C. The IRS ruled that the Contribution and Distribution 2 would qualify as a reorganization under section 368(a)(1)(D), with the specified nonrecognition, basis, holding period, earnings and profits, and fractional share consequences. The letter gave no opinion on the Liquidation, Distribution 1, Cancellation, or Acquisitions, including whether the Acquisitions would be an expansion of Business C, so the ruling covers only part of the proposed transaction.

Ruling snapshot

• Question: Do the Contribution and Distribution 2 qualify for the requested Type D reorganization and section 355 treatment, including basis, holding period, and fractional share rules?
• Outcome: Mixed. The IRS granted the specified rulings for the Contribution and Distribution 2, but gave no opinion on the Liquidation, Distribution 1, Cancellation, or Acquisitions.
• Key authorities: IRC §§ 332, 355, 357, 358, 361, 362, 368(a)(1)(D), 47, 50, 1001, 1032, 1221, 1222, and 1223; Treas. Reg. §§ 1.83-3(d), 1.83-7(b), 1.1502-13, 1.1502-14, 1.1502-19, 1.312-10, 1.355-3(b)(3)(ii), and 1.358-2(a)(2).

Full text (IRS public release)

Internal Revenue Service              Department of the Treasury

Index Numbers: 355.01-00, 368.04-00   Washington, DC 20224



                                      Person to Contact:
Number: 200033029
                                      Telephone Number:
Release Date: 8/18/2000
                                      Refer Reply To:
                                      CC:DOM:CORP:Br4 PLR-101763-00
                                      Date:
                                      May 18, 2000


Distributing                  =

Controlled                    =

Sub 1                         =

Sub 2                         =

Sub 3                         =

Sub 4                         =

Sub 5                         =

Sub 6                         =

Sub 7                         =

Sub 8                         =

Corp W                        =

Corp X                        =

Corp Y                        =

Corp Z                        =

Business A                    =

Business B                    =

Business C                    =

Year 1                        =
                                            -2-

Year 2                             =

Year 3                             =

a                                  =

b                                  =

c                                  =

       This letter responds to your January 12, 2000 request for rulings on certain
federal income tax consequences of a proposed transaction. The information
submitted in that letter and in later correspondence is summarized below.

        The rulings 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 ruling request. Verification of the facts, information, and other data
in this ruling letter may be required as part of the audit process.

                                   Summary of Facts

      Distributing is a publicly traded holding company that conducts Business A,
Business B, and Business C through its subsidiaries. Distributing wholly owns Sub 1
(Business A), Sub 2 (Business B), Sub 4 (Business C), Sub 5 (Business C), Sub 6
(Business C), Sub 7 (Business C), and Sub 8 (Business C). Sub 2 wholly owns Sub 3,
which holds debt securities and other short-term investment assets.

        Sub 1, Sub 2, Sub 4, Sub 5, and Sub 6 each has engaged in its business for
more than five years. Sub 7 has engaged in Business C since Year 1, when it was
formed by Distributing to purchase the Business C assets of Corp W ("Acquisition 1").
Sub 8 has engaged in Business C since Year 2, when it was formed by Distributing to
purchase the Business C assets of Corp X (“Acquisition 2"). In addition, Distributing
directly purchased the Business C assets of Corp Y (“Acquisition 3") and Corp Z
(“Acquisition 4") in Year 3 (Acquisitions 1 through 4, collectively, the “Acquisitions”).

       Financial information has been received indicating that Business A (as
conducted by Sub 1) and Business B (as conducted by Sub 2) each has had gross
receipts and operating expenses representing the active conduct of a trade or business
for each of the past five years.

       Distributing has issued, and expects to continue issuing, stock options as
compensation to employees and directors (the “Compensatory Options”).
Distributing is also authorized to repurchase shares of its stock under its stock
repurchase plan.
                                             -3-

       Management of Distributing wishes to expand Business C by making acquisitions
using Distributing stock as consideration. Distributing’s financial advisor has concluded,
in a series of reasoned and detailed letters, that Distributing’s cost of making these
acquisitions would be materially lower if Business C were separated from Business B.

                                 Proposed Transaction

       To accomplish this separation, Distributing has proposed the following series        of
steps (collectively, the “Proposed Transaction”):

      (i) Sub 1 will liquidate into Distributing in a transaction the taxpayer represents
      will qualify under § 332 of the Internal Revenue Code (the “Code” and the
      “Liquidation”).

      (ii) Sub 2 will distribute its Sub 3 stock to Distributing (“Distribution 1”).

      (iii) An a dollar intercompany payable owed by Distributing to Sub 2 will be
      canceled (the “Cancellation”).

      (iv) Distributing will contribute its Sub 2 stock to newly formed Controlled in
      exchange for all of Controlled’s stock (the “Contribution”).

      (v) Distributing will distribute the Controlled stock pro rata to its shareholders
      (“Distribution 2”). Fractional shares of Controlled stock that would otherwise
      have been issued in Distribution 2 will be accumulated by the issuing agent and
      sold by a stock brokerage firm to the general public, with the net proceeds going
      to the shareholders who would have received the fractional shares.

      (vi) Within one year following Distribution 2, Distributing will use b percent of its
      stock to acquire companies that will augment its Business C operations.

                  Contribution and Distribution 2 Representations

      The taxpayer has made the following representations regarding the Contribution
and Distribution 2:

      (a) No part of the consideration distributed by Distributing will be received by a
shareholder as a creditor, employee, or in any other capacity other than that of a
shareholder of Distributing.

      (b) The five years of financial information submitted on behalf of Sub 1 (for
Business A) and Sub 2 (for Business B) represents the present operations of each
corporation, and there have been no substantial operational changes to either
corporation since the date of the last submitted financial statements.
                                             -4-

       (c) Immediately after Distribution 2, the gross assets of the trade or business
relied on by Distributing to satisfy the active trade or business requirement of § 355(b)
(Business A) will have a fair market value equal to at least five percent of the total fair
market value of Distributing’s gross assets.

        (d) Immediately after Distribution 2, the gross assets of the trade or business
relied on by Controlled to satisfy the active trade or business requirement of § 355(b)
(Business B of Sub 2) will have a fair market value equal to at least five percent of the
total fair market value of Sub 2’s gross assets.

       (e) Immediately after Distribution 2, at least 90 percent of the fair market value
of the gross assets of Controlled will consist of stock and securities of a controlled
corporation (Sub 2) that is engaged in the active conduct of a trade or business as
defined in § 355(b)(2).

        (f) Following Distribution 2, Distributing and Sub 2 each will continue the active
conduct of its business, independently and with its own employees, except for sharing c
for a limited time.

       (g) Distribution 2 is being carried out so that Distributing can make more efficient
use of its stock in expanding Business C. Distribution 2 is motivated, in whole or
substantial part, by this corporate business purpose and other business reasons.

      (h) The total adjusted basis and fair market value of the assets transferred to
Controlled by Distributing each equals or exceeds the liabilities assumed (as
determined under § 357(d)) by Controlled.

       (i) The liabilities of Distributing being assumed (as determined under § 357(d))
by Controlled were incurred in the ordinary course of business and are associated with
the assets being transferred.

       (j) There is no plan or intention by any shareholder who owns five percent or
more of the Distributing stock, and the management of Distributing, to its best
knowledge, is not aware of any plan or intention on the part of any particular remaining
shareholder or security holder of Distributing to sell, exchange, transfer by gift, or
otherwise dispose of any stock in, or securities of, either Distributing or Controlled after
the Proposed Transaction.

       (k) There is no plan or intention by either Distributing or Controlled, directly or
through any subsidiary corporation, to purchase any of its outstanding stock after the
Proposed Transaction, other than through stock purchases meeting the requirements
of section 4.05(1)(b) of Rev. Proc. 96-30, 1996-1 C.B. 696, 705.

      (l) 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
                                             -5-

the assets of either corporation after the Proposed Transaction, except in the ordinary
course of business.

      (m) No intercorporate debt will exist between Distributing (or its affiliates) and
Controlled (or its affiliates) at the time of, or after, Distribution 2.

      (n) No two parties to the Proposed Transaction are investment companies as
defined in § 368(a)(2)(F)(iii) and (iv).

       (o) Immediately before Distribution 2, items of income, gain, loss, deduction,
and credit will be taken into account as required by the applicable intercompany
transaction regulations (see §§ 1.1502-13 and 1.1502-14 of the Income Tax
Regulations as in effect before the publication of T.D. 8597, 1995-2 C.B. 147, and as
currently in effect; § 1.1502-13 as published by T.D. 8597). Further, any excess loss
account Distributing may have in Controlled stock will be included in income
immediately before Distribution 2 to the extent required by applicable regulations
(see § 1.1502-19).

       (p) The income tax liability for the taxable year in which investment credit
property (including any building to which § 47(d) applies) is transferred (if any) will be
adjusted pursuant to § 50(a)(1) or (a)(2) (or § 47, as in effect before amendment by
Public Law 101-508, Title 11, 104 Stat. 1388, 536 (1990), if applicable) to reflect an
early disposition of property.

       (q) For purposes of § 355(d), immediately after Distribution 2, no person
(determined after applying § 355(d)(7)) will hold stock possessing 50 percent or more of
the total combined voting power of all classes of Distributing stock entitled to vote, or
50 percent or more of the total value of shares of all classes of Distributing stock that
was acquired by purchase (as defined in § 355(d)(5) and (8)) during the five-year period
(determined after applying § 355(d)(6)) ending on the date of Distribution 2.

       (r) For purposes of § 355(d), immediately after Distribution 2, no person
(determined after applying § 355(d)(7)) will hold stock possessing 50 percent or more of
the total combined voting power of all classes of Controlled stock entitled to vote, or
50 percent or more of the total value of shares of all classes of Controlled stock that
was either (i) acquired by purchase (as defined in § 355(d)(5) and (8)) during the five-
year period (determined after applying § 355(d)(6)) ending on the date of the
Distribution or (ii) attributable to distributions on Distributing stock that was acquired by
purchase (as defined in § 355(d)(5) and (8)) during the five-year period (determined
after applying § 355(d)(6)) ending on the date of Distribution 2.

       (s) Distribution 2 is not part of a plan or series of related transactions (within the
meaning of § 355(e)) pursuant to which one or more persons will acquire, directly or
indirectly, stock possessing 50 percent or more of the total combined voting power of all
classes of either Distributing or Controlled entitled to vote, or stock possessing 50
                                              -6-

percent or more of the total value of all classes of stock of either Distributing or
Controlled.

      (t) Distributing is not an S corporation (under § 1361(a)), and neither Distributing
nor Controlled plans to make an S corporation election under § 1362(a) following the
Proposed Transaction.

        (u) The payment of cash in lieu of fractional shares of Controlled will be solely
for the purpose of avoiding the expense and inconvenience to Distributing of issuing
fractional shares and does not represent separately bargained-for consideration. The
total cash consideration to be paid in lieu of fractional shares of Controlled stock will not
exceed one percent of the total consideration that will be issued in the Proposed
Transaction to the Distributing shareholders. The fractional share interests of each
Distributing shareholder will be aggregated, and no Distributing shareholder will receive
cash in an amount equal to or greater than the value of one full share of Controlled
stock.

       (v) Distributing will use b percent of its stock to make acquisitions in the year
following Distribution 2.

       (w) Any Compensatory Options granted will contain customary terms and
conditions, will be granted in connection with the performance of services for
Distributing or Controlled, will not be excessive by reference to the services performed,
and, immediately after Distribution 2 and within six months thereafter, (i) will be non-
transferable within the meaning of § 1.83-3(d) and (ii) will not have a readily
ascertainable fair market value as defined in § 1.83-7(b).

       (x) Payments made in connection with any continuing transactions between
Distributing (and its subsidiaries) and Controlled (and its subsidiaries) will be for fair
market value based on terms and conditions arrived at by the parties bargaining at
arm’s length.

                                           Rulings

       Based solely on the facts submitted and representations made, we rule as
follows on the Proposed Transaction:

      (1) The Contribution, followed by Distribution 2, will be a reorganization under §
368(a)(1)(D). Distributing and Controlled each will be "a party to a reorganization"
under § 368(b).

      (2) No gain or loss will be recognized by Distributing on the Contribution             (§§
361(a) and 357(a)).

       (3) No gain or loss will be recognized by Controlled on the Contribution
                                            -7-

(§ 1032(a)).

      (4) The basis of each asset received by Controlled in the Contribution will equal
the basis of that asset in the hands of Distributing immediately before the Contribution
(§ 362(b)).

        (5) The holding period of each asset received by Controlled in the Contribution
will include the period during which Distributing held that asset (§ 1223(2)).

       (6) No gain or loss will be recognized by (and no amount will otherwise
be included in the income of) the Distributing shareholders upon their receipt of
Controlled stock in Distribution 2 (§ 355(a)(1)).

       (7) The aggregate basis of the Distributing stock and the Controlled stock in
the hands of each Distributing shareholder (including fractional share interests to which
the shareholder may be entitled) will equal the aggregate basis of the Distributing stock
held by that shareholder immediately before Distribution 2, allocated between the
Distributing stock and the Controlled stock in proportion to the fair market value of each
in accordance with § 1.358-2(a)(2) (§ 358(a)(1), (b), and (c)).

       (8) The holding period of the Controlled stock received by each Distributing
shareholder in Distribution 2 will include the holding period of the Distributing stock on
which Distribution 2 is made, provided the Distributing stock is held as a capital asset
on the date of Distribution 2 (§ 1223(1)).

      (9) No gain or loss will be recognized by Distributing on Distribution 2            (§
361(c)).

       (10) Earnings and profits will be allocated between Distributing and Controlled
in accordance with §§ 312(h), 1.312-10(a), and 1.1502-33(e)(3).

        (11) If cash is received by a Distributing shareholder as a result of the sale of a
fractional share of Controlled stock by Distributing’s brokerage firm, the shareholder will
have gain or loss measured by the difference between the amount of cash received
and the basis of the fractional share (determined under ruling (7) above)        (§ 1001).
If the Controlled stock is held by the shareholder as a capital asset, the gain or loss will
be capital gain or loss subject to the provisions and limitations of Subchapter P of
Chapter 1 of the Code (§§ 1221 and 1222).

                                         Caveats

       No opinion is expressed about the tax treatment of the Proposed Transaction
under other provisions of the Code or regulations, or the tax treatment of any conditions
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 about
                                              -8-

the federal tax consequences of the Liquidation, Distribution 1, the Cancellation, or the
Acquisitions, including whether any of the Acquisitions should be considered an
expansion of Business C under § 1.355-3(b)(3)(ii).

                                  Procedural Statements

      This ruling letter is directed only to the taxpayer who requested it. Section
6110(k)(3) provides that it may not be used or cited as precedent.

        Each taxpayer affected by the Proposed Transaction should attach a copy of
this ruling letter to its, his, or her federal tax return for the taxable year in which the
Proposed Transaction is completed.

       Under a power of attorney on file in this office, a copy of this ruling letter is being
sent to your authorized representative.

                                          Sincerely,
                                          Assistant Chief Counsel (Corporate)
                                      By: Wayne T. Murray
                                          Senior Technician/Reviewer
                                          Branch 4