Spin-off cash and contingent liabilities received reorganization treatment

Plain-English summary

A public company transferred one business to a new controlled corporation, received borrowed cash and controlled-company stock, and distributed the stock to its shareholders. The IRS ruled on three discrete issues rather than the transaction’s overall tax treatment. A payment to preexisting creditors could qualify under section 361(b)(3) even though it occurred before the special cash distribution. Cash used within the represented period for shareholder distributions, stock repurchases, or debt repayment could be treated as distributed under the reorganization plan if the contribution and spin-off otherwise qualified. Later payments under specified contingent-liability arrangements would be treated as adjustments to amounts exchanged immediately before the distribution.

Ruling snapshot

• Question: How would pre-distribution creditor payments, later use of borrowed cash, and contingent liabilities be treated in the spin-off?
• Outcome: Approved, subject to the transaction otherwise satisfying sections 355 and 368
• Key authorities: IRC §§ 355, 361(b), 368(a)(1)(D); Arrowsmith v. Commissioner

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201524005 Third Party Communication: None
Release Date: 6/12/2015 Date of Communication: Not Applicable
Index Number: 355.00-00; 368.04-00
Person To Contact:
----------------- -----------------------, ID No. ----------------
----------------------------- Telephone Number:
---------------------------------- ------------------
---------------------------------- Refer Reply To:
----------------------------------- CC:CORP:BR:2
PLR-132762-14
Date:
February 24, 2015

              TY: ------

Legend

Distributing = -----------------------------------
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Controlled = ------------------------------------
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Business A = ------------------------------------------------------------------------

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

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

Date A = ------------------------

Date B = -----------------

Date C = -----------------------

Date D = -----------------------

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

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

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

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

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

e = ----

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

This letter responds to your authorized representative’s letter dated August 29, 2014,
and subsequent correspondence, requesting rulings regarding certain federal income
tax consequences of a transaction (“Transaction”). The information submitted in that
request and in later correspondence is summarized below.

This letter is issued pursuant to section 6.03 of Rev. Proc. 2015-1, 2015-1 I.R.B. 1,
regarding one of 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 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 facts and representations submitted by the taxpayer and accompanied by
penalties of perjury statements executed by an appropriate party. This office has not
verified any of the material submitted in support of the request for rulings. Verification of

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the information, representations, and other data may be required as part of the audit
process.
Summary of Facts

Distributing, a publicly traded State A corporation, is the common parent of an affiliated
group of corporations that files a consolidated federal income tax return. At the time of
the Transaction, Distributing was directly or indirectly engaged in Business A and
Business B through its domestic and foreign subsidiaries.

                                     Transaction

Distributing entered into the Transaction to spin off Business A to its public
shareholders. The relevant steps of the Transaction are set forth below:

(i) On Date A, Distributing formed Controlled, a State A corporation.

(ii) On Date B, Distributing paid pre-existing creditors $a (the “Date B Payment”).

(iii) On Date C, Controlled borrowed approximately $b from unrelated third-party
lenders.

(iv) Distributing transferred the Business A Assets to Controlled in exchange for
Controlled common stock, $c of the $b borrowed in step (iii) (the “Special
Distribution”), and the assumption of certain liabilities (together, the
“Contribution”). The Special Distribution occurred on Date D.

(v) Distributing made additional payments to creditors in the amount of $d.

(vi) Distributing distributed all of the stock of Controlled to its shareholders pro rata
(“Distribution”).

(vii) Distributing will: (i) distribute the Special Distribution to its shareholders (through
quarterly dividends, redemptions pursuant to existing stock repurchase plans, or
otherwise), and/or (ii) transfer the Special Distribution to creditors within e
months of the Distribution.

In connection with the Distribution, Distributing and Controlled entered into certain
agreements (collectively, known as the “Agreements”). The Agreements include (i) the
separation and distribution agreement, (ii) a tax matters agreement, (iii) an employee
matters agreement, and (iv) an intellectual property agreement, each of which requires
one party to indemnify the other for certain pre-Distribution liabilities (the indemnification
provisions of each are referred to as the “Contingent Liability Arrangements”). In
addition, the Agreements include some commercial agreements for each party to supply
the other with goods and services on an arm's length basis.

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                                 Representations

(a) The Date B Payment by Distributing was made pursuant to the plan of
reorganization that includes the Contribution and Distribution.

(b) Within e months of the Distribution, Distributing will use the Special Distribution
proceeds to (i) make quarterly dividends, (ii) repurchase shares of its stock, or (iii)
repay Distributing indebtedness.

                                      Rulings

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

(1) Provided the Date B Payment otherwise qualified as a distribution in pursuance
of the plan of reorganization within the meaning of sections 361(b)(1)(A) and
361(b)(3), the fact that the Date B Payment was made prior to the Special
Distribution will not preclude it from being considered a payment to creditors
within the meaning of section 361(b)(3).

(2) Provided that the Contribution and Distribution meet the requirements of sections
368(a)(1)(D) and 355, the use of the Special Distribution in the manner described
in Step (vii) above within e 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).

(3) Amounts transferred pursuant to the Contingent Liability Arrangements that
(i) have arisen or will arise for a taxable period ending on or before the
Distribution or for a taxable period beginning before and ending after the
Distribution, and (ii) will not become fixed and ascertainable until after the
Distribution, will be treated as adjustments to amounts contributed by Distributing
to Controlled or distributed by Controlled to Distributing immediately before the
Distribution (Arrowsmith v. Commissioner, 344 U.S. 6 (1952); Rev. Rul. 83-73,
1983-1 C.B. 84).
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 Transaction that are not specifically covered by the above rulings.

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                             Procedural Statements

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 letter ruling 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, copies of this letter
ruling are being sent to your authorized representatives.

                                   Sincerely,


                                   ________________________
                                   Mark J. Weiss
                                   Chief, Branch 2
                                   Office of Associate Chief Counsel (Corporate)

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