PLR 1350006: IRS approves section 382 treatment for a parent spin-off and related contribution

Plain-English summary

The IRS ruled on the section 382 consequences of a corporate group's spin-off of its parent company and a related contribution of assets by a subsidiary. The ruling treated the spin-off date as a testing date for the subsidiary's loss subgroup and allowed the creation of a new public group under the segregation rules. It also concluded that the new public group was treated as a 5-percent shareholder for the subsidiary and that the subsidiary could use the presumption of no cross-ownership when measuring the ownership change. Finally, the IRS ruled that a separate contribution was not treated as a capital contribution made to avoid or increase the section 382 limitation, so the loss subgroup's value did not have to be reduced by that contribution.

Ruling snapshot

• Question: How would the parent spin-off and related asset contribution affect the subsidiary's section 382 ownership-change limitation?
• Outcome: Approved, with the stated caveats and representations.
• Key authorities: IRC §§ 355, 382, and 1504; Treas. Reg. §§ 1.382-2, 1.382-2T, and 1.1502-91

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201350006 Third Party Communication: None
Release Date: 12/13/2013 Date of Communication: Not Applicable
Index Number: 382.00-00, 382.07-00,
382.07-05, 382.12-01 Person To Contact:
---------------------, ID No. ------------------
---------------------- Telephone Number:
--------------------------- ----------------------
------------------------------ Refer Reply To:
--------------------------- CC:CORP:B05
------------------------------------- PLR-120642-13
Date:
September 13, 2013

Legend

Parent = ------------------------------

Foreign Parent = -------------------------------

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

Sub 2 = -------------------------------

Parent Group = ---------------------------------------------------------------------------------
---------------------------

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

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

Year 1 = -------

Year 2 = -------
PLR-120642-13 2

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

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

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

a = ------

b = -----

c = -----

d = ------

e = ------

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

This letter responds to your May 1, 2013 request for rulings regarding certain federal
income tax consequences resulting from a series of transactions that took place during
Year 2. The information provided in that request and in later correspondence is
summarized below.

The rulings contained in this letter are based upon facts 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.

                                Summary of Facts

Parent, a State A corporation, is the common parent of a group of affiliated corporations
that join in the filing of a consolidated federal income tax return (the “Parent Group”).
Parent has outstanding a single class of common stock, which is widely held and
publicly traded, and has no preferred stock outstanding.

Parent was formed on Date 1 as an indirect, wholly owned subsidiary of Foreign Parent
for the purpose of facilitating the Parent Spin-off (defined below). Foreign Parent is a
widely held, publicly traded corporation formed under the laws of Country A.

The Parent Spin-off was one in a series of related transactions that took place during
Year 2 (the “Transactions”). As part of the Parent Spin-off, on Date 2, Foreign Parent
caused the business Parent currently conducts (the “Parent Business”) to be
PLR-120642-13 3

contributed to Parent. The Parent Business assets contributed included the stock of Sub
1 and other Parent Business assets.

Sub 1, a State A corporation, was the parent of a group of affiliated corporations that
filed a consolidated federal income tax return (the “Sub 1 Group”). The Sub 1 Group
had significant net operating loss (“NOL”) carryovers prior to the contribution of Sub 1’s
stock to Parent, and the Sub 1 Group had been a loss group within the meaning of
Treas. Reg. § 1.1502-91(c)(1) since Year 1.

Sub 2, a direct, wholly owned subsidiary of Sub 1, owned assets unrelated to the Parent
Business. As part of the Transactions, prior to the Parent Spin-off, Sub 2 contributed
certain of its non-Parent Business assets to Sub 1 in exchange for Sub 1 stock (the
“Sub 2 Contribution”). Following the Sub 2 Contribution, Sub 1 contributed the non-
Parent Business assets it received in the contribution to a new corporation and
subsequently distributed the stock of such corporation to its shareholder in non-
recognition transactions pursuant to section 355 and related provisions.

On Date 3, after the Parent Business was contributed to Parent and Parent was
distributed internally to Foreign Parent, Foreign Parent distributed all of the stock of
Parent pro rata to its shareholders (the “Parent Spin-off”). Pursuant to the Parent Spin-
off, each of the shareholders of Foreign Parent received a shares of Parent stock for
every b shares of Foreign Parent stock held. Following the Parent Spin-off, Foreign
Parent and its subsidiaries did not own any shares of Parent stock.

