Supplemental spin-off payment may fund qualifying creditor repayment

Plain-English summary

This supplemental ruling addressed a possible additional payment following a completed contribution and external distribution covered by an earlier spin-off ruling. The IRS ruled that any payment, other than the portion treated as interest under section 483, would be money or other property received in exchange for the contributed property under section 361(b)(1). If the distributing corporation uses equal cash within the redacted period to repay creditors whose debts existed at the distribution date, that repayment will be treated as a distribution under the reorganization plan. Both conclusions depend on execution of the attached closing agreement. The IRS did not rule on the amount of section 483 interest income.

Ruling snapshot

• Question: How is the additional payment treated, and can matching creditor repayments qualify under section 361(b)?
• Outcome: Approved, subject to timely repayment of existing creditors and execution of the closing agreement.
• Key authorities: IRC §§ 361(b) and 483; Arrowsmith v. Commissioner, 344 U.S. 6 (1952).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201516014 Third Party Communication: None
Release Date: 4/17/2015 Date of Communication: Not Applicable
Index Number: 355.01-00, 361.00-00
Person To Contact:
--------------------------- -----------------, ID No. ----------------
--------------------------- Telephone Number:
----------------------------------------- --------------------
----------------------- Refer Reply To:
------------------------------- CC:CORP:1
PLR-123957-14
Date:
December 05, 2014

                                                 LEGEND

Distributing 4 = --------------------------------------------

Controlled 2 = ------------------------------
---------------------------------------

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

$aa = -----------------------------------------------------------------------
-----------------------------------------------------------------
--------------------------------------------------------
----------------

Additional Payment = ----------------------------------------------------------------------
----------------------------------------------------------------------
-------------------------------------------------------------------
-----------------------------------------------------------------
---------------------------------------------------

Board Resolution = ----------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
---------------------------------

aaa = -----

Date 5 = ------------------
PLR-123957-14 2

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

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

   This letter responds to your letter dated June 17, 2014, requesting that we

supplement our letter ruling dated June 4, 2014 (PLR-137376-13) (the “Prior Letter
Ruling”). The information submitted for consideration is summarized below. Capitalized
terms not defined in this letter have the meanings assigned to them in the Prior Letter
Ruling.

   This letter is issued pursuant to section 6.03 of Rev. Proc. 2014-1, 2014-1 I.R.B.

15, regarding one or more significant issues under sections 332, 351, 355, 368, or
1036. The rulings contained in this letter only address one or more discrete legal
issues involved in the transaction. This Office expresses no opinion in this letter as
to the overall tax consequences of the transactions described in this letter or as to
any issue not specifically addressed by the rulings below.

  The rulings contained in this letter are based upon the information and

representations submitted by the taxpayer and accompanied by penalty of perjury
statements 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.

   The Prior Letter Ruling addresses certain federal income tax consequences of

the Proposed Transactions under sections 355, 368 and certain other relevant
provisions of the Internal Revenue Code. Except as modified below, the representations
and material facts set forth in the Prior Letter Ruling remain in effect for purposes of this
supplemental letter ruling.

                             SUPPLEMENTAL FACTS

    The Controlled 2 Contribution and the External Distribution were completed on

Date 6. On Date 5, Distributing 4’s Board of Directors adopted the Board Resolution.
The Board Resolution authorized Distributing 4 to implement the External Distribution,
and stated that Distributing 4 will, in connection with the plan that includes the
Controlled 2 Contribution and the External Distribution, and within aaa months following
its receipt, if any, of the Additional Payment, use an amount of cash equal to the
Additional Payment to repay creditors to whom Distributing 4 had existing debt
obligations at the time of the External Distribution. Distributing 4 intends to establish a
separate bank account to deposit any Additional Payment received.

                                     RULINGS

PLR-123957-14 3

   Based solely on the information submitted and the representations made, and

conditioned upon Distributing’s execution of the closing agreement attached hereto and
made a party hereof, we rule as follows:

1. Any payment Distributing 4 receives as part of the Additional Payment, to the
   extent not treated as interest by reason of section 483, will be treated as “other
   property or money” within the meaning of section 361(b)(1) received by
   Distributing 4 in exchange for the property Distributing 4 transferred to Controlled
   2 in the Controlled 2 Contribution (Arrowsmith v. Commissioner, 344 U.S. 6
   (1952)).

2. Provided that within aaa months following its receipt, if any, of the Additional
   Payment, Distributing 4 transfers an amount of cash equal to the Additional
   Payment to repay creditors to whom Distributing 4 had existing debt obligations
   at the time of the External Distribution, the transfer will be treated as a
   distribution by Distributing 4 in pursuance of the plan of reorganization within the
   meaning of Section 361(b). Sections 361(b)(1)(A), 361(b)(3).

                            CLOSING AGREEMENT
   
   In connection with the issuance of this supplemental ruling letter, a closing
   

   agreement is being entered into between the Internal Revenue Service and the
   taxpayer with respect to certain of those issues affecting its tax liability on the basis set
   forth above. Pursuant to our practice with respect to such agreements, the closing
   agreement contains a stipulation to the effect that any change or modification of
   applicable statutes enacted subsequent to the date of this agreement and made
   applicable to the taxable period involved will render the agreement ineffective to the
   extent that it is dependent upon such statutes. This private letter ruling will become
   effective upon execution of the closing agreement.

                                    CAVEATS
   

   Except as expressly provided herein, no opinion is expressed or implied
   concerning the tax treatment of the Supplemental Facts or the Proposed Transaction
   under any provision of the Code and regulations or the tax treatment of any condition
   existing at the time of, or effects resulting from the Supplemental Facts or the Proposed
   Transaction that is not specifically covered by the above rulings or the Prior Letter
   Ruling. In particular, we express no opinion regarding:

   (i) The extent to which Distributing 4 will be required to include in its gross
   income amounts treated as interest by reason of section 483 with respect
   to the Additional Payment.

                           PROCEDURAL MATTERS
   

   PLR-123957-14 4

   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 (PLR-123957-14) 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,
   
                                  Maury Passman
                                  Chief, Branch 4
                                  Office of Associate Chief Counsel (Corporate)
   

cc: