Corporate separation steps receive four discrete tax rulings

Plain-English summary

A publicly traded parent planned a complex separation of one business through domestic transfers, foreign transfers, a Country B restructuring, a contribution to a controlled corporation, borrowing, and a stock distribution. The IRS expressly did not rule on whether the overall transaction qualified under IRC §§ 332, 355, or 368. It ruled that transfers of less than a redacted percentage of two subsidiaries' assets would not prevent their liquidations from otherwise being complete liquidations under § 332. It also specified the federal tax treatment of the Country B steps and ruled that, if the contribution and distribution otherwise qualified, using the controlled corporation's cash for shareholder payments within the stated period would be treated as a distribution under the reorganization plan for § 361(b). Finally, the controlled corporation would not be a successor to the distributing corporation for § 1504(a)(3).

Ruling snapshot

• Question: What treatment applied to four discrete issues within the proposed corporate separation?
• Outcome: Approved for the four requested discrete rulings, subject to the stated qualification assumptions
• Key authorities: IRC §§ 332, 355, 361, 368, and 1504(a)(3)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201504007 Third Party Communication: None
Release Date: 1/23/2015 Date of Communication: Not Applicable
Index Number: 355.01-00, 332.00-00,
361.00-00, 1504.00-00 Person To Contact:
------------------------, ID No. ------------
------------------------------------------ Telephone Number:
---------------------- --------------------
--------------------------- Refer Reply To:
CC:CORP:B04
------------------------------------------------------------ PLR-122907-14
----------------- Date:
October 07, 2014

Legend

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

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

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Distributing = --------------------------------------------------------------------------------------
Retained --------------------------------------------------------------------------------------
Business --------------------------------------------------------------------------------------

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PLR-122907-14 2

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Controlled = --------------------------------------------------------------------------------------
Business --------------------------------------------------------------------------------------

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

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

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

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

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FSub 1 = -----------------------

FSub 2 = --------------------------------------------------------------------------------------

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FSub 3 = ---------------------------

PLR-122907-14 3

FSub 4 = -------------------------------

FSub 5 = --------------------------------------------------------------------------------------

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FSub 6 = --------------------------------------------------------------------------------------

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FSub 7 = ---------------------------------------------

FSub 8 = ---------------------------------

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

Country B = ----------

Country C = ----------------------

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

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

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

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

Date 5 = ---------------------------

PLR-122907-14 4

Date 6 = ---------------------------

Date 7 = ---------------------------

a = -------

b = -------

c = ---

d = ---

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

We respond to your authorized representatives’ letter dated June 9, 2014, requesting
rulings on certain federal income tax consequences of a proposed and partially
completed transaction (the Proposed Transaction). The information provided in that
request and in subsequent correspondence dated August 27, 2014, September 29,
2014, and October 1, 2014 is summarized below.

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. This Office has not verified any of the material submitted in
support of the request for rulings. Verification of the information, representations, and
any other data may be required as part of the audit process.

This Office expresses no opinion concerning the tax consequences of any aspect of any
transaction or item discussed or referenced in this letter, except as expressly provided
herein. Specifically, this Office expresses no opinion whether the Proposed Transaction
qualifies under sections 332, 355, or 368 of the Internal Revenue Code, or regarding
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 Proposed
Transaction.

SUMMARY OF FACTS

Distributing is a publicly traded State A corporation and the common parent of an
affiliated group of corporations that join in the filing of a consolidated federal income tax
return (the Distributing Group). Distributing has one class of stock outstanding.
Distributing is engaged in and operates, through its subsidiaries, several lines of
business, including the Controlled Business (the subsidiaries engaged in such business,

PLR-122907-14 5

the Controlled Subsidiaries), and the Distributing Retained Business (the subsidiaries
engaged in such business, the Distributing Subsidiaries).
Distributing wholly owns Sub 1, FSub 2, and Controlled, which was created on Date 1.
Distributing conducts the Distributing Retained Business and the Controlled Business in
the United States through Sub 1 and its subsidiaries. Sub 1 wholly owns Sub 2 and
Sub 3. Sub 2 directly conducts the Distributing Retained Business and Controlled
Business through U.S. and foreign entities and subsidiaries. Distributing conducts the
Controlled Business through U.S. and foreign subsidiaries. Sub 2 wholly owns all of the
stock of Sub 4. Sub 4 conducts the Controlled Business through U.S. and foreign
subsidiaries. Sub 1, Sub 2, Sub 3 (prior to Step (ii)), and Sub 4 are State A
corporations.
FSub1, a Country C corporation, and its subsidiaries, principally conduct Distributing’s
world-wide foreign Distributing Retained Business (except for Country B), and all of
Distributing’s world-wide foreign Controlled Business (except for Country B). .
Distributing owns a percent of FSub 1 directly. Sub 3 directly owns the remaining b
percent of FSub 1. FSub 1 wholly owns FSub 3, a Country C corporation. Through
multiple foreign corporations and entities owned primarily by FSub 3, Distributing
conducts the foreign world-wide (except Country B) Distributing Retained Business and
Controlled Business.
In Country B, FSub 2 wholly owns FSub 5, both Country B corporations. FSub 5
conducts the Distributing Retained Business through U.S. and foreign subsidiaries and
the Controlled Business through Country B subsidiaries (Country B Subsidiaries).

PROPOSED TRANSACTION

Distributing proposes to undertake (or has already undertaken) the following steps
(collectively, the Proposed Transaction). The relevant steps of the Proposed
Transaction are set forth below:

Domestic Transfers

(i) On Date 1, Distributing formed Controlled, a State A limited liability corporation,
treated as a disregarded entity for federal income tax purposes (a DRE).

(ii) On Date 3, Sub 2, Sub 3, and Sub 1 (in that order) converted to limited liability
corporations under the laws of State A intended to be treated as DREs for federal
income tax purposes.

(iii) Sub 2 will distribute the stock of all top-tier Controlled Subsidiaries that it holds to
Sub 1, and Sub 1 will distribute the stock of these Controlled Subsidiaries to
Distributing, in transactions intended to be disregarded for federal income tax purposes.

PLR-122907-14 6

(iv) Distributing will transfer the stock of the Controlled Subsidiaries received in Step
(iii) to Controlled in a transaction intended to be disregarded for federal income tax
purposes.

Foreign Transfers

(v) Under local foreign law, the world-wide foreign Distributing Retained Business
and Controlled Business will be separated. FSub 3 will form FSub 4, a Country C
corporation, by contributing the Controlled Business to FSub 4 in exchange for all the
stock of FSub 4. FSub 3 will distribute all the stock of FSub 4 to FSub1.

(vi) Sub 3 will distribute its b percent interest in FSub1 to Sub 1, and Sub 1 will
distribute the b percent interest to Distributing in transactions intended to be
disregarded for federal income tax purposes.

(vii) FSub 1 will distribute all the stock of FSub 4 to Distributing. Distributing will
contribute all the stock of FSub 4 to Controlled in a transaction intended to be
disregarded for federal income tax purposes.

Country B Transfers

(viii) On Date 2, FSub 5 formed FSub 8, a Country B corporation.

(ix) On Date 4, Controlled formed FSub 7, a Country B entity treated as a DRE for
federal income tax purposes. FSub 7 will have two authorized classes of stock: (i)
voting, participating common shares (the FSub 7 Common Shares), and (ii) redeemable
preferred shares (the FSub 7 Preferred Shares). Controlled will own all outstanding
FSub 7 Common Shares.

(x) On Date 5, FSub 2 and FSub 5 underwent an amalgamation under Country B
law, with the surviving corporation, FSub 6, succeeding to the assets and liabilities of
both FSub 2 and FSub 5. The stock of FSub 6 will be held by Distributing.

(xi) FSub 6 will recapitalize, creating a new class of common stock (FSub 6 New
Common Stock) and a class of preferred stock (FSub 6 Special Shares). FSub 6 will
redeem each existing share of FSub 6 stock for one share of FSub 6 New Common
Stock and one share of FSub 6 preferred stock.

(xii) In a three-party agreement among Distributing, Controlled, and FSub 7: (a)
Distributing will transfer the FSub 6 Special Shares to FSub 7, (b) Controlled will issue
additional Controlled member interests to Distributing, and (iii) FSub 7 will issue
additional FSub 7 member interests to Controlled.

(xiii) FSub 6 will contribute the Country B Subsidiaries and its Country B Controlled
Business assets to FSub 8 in exchange for all of the stock of FSub 8 and the
assumption by FSub 8 of certain liabilities.

PLR-122907-14 7

(xiv) To conform with certain Country B requirements, the following steps will be
effectuated, pursuant to a binding commitment, in close temporal proximity, and either
all the steps will be implemented or none of the steps will be implemented: (a) FSub 6
will transfer its shares of FSub 8 to FSub 7 in exchange for FSub 7 Preferred Shares
with an equal value, (b) FSub 6 will redeem the FSub 6 Special Shares held by FSub 7
in exchange for the issuance by FSub 6 to FSub 7 of a promissory note equal in value
to the redeemed FSub 6 Special Shares, (c) FSub 7 will redeem the FSub 7 Preferred
Shares held by FSub 6 in exchange for the issuance to FSub 6 of a promissory note
equal in value to the redeemed FSub 7 Preferred Shares, and (d) the promissory notes
held by FSub 6 and FSub 7 will be set off against each other and cancelled. As a
result, FSub 7, wholly-owned by Controlled LLC, will own all of the shares of FSub 8.
FSub 8 at the time of the binding commitment will hold all of the Country B Controlled
Business assets and subsidiaries. Steps (viii) through (xiv) are collectively, the Country
B Spinoff.

(xv) FSub 7 filed an election under section 301.7701-3 of the Income Tax Regulations
to be treated as a corporation for federal income tax purposes effective Date 6.

Contribution & Distribution

(xvi) Following steps (viii) – (xv), Controlled converted on Date 7 to a State A
corporation in a transaction intended to be treated as a contribution of all the stock of
the top-tier Controlled Business Subsidiaries, F Sub 1, F Sub 7, and certain assets
related to the Controlled Business from Controlled LLC to the Controlled corporation in
exchange for all the stock of Controlled, Controlled Cash (described below), and any
assumed liabilities in connection with the conversion (the Controlled Contribution).

(xvii) Controlled will raise cash (the Borrowed Cash) through one or more of the
issuance of: (i) private or publicly-traded Controlled debt instruments, (ii) one or more
term loans, and (iii) a revolving credit facility.

(xviii) Controlled will distribute to Distributing all or a portion of the Borrowed Cash, and
possibly additional available cash (collectively, the Controlled Cash).

(xix) Distributing will distribute the Controlled stock pro rata to its shareholders (the
Distribution).

(xx) Distributing will transfer all of the Controlled Cash to its shareholders within c
months. Distributing will accomplish such transfer by purchasing its shares as part of
and pursuant to its existing open-market share buy-back program or open market
purchases within the meaning of Section 4.05(1)(b) of Rev. Proc. 96-30, 1996-1 C.B.

696. Alternatively, Distributing may transfer the Controlled Cash to its shareholders in
     the form of one or more pro rata dividends paid in continuation of Distributing’s historic
     practice of making regular quarterly dividend payments (any share repurchase or
     dividend described herein, a Shareholder Payment). The exact form of Distributing’s

PLR-122907-14 8

Shareholder Payment will depend on then prevailing market conditions and Controlled’s
assessment of market perceptions at and after the effective date of the Distribution.
Distributing has no plan or intention to purchase more than 10 percent of its currently
outstanding shares in the c months following the Distribution.

REPRESENTATIONS

(a) The Controlled Business assets owned by Sub 1 prior to its conversion to a
limited liability company, and that will be contributed to Controlled as part of the
Proposed Transaction, represent less than d percent of Sub 1’s total assets.

(b) The Controlled Business assets owned by Sub 2 prior to its conversion to a
limited liability company, and that will be contributed to Controlled as part of the
Proposed Transaction, represent less than d percent of Sub 2’s total assets.

(c) Except as otherwise described above, the liquidations of Sub 1 and Sub 2 will not
be preceded or followed by the reincorporation in, or transfer or sale to, a recipient
corporation of any of the businesses or assets of Sub 1 or Sub 2, respectively, if
persons holding, directly or indirectly, more than 20 percent in value of the stock of Sub
1 or Sub 2, respectively, also hold, directly or indirectly, more than 20 percent in value
of the stock in the recipient corporation. For purposes of this representation, ownership
will be determined by application of the constructive ownership rules of section 318(a)
as modified by section 304(c)(3).

(d) All notes issued in Step (xiv) will have the same terms and values, and all
exchanges in Step (xiv) will be for consideration of equal value.

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

(f) The total fair market value of the assets transferred to Controlled in the
Controlled Contribution will exceed the sum of (i) the amount of any liabilities assumed
(within the meaning of section 357(d)) by Controlled in connection with the exchange,
(ii) the amount of any liabilities (if any) owed to Controlled by Distributing that are
discharged or extinguished in connection with the exchange, and (iii) the amount of
cash and the fair market value of any other property (other than stock and securities
permitted to be received under section 361(a) without the recognition of gain) received
by Distributing in connection with the exchange. The fair market value of the assets of
Controlled will exceed the amount of its liabilities immediately after the exchange.

(g) The aggregate adjusted basis and the aggregate fair market value of the assets
transferred to Controlled in the Controlled Contribution will each equal or exceed the
sum of (i) the total liabilities to assumed (as determined under section 357(d)) by
Controlled plus any liabilities to which the transferred assets are subject, and (ii) the

PLR-122907-14 9

total amount of any money and the fair market value of any other property (within the
meaning of section 361(b)) received by Distributing from Controlled in the exchange.

(h) Any liabilities assumed (as determined under section 357(d)) by Controlled in the
Contribution will be incurred in the ordinary course of business and will be associated
with the assets being transferred.

(i) Within c months following the Distribution, Distributing will use the entire amount
of the Controlled Cash to repurchase shares of its stock or make dividend distributions.

RULINGS

(1) The transfers of less than d percent of the Sub 1 and Sub 2 assets to Controlled
will not preclude the Liquidations from otherwise constituting “complete liquidations”
within the meaning of section 332.

(2) Steps (viii) through (xv) will be treated as if: (a) FSub 6 contributed the Country B
Controlled Business to FSub 8 in exchange for all of the FSub 8 stock and the
assumption by FSub 8 of liabilities to which the transferred assets are subject, and (b)
FSub 6 distributed the FSub 8 stock to Distributing (Rev. Rul. 83-142, 1983-2 C.B. 68;
Rev. Rul. 77-191, 1977 C.B. 94).

(3) Provided that the Contribution and Distribution meet the requirements of sections
368(a)(1)(D) and 355, the use of the Controlled Cash in the manner described in Step
(xx) above within c months of the date of the Distribution will be treated as a distribution
in pursuance of the plan of reorganization within the meaning of section 361(b).

(4) Controlled will not be a successor to Distributing 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.

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.

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

PLR-122907-14 10

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,

Filiz A. Serbes
Branch Chief, Branch 3
Office of Associate Chief Counsel (Corporate)

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