Based on publicly available information, as of Date 3 Foreign Parent had c shareholders
that were considered 5-percent shareholders within the meaning of section 382 (other
than “direct public groups” as defined in Treas. Reg. § 1.382-2T(j)(2)(ii)). These 5-
percent shareholders collectively owned approximately d percent of Foreign Parent’s
stock. The remaining approximately e percent of Foreign Parent’s stock is treated for
purposes of section 382 as owned by one or more public groups (the “Foreign Parent
Public Groups”). The Foreign Parent Public Groups constituted public groups of a
highest tier entity and 5-percent shareholders with respect to the Sub 1 Group pursuant
to Treas. Reg. §§ 1.382-2T(j)(1)(iv)(A) and 1.382-2T(g)(1)(ii).

In PLR-149071-11, supplemented by PLR-137492-12, PLR-120264-12, PLR-137488-
12, and PLR-149032-12, the Internal Revenue Service ruled that the Parent Spin-off
would be treated as a tax-free distribution under section 355 and that Sub 1 would join
the Parent Group at the end of Date 2.

                                Representations

Parent has made the following representations regarding the ownership of its equity and
its section 382 owner shift analysis:
PLR-120642-13 4

(a) The members of the Sub 1 Group bear the relationship defined in section
1504(a)(1) to each other through Sub 1 at the time of Foreign Parent’s
contribution of all of the stock of Sub 1 to Parent on Date 2.

(b) On Date 2, the Sub 1 Group became a loss subgroup as defined in Treas. Reg.
§ 1.1502-91(d) (the “Sub 1 Loss Subgroup”).

(c) Parent’s only class of outstanding stock on Date 3 was its common stock.

(d) Other than its common stock, as of Date 3, Parent had no other outstanding
interests or obligations that would be treated as stock for purposes of section
382.

(e) Immediately prior to the Parent Spin-off, the indirect public groups with respect to
the Sub 1 Group as defined in Treas. Reg. § 1.382-2T(j)(1)(iv)(A) owned in the
aggregate greater than 50 percent of Foreign Parent’s outstanding stock directly
and a greater than 50 percent indirect interest in the stock of Sub 1.

(f) Immediately after the Parent Spin-off, direct public groups owned in the
aggregate greater than 50 percent of Parent’s outstanding stock.

                                     Rulings

(1) Date 3, the date on which the Parent Spin-off occurred, constitutes a testing date
within the meaning of Treas. Reg. § 1.382-2(a)(4) with respect to the Sub 1 Loss
Subgroup.

(2) The segregation rules in Treas. Reg. § 1.382-2T(j)(2)(iii)(B) and (j)(3) apply to the
Parent Spin-off, which causes the creation of a new public group of Parent that
consists of all shareholders of Parent that were not 5-percent shareholders
immediately following the Parent Spin-off (the “New Public Group”).

(3) The New Public Group constitutes a public group that is treated as a 5-percent
shareholder with respect to Sub 1 pursuant to Treas. Reg. § 1.382-2T(j)(1)(iv)(A).

(4) For purposes of determining whether the Parent Spin-off resulted in a change of
ownership of the Sub 1 Loss Subgroup, under Treas. Reg. § 1.382-2T(k)(2),
Parent may choose to apply the presumption of no cross-ownership in Treas.
Reg. § 1.382-2T(j)(1)(iii) to determine the increase in ownership of Parent’s
public groups as a result of the Parent Spin-off and Parent is not required to use
actual knowledge with respect to the ownership of its stock by shareholders who
were not 5-percent shareholders of Parent’s stock at the time of the Parent Spin-
off.
PLR-120642-13 5

(5) Section 382(l)(1) does not apply to treat the Sub 2 Contribution as a capital
contribution received by Sub 1 as part of a plan a principal purpose of which was
to avoid or increase its section 382 limitation.

(6) The Sub 1 Group is not required to reduce its value by the value of the Sub 2
Contribution for purposes of determining its section 382 limitation for an
ownership change occurring on Date 3.

                                      Caveats

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter, or concerning any conditions existing at the time of, or effects resulting from,
such transactions that are not specifically covered in the above rulings.

                                Procedural Matters

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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

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.

                                   Sincerely,


                                   _A. Graham Magill_____________
                                   A. Graham Magill
                                   Assistant Branch Chief, Branch 5
                                   Office of Associate Chief Counsel (Corporate)

cc: