IRS approves discrete spin-off acquisition and affiliation issues

Plain-English summary

A public-company group proposed internal and external distributions that would separate a subsidiary, along with related entity-classification, liquidation, and possible acquisition steps. The IRS ruled how earlier third-party acquisitions would be measured under section 355(e) if later acquisitions were part of the same plan, allowing the relevant ownership increases to be reduced for resulting dilution. It also ruled that an LLC's corporate election would be respected despite a later liquidation. Finally, the separated company would not be treated as a successor under section 1504(a)(3) and could become the common parent of its own consolidated group. The letter addressed only these discrete issues and did not rule that the distributions otherwise qualified under section 355.

Ruling snapshot

• Question: How would acquisition dilution, an LLC election followed by liquidation, and the affiliated-group successor rule apply to the proposed spin-off steps?
• Outcome: Approved
• Key authorities: IRC §§ 355(e), 368(a)(1)(D), 1504(a)(2)-(3); Treas. Reg. §§ 1.355-7, 301.7701-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201538015 Third Party Communication: None
Release Date: 9/18/2015 Date of Communication: Not Applicable
Index Number: 355.01-00, 1504.01-00
Person To Contact:
-------------------------------------------------- -----------------------, ID No. -----------------
---------------------------- Telephone Number:
----------------------- ---------------------
-------------------------------- Refer Reply To:
CC:CORP:03
PLR-140511-14
Date:
April 28, 2015

Legend

Distributing 3 = -----------------------------

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

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

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

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

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

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

Third Parties = ---------------------------------------------------------------------

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

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

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

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

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

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

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

   This letter responds to your letter dated October 28, 2014, requesting rulings on

certain federal income tax consequences of the Proposed Transaction (defined below).
The information provided in that letter and in later correspondence (together, the “Ruling
Request”) is summarized below.

  The rulings contained in this letter are based on facts and representations

submitted by the taxpayer and accompanied by a penalties of perjury statement
executed by the 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.

    This letter is issued pursuant to section 6.03 of Rev. Proc. 2015-1, 2015-1 I.R.B.

1, regarding one or more significant issues under §§ 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.

                                         Summary of Facts

     Distributing 3 is a widely held, public company that is the common parent of an

affiliated group of corporations filing a consolidated federal income tax return.
Distributing 3 owns all of the stock of Distributing 2, which owns all of the stock of
Distributing 1. Distributing 1 owns all of the interests of Sub 1, all of the interests in LLC
3 and, directly and through Sub 1, all of the interests of LLC 1. LLC 1 owns all of the
interests in LLC 2. LLC 3 and LLC 2 each is disregarded as an entity separate from its

PLR-140511-14 3

owner for federal tax purposes (a “DRE”). LLC 1 is classified as a partnership for
federal tax purposes. Sub 1 is classified as a corporation for federal tax purposes.
Distributing 2 conducts Business A; LLC 2 conducts Business B; and LLC 3 conducts
Business C.

    Distributing 1 and Sub 1 previously acquired all of the minority interests of LLC 1

held by Third Parties in exchange for cash of approximately $a million and b shares of
Distributing 3 stock (the “Exchanges”). Following the Exchanges, LLC 1 distributed all
of the interests of LLC 3 to Distributing 1. Distributing 1 has recently conducted
negotiations and is currently evaluating one or more possible acquisitions or
combination transactions (the “Acquisitions”). Distributing 1 believes it is highly likely
that the company will pursue one or more Acquisitions following the Distributing 1
External Distribution (defined below), and the potential to complete an Acquisition is, in
part, motivating the Distributing 1 External Distribution.

                              Proposed Transaction

   Distributing 3 and its affiliates propose to undertake the following steps

(collectively, the “Proposed Transaction”) in the order set forth below:

   1.     LLC 3 will elect under Treas. Reg. § 301.7701-3 to be treated as a
          corporation for federal tax purposes (the “LLC 3 Election”).

   2.     Distributing 1 will distribute all of the interests in LLC 3 to Distributing 2
          (the “LLC 3 Distribution”) in a transaction that together with the LLC 3
          Election is intended to qualify as a reorganization under §§ 368(a)(1)(D)
          and 355.

   3.     Distributing 2 will form LLC 4, a State A limited liability company classified
          as a DRE.

   4.     LLC 3 will merge with and into LLC 4, with LLC 4 surviving (the “LLC 3
          Liquidation”) in a transaction intended to qualify as a complete liquidation
          under § 332.

   5.     Distributing 2 will distribute all of the stock of Distributing 1 to Distributing 3
          (the “Distributing 1 Internal Distribution”) in a transaction intended to
          qualify under § 355.

   6.     Distributing 3 will distribute all of the stock of Distributing 1 pro rata to its
          shareholders (the “Distributing 1 External Distribution”) in a transaction
          intended to qualify under § 355.

                                       Rulings

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   Based solely on the information submitted, we rule as follows:
   1.     Provided the Acquisitions are treated as pursuant to a plan under
          § 355(e)(2)(A)(ii), the increases in the percentage of either voting power or
          value of the stock of Distributing 1, Distributing 2, or Distributing 3
          acquired, directly or indirectly, by Third Parties in the Exchanges will be
          treated as acquisitions that are taken into account for purposes of § 355(e)
          only after reducing such increases for any dilution, directly or indirectly, in
          such respective interests resulting from any Acquisition.
   2.     The LLC 3 Election will be respected for purposes of the LLC 3
          Distribution notwithstanding the subsequent LLC 3 Liquidation. See Rev.
          Rul. 2003-79, 2003-2 C.B. 80; Rev. Rul. 98-27, 1998-1 C.B. 1159.
   3.     Neither Distributing 1 nor any of its affiliates will be treated as a
          “successor” to Distributing 3 or any of its affiliates for purposes of
          § 1504(a)(3). Therefore, Distributing 1 and its direct and indirect
          subsidiaries that are “includible corporations” (under § 1504(b)) and satisfy
          the ownership requirements of § 1504(a)(2) will be members of an
          affiliated group of corporations entitled to file a consolidated federal
          income tax return with Distributing 1 as the common parent immediately
          following Distributing 1 External Distribution.

                                     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 or implied whether any of the
distributions are part of a plan (or a series of related transactions) pursuant to which one
or more persons will acquire directly or indirectly stock representing 50 percent or
greater interest in the distributing corporation or the controlled corporation. See § 355(e)
and Treas. Reg. § 1.355-7.

                             Procedural Statements

  This ruling letter is directed only to the taxpayers who requested it. Section

6110(k)(3) provides that it may not be used or cited as precedent.

  A copy of this ruling letter must be attached to the federal income tax return of

each taxpayer involved for the taxable year in which the transactions described herein
are completed. Alternatively, a taxpayer filing its return electronically may satisfy this

PLR-140511-14 5

requirement by attaching a statement to its federal income tax return that sets forth the
date and control number of this ruling letter.

   Under a power of attorney on file in this office, a copy of this letter is being sent

to your authorized representatives.

                                    Sincerely,



                                    Gerald B. Fleming
                                    Senior Technician Reviewer, Branch 2
                                    Office of Associate Chief Counsel (Corporate)

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