PLR 200534006: Stock held by compensation trust does not undo spin-off ruling

Plain-English summary

After a corporate spin-off, a trust holding assets for the distributing company's deferred compensation plan received shares of the spun-off company. The trust was treated as owned by the distributing company for income tax purposes, raising a question whether that company had improperly retained stock. Once the issue was identified, the trust sold its remaining shares. In this supplemental ruling, the IRS reaffirmed its earlier tax-free spin-off rulings and concluded that the trust's stock ownership was not a retention made under a plan whose principal purposes included avoiding federal income tax.

Ruling snapshot

• Question: Did the compensation trust's temporary ownership of spun-off stock breach the spin-off retention rule?
• Outcome: Approved: the earlier rulings were reaffirmed and the ownership was not the disqualifying retention described in section 355(a)(1)(D)(ii).
• Key authorities: IRC §§ 355(a)(1)(D)(ii), 368(a)(1)(D), 671.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200534006
Third Party Communication: None
Release Date: 8/26/2005
Date of Communication: Not Applicable
Index Numbers: 355.01-00, 368.04-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
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CC:CORP:B04
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PLR-107506-05
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Date:
May 24, 2005
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Date E = -------------------------

Date F = -----------------

Date G = ----------------------

Date H = -------------------------

c = -----------

d = ---------

e = ---------

f = ---------

g = ---------

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

PLR-107506-05
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This letter responds to your February 2, 2005 request that we supplement our

letter ruling dated September 30, 2003 (PLR-116297-03) (the “Prior Ruling”). The

information submitted for consideration is summarized below. Capitalized terms not

defined in this ruling have the meanings assigned to them in the Prior Ruling.

The ruling contained in this letter is based upon information 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 material

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.

The Prior Ruling addresses the transfer of certain assets and liabilities by

Distributing to Controlled in constructive exchange for Controlled Common Stock and

the pro rata distribution of all the shares of Controlled Common Stock to holders of

Distributing Common Stock (the “External Distribution”). The Prior Ruling held that the

External Distribution qualified as tax free under §§ 355 and 368(a)(1)(D) of the Internal

Revenue Code. The External Distribution was completed on Date E.

Supplemental Facts

On Date F, Distributing established a non-qualified deferred compensation plan

(the “Distributing Plan”), which was amended effective Date G. In connection with the

Distributing Plan, Distributing adopted and maintained a “rabbi trust” (the “Distributing

Trust”) for the purpose of holding assets until paid to Distributing Plan participants or

their beneficiaries in accordance with the Distributing Plan. Pursuant to § 671, the

Distributing Trust is a grantor trust, and, accordingly, any assets held by the Distributing

Trust generally are treated for federal income tax purposes as owned by Distributing.

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On Date E, the Distributing Trust held approximately c shares of Distributing

Common Stock. In the External Distribution, the Distributing Trust received

approximately d shares of Controlled stock in respect of the shares of Distributing

Common Stock held by the Distributing Trust.

In connection with the External Distribution, Controlled established a separate

non-qualified deferred compensation plan (the “Controlled Plan”) and adopted a “rabbi

trust” (the “Controlled Trust”) for the purpose of holding assets until paid to Controlled

Plan participants or their beneficiaries in accordance with the Controlled Plan.

Immediately following the External Distribution, Distributing caused the Distributing

Trust to transfer to the Controlled Trust the account balances of those participants in the

Distributing Plan who became employees of Controlled and elected to have their

account balances transferred to the Controlled Plan. Following this transfer to the

Controlled Trust, the Distributing Trust held approximately e shares of Distributing

Common Stock and approximately f shares of Controlled stock.

The Distributing employees responsible for reviewing the original request for

rulings were not aware of the fact that the Distributing Trust held shares of Distributing

Common Stock and/or that such shares would be participating in the External

Distribution.

Between Date E and Date H, the Distributing Trust disposed of approximately g

shares of Controlled stock. As soon as Distributing discovered that the ownership of

Controlled stock by the Distributing Trust might constitute a deemed retention by

Distributing of Controlled stock, it caused the Distributing Trust to dispose of all

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remaining shares of Controlled stock held by the Distributing Trust in an open market

transaction and prepared this supplemental request.

Representations

Distributing reaffirms all of the facts, representations and statements contained in

the Prior Ruling as of the date of the External Distribution.

Rulings

Based solely on the information and representations submitted with the original

and supplemental requests, we reaffirm the rulings and caveats set forth in the Prior

Ruling and we rule that the ownership of Controlled stock by the Distributing Trust after

the External Distribution did not constitute a retention by Distributing of Controlled stock

in pursuance of a plan having as one of its principal purposes the avoidance of federal

income tax (§ 355(a)(1)(D)(ii)).

Procedural Statements

This supplemental ruling letter is directed only to the taxpayer that requested it.

Section 6110(k)(3) provides that it may not be used or cited as precedent.

Each taxpayer involved in the transaction should attach a copy of this

supplemental letter to the taxpayer’s federal income tax return for the taxable year in

which the transaction covered by this letter is completed.

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Under a power of attorney on file in this office, a copy of this letter is being sent

to your authorized representatives.

Sincerely,

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