PLR 200813035: Foreign group spin-off qualifies for specified tax-free treatment

Plain-English summary

A foreign corporation planned to put a country-specific business group into a new company and distribute that company's stock to its two U.S. shareholders. The group said the separation would improve financing for future acquisitions. The IRS ruled that the contribution and stock distribution would be a section 368(a)(1)(D) reorganization and that the specified company and shareholder steps would produce no recognized gain or loss. The new company would take carryover basis and holding periods in the transferred assets, while the shareholders would allocate their existing stock basis between the two companies. The letter expressly did not decide several other issues, including the distribution's business purpose and potential tax under section 367.

Ruling snapshot

• Question: Does the proposed foreign business spin-off receive the specified reorganization and nonrecognition treatment?
• Outcome: Approved for the listed steps, with important issues outside the ruling.
• Key authorities: IRC §§ 355(a), 358, 361, 362, 368(a)(1)(D).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 200813035
Third Party Communication: None
Release Date: 3/28/2008
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:06
PLR-144911-07
Date:
December 17, 2007

P1 = --------------------------------------
--------------------------------------
-----------------------

P2 = --------------------------------------
--------------------------------------
-----------------------

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

State = -------------

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

Country B = ----------------

r = ----

x = --------

y = --------

z = ----

Year 1 = -------

Year 2 = -------
PLR-144911-07
2

Industry C = ---------------------

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

This letter responds to your October 4, 2007 letter requesting rulings as to certain Federal income tax consequences of proposed transactions. The information provided in that letter and in later correspondence is summarized below.

The rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalty 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 may be required as part of the audit process. In particular, this office has not reviewed any information pertaining to, and has made no determination regarding, whether the proposed transaction: (i) satisfies the business purpose requirement of § 1.355-2(b) of the Income Tax Regulations; (ii) is used principally as a device for the distribution of the earnings and profits of Distributing or Controlled or both (see § 355(a)(1)(B) and § 1.355-2(d)); and (iii) is part of a plan (or series of related transactions) pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent or greater interest in any distributing corporation or controlled corporation (see § 355(e) and § 1.355-7).

SUMMARY OF FACTS

P1 is the common parent of an affiliated group of companies that files a consolidated Federal income tax return with its eligible members on a calendar year basis. P1 wholly owns P2. P1 and P2 are organized in State.

Distributing is organized in Country A. P1 owns x percent of Distributing and P2 owns y percent of Distributing for Federal income tax purposes (i.e., without regard to the interest that a disregarded entity owns in Distributing). P1 and P2 acquired x percent and y percent in Distributing in a series of tax-free transactions in Year 1 followed by two taxable redemptions in each of Year 1 and Year 2 in which Distributing redeemed shares that P2 held. Years 1 and 2 are within the five-year pre-distribution period.

Prior to this series of transactions, P1 owned Distributing indirectly, through a first-tier U.S. subsidiary and a second-tier foreign subsidiary, and P2 owned no shares of Distributing. In Year 1, the second-tier foreign subsidiary liquidated into the first-tier U.S. subsidiary in a transaction described in § 332. The first-tier U.S. subsidiary merged into P1 in a transaction described in § 368(a)(1)(A), and shortly thereafter P1 contributed z percent of its interest in Distributing to P2 in a transaction described in §

351. Ultimately, the interests of P1 and P2 in Distributing are x percent and y percent
     respectively, as a result of the taxable redemptions in Year 1 and Year 2.
     PLR-144911-07 3

Distributing is engaged in Industry C worldwide through various foreign subsidiaries and disregarded entities, including wholly-owned Country B Group, comprised of a disregarded entity owning a chain of subsidiaries organized in Country B.

P1’s management seeks to acquire additional foreign entities in Industry C and believes that it can optimize financing for future acquisitions via the Country B Group if the Country B Group were owned directly by P2 and not by Distributing.

Distributing has filed financial information indicating that each of Country B Group and Distributing and the entities that it retains have had gross receipts and operating expenses representative of the active conduct of a trade or business for each of the past five years.

PROPOSED TRANSACTIONS

To achieve the stated corporate business purpose, the taxpayer proposes the following transactions:

1. Distributing will amend its bylaws to change its status from a generally tax-
   exempt entity to a fully taxable entity for Country A purposes.

2. Distributing will recapitalize its stock into r different classes.

3. As noted above, P1 owns x percent of Distributing and P2 owns y percent of
   Distributing for Federal income tax purposes, i.e., without regard to the interest
   that a disregarded entity owns in Distributing. Distributing will redeem the shares
   the disregarded entity holds, thereby conforming ownership for legal purposes
   with ownership for Federal income tax purposes.

4. Distributing will form Controlled, a new holding company organized in Country B.

5. Distributing will contribute Country B Group to Controlled in exchange for
   additional shares of Controlled, whether actually issued or deemed issued.

6. Distributing will distribute, pro rata, all its shares of Controlled stock to
   Distributing’s shareholders, P1 and P2.

7. P1 will contribute its x percent interest in Controlled to P2 in exchange for
   additional shares of P2, whether actually issued or deemed issued.

Certain transactions will continue between Distributing and Controlled, including cross- chain product sales and sharing of a logistics and distribution center. In addition, certain executives will continue to oversee the Distributing and Controlled active businesses. (Hereinafter, both types of transactions will comprise “Continuing
PLR-144911-07
4

Transactions.”) The salaries of these executives will be allocated to members of the Distributing and Controlled separate affiliated groups, as defined in § 355(b)(3)(B) (hereinafter, “SAGs”), in proportion to the services rendered each, consistent with current practice. Payments made in connection with all Continuing Transactions will be for fair market value based on terms and conditions for which the parties bargain at arms’ length.

REPRESENTATIONS

The taxpayer represents as follows:

1. Any indebtedness that Controlled (or any member of its SAG) owes to
   Distributing (or any member of its SAG) after the distribution will not constitute
   stock or securities.

2. No part of the consideration distributed by Distributing will be received by P1 and
   P2 as a creditor, employee, or in any capacity other than in that of a shareholder
   of Distributing.

3. The five years of financial information submitted on behalf of Distributing’s
   retained subsidiaries (members of the Distributing SAG (as defined in §
   355(b)(3)(B)) that will conduct Distributing’s active trade or business and on
   behalf of Controlled and the Country B Group (members of the Controlled SAG)
   is representative of the current operations of each business, and there have been
   no substantial operational changes in either business since the date of the last
   financial statements submitted. Distributing’s retained subsidiaries are, and
   immediately after the distribution will be, affiliated with Distributing in a manner
   that satisfies § 1504(a), without regard to § 1504(b). Following the contribution,
   and immediately after the distribution, the Country B Group will be affiliated with
   Controlled in a manner that satisfies § 1504(a), without regard to § 1504(b).

4. Neither the Distributing active business nor control of any entity conducting this
   business was acquired during the five-year period ending on the date of the
   distribution in a transaction in which gain or loss was recognized in whole or in
   part. Throughout the five-year period ending on the date of the distribution,
   Distributing and/or its retained subsidiaries have been the principal owners of the
   goodwill and significant assets of the Distributing active business and will
   continue to be the owners following the distribution.

5. Neither the Controlled active business nor control of an entity conducting this
   business was acquired during the five-year period ending on the date of the
   distribution in a transaction in which gain or loss was recognized in whole or in
   part. Throughout the five-year period ending on the date of the distribution, the
   Country B Group has been the principal owner of the goodwill and significant
   PLR-144911-07 5

   assets of the Controlled active business and will continue to be the owner
   following the distribution.

6. Following the distribution, the Distributing SAG will continue the active conduct of
   the Distributing active business (through the retained subsidiaries),
   independently and with its separate employees, except for Continuing
   Transactions.

7. Following the distribution, the Controlled SAG will continue the active conduct of
   the Controlled active business (through the Country B Group), independently and
   with its separate employees, except for Continuing Transactions.

8. The distribution will facilitate the financing of future foreign acquisitions by
   improving the borrowing capability of the Country B Group. The distribution is
   motivated in whole or substantial part by this corporate business purpose.

9. The distribution will not be used principally as a device for the distribution of the
   earnings and profits of Distributing, Controlled, or both.

10. No plan or intention exists to liquidate Distributing, any of the retained
    subsidiaries, or any member of the Country B Group, to merge any of these
    entities with any other entity, to dispose of Controlled after the distribution, or to
    sell or otherwise dispose of the assets of any of these entities after the
    distribution, except in the ordinary course of business.

11. The total adjusted basis and fair market value of the assets transferred to
    Controlled in the contribution will equal or exceed the sum of (i) the total liabilities
    assumed (as determined under § 357(d)) by Controlled and (ii) the total amount
    of any money and the fair market value of any other property (within the meaning
    of § 361(b)) received by Distributing and transferred to its creditors in connection
    with the reorganization.

12. Any liabilities to be assumed (as determined under § 357(d)) by Controlled in the
    contribution were incurred in the ordinary course of business and are associated
    with the assets being transferred.

13. The total fair market value of the assets transferred to Controlled in the
    contribution will exceed the sum of (i) the amount of any liabilities assumed (as
    determined under § 357(d)) by Controlled in connection with the exchange, (ii)
    the amount of any liabilities owed to Controlled by Distributing that are
    discharged or extinguished in connection with the exchange, and (iii) the amount
    of any cash and the fair market value of any other property (other than stock and
    securities permitted to be received under § 361(a) without the recognition of gain)
    received by Distributing in connection with the exchange. The fair market value
    PLR-144911-07 6

    of the assets of Controlled will exceed the amount of its liabilities immediately
    after the exchange.

14. The aggregate fair market value of the assets Distributing transfers in the
    contribution will equal or exceed the aggregate adjusted basis of these assets.

15. Distributing will neither accumulate its receivables nor make extraordinary
    payment of its payables in anticipation of the distribution.

16. No intercorporate debt will exist between Distributing (or any member of its SAG)
    and Controlled (or any member of its SAG) at the time of, or after, the
    distribution, other than intercompany loans that have arisen, or will arise,
    between the parties in the ordinary course of business.

17. Payments made in connection with all continuing transactions, if any, between
    Distributing (or any member of its SAG) and Controlled (or any member of its
    SAG) will be for fair market value based on terms and conditions arrived at by the
    parties bargaining at arm’s length.

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

19. For purposes of § 355(d), immediately after the distribution, 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 the distribution.

20. For purposes of § 355(d), immediately after the distribution, 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 or securities that were 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.

21. The distribution is not part of a plan or series of related transactions (within the
    meaning of Treas. Reg. § 1.355-7) pursuant to which one or more persons will
    acquire directly or indirectly stock representing a 50-percent or greater interest
    PLR-144911-07 7

    (within the meaning of § 355(d)(4)) in Distributing or Controlled (including any
    predecessor or successor of any such corporation).

22. Immediately after the transaction (as defined in § 355(g)(4)), either (1) no person
    will hold a 50-percent or greater interest (within the meaning of § 355(g)(3)) in
    Distributing or Controlled, (2) if any person holds a 50-percent or greater interest
    (within the meaning of § 355(g)(3)) in any disqualified investment corporation
    (within the meaning of § 355(g)(2)), such person will have held such interest in
    such corporation immediately before the transaction, or (3) neither Distributing
    nor Controlled will be a disqualified investment corporation (within the meaning of
    § 355(g)(2)).

23. P1’s postdistribution amount, as defined by Treas. Reg. § 1.367(b)-5(e)(2), with
    respect to Distributing is greater than or equal to its predistribution amount, as
    defined by Treas. Reg. § 1.367(b)-5(e)(1) with respect to Distributing.

24. P1’s postdistribution amount, as defined by Treas. Reg. § 1.367(b)-5(e)(2), with
    respect to Controlled is greater than or equal to its predistribution amount, as
    defined by Treas. Reg. § 1.367(b)-5(e)(1) with respect to Controlled.

25. P2’s postdistribution amount, as defined by Treas. Reg. § 1.367(b)-5(e)(2), with
    respect to Distributing is greater than or equal to its predistribution amount, as
    defined by Treas. Reg. § 1.367(b)-5(e)(1) with respect to Distributing.

26. P2’s postdistribution amount, as defined by Treas. Reg. § 1.367(b)-5(e)(2), with
    respect to Controlled is greater than or equal to its predistribution amount, as
    defined by Treas. Reg. § 1.367(b)-5(e)(1) with respect to Controlled.

                                    RULINGS
    

Based solely upon the information submitted and representations made, we rule as follows:

1. The contribution of Country B Group to Controlled followed by the distribution of
   Controlled stock to P1 and P2 will be a reorganization under § 368(a)(1)(D).
   Distributing and Controlled will each be “a party to the 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 (§ 1032(a)).
   PLR-144911-07 8

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 that Controlled received in the contribution will
   include the period during which Distributing held that asset (§ 1223(2)).

6. No gain or loss will be recognized by Distributing on the distribution (§ 361(c)(1)).

7. No gain or loss will be recognized by P1 and P2 on the distribution (§ 355(a)(1)).

8. The aggregate basis of the Distributing stock and the Controlled stock in the
   hands of P1 will equal the aggregate basis of the Distributing stock held by P1
   immediately before the distribution, allocated between the stock of Distributing
   and Controlled in proportion to the fair market value of each that P1 holds
   immediately following the distribution in accordance with Treas. Reg. § 1.358-
   2(a)(2) (§ 358(b) and § 358(c)).

9. The aggregate basis of the Distributing stock and the Controlled stock in the
   hands of P2 will equal the aggregate basis of the Distributing stock held by P2
   immediately before the distribution, allocated between the stock of Distributing
   and Controlled in proportion to the fair market value of each that P2 holds
   immediately following the distribution in accordance with Treas. Reg. § 1.358-
   2(a)(2) (§ 358(b) and § 358(c)).

10. The holding period of the Controlled stock that P1 and P2 receive in the
    distribution will include the holding period of the Distributing stock on which the
    distribution is made, provided the Distributing stock was held as a capital asset
    on the date of the distribution (§ 1223(1)).

11. Earnings and profits, if any, will be allocated between Distributing and Controlled
    in accordance with § 312(h) and Treas. Reg. § 1.312-10(a).

                                    CAVEATS
    

Except as expressly provided herein, we express no opinion about the tax treatment of the Proposed Transactions under other provisions of the Code and regulations or the tax treatment of any conditions existing at the time of, or effects resulting from, the Proposed Transactions that are not specifically covered by the above rulings. In particular, this office has not reviewed any information pertaining to, and has made no determination regarding:

(i) Whether the distribution satisfies the business purpose requirement of Treas. Reg. § 1.355-2(b);
PLR-144911-07
9

(ii) Whether the distribution is used principally as a device for the distribution of the earnings and profits of Distributing or Controlled or both;

(iii) Whether the distribution and an acquisition or acquisitions are part of a plan (or series of related transactions) under § 355(e)(2)(A)(ii);

(iv) The Federal income tax consequences or characterizations of Distributing’s recapitalization (Proposed Transaction #2), P1’s contribution of shares of Controlled stock to P2 (Proposed Transaction #7), any of the transactions in Year 1, and Distributing’s redemption of P2’s stock in Year 2; and

(v) The Federal income tax consequences under § 367 resulting from any transaction described above.

PROCEDURAL STATEMENTS

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

A copy of this ruling 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 the return that provides the date 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 representative.

Sincerely,

_______
Alfred C. Bishop, Jr.
Branch Chief, Branch 6
Office of Associate Chief Counsel (Corporate)

cc: