PLR 201348005: IRS approves a tax-free spin-off of a controlled subsidiary

Plain-English summary

A publicly traded corporation planned to separate one business from its other operations by distributing all of the stock of its controlled subsidiary to its shareholders. The IRS ruled that the distribution would generally qualify for nonrecognition under IRC § 355, so the distributing corporation and its shareholders would not recognize gain or loss on the distribution. The ruling also addressed the allocation of stock basis, the carryover of holding periods, and the allocation of earnings and profits between the two corporations. The IRS expressly did not rule on several conditions, including business purpose, device concerns, the reverse stock split, and possible below-market transactions between the corporations.

Ruling snapshot

• Question: Would the proposed distribution of a controlled subsidiary's stock qualify for the requested tax-free spin-off treatment?
• Outcome: approved
• Key authorities: IRC §§ 355, 358, 1223, and 312

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201348005                                              Third Party Communication: None
Release Date: 11/29/2013                                       Date of Communication: Not Applicable
Index Number: 355.01-00
                                                               Person To Contact:
----------------------                                         ------------------, ID No. -------------
------------------------------------------------------------   Telephone Number:
---------                                                      ---------------------
-------------------------                                      Refer Reply To:
----------------------------                                   CC:CORP:B04
------------------------------------------------------         PLR-108248-13
                                                               Date:
                                                               August 13, 2013




Legend

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

Controlled                   = -----------------------------
                               -------------------------------------------------
                               -------------------------------
                               -----------------------

Sub 1                        = ----------------------
                               -------------------------------
                               -----------------------

Exchange                     = -------------

Date 1                       = ---------------------------

Date 2                       = -----------------------

Date 3                       = ----------------------

Business A                   = ----------------------------------

Business B                   = -------------------------------

Business C                   = -----------------------------------------
PLR-108248-13                                          2

Business D                = ------------------------

State A                   = -------------

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

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

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

d                         = ---------------

e                         = ----------------------------------------------------------------------------------
                            ----------------------------------------------------------------------------------
                            ----------------

f                         = ---



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

              This letter is in response to your February 19, 2013 request for rulings on
certain federal income tax consequences of a Proposed Transaction (defined below).
The information submitted in that request and in later correspondence is summarized
below.

                The rulings contained in this letter are based upon the 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.
Moreover, this office has not verified 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 Federal Income Tax Regulations; (ii) is used
principally as a device for the distribution of earnings and profits of the distributing
corporation, the controlled corporation, 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% or greater
interest in the distributing corporation or the controlled corporation (see § 355(e) and §
1.355-7).
PLR-108248-13                                  3

                                           Facts

               Distributing, a publicly-traded State A corporation, is the common parent
of a consolidated group of corporations (the “Group”) that has numerous corporate and
non-corporate, direct and indirect subsidiaries. The authorized capital stock of
Distributing consists of a shares of voting common stock, b par value, and c shares of
preferred stock, b par value. As of Date 1, d shares of the common stock and no
shares of the preferred stock were outstanding. Some of the Distributing common stock
is held by foreign shareholders, none of which holds five percent or more of such stock.
Distributing's common stock is listed on the Exchange. Distributing, through its direct
and indirect subsidiaries, engages in Business A, Business B, and Business C.

              Distributing wholly owns Controlled, a State A corporation which is a
member of the Group. Controlled owns numerous corporate and non-corporate, direct
and indirect subsidiaries. Controlled, through its direct and indirect subsidiaries,
engages in Business D. On Date 2, Controlled acquired all of the stock of Sub 1, a
State A corporation that has historically conducted Business D. Sub 1 is a member of
the Group.

               Distributing wishes to completely separate Business D from Business A,
Business B, and Business C in order to: (i) allow each of Distributing and Controlled to
prioritize independently their various investment opportunities going forward and to
better position the management teams of Distributing and Controlled to pursue organic
growth and/or acquisitions and fund those growth investments via direct access to the
debt or equity markets, as appropriate, taking into account only those considerations
relating to each company’s business strategies and business models, (ii) enhance
Controlled’s ability to use its equity as an attractive acquisition currency, (iii) allow
Distributing and Controlled to focus on their respective strategic priorities, the different
challenges and opportunities in their businesses, and their different financial profiles
and capital needs, and (iv) provide Distributing and Controlled with the ability to issue
equity-based incentive awards that more directly link and closely align the interests of
each of their companies and their employees, making equity-based incentive awards a
more effective management tool to attract, motivate and retain key employees.

                                    Proposed Transaction

              To achieve the separation, management has proposed the following
transactions (the “Proposed Transaction”):

               (1) Distributing anticipates undertaking a reverse stock split immediately
prior to the Distribution (defined below), subject to receipt of stockholder approval. If
approved by Distributing’s stockholders, the Board of Directors of Distributing will be
authorized to effect the reverse stock split with a ratio of e. Distributing will distribute
cash to its stockholders in lieu of fractional shares.
PLR-108248-13                                  4

             (2) Distributing will distribute its Controlled stock, pro rata, to its
shareholders (the “Distribution”).

               Distributing and Controlled will enter into one or more agreements (the
“Post-Separation Agreements”) to effect the transaction steps and to provide for mutual
indemnification obligations that generally (A) hold Controlled responsible for liabilities
arising out of the businesses of Controlled and its subsidiaries as well as for breaches
by Controlled of the Post-Separation Agreements, the Tax Sharing Agreement, or the
Transitional Services Agreements (each defined below), and (B) hold Distributing
responsible for liabilities arising out of the businesses that will not be owned by
Controlled and its subsidiaries at the time of the Distribution as well as for breaches by
Distributing of the Post-Separation Agreements, the Tax Sharing Agreement, or the
Transitional Services Agreements. In addition, Distributing and Controlled will enter into
a tax sharing agreement (the “Tax Sharing Agreement”) that will provide for the
allocation of and indemnification of tax liabilities and other agreements related to tax
matters.

               Certain members of the Distributing SAG and the Controlled SAG (each
defined below) will also enter into one or more services agreements for the provision of
certain transitional services, which may include information technology, payroll, legal,
human resources, and other services (the “Transitional Services Agreements”). The
Transitional Services Agreements will be effective for a period of up to f months after
the Distribution (subject to an option, at Controlled’s election, to extend certain services
for up to an additional f months).

                                    Representations

               The following representations have been made regarding the Proposed
Transaction:

              (a) Any indebtedness owed by Controlled to Distributing after the
Distribution will not constitute stock or securities.

             (b) No part of the consideration to be distributed by Distributing will be
received by a shareholder as a creditor, employee, or in any capacity other than that of
a shareholder of Distributing.

               (c) The Distribution will occur no sooner than Date 3.

               (d) The five years of financial information submitted on behalf of Business
A is representative of the present operations of Business A, and with regard to such
business, there have been no substantial operational changes since the date of the last
financial statements submitted.
PLR-108248-13                                5

               (e) The five years of financial information submitted on behalf of Business
D is representative of the present operations of Business D, and with regard to such
business, there have been no substantial operational changes since the date of the last
financial statements submitted.

               (f) Distributing and Controlled will treat all members of their respective
separate affiliated groups as defined in § 355(b)(3)(B) (the “Distributing SAG” and the
“Controlled SAG”, respectively) as one corporation in determining whether the
requirements of § 355(b)(2)(A) regarding the active conduct of a trade or business are
satisfied.

               (g) The Distributing SAG neither acquired Business A nor acquired
control of an entity conducting Business A during the five-year period ending on the
date of the Distribution in a transaction in which gain or loss was recognized (or treated
as recognized) in whole or in part. Throughout the five-year period ending on the date
of the Distribution, the Distributing SAG has been the principal owner of the goodwill
and significant assets of Business A and will continue to be the principal owner following
the Distribution.

               (h) The Distributing SAG neither acquired Business D nor acquired
control of an entity conducting Business D during the five-year period ending on the
date of the Distribution in a transaction in which gain or loss was recognized (or treated
as recognized) in whole or in part. Throughout the five-year period ending on the date
of the Distribution, the Distributing SAG has been the principal owner of the goodwill
and significant assets of Business D and the Controlled SAG will continue to be the
principal owner following the Distribution.

               (i) Following the Proposed Transaction, Distributing and Controlled will
each continue the active conduct of its respective business, independently and with its
separate employees, except that certain members of the Distributing SAG may provide
certain transitional services for a period of up to f months (subject to an option, at
Controlled’s election, to extend certain services for up to an additional f months) after
the Distribution under the Transitional Services Agreements.

               (j) No intercorporate debt will exist between Distributing and Controlled at
the time of, or subsequent to, the Distribution, other than: (i) payables and receivables
arising from products purchased or services provided under the Post-Separation
Agreements or the Transitional Services Agreements or taxes, the allocation of which
shall be governed by the Tax Sharing Agreement, (ii) trade payables and receivables
incurred in the ordinary course of business, and (iii) short-term balances related to the
shared costs incurred in carrying out the Proposed Transaction, if any, which will be
settled as soon as practical following the Distribution. Any indebtedness owed by
Controlled to Distributing after the Distribution will not constitute stock or securities.
PLR-108248-13                                   6

              (k) Immediately before the Distribution, items of income, gain, loss,
deduction, and credit will be taken into account as required by the applicable
intercompany transaction regulations (see § 1.1502-13 and § 1.1502-14 as in effect
before the publication of T.D. 8597, 1995-2 C.B. 147, and as currently in effect; §
1.1502-13 as published by T.D. 8597). Any excess loss account Distributing may have
in the Controlled Stock (or a member may have in the stock of another member that is
required to be taken into account by § 1.1502-19) will be included in income
immediately before the Distribution to the extent required by regulations (see § 1.1502-
19).

              (l) Except as set forth in the Transitional Services Agreements, payments
made in connection with all continuing transactions, if any, between Distributing or its
subsidiaries and Controlled or its subsidiaries will be for fair market value based on
terms and conditions arrived at by the parties bargaining at arm's length.

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

                (n) The Distribution is being undertaken for the following corporate
business purposes: (i) to allow each of Distributing and Controlled to prioritize
independently their various investment opportunities going forward and to better
position the management teams of Distributing and Controlled to pursue organic growth
and/or acquisitions and fund those growth investments via direct access to the debt or
equity markets, as appropriate, taking into account only those considerations relating to
each company’s business strategies and business models, (ii) to enhance Controlled’s
ability to use its equity as an attractive acquisition currency, (iii) to allow Distributing and
Controlled to focus on their respective strategic priorities, the different challenges and
opportunities in their businesses, and their different financial profiles and capital needs,
and (iv) to provide Distributing and Controlled with the ability to issue equity-based
incentive awards that more directly link and closely align the interests of each of their
companies and their employees, making equity-based incentive awards a more
effective management tool to attract, motivate and retain key employees. The
Distribution is motivated, in whole or substantial part, by one or more of these corporate
business purposes.

               (o) The Distribution is not being used principally as a device for the
distribution of the earnings and profits of Distributing or Controlled or both.

               (p) The Distribution is not 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% or greater interest (within the meaning of
§ 355(d)(4)) in Distributing or Controlled (including any predecessor or successor of any
such corporation).
PLR-108248-13                                 7

              (q) For purposes of § 355(d), immediately after the Distribution, no person
(determined after applying § 355(d)(7)) will hold stock possessing 50% or more of the
total combined voting power of all classes of Distributing stock entitled to vote, or 50%
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.

               (r) For purposes of § 355(d), immediately after the Distribution, no person
(determined after applying § 355(d)(7)) will hold stock possessing 50% or more of the
total combined voting power of all classes of Controlled Stock entitled to vote, or 50% or
more of the total value of shares of all classes of Controlled Stock, that was either (1)
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 (2)
attributable to distributions on 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.

               (s) Immediately after the Distribution, either (i) no person will hold a 50%
or greater interest (within the meaning of § 355(g)(3)) in the stock of Distributing or
Controlled who did not hold such an interest before the transaction, or (ii) neither
Distributing nor Controlled is or will be a disqualified investment corporation for
purposes of § 355(g).

               (t) Distributing, Controlled, and the shareholders of Distributing will pay
their respective expenses, if any, incurred in connection with the Distribution.

               (u) Distributing was not a United States real property holding corporation
as defined in § 897(c)(2) (a “USRPHC”) during the five-year period ending on the date
of the Distribution, and Distributing will not be a USRPHC immediately after the
Distribution.

             (v) Controlled was not (and will not be) a USRPHC during the five-year
period ending on the date of the Distribution, and Controlled will not be a USRPHC
immediately after the Distribution.

                                           Rulings

              Based solely on the information submitted and the representations set
forth above, we rule as follows with respect to the Proposed Transaction:

              (1) No gain or loss will be recognized by Distributing in the Distribution
(§ 355(c)).
PLR-108248-13                                 8

               (2) No gain or loss will be recognized by (and no amount will be includible
in the income of) Distributing shareholders upon their receipt of the stock of Controlled
in the Distribution (§ 355(a)).

               (3) The basis of the Controlled stock and the Distributing common stock
in the hands of a shareholder of Distributing immediately after the Distribution will equal
the basis of the Distributing common stock held by such shareholder immediately prior
to the Distribution, allocated between the Controlled stock and the Distributing common
stock in proportion to their relative fair market values immediately following the
Distribution in accordance with § 1.358-2(a)(2) (§ 358(b)(2)).

               (4) The holding period of the Controlled stock received by each
shareholder of Distributing will include the holding period of the respective Distributing
common stock with respect to which the Distribution is made, provided that the
Distributing stock is held as a capital asset on the date of the Distribution (§ 1223(1)).

              (5) Earnings and profits will be allocated between Distributing and
Controlled following the Distribution under § 312(h) and §§ 1.312-10(b) and 1.1502-
33(e)(3).

                                           Caveats

                Except as expressly provided herein, no opinion is expressed about the
federal income tax consequences of the Proposed Transaction under other provisions
of the Code or the regulations, or 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. In particular, no opinion is expressed regarding:

                (i) whether the Distribution satisfies the business purpose requirement of
§ 1.355-2(b);

               (ii) whether the Distribution is being used principally as a device for the
distribution of earnings and profits of Distributing or Controlled or both (see §
355(a)(1)(B) and § 1.355-2(d));

              (iii) whether the Distribution and any acquisition or acquisitions are part of
a plan (or series of related transactions) under § 355(e)(2)(A)(ii) and § 1.355-7;

              (iv) the federal income tax consequences of the reverse stock split, as
described in step (1) above; and

                (v) any below fair market value transactions between Distributing and
Controlled.

                                    Procedural Statements
PLR-108248-13                                  9

             This ruling letter 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 their return that provides the date and
control number of this ruling letter.

                In accordance with the power of attorney on file in this office, a copy of this
ruling letter is being sent to your authorized representative.



                                           Sincerely,



                                           _Richard K. Passales______
                                           Richard K. Passales
                                           Senior Counsel, Branch 4
                                           Office of Associate Chief Counsel (Corporate)




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