Business split-off gets excess-loss and liquidation rulings

Plain-English summary

A public corporate group proposed separating one business through an initial public offering, internal distributions, a subsidiary liquidation, and exchange offers for the separated company's stock. The IRS issued several narrow rulings without deciding whether the overall transaction qualified under §§ 332 and 355. Subject to those qualifications, the transaction would not trigger the specified excess-loss-account adjustments, and the subsidiary liquidation could remain complete despite prior restructuring and limited reincorporated assets. The IRS also ruled that the subsidiary met the active-business requirement, that timely related exchange offers and any clean-up spin-off could count as one distribution, and that temporary retention of an intercompany instrument would not defeat control if the instrument was debt. The separated company would not be treated as a successor to the distributing parent for consolidated-group affiliation purposes.

Ruling snapshot

• Question: How do the excess-loss, liquidation, active-business, control, and successor rules apply to the proposed business split-off?
• Outcome: Approved on the discrete issues, subject to stated §§ 332 and 355 conditions
• Key authorities: IRC §§ 332, 355, 358(g), and 1504(a)(3); Treas. Reg. § 1.1502-19

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201441010 Third Party Communication: None
Release Date: 10/10/2014 Date of Communication: Not Applicable
Index Number: 1502.19-00, 355.00-00,
332.00-00 Person To Contact:
--------------------------, ID No. ----------------
------------------------ -----------------
------------------------------------------------------ Telephone Number:
------------------------------------ ----------------------
------------------------------ Refer Reply To:
--------------------------------------- CC:CORP:B01
PLR-141865-13
Date:
April 22, 2014

                                                LEGEND

Distributing 2 = -------------------------------------

Distributing 1 = -----------------------------------------------------

-----------------------------------------------------------------------------------------------

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

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

Sub 3 = -------------------------------

Sub 4 = ----------------------------------------

Sub 5 = ------------------------

PLR-141865-13 2

Sub 6 = ---------------------------------------------

Sub 7 = ----------------------------------------

Sub 8 = ---------------------------------

Sub 9 = -------------------------

SpinCo = --------------------------------------

SplitCo = --------------------------------------

                                                           -----------------

-----------------------------------------------------------------------------------------------

LLC 1 = -------------------------------------

LLC 2 = ---------------------

LLC 3 = -----------------------------------

LLC 4 = ------------------------------------

LLC 5 = -------------------------
PLR-141865-13 3

----------------------------------------------------------------------------------------------------------------

Partnership = ---------------------------------------------

Entity = ------------------------------------

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

State B = --------------

State C = -------

State D = -----------

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

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

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

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

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

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

g = ------------------------

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

i = ------

j = ----

k = ----

l = ----------

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

Business B = --------------------------------
PLR-141865-13 4

Business C = ------------------------------------------------------

Business C1 = ------------------------------------------------------
------------------------------------------------------
-------------

Facility A = ------------------------------------------------------
-----------

Facility B = ------------------------------------------------------
--------------------

Facility C = ------------------------------------------------------
---------------------------------------

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

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

This letter responds to your authorized representatives’ letter dated September 26,
2013, requesting rulings on certain federal income tax consequences of a proposed
transaction (the “Proposed Transaction”). The information provided in that request and
in subsequent correspondence is summarized below. This letter supersedes the letter
dated April 10, 2014.

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.

This Office expresses no opinion as to the overall tax consequences of the transaction
described in this letter, including qualification under sections 332 and 355, or as to any
issue or step not specifically addressed by this letter. Rather, the rulings contained in
this letter only address one or more discrete legal issues involved in the transaction.
Further, 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.

                                       SUMMARY OF FACTS

PLR-141865-13 5

Distributing 2 is a State A corporation and is the common parent of a consolidated
group (the “Distributing 2 Group”). Distributing 2’s stock is publicly traded and widely
held. The Distributing 2 Group is engaged in several lines of business; relevant to this
request are Business A, Business B, and Business C.

Distributing 2 owns all of the common stock of Distributing 1 and Sub 1, both State B
corporations. Distributing 1 has non-voting preferred stock outstanding that is owned by
unrelated parties. Distributing 1 owns all of the common stock of Sub 2 and SpinCo,
both state B corporations. Sub 2 owns all of the common stock of Sub 3, a State B
corporation. SpinCo owns all of the stock of Sub 4 and SplitCo, each a State B
corporation, and Sub 5, a State C corporation. Sub 4 owns a% of the stock of Sub 6, a
State B limited liability company treated as a corporation; the remaining b% of the stock
of Sub 6 is owned by Distributing 1. Distributing 1 owns c%, Sub 2 owns d%, and Sub 6
owns e% of Sub 7, a State D corporation. SplitCo owns all of the stock of Sub 8, an
Entity, and Sub 9, a State B corporation. SplitCo and its subsidiaries have a net
intercompany payable to Distributing 1 and its subsidiaries (the “SplitCo Intercompany
Payable”).

Sub 3 owns all of the interests in LLC 1, a State B limited liability company treated as a
disregarded entity. Sub 7 owns directly or indirectly all of the interests in LLC 2, LLC 3,
LLC 4, and LLC 5, each a State B limited liability company treated as a disregarded
entity. LLC 1 owns f% of the interests in Partnership, LLC 2 owns g% of the interests in
Partnership, and an unrelated third-party owns the remaining interests in Partnership.
Partnership owns Facility A, LLC 4 owns Facility B, and LLC 5 owns Facility C.

Distributing 1 is directly and indirectly engaged in Business A, Business B, Business C,
and other lines of business. Sub 4, Sub 5, Sub 6, and Sub 7 are engaged in Business
A. SplitCo, Sub 8, and Sub 9 are engaged in Business B. SpinCo historically has held
directly and indirectly assets relating to Business A, Business B, and Business C.
Partnership, LLC 4 and LLC 5 are engaged in Business C1, which is a part of Business
C, through their respective ownership of Facility A, Facility B, and Facility C.

Distributing 2 has an excess loss account within the meaning of Treas. Reg. §1.1502-
19(a)(2) (an “ELA”) in its Distributing 1 stock (the “Distributing 1 ELA”). At the time the
ruling request was submitted: Distributing 2 estimates that its ELA in the Distributing 1
stock was approximately $h; Distributing 1 did not have an ELA in its SpinCo stock; and
SpinCo did not have an ELA in its SplitCo stock. Distributing 2 anticipates that (i) there
will be no ELA in the stock of either SpinCo or SplitCo immediately before the Internal
Distribution (described in Step (viii) below), and (ii) with the application of the rulings
provided in this letter, there will be no ELA in the stock of SplitCo following the SpinCo
Liquidation (described in Step (ix) below) and immediately before the External
Distribution (described in Step (x) below).

Prior to the Proposed Transaction, Distributing 2 consolidated most of Distributing 1’s
assets and liabilities that comprise Business B under a holding company (SplitCo) via a
PLR-141865-13 6

combination of contributions and sales (collectively, the “Prior Restructuring
Transactions”). The Prior Restructuring Transactions were completed on or prior to
Date 1.

Following the Business C1 Acquisition (described in Step (v) below) and prior to the
SpinCo Liquidation, SpinCo and members of its “separate affiliated group” as defined in
section 355(b)(3) (the “SpinCo SAG”) will directly engage in Business C1. After the
SpinCo Liquidation, Distributing 2 and members of its “separate affiliated group” as
defined in section 355(b)(3) (the “Distributing 2 SAG”) will directly engage in Business
C1. Employees of Distributing 1 and Sub 1 will have conducted operational and
management activities with respect to Business C1 of Partnership, LLC 4, and LLC 5,
throughout the five-year period ending on the date of the Internal Distribution.
Employees of the SpinCo SAG will conduct operational and management activities with
respect to Business C1 of Partnership, LLC 4, and LLC 5 following the Internal
Distribution and prior to the SpinCo Liquidation. Employees of the Distributing 2 SAG
will conduct operational and management activities with respect to Business C1 of
Partnership, LLC 4, and LLC 5 following the SpinCo Liquidation.

