Discrete issues approved in a proposed REIT business separation

Plain-English summary

A publicly traded real estate investment trust proposed a multi-step separation of two businesses involving subsidiary mergers, contributions, distributions, and a shareholder spin-off. The IRS issued five narrow rulings rather than approving the transaction's overall tax treatment. It ruled favorably on the treatment of an earlier partnership distribution, the ordering of a subsidiary contribution and merger, satisfaction of the active-business requirement despite the business's size, use of reorganization proceeds, and preservation of complete-liquidation treatment. Each conclusion depended on the stated representations and on the transaction otherwise satisfying the relevant statutory requirements. The IRS expressly gave no ruling on REIT or taxable REIT subsidiary qualification.

Ruling snapshot

• Question: Would five specified steps or features prevent the proposed separation from receiving the intended nonrecognition treatment?
• Outcome: Approved on the five discrete issues, subject to stated conditions
• Key authorities: IRC §§ 332, 355, 361, 368; Rev. Proc. 2014-1

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201535007 Third Party Communication: None
Release Date: 8/28/2015 Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-00,
355.03-00, 368.01-00, Person To Contact:
332.00-00 --------------------------, ID No. --------------
Telephone Number:
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-------------------------- Refer Reply To:
---------------------------- CC:CORP:4
PLR-113420-14
------------------------------- Date:
------------------------------------------------------------ March 03, 2015

LEGEND

Distributing = ---------------------------------------------------------------------------------------
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Controlled 1 = ---------------------------------------------------------------------------------------
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Controlled 2 = ---------------------------------------------------------------------------------------
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Sub 1 = ---------------------------------------------------------------------------------------
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Sub 2 = ---------------------------------------------------------------------------------------
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Sub 3 = ---------------------------------------------------------------------------------------
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Sub 4 = ---------------------------------------------------------------------------------------
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New GP = ---------------------------------------------------------------------------------------
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Newco TRS = ---------------------------------------------------------------------------------------
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Partnership = ---------------------------------------------------------------------------------------
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LLC Group 1 = ---------------------------------------------------------------------------------------
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LLC Group 2 = ---------------------------------------------------------------------------------------
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LLC Group 3 = ---------------------------------------------------------------------------------------
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DRE 1 = ---------------------------------------------------------------------------------------
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DRE 2 = ---------------------------------------------------------------------------------------
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DRE 3 = ---------------------------------------------------------------------------------------
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DRE 4 = ---------------------------------------------------------------------------------------
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DRE 5 = ---------------------------------------------------------------------------------------
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DRE 6 = ---------------------------------------------------------------------------------------
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New LLC = ---------------------------------------------------------------------------------------
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Business A = ---------------------------------------------------------------------------------------
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Size of Business ---------------------------------------------------------------------------------------
A ---------------------------------------------------------------------------------------
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Business B = ---------------------------------------------------------------------------------------
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c = ----

d = ------

e = ----

State F = --------------

Date G = --------------

Date H = ----------------------

Date I = ---------------------------

Year J = -------
PLR-113420-14 4

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

   This letter responds to your March 26, 2014 request for rulings under sections

332, 355, 361, and 368 of the Internal Revenue Code (the “Code”) and related
provisions with respect to a proposed transaction described below (the “Proposed
Transaction”). The information provided in that request and in later correspondence 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. 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 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 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.

                                     FACTS

   Distributing is a State F corporation. Distributing and its predecessors have been

indirectly engaged in Business A (since Date G) and Business B. Distributing has been
a real estate investment trust (“REIT”) within the meaning of section 856(a) since Date
H, and its stock is publicly traded.

    Distributing owns all of the equity interests in Sub 1, a State F limited liability

company (“LLC”) which is classified as a corporation for U.S. federal income tax
purposes and as a taxable REIT subsidiary within the meaning of 856(l) (a “TRS”). Sub
1’s principal asset is a c percent general partner interest in Partnership, a domestic
entity that is classified as a partnership for U.S. federal income tax purposes;
Distributing owns the remaining d percent interest in Partnership as a limited partner.
Distributing and Sub1 created Partnership in Year J in a transaction in which no gain or
loss was recognized. Additionally, Distributing owns all of the equity interests in DRE 1,
a State F LLC which is disregarded as separate from Distributing for U.S. federal
income tax purposes. DRE 1 owns a single property and Business A is operated in a
portion of that property.

   Partnership owns all the equity interests in DRE 2, a State F LLC disregarded as

separate from Partnership for U.S. federal income tax purposes. DRE 2 owns all of the
equity interests in a number of LLCs (“LLC Group 1”) that are disregarded as separate
from Partnership for U.S. federal income tax purposes and which own a majority of
PLR-113420-14 5

Distributing’s real estate holdings by value. Additionally, DRE 2 owns certain land
associated with Business B (the “Additional Land”), and DRE 2 owns all of the equity
interests in Sub 2, a State F LLC which is classified as a corporation and as a TRS for
U.S. federal income tax purposes. Sub 2 is the common parent of a group of corporations
that file a consolidated U.S. federal income tax return.

   Sub 2 owns, inter alia, all of the stock of Sub 3, a State F corporation, and all of the

equity interests in Sub 4, a State F LLC which is classified as a corporation for U.S.
federal income tax purposes. Sub 4 owns all of the equity interests in DRE 3, a State F
LLC disregarded as separate from Sub 4 for U.S. federal income tax purposes, and all of
the equity interests in a number of LLCs (“LLC Group 2”) that are disregarded as separate
from Sub 4 for U.S. federal income tax purposes. DRE 3 is the nominal employer of
personnel associated with Business A and Business B, and holds certain land associated
with Business B. Sub 3 owns all of the equity interests in DRE 4, a State F LLC
disregarded as separate from Sub 3 for U.S. federal income tax purposes. Each of Sub 3
and Sub 4 is a TRS.

    DRE 4 owns all of the equity interests in DRE 5, a State F LLC disregarded as an

entity separate from Sub 3 for U.S. federal income tax purposes. Among other assets,
DRE 5 owns and operates a core property of Business B, and owns and operates
Business A. Additionally, DRE 4 owns all of the equity interests in DRE 6, a State F LLC,
and all of the equity interests in a number of LLCs (“LLC Group 3”) that are disregarded
as separate from Sub 3 for U.S. federal income tax purposes. The LLC Group 3 entities
own and operate various aspects of Business B.

                          PROPOSED TRANSACTION

   For what are represented as valid business purposes, the parties propose to

undertake the following Proposed Transaction steps, pursuant to an overall plan and in
the order set forth below:

1. DRE 2 will distribute all the stock of Sub 2 and the Additional Land to Partnership,
   and Partnership will distribute all the stock of Sub 2 and the Additional Land to
   Distributing and Sub 1, pro rata (the “Partnership Distribution”). Prior to DRE 2’s
   distribution of the Additional Land to Partnership, DRE 2 may contribute the
   Additional Land to one or more disregarded LLCs and then distribute the Additional
   Land to Partnership by means of a distribution of all of the membership interests in
   the disregarded LLCs. References to the Additional Land include references to all
   of the membership interests in the disregarded LLCs in the event the Additional
   Land is contributed to these disregarded LLCs prior to DRE 2’s distribution to
   Partnership. Step 1 and the subsequent steps are intended to result in the addition
   of Sub 3, the entity that owns and operates Business A (through DRE 4 and DRE
   5), to Distributing’s separate affiliated group (as defined in section 355(b)(3)(B)),
   for purposes of the active trade or business requirements of section 355(b).
   PLR-113420-14 6

2. Sub 1 will form New GP, a new wholly-owned subsidiary, and contribute its general
   partnership interest in Partnership in exchange for all of the stock of New GP (the
   “Sub 1 Contribution”).

3. Sub 1 will merge with and into Distributing with Distributing surviving the merger
   (the “Sub 1 Merger,” and together with the Sub 1 Contribution, the “Sub 1
   Restructuring”).

4. DRE 5 will form a new wholly-owned LLC (“New LLC”) as an entity disregarded as
   separate from Sub 3 for U.S. federal income tax purposes, and will contribute all of
   the assets it uses in conducting Business A to New LLC in exchange for all of the
   interests in New LLC (and New LLC will assume all of the liabilities associated with
   DRE 5’s conduct of Business A).

5. DRE 5 will distribute all of its interests in New LLC to DRE 4.

6. DRE 4 will form Newco TRS, a new wholly-owned subsidiary that will make a joint
   election with Distributing to be a TRS, and DRE 4 will transfer New LLC and DRE 6
   to Newco TRS in exchange for all of Newco TRS’s stock in a transaction (when
   combined with the following step) intended to qualify as a reorganization within the
   meaning of section 368(a)(1)(D).

7. DRE 4 will distribute all the stock of Newco TRS to Sub 3, which, in turn, will
   distribute all the stock of Newco TRS to Sub 2 in a transaction intended to qualify
   as a nonrecognition transaction under section 355 (the “Newco TRS Distribution”).

8. Sub 4 will merge with and into Sub 2 with Sub 2 surviving the merger (the “Sub 4
   Merger”).

9. DRE 3 will distribute certain employee arrangements and land associated with
   Business B to Sub 2.

10. Sub 2 will form Controlled 1, a new wholly-owned domestic subsidiary that will
    make a joint election with Distributing to be a TRS, and Sub 2 will contribute to
    Controlled 1 all of its interests in Newco TRS, DRE 3, LLC Group 2, and any other
    assets held by Sub 4 at the time of the Sub 4 Merger that are not associated with
    Business B (such assets, other than the stock of Newco TRS, collectively the
    “Retained Sub 4 Assets”) in exchange for all of Controlled 1’s stock (the
    “Controlled 1 Contribution”), in a transaction (when combined with the following
    step) intended to qualify as a reorganization within the meaning of section
    368(a)(1)(D).

11. Sub 2 will distribute all of the Controlled 1 stock to Distributing in a transaction
    intended to qualify as a nonrecognition transaction under section 355 (the
    PLR-113420-14 7

    “Controlled 1 Distribution”).

12. Distributing will form Controlled 2, a new wholly-owned domestic subsidiary that
    will make a joint election with Distributing to be a TRS, and Distributing will
    contribute to Controlled 2 all the stock of Sub 2, the Additional Land, and any other
    assets associated with Business B, if any (potentially including DRE 1), in
    exchange for all of the stock of Controlled 2, Controlled 2’s assumption of certain
    compensatory-related liabilities and/or other liabilities associated with Business B
    and cash (the “section 361(b) Proceeds”) that may be funded by a borrowing by
    Controlled 2, in a transaction intended to qualify as a reorganization within the
    meaning of section 368(a)(1)(D) (the “Controlled 2 Contribution”).

13. Distributing will distribute all of the stock of Controlled 2 to its shareholders on a
    pro rata basis (the “Distribution” and, together with the Newco TRS Distribution and
    the Controlled 1 Distribution, the “Distributions”).

14. Distributing will use the section 361(b) Proceeds to repay its debt, to pay dividends
    (including regular quarterly dividends) to its shareholders, or to repurchase its
    shares, in each case no later than e months following the Distribution, which will
    occur pursuant to a plan that includes the Controlled 2 Contribution and the
    Distribution, and will be evidenced by a Distributing board resolution adopted in
    connection with the Controlled 2 Contribution and the Distribution.

    The section 361(b) Proceeds received by Distributing in the Controlled 2
    Contribution will not exceed Distributing’s net basis in the property transferred (i.e., the
    aggregate basis of such assets less liabilities assumed within the meaning of section
    357(d), other than liabilities to which section 357(c)(3) applies).

    In connection with the Distribution, Distributing and Controlled 2 (and their
    respective affiliates, as applicable) will enter into certain post-separation agreements and
    arrangements which will include: a separation and distribution agreement, a transition
    services agreement for a period not to exceed two years, a tax matters agreement, an
    employee matters agreement, a commercial agreement governing the sourcing of product
    and trademark licensing between Distributing and Controlled 2 with regard to Business A
    (Business A will source branded merchandise from Business B at cost or from
    manufacturers, in each case paying a royalty to Business B), and a sub-leasing
    agreement for shared space (e.g., a sub-lease with respect to the portion of the property
    owned by DRE 1 in which Business A operates).
    PLR-113420-14 8

