PLR 1037024: IRS ruled on stock repurchases affecting section 355 spin-off testing

Plain-English summary

The IRS supplemented an earlier ruling on completed and proposed section 355 distributions by a publicly traded corporation. The supplemental ruling addresses how the corporation's open-market repurchases of its common stock should be treated when testing whether the distributions are part of a section 355(e) acquisition plan. It provides pro rata treatment for repurchases from public shareholders when the corporation can demonstrate that controlling shareholders and a specified person were not sellers, and it sets out corresponding rules for increases in public or controlling shareholders' ownership percentages. The IRS did not rule on business purpose, device, or other section 355(e) questions reserved in the caveats.

Ruling snapshot

• Question: How should open-market repurchases be treated when testing the effect of the distributions under IRC § 355(e)?
• Outcome: Approved
• Key authorities: IRC §§ 355, 355(d)(4), and 355(e); Treas. Reg. §§ 1.355-2(b), 1.355-2(d), and 1.355-7

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201037024 Third Party Communication: None
Release Date: 9/17/2010 Date of Communication: Not Applicable
Index Number: 355.01-00, 355.10-00
Person To Contact:
---------------------- ----------------------, ID No. -------------
---------------------------------------------------------- Telephone Number:
--------------------------- ---------------------
---------------------------- Refer Reply To:
------------------------------------ CC:CORP:B05
PLR-155170-09
Date:
June 08, 2010

Legend

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

Shareholder = --------------------------------------------------------------------

Person = -----------------------------------------------------------------------------------------

Date1 = ----------------------

Date2 = ----------------------

Date3 = --------------------------

Date4 = ---------------------

Date5 = -----------------------

Date6 = ------------------

a = -----------------

b = ---------------

c = --

d = ----
PLR-155170-09 2

e = ----

f = ---------------

g = ------

h = -------------

i = ----

j = ---------------

k = ---------------

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

   This letter responds to your letter of December 11, 2009 requesting that we

supplement our letter ruling dated August 26, 2008 (PLR-118350-08) (the “Original
Ruling”). The information submitted for consideration is summarized below. Capitalized
terms used but not defined in this letter have the meanings assigned to them in the
Original Ruling.

    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 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. In particular, this office has not
reviewed any information pertaining to, and has made no determination regarding,
whether the completed and proposed post-External Distributions transactions described
in this letter (collectively, the “Proposed Transaction”) or the transactions addressed in
the Original Ruling: (i) satisfy the business purpose requirement of § 1.355-2(b) of the
Income Tax Regulations; (ii) are used principally as a device for the distribution of the
earnings and profits of any of the distributing or controlled corporations (see section
355(a)(1)(B) and § 1.355-2(d)); or (iii) are part of a plan (or series of related
transactions) pursuant to which one or more persons has acquired or will acquire
directly or indirectly stock representing a 50-percent or greater interest in any of the
distributing or controlled corporations (see section 355(e) and § 1.355-7).

Supplemental Facts

   The External Distributions were completed on Date1. Following the External

Distributions and a one-for-two reverse stock split with respect to the Distributing
Common Stock and Distributing Class B Common Stock, Distributing had outstanding
PLR-155170-09 3

approximately a shares of Distributing Common Stock and b shares of Distributing
Class B Common Stock. Each share of Distributing Common Stock entitles its holder to
c vote per share, and each share of Distributing Class B Common Stock entitles its
holder to d votes per share when voting together with the Distributing Common Stock as
a single class. In general, holders of Distributing Common Stock and Distributing Class
B Common Stock vote together as a single class on all matters, including the election of
Distributing’s directors; however, holders of Distributing Common Stock, acting as a
single class, are entitled to elect e percent of Distributing’s directors.

    As of Date2, Shareholder owned, directly or indirectly, (i) approximately f shares

of Distributing Common Stock, representing g percent of the class and (ii) all of the
outstanding shares of Distributing Class B Common Stock. Also as of Date2, Person
owned approximately h shares of Distributing Common Stock, representing i percent of
the class. Pursuant to an agreement between Shareholder and Person, Person
generally has the right to vote all of the shares of Distributing Common Stock and
Distributing Class B Common Stock held by Shareholder. To the best of Distributing’s
knowledge, two investment advisors are the only other shareholders of Distributing that
hold 5 percent or more of the aggregate voting power or value of its outstanding stock
(the “Investment Advisors”). For purposes of this ruling, the term “Controlling
Shareholders” includes Shareholder and any person that is a controlling shareholder
within the meaning of § 1.355-7(h)(3), and the term “Public Shareholders” includes each
Distributing shareholder other than Person and any Controlling Shareholder.

   Distributing states that its management determined at the time of the External

Distributions that the amount of cash and other liquid assets held by Distributing did not
exceed the reasonable needs of Distributing’s businesses, including for possible
acquisitions. Distributing states that the uncertainty and volatility existing in the capital
markets since the time of the External Distributions have adversely impacted its ability
to make acquisitions. Because Distributing’s management considers Distributing
Common Stock to be undervalued by the capital markets, Distributing has been
repurchasing shares of Distributing Common Stock in open market transactions and
intends to continue to do so.

     Specifically, between Date4 and Date6, Distributing repurchased approximately j

shares of Distributing Common Stock in open market transactions (the “Completed
Open Market Repurchases”). Distributing’s management would like to continue
repurchasing shares of Distributing Common Stock in open market transactions (the
“Proposed Open Market Repurchases,” and together with the Completed Open Market
Repurchases, the “Open Market Repurchases”) or in privately negotiated transactions.
All Distributing shareholders were allowed to participate in and benefit from the
Completed Open Market Repurchases, and all Distributing shareholders may participate
in and benefit from the Proposed Open Market Repurchases. Distributing states that it
is indifferent as to which of its shareholders participate in the Open Market
Repurchases, and that the Open Market Repurchases are not motivated to any extent
PLR-155170-09 4

by a desire to increase or decrease the ownership percentage of any particular
shareholder or group of shareholders.

   In addition, between Date3 and Date5, Shareholder sold approximately k shares

of Distributing Common Stock through a combination of open market transactions and
privately negotiated sales. As of Date5, Shareholder continues to own all of the
outstanding shares of Distributing Class B Common Stock.

Supplemental Representation

  The following representation is made by Distributing with respect to the Open

Market Repurchases:

  All of the facts, representations and statements contained in the Original Ruling
  are hereby affirmed as of the date of the External Distributions, including the
  representation that none of the External Distributions is part of a plan or series of
  related transactions (within the meaning of § 1.355-7) pursuant to which one or
  more persons will acquire, directly or indirectly, stock representing a 50-percent
  or greater interest (within the meaning of Section 355(d)(4)) in Distributing or any
  of the controlled corporations (including any predecessor or successor of any
  such corporation).

Supplemental Rulings

   Based on the information submitted and the representations set forth above, we

rule as follows:

1. For purposes of determining the “voting power” (within the meaning of Section
  355(d)(4)) of Distributing Common Stock and Distributing Class B Common
  Stock, the voting power of such stock will be measured by reference to its
  relative ability to elect Distributing directors. Rev. Rul. 69-126, 1969-1 C.B. 218.

2. For purposes of testing the effect of the Open Market Repurchases on the
  External Distributions under section 355(e):

      a. The Open Market Repurchases will be treated as being made pro rata
         from the Public Shareholders to the extent Distributing can demonstrate
         that such Open Market Repurchases were not made from one or more of
         the Controlling Shareholders or from Person. Any Open Market
         Repurchases treated as being made pro rata from the Public
         Shareholders will not affect the determination of the percentage of the
         total combined voting power or value of the stock of Distributing acquired
         (within the meaning of section 355(e)(2)(A)(ii)) by any particular Public
         Shareholder.

PLR-155170-09 5

      b. Any increase in the percentage, by vote or value, of Distributing stock
         owned by Public Shareholders that may result from Open Market
         Repurchases with respect to which Distributing cannot demonstrate that
         such Open Market Repurchases are not made from one or more
         Controlling Shareholders will be disregarded (and not treated as an
         acquisition within the meaning of section 355(e)(2)(A)(ii)) to the extent of
         any decrease in the percentage, by vote or value, respectively of
         Distributing stock owned by Public Shareholders that results from Open
         Market Repurchases made from Public Shareholders.

      c. Any increase in the percentage, by vote or value, of Distributing stock
         owned by any Controlling Shareholder that may result from Open Market
         Repurchases with respect to which Distributing can demonstrate that such
         Open Market Repurchases are not made from such Controlling
         Shareholder will be disregarded (and not treated as an acquisition within
         the meaning of section 355(e)(2)(A)(ii)) to the extent of any decrease in
         the percentage, by vote or value, respectively of Distributing stock owned
         by such Controlling Shareholder that results from Open Market
         Repurchases made from such Controlling Shareholder.

      d. The effect of any Open Market Repurchase will only be taken into account
         under Section 355(e) to the extent such Open Market Repurchase
         (without regard to its treatment under this ruling letter) is part of a plan (or
         series of related transactions) that includes the External Distributions.

Supplemental Caveats

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

under other provisions of the Code and regulations or on 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 and the rulings contained in our
Original Ruling.

    In particular, no opinion is expressed regarding whether the Proposed

Transaction or the transactions addressed in the Original Ruling: (i) satisfy the business
purpose requirement of § 1.355-2(b) of the Income Tax Regulations; (ii) are used
principally as a device for the distribution of the earnings and profits of any of the
distributing or controlled corporations (see section 355(a)(1)(B) and § 1.355-2(d)); or (iii)
are part of a plan (or series of related transactions) pursuant to which one or more
persons has acquired or will acquire directly or indirectly stock representing a 50-
percent or greater interest in any of the distributing or controlled corporations (see
section 355(e) and § 1.355-7).
PLR-155170-09 6

   In addition, no opinion is expressed regarding whether Person is or was a

“controlling shareholder” within the meaning of § 1.355-7(h)(3), or the federal income
tax treatment of any increase or decrease in the percentage, by vote or value, of
Distributing stock owned by Person that may result from any Open Market Repurchase
that occurred or occurs at a time when Person was not or is not a controlling
shareholder.

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.

   A copy of this letter must be attached to any income tax return for which it is

relevant. Alternatively, any taxpayer filing its return electronically may satisfy this
requirement by attaching a statement to the return that provides the date and control
number of this letter ruling.

   Pursuant to a power of attorney on file in this office, a copy of this letter is being

sent to your authorized representative.

                                    Sincerely,



                                    _Douglas C. Bates___________
                                    Douglas C. Bates
                                    Assistant to the Branch Chief, Branch 5
                                    Office of Associate Chief Counsel
                                    (Corporate)