Financial information has been submitted that Business C1 has had gross receipts and
operating expenses indicating the active conduct of a trade or business for each of the
past five years.

                            PROPOSED TRANSACTION

Distributing 2 is entering into the Proposed Transaction in part to split off Business B to
its public shareholders. The relevant steps of the Proposed Transaction are described
below:

(i) Distributing 1, SpinCo, and certain of their affiliates will sell certain assets
related to Business B to SplitCo (the “Business B Transfers”).

(ii) The SplitCo Intercompany Payable will be refinanced into a term loan owed by
SplitCo to Distributing 1 (the “SplitCo Note”). SplitCo is also expected to
assume intercompany debt owed by Distributing 1 (the “Assumed Debt”).

(iii) SplitCo will enter into a term loan facility with Distributing 1 (“Term Loan Facility
1”) and a term loan facility with third-party lenders (“Term Loan Facility 2”).

(iv) SplitCo will effect an initial public offering of no more than i% of the SplitCo
stock (the “SplitCo IPO”). Concurrent with the closing of the SplitCo IPO,
SplitCo expects to borrow the full amount under Term Loan Facility 1 (such
borrowings, the “Distributing 1 Instrument”) and the full amount available under
Term Loan Facility 2. SplitCo anticipates that it will use the net proceeds of the
SplitCo IPO together with the borrowings under Term Loan Facility 1 and Term
Loan Facility 2, in part, to repay all of SplitCo’s related party debt owed to
PLR-141865-13 7

    Distributing 1 and its affiliates (including the SplitCo Note, and the Assumed
    Debt, if any).

(v) SpinCo will acquire Business C1 (the “Business C1 Acquisition”) as follows: (1)
Sub 7 will distribute its interests in LLC 2, LLC 3, LLC 4, and LLC 5 to Sub 6 in
redemption of a portion of Sub 6’s Sub 7 stock; (2) Sub 6 will in turn distribute
its interests in LLC 2, LLC 3, LLC 4, and LLC 5 to Sub 4 in redemption of a
portion of Sub 4’s Sub 6 stock; (3) Sub 4 will in turn distribute its interests in
LLC 2, LLC 3, LLC 4, and LLC 5 to SpinCo; (4) SpinCo will purchase the f%
interest in Partnership held by LLC 1; and (5) SpinCo will hire as its employees
certain Distributing 1 employees who hold management positions and an
operational position with respect to Business C.

(vi) SpinCo will contribute all of the stock of Sub 5 to Sub 4 (the “Sub 5
Contribution”).

(vii) SpinCo will distribute to Distributing 1 all of the stock of Sub 4 and certain
intercompany receivables.

(viii) Distributing 1 will distribute all of the stock of SpinCo to Distributing 2 (the
“Internal Distribution”).

(ix) SpinCo will convert under state law to a limited liability company which will be
treated as a disregarded entity, and as such, a branch or division of Distributing
2 (the “SpinCo Liquidation”).

(x) Pursuant to one or more offers to exchange all of its shares of SplitCo for
shares of Distributing 2 held by its shareholders, Distributing 2 will exchange
SplitCo shares for Distributing 2 shares (an “Exchange Offer”; the one or more
Exchange Offer(s) collectively, the “Split-Off”). If the Split-Off is
undersubscribed, any remaining shares of SplitCo will be distributed pro rata to
Distributing 2’s shareholders within j months following the initial exchange (the
“Clean-up Spin-Off” and, together with the Split-Off, the “External Distribution”).

                              REPRESENTATIONS

(a) The assets transferred in the Sub 5 Contribution, the Business B Transfers, and
any other assets (excluding the assets transferred in the Prior Restructuring
Transactions) owned by SpinCo at the commencement of the Proposed
Transaction that are contributed by SpinCo or by Distributing 2 to a related
corporation as part of the Proposed Transaction (collectively, the
“Reincorporated Assets”) constitute no more than k% of the value of the assets
of SpinCo. For purposes of this representation, a corporation is a “related
corporation” if Distributing 2 owns directly or indirectly more than 20% of the
value of the stock of the corporation and, for purposes of determining Distributing
PLR-141865-13 8

  2’s ownership, the constructive ownership rules of section 318(a) as modified by
  section 304(c)(3) apply. For purposes of computing the value of the assets
  owned by SpinCo, Distributing 2 has included all of the assets SpinCo owns as a
  matter of applicable local law, including those assets acquired in the Prior
  Restructuring Transactions.

(b) The five years of financial information submitted on behalf of SpinCo is
representative of Business C1’s present operations and, with regard to Business
C1, there have been no substantial operational changes since the date of the last
financial statements submitted.

(c) Following the Internal Distribution and prior to the SpinCo Liquidation, the SpinCo
SAG will continue the conduct of Business C1 independently and with its
separate employees, with the exception of certain operational activities that will
be performed by employees of the Distributing 2 SAG for Partnership, LLC 4, and
LLC 5, and services performed by independent contractors consistent with
industry standards. Following the SpinCo Liquidation, the Distributing 2 SAG will
continue the conduct of Business C1 independently and with its separate
employees with the exception of services performed by independent contractors
consistent with industry standards.

(d) SplitCo’s borrowing pursuant to the Distributing 1 Instrument is solely to facilitate
the Proposed Transaction.

(e) Following the External Distribution and as long as Distributing 2, Distributing 1, or
any of their affiliates retain the Distributing 1 Instrument, none of Distributing 2’s
or Distributing 1’s directors or officers will serve as directors or officers of SplitCo.

(f) Distributing 1 will dispose of its interest in the Distributing 1 Instrument as soon
as practicable and in all events not later than l after the issuance of the
Distributing 1 Instrument.

                                      RULINGS

Based solely on the information submitted and the representations set forth above, we
rule as follows:

(1) Provided that the Internal Distribution and the External Distribution each satisfies
the requirements of section 355, and provided that the SpinCo Liquidation
satisfies the requirements of section 332, no adjustment under Treas. Reg.
§1.1502-19(e) or under section 358(g) shall be made with respect to the
Proposed Transaction as a whole or with respect to any step thereof.

(2) For federal income tax purposes, (i) Distributing 2 will be treated as having
acquired all of the stock of SpinCo prior to the time SpinCo adopts a plan of
PLR-141865-13 9

   liquidation, and (ii) SpinCo will be treated as transferring to Distributing 2 (x) all of
   the assets it owns as a matter of local law at the time of the Internal Distribution
   and the SpinCo Liquidation, and (y) no other assets.

(3) The Reincorporated Assets and the assets transferred in the Prior Restructuring
Transactions will not preclude the SpinCo Liquidation from constituting a
“complete liquidation” within the meaning of section 332.

(4) With respect to the Internal Distribution, SpinCo will satisfy the active trade or
business requirement of section 355(b).

(5) Provided that the External Distribution would otherwise satisfy the requirements
of section 355 if all of the SplitCo stock were to be distributed pursuant to only
one Exchange Offer, and provided that any subsequent Exchange Offer(s)
and/or the Clean-up Spin-Off (if needed) will be completed within j months of the
completion of the initial distribution of SplitCo stock pursuant to the initial
Exchange Offer, the External Distribution will be treated as a single distribution in
determining whether the requirements of section 355(a)(1)(D) are met.

(6) Provided that the Distributing 1 Instrument constitutes indebtedness, the
retention of the Distributing 1 Instrument by Distributing 1 will not cause either the
Internal Distribution or the External Distribution to fail to meet the requirements of
section 355(a)(1)(D).

(7) SplitCo will not be a successor to Distributing 2 for purposes of section
1504(a)(3).

                                      CAVEATS

No opinion is expressed or implied about the federal income tax consequences of any
other aspect of any transaction or item discussed or referenced in this letter, or the
federal income 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 whether the Distributing 1 Instrument
constitutes debt or equity.
PLR-141865-13 10

                          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.

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,



                                   Mark S. Jennings
                                   Branch Chief, Branch 1
                                   Office of Associate Chief Counsel
                                   (Corporate)