PLR 200850016: a supplement that keeps a deal on track past a five-year clock, and cannot be read on its own

Plain-English summary

A four page supplemental private letter ruling, control number "PLR-129071-08", dated August 28, 2008 and released 12/12/2008. It is routed "CC:CORP:2", carries Index Number "355.01-01, 382.00-00", and is signed by Gerald B. Fleming, Senior Technician Reviewer, Branch 2, (Corporate). It answers a request of June 26, 2008.

This letter does not stand alone, and it says so. It supplements two earlier rulings, "dated March 14, 2008 (PLR-141238-07) and April 29, 2008 (PLR-114603-08)", which it calls the Prior Rulings, and it states that "Capitalized terms not defined in this letter have the meanings originally assigned to them in the Prior Rulings." The consequence is unusual for a public release. Almost every noun here is a capitalized defined term, Distributing, Distributing 1, Distributing 2, Controlled, the Recapitalization, the Split-Off, Spin-Off 1, the Recently Acquired Stock, the Proposed Transactions, Year A, together with the placeholder letters g, h and q. None are defined in this document. Its own legend contains exactly one term, Date 4, and nothing else. That was verified by checking that nothing at all sits between the legend heading and the Date 4 line, and that the salutation follows immediately.

So a reader of this release is holding the amendment to a contract without the contract. The Prior Rulings are themselves public documents, but each carries its own independent redactions, and the capitalized terms in one are not keyed to the other in any way a reader can reconstruct. This is a different sort of opacity from the usual hyphen runs. Nothing has been blacked out. The meaning simply lives elsewhere.

What can be read is the shape of a problem, and it is a recognisable one. The Prior Rulings recorded that Distributing 1 had held all its Controlled Common Stock for the five-year period ending on the date of the Proposed Transactions, apart from "approximately g shares that it purchased from Controlled during the h quarter of Year A". That block is the Recently Acquired Stock, and the deal was built to hold it back: step (ii) of the Proposed Transactions said "Distributing 1 will retain the Recently Acquired Stock" and not distribute it in Spin-Off 1.

Then the calendar moved. Distributing and Controlled "now believe it is possible that the Recapitalization, the Split-Off, and related transactions will not be completed before Date 4, when the Recently Acquired Stock will have been owned for more than five years." In other words the constraint the deal was designed around may lapse before the deal closes.

The obvious response would be to redraft and take advantage. That is not what they did. The letter gives the reason in one line: "In order to avoid having to renegotiate the deal", the parties intend to carry out the Proposed Transactions exactly as described in the Prior Rulings "whether or not the Recapitalization, the Split-Off, and related transactions are completed prior to Date 4", and Distributing 1 still plans to retain the stock. The phrase renegotiate the deal appears once in the document, and it is the most human sentence in it. Having priced and papered a transaction around a restriction, the parties would rather keep observing a restriction that may no longer bind than reopen the negotiation. What they want from the Service is confirmation that being cautious past the point of necessity costs them nothing.

The second supplemental fact is money. Step (viii) of the Proposed Transactions had Distributing reimbursing up to $q of Controlled's transaction expenses, plus certain deal related expenses, plus a per holder charge for servicing an enlarged shareholder base. Controlled has now run up expenses "in excess of the $q previously anticipated", and more are expected.

The supplemental ruling is a single sentence, and it is about the first fact: the adjustments, clarification and timing considerations "will have no adverse effect on the rulings contained in the Prior Rulings, which will remain in full force and effect."

The supplemental ruling covers the adjustments, clarification, and timing considerations described in the supplemental facts, which include the expense overrun. Caveat (iv) reserves "the federal income tax treatment of Distributing's reimbursement of Controlled for certain transaction related expenses to the extent not covered by the foregoing ruling or Prior Rulings." Thus the letter preserves the earlier rulings while leaving any reimbursement treatment outside the foregoing ruling or Prior Rulings unresolved.

Three points of format, recorded rather than repaired, since the document came from a clean text layer.

First, the signature block is short a line. It reads "Gerald B. Fleming / Senior Technician Reviewer, Branch 2 / (Corporate)", with no "Office of Associate Chief Counsel" above the parenthesis. The phrase appears nowhere in this letter. Four sibling rulings were checked before this entry was written, docs/2008/0850018.md, docs/2008/0850017.md, docs/2008/0850015.md and docs/2008/0850026.md, and each prints it exactly once. The parenthesized "(Corporate)" here is left hanging from a heading that was dropped.

Second, the same two citations are spelled two ways inside four pages. The opening paragraph writes "Treas. Reg. section 1.355-2(b)" and "Treas. Reg. section 1.355-2(d)", using the word section, three times in total. The caveats write "Treas. Reg. §1.355-2(b)" and "Treas. Reg. §1.355-2(d)", using the symbol, twice. The same split runs through the Code cite: "section 355(a)(1)(B)" lowercase in the opening paragraph, "Section 355(a)(1)(B)" capitalized in the caveats. Each spelling appears once. The front of the letter and the back of it were evidently drafted from different templates.

Third, the caveats at the back and the reservations at the front cover overlapping but not identical ground. Both decline business purpose and device. The front reserves the plan question by reference to "section 355(e) and Treas. Reg. section 1.355-7"; the back reserves it by reference to "Section 355(e)(2)(A)(ii)". The narrower cite is the one that survives to the end.

The sections listed above are every provision cited by number anywhere in the letter, which is a short list because the letter's substance is carried entirely by terms defined in documents it points at. Section 382, in the index number and named once in the description of what the Prior Rulings addressed, is never applied here.

The citation check this corpus normally runs could not be performed because the legal research tool is unavailable in this session. Every section listed above was verified against the released text itself, and nothing has been supplied or corrected from memory.

Ruling snapshot

• Question: If a recapitalization and split-off do not close before the date on which a recently purchased block of stock passes its five-year mark, and if reimbursable deal expenses run past the agreed cap, do the two earlier rulings still hold?
• Outcome: Approved. One supplemental ruling was given: the adjustments, clarification and timing considerations described will have no adverse effect on the rulings contained in the Prior Rulings, which remain in full force and effect. No opinion was expressed on business purpose, on device, on whether the distributions are part of a plan under section 355(e)(2)(A)(ii), or on the tax treatment of the expense reimbursement.
• Key authorities: Sections 355 and 382 of the Code, with sections 355(a)(1)(B), 355(e) and 355(e)(2)(A)(ii) and regulations sections 1.355-2(b), 1.355-2(d) and 1.355-7 named in the reservations, and the two prior rulings PLR-141238-07 and PLR-114603-08 carrying the substance.

Full text (IRS public release)

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Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 200850016 Third Party Communication: None
Release Date: 12/12/2008 Date of Communication: Not Applicable
Index Number: 355.01-01, 382.00-00
Person To Contact:
--------------------- ---------------------, ID No. -------------
------------------------------------------------- Telephone Number:
---------------- ---------------------
----------------------- Refer Reply To:
-------------------------------------------- CC:CORP:2
PLR-129071-08
Date:
August 28, 2008

Legend

Date 4 = --------------------------

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

   This letter responds to your June 26, 2008 request that we supplement our letter

rulings dated March 14, 2008 (PLR-141238-07) and April 29, 2008 (PLR-114603-08)
(the “Prior Rulings”). The information submitted for consideration is summarized below.
Capitalized terms not defined in this letter have the meanings originally assigned to
them in the Prior Rulings.

    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. 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 Treas. Reg. section 1.355-2(b); (ii) is
used principally as a device for the distribution of the earnings and profits of the
distributing corporation or the controlled corporation or both (see section 355(a)(1)(B) of
the Internal Revenue Code and Treas. Reg. section 1.355-2(d)); or (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 the distributing
corporation or the controlled corporation (see section 355(e) and Treas. Reg.
section 1.355-7).
PLR-129071-08 2

   The Prior Rulings address certain U.S. federal income tax consequences of

Proposed Transactions under sections 355 and 382 of the Code, and other Code
provisions. Except as modified below, the facts and representations set forth in the
Prior Rulings remain in effect for purposes of this supplemental ruling letter.

                                  Supplemental Facts

Retention of the Recently Acquired Stock

   The Prior Rulings include the statement that “Distributing 1 has held all of its

shares of Controlled Common Stock, other than approximately g shares that it
purchased from Controlled during the h quarter of Year A, for the five-year period
ending on the date of the Proposed Transactions.” Step (ii) of the Proposed
Transactions includes the statement that “Distributing 1 will retain the Recently Acquired
Stock” and not distribute it in Spin-Off 1.

   Distributing and Controlled now believe it is possible that the Recapitalization, the

Split-Off, and related transactions will not be completed before Date 4, when the
Recently Acquired Stock will have been owned for more than five years.

   In order to avoid having to renegotiate the deal, Distributing and Controlled

intend to effect the Proposed Transactions in the manner described in the Prior Rulings
whether or not the Recapitalization, the Split-Off, and related transactions are
completed prior to Date 4. Moreover, Distributing 1 still plans to retain the Recently
Acquired Stock and not distribute it in Spin-Off 1.

Payment of Expenses

   Step (viii) of the Proposed Transactions states as follows:

          Distributing will reimburse up to $q of transaction expenses incurred by
          Controlled in connection with the Split-Off and Distributing will also pay or
          reimburse Controlled for certain deal related expenses. In addition,
          through the h anniversary of the date of consummating the Split-Off,
          Distributing will reimburse Controlled, at a fixed rate per holder in excess
          of an agreed upon number of shareholders, for certain additional costs
          that Controlled will incur as a result of having to service the increased
          number of Controlled shareholders.

  To date, Controlled has incurred costs and expenses related to the

Recapitalization, the Split-Off, and related transactions (the “Controlled
Transaction/Deal Expenses”) that are in excess of the $q previously anticipated for
which Distributing will reimburse Controlled. In addition, Distributing and Controlled
PLR-129071-08 3

expect that there will be additional Controlled Transaction/Deal Expenses for which
Distributing will reimburse Controlled.

                                  Supplemental Ruling

   Based on the information set forth herein and submitted with the Prior Rulings,

we rule as follows:

   The adjustments, clarification and timing considerations described in the

supplemental facts submitted will have no adverse effect on the rulings contained in the
Prior Rulings, which will remain in full force and effect.

                                          Caveat

   No opinion is expressed about the tax treatment of the Proposed Transactions

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 Transactions that are not
specifically covered by the above rulings. In particular, no opinion is expressed
regarding:

   (i)     Whether the Distributions satisfy the business purpose requirements of
           Treas. Reg. §1.355-2(b);

   (ii)    Whether the Distributions are used principally as a device for the
           distribution of the earnings and profits of Distributing, Distributing 2,
           Distributing 1, or Controlled (see Section 355(a)(1)(B) and Treas. Reg.
           §1.355-2(d));

   (iii)   Whether the Distributions are part of a plan (or series of related
           transactions) under Section 355(e)(2)(A)(ii); and

   (iv)    The federal income tax treatment of Distributing’s reimbursement of
           Controlled for certain transaction related expenses to the extent not
           covered by the foregoing ruling or Prior Rulings.

                                 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, taxpayers filing their returns electronically may satisfy this
requirement by attaching a statement to their return that provides the date and control
number of the letter ruling.
PLR-129071-08 4

     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,



                                   Gerald B. Fleming
                                   Senior Technician Reviewer, Branch 2
                                   (Corporate)

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