Business size does not prevent spin-off qualification

Plain-English summary

A publicly traded real estate investment trust planned to form and distribute a controlled REIT that would continue a separate business through an acquired target. The IRS ruled that the relative size of each relevant business, measured against the distributing or controlled corporation's gross assets, would not prevent either business from qualifying as an active trade or business under section 355(b). It also ruled that the controlled corporation's acquisition of the target would not cause the distribution to fail the active-business requirement. The rulings depended on the acquisition qualifying as a section 368(a)(1)(B) reorganization. The IRS did not rule on whether either corporation qualified as a REIT.

Ruling snapshot

• Question: Do the businesses' relative asset values or the target acquisition prevent the planned distribution from meeting section 355's active-business requirement?
• Outcome: No, subject to the target acquisition qualifying as a section 368(a)(1)(B) reorganization
• Key authorities: IRC §§ 355(b), 368(a)(1)(B), and 856(l); Treas. Reg. § 1.355-3(b)(3)(ii)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201603020 Third Party Communication: None
Release Date: 1/15/2016 Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-00,
368.02-00, 368.04-00 Person To Contact:
------------------------, ID No. ------------------
----------------- ----------------------------------------------------
------------------------------------------------------------ Telephone Number:
----------------------------- --------------------
------------------------------------ Refer Reply To:
-------------- CC:CORP:B02
---------------------------------- PLR-121615-15
Date:
October 20, 2015

Legend

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

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

Target A = ------------------------------

Target B = ------------------------

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

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

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

QRS1 = ---------------------------------------------------

QRS2 = ------------------------------------------------
PLR-121615-15 2

REIT Property = ---------------------------------------------------------------------------------

                                ---------------------------------------------------------------------------------
                       -----------------------------------------------------------------------------
                                --------------------------------------------

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

Year 1 = -------

Year 2 = -------

a = ------

b = ----

c = --

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

This letter responds to your June 22, 2015 request, submitted by your authorized
representatives, for rulings under sections 368(a)(1)(D) and 355. The information
provided in that letter 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 penalties of perjury statements
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. 2015-1, 2015-1 I.R.B. 1,
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 publicly traded State A real estate investment trust under sections 856
through 860 (“REIT”) with a highly diversified portfolio of properties. In conjunction with
PLR-121615-15 3

these real property investments, Distributing indirectly operates or will operate several
distinct lines of business, which include, among others, Business A and Business B.
Distributing directly owns all of the outstanding stock of QRS1, an entity treated as a
qualified REIT subsidiary for federal income tax purposes. QRS1 owns all of the stock
of QRS2, also a qualified REIT subsidiary for federal income tax purposes, indirectly
through several disregarded entities. Distributing has conducted the management and
operations activities of Business A through QRS2 and Distributing’s separate affiliated
group (“SAG”) since the formation of QRS2 on Date 1 (a date more than five years
ago).

In Year 1, Distributing acquired Target A, which also engages in Business A, in a
taxable acquisition, which Distributing represents as qualifying as a trade or business
expansion of Business A described in Treas. Reg. § 1.355-3(b)(3)(ii).

Target B was an entity electing to be treated as a S corporation for federal income tax
purposes. Target B conducts all of the managerial and operational activities, and owns
all of the assets and employees associated with Business B. It has continuously and
actively conducted Business B since Year 2 (more than five years ago).

                                  TRANSACTION

For what are represented as valid business purposes, Distributing entered into the
following Transaction:

(i) Distributing formed Controlled, a new, wholly owned, State A corporation with
one class of common stock, and contributed certain REIT Property to Controlled.
Controlled elected to be treated as a REIT effective for the taxable year
beginning the day of the acquisition of Target B.

(ii) Distributing acquired all the membership interests in Target B in a tax-free
reorganization under section 368(a)(1)(B) in which the members of Target B
acquired solely the stock of Controlled in exchange for all of the stock of Target B
(the “Target B Acquisition”). Immediately thereafter, Controlled and Target B
made a joint election, pursuant to section 856(l), for Target B to be treated as a
taxable REIT subsidiary (TRS) of Controlled.

(iii) Distributing distributed its Controlled shares to Distributing’s public shareholders
on a pro rata basis.

Following the separation, Distributing’s public shareholders own a percent of Controlled
and the remaining b percent of Controlled is held by the former members of Target B.
Controlled will continue Business B through Target B, a member of the Controlled SAG.
PLR-121615-15 4

                              REPRESENTATIONS

       1. Except for the lease of Distributing headquarters office space, which is a
   limited lease of de minimis value (less than c percent) as compared to the value
   of real estate leased to third parties (as described in the separation and
   distribution agreement, the transition services agreement, the tax matters
   agreement, the employee matters agreement, and the headquarters sublease
   agreement), there is no intention on the part of Distributing to lease any of its real
   property to Controlled and there is no intention on the part of Controlled to lease
   any of its real property to Distributing following the separation.

      2. Distributing represents that the acquisition of Target B in the Target B
   Acquisition satisfies all of the requirements of a tax-free reorganization under
   section 368(a)(1)(B), with the shareholders of Target B receiving solely stock of
   Controlled.

                                     RULINGS

Based solely on the information submitted and the representations set forth above, and
provided that the Target B Acquisition described in Step (ii) of the Transaction qualifies
as a tax-free reorganization under section 368(a)(1)(B), we rule as follows:

(1) The relative fair market value of the gross assets of Business A as compared to
the fair market value of the gross assets of Distributing will not prevent Business
A from otherwise qualifying as an active trade or business for purposes of section
355(b).

(2) The relative fair market value of the gross assets of Business B as compared to
the fair market value of the gross assets of Controlled will not prevent Business B
from otherwise qualifying as an active trade or business for purposes of section
355(b).

(3) The Target B Acquisition will not cause the distribution to fail to satisfy the active
trade or business requirement of section 355(b)(2)(D)(ii) with respect to Business
B.

                                     CAVEATS

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax treatment of the 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
Transaction that is not specifically covered by the above rulings. Specifically, we are
not ruling on whether Controlled or Distributing qualifies as a REIT under Part II of
PLR-121615-15 5

Subchapter M of Chapter 1 of the Code.

                          PROCEDURAL STATEMENTS

These rulings are 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.

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,


                                   _Richard Heinecke_______
                                   Richard Heinecke
                                   Assistant to the Branch Chief, Branch 5
                                   Office of Associate Chief Counsel (Corporate)