PLR 200113017: Closing a loss-making division leaves earlier spin-off rulings intact

Plain-English summary

A corporation had received rulings about a tax-free separation under section 355. After the transaction, one division of its subsidiary began suffering unexpected losses. The subsidiary proposed to sell or write off that division's assets and use any proceeds to strengthen its remaining division, rather than pay dividends or distributions. The IRS ruled that this change would not affect its earlier rulings. The letter addresses the effect of the later business decision on those rulings, without restating the earlier rulings' terms.

Ruling snapshot

• Question: Would discontinuing the loss-making division change the IRS's earlier rulings on the separation?
• Outcome: Approved: the earlier rulings remain in force.
• Key authorities: IRC § 355; the prior private letter ruling.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200113017
Washington, DC 20224
Release Date: 3/30/2001
Index Number: 355.04-00
Person to Contact:

Telephone Number:

Refer Reply To:
CC:CORP:1-PLR-124544-00
Date:
December 21, 2000

Distributing
=

Distributing Sub 1 =

Controlled
=

Date A
=

Business A
=

Division 1
=

Division 2
=

Dear :

This is a reply to your letter dated October 30, 1999, requesting a ruling supplementing and affirming the rulings granted in PLR-114099-99 ("Prior Ruling"), specifically, rulings under § 355 of the Internal Revenue Code (the "Code") and other Code sections, as to the federal income tax consequences of a proposed transaction. Since the issuance of the Prior Ruling, certain business conditions have resulted in Distributing’s desire to discontinue an operating division of Distributing Sub 1. The information submitted for consideration is substantially as set forth below.

On Date A, the transactions described in the Prior Ruling, including the tax-free separation of Distributing from Controlled (the "Distributions"), were effectuated. Ultimately, the transactions resulted in Distributing Sub 1 becoming a first tier, wholly owned subsidiary of Distributing. Distributing Sub 1 currently engages in integrated Business A; more specifically, Distributing Sub 1 conducts Division 1 and Division 2, which each perform a separate function of Business A. Due to a change in economic conditions since the issuance of the original letter ruling, Division 1 has been unable to compete with larger companies engaged in Business A and is experiencing unprecedented losses. Division 2, however, continues to meet or exceed business expectations. 2 PLR-124544-00

The following representation was made by the taxpayer in connection with the Prior Ruling:

There is no plan or intention to liquidate either Corporation X or Corporation Y, to merge either Corporation X or Corporation Y (herein Distributing Sub 1) 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.

As a result of the unprecedented and unexpected losses, Distributing Sub 1 now proposes to sell or write off the assets associated with Division 1 and to use the proceeds to enhance Division 2. The proceeds will not be used for distributions or dividends to Distributing or Distributing shareholders.

Based solely on the information submitted and the representations made, we rule that the discontinuation of Division 1 of Distributing Sub 1, as discussed above, will have no effect on the rulings provided in the Prior Ruling and those rulings remain in full force and effect.

This ruling is directed only to the taxpayer(s) 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 should be attached to the federal income tax returns of the taxpayers involved for the taxable year in which the transactions covered by this ruling are consummated.

Sincerely,
Associate Chief Counsel (Corporate)
By: Christopher W. Schoen
Assistant to the Chief, Branch 1