                              REPRESENTATIONS
    

a) Distributing’s and Sub 1’s basis in the Sub 2 stock distributed to them in the
Partnership Distribution, in each case, will be determined, in whole, by reference to
Partnership’s basis in such stock.

b) Distributing, Sub 1, and Partnership will not recognize any gain or loss on the
distribution of the Sub 2 stock pursuant to the Partnership Distribution.

c) In applying section 355(b)(2)(A) regarding the active conduct of a trade or business
to the Distribution, Distributing will treat all members of its separate affiliated group,
as defined in section 355(b)(3)(B) (the “Distributing SAG”), as one corporation.

d) The five years of financial information submitted on behalf of Business A are
representative of its present operations, and with regard to such operations, there
have been no substantial changes since the date of the last financial statements
submitted.

e) Subject to Ruling 1 below, the separate affiliated groups respectively of Newco
TRS, Controlled 1, and Distributing, as defined in section 355(b)(3)(B) (a “SAG”),
will not have acquired Business A nor control of an entity conducting Business A
during the five year period preceding the Newco TRS Distribution, the Controlled 1
Distribution, and the Distribution, in a transaction in which gain or loss was
recognized (or treated as recognized) in whole or in part.

f) Except for Sub 2’s contribution of the Retained Sub 4 Assets to Controlled 1 in the
Controlled 1 Contribution, the Sub 4 Merger will not be preceded or followed by the
reincorporation in, or transfer or sale to, a recipient corporation (Recipient) of any
of the businesses or assets of Sub 4, if persons holding, directly or indirectly, more
than 20 percent in value of the Sub 2 stock also hold, directly or indirectly, more
than 20 percent in value of the stock in Recipient. 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).

                                    RULINGS

1. Distributing’s and Sub 1’s receipt of the Sub 2 stock pursuant to the Partnership
   Distribution will not constitute a transaction in which gain or loss is recognized in
   whole or in part within the meaning of sections 355(b)(2)(C) or (D) and
   355(b)(3)(C).

2. For U.S. federal income tax purposes, and provided that the Sub 1 Merger will
   otherwise qualify as a reorganization (within the meaning of section 368(a)(1)(A))
   of Sub 1 into Distributing, the Sub 1 Contribution will be treated in accordance with
   PLR-113420-14 9

   its form as occurring prior to the Sub 1 Merger.

3. Provided Business A otherwise satisfies the active trade or business requirements
   of section 355(b), the Size of Business A will not preclude Newco TRS, Controlled
   1, and Distributing from satisfying the active trade or business requirements of
   section 355(b) with respect to the Distributions.

4. Provided Distributing’s transfers of the section 361(b) Proceeds otherwise qualify
   as distributions in pursuance of the plan of reorganization within the meaning of
   section 361(b)(1)(A) (including by reason of section 361(b)(3)), Distributing’s
   transfers of the section 361(b) Proceeds in the manner described in Step (14)
   above will not preclude such qualification.

5. Provided the Sub 4 Merger otherwise would qualify as a “complete liquidation”
   within the meaning of section 332, the contribution by Sub 2 of the Retained Sub 4
   Assets to Controlled 1 in the Controlled 1 Contribution and the subsequent
   distribution of the stock of Controlled 1 by Sub 2 in the Controlled 1 Distribution will
   not preclude the Sub 4 Merger from qualifying as a “complete liquidation” within the
   meaning of section 332.

                                    CAVEATS
   

   Except as expressly provided herein, no opinion is expressed or implied
   concerning the tax treatment of 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 proposed transaction that is not specifically covered by the
   above rulings. In particular, no opinion is expressed with regard to whether Distributing
   or any other entity discussed herein qualifies as a REIT under subchapter M of Chapter
   1, Subtitle A of the Code, or whether any subsidiary discussed herein qualifies as a TRS
   under section 856(l). Furthermore, this letter does not provide any rulings under
   sections 856 or 857.

                         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-113420-14 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,
   
                                ______________________________
                                Maury Passman
                                Chief, Branch 4
                                Office of Associate Chief Counsel
                                (Corporate)