Spin-off business size and deferred-compensation stock retention approved

Plain-English summary

A publicly traded parent proposed contributing a subsidiary and other assets to a newly formed controlled corporation, distributing most of the controlled corporation's stock to its shareholders, and retaining a small percentage through grantor trusts for employee deferred-compensation plans. The IRS ruled that the relative size of the transferred business would not prevent it from qualifying as an active trade or business under section 355(b). It also ruled that the deferred-compensation trusts' temporary retention of controlled-corporation stock, for the represented employee-alignment and compensation purpose and subject to disposal within five years, would not constitute a tax-avoidance plan under section 355(a)(1)(D)(ii). The rulings assumed that the transaction otherwise qualified under sections 355 and 368(a)(1)(D).

Ruling snapshot

• Question: Will the transferred business qualify as an active trade or business despite its relative asset value, and will deferred-compensation trusts' temporary stock retention violate section 355's distribution requirement?
• Outcome: Approved, subject to the stated representations and the transaction otherwise qualifying under sections 355 and 368(a)(1)(D).
• Key authorities: IRC §§ 355(a)(1)(D)(ii), 355(b), 368(a)(1)(D), 368(c), 671, and 851; Treas. Reg. § 1.337(d)-7

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201605016                                              Third Party Communication: None
Release Date: 1/29/2016                                        Date of Communication: Not Applicable
Index Number: 355.01-00, 355.03-00,
              355.05-01                                        Person To Contact:
                                                               -----------------, ID No. ------- ----------
------------------                                             Telephone Number:
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----------------------------------------------------           Refer Reply To:
--------------------------------------------------             CC:CORP:2
 ----------------------------------                            PLR-119393-15
                                                               Date:
                                                               November 23, 2015




Legend

Distributing               =                  ------------------------------------
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Controlled                 =                  -----------------------------------------------
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Sub                        =                  --------------------------------------------
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LLC                        =                  ----------------------------------------------------------------
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State A                    =                 --------------

Business A                 =                 ------------------------------------------------------------------------
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Business B                 =                  -----------------------------------------------------------------------
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PLR-119393-15                                             2

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

Funds                      =                  -----------------------------------------------------------------------
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                           --
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Distributing DCP           =                 ------------------------------------------------------------------------
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Trust                                         -----------------------------------------------------------------------
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LLC DCP Trusts             =                  -----------------------------------------------------------------------
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a                          =                 -------------------------

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

Certain                    =                 ------------------------------------------------------------------------
Agreements                                    -----------------------------------------------------------------------
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Dear -------------:

This letter responds to your authorized representatives' letter dated June 5, 2015,
requesting rulings on certain Federal income tax consequences of a series of
transactions (the “Proposed Transaction”, as defined herein). The material information
provided in that request and in subsequent correspondence is summarized below.
PLR-119393-15                                 3

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 and the rulings contained herein are issued pursuant to section 6.03 of Rev.
Proc. 2015-1, 2015-1 I.R.B. 1, 17, regarding one or more or significant issues under
section 355, and only addresses one or more or discrete legal issues involved in the
transactions. This Office expresses no opinion as to the overall tax consequences of
the transactions described in this letter, or as to any issues not specifically addressed
by the rulings below.

                                   Summary of Facts

Distributing, a State A corporation, is publicly-traded and the common parent of an
affiliated group of includible corporations which join in the filing of a consolidated
Federal income tax return (the “Distributing Group”). Distributing wholly owns LLC, a
State A limited liability company that is treated as a disregarded entity for Federal
income tax purposes. Distributing also wholly owns Sub, a State A corporation and
member of the Distributing Group. The Distributing Group has been engaged in the
conduct of Business A (through LLC) and Business B (through Sub). In the Proposed
Transaction, as described below, Distributing will contribute Business B as well as other
assets and stock to Controlled. The fair market value of Business B is a percent of the
fair market value of the gross assets that Distributing will contribute to Controlled.

Distributing and LLC maintain certain Deferred Compensation Plans (“DCPs”) for the
benefit of their employees. As part of its DCP, Distributing deposits cash into the
Distributing DCP Trust and directs the trustee to purchase Distributing stock in the open
market. Similarly, LLC deposits cash into various LLC DCP Trusts and directs the
trustees to purchase Distributing stock and shares of Funds managed by LLC. The
Distributing DCP Trust and LLC DCP Trusts all are grantor trusts, and they hold, in the
aggregate, b percent of the total outstanding Distributing Common Stock. As a result of
the Distribution, the Distributing DCP Trust and LLC DCP Trusts, in their capacity as
holders of Distributing stock, will receive shares of Controlled stock (the “Retained
Stock”).

                                 Proposed Transaction

The relevant steps of the Proposed Transaction are set forth below:

   (i)    On Date 1, Distributing formed Controlled.

   (ii)   Distributing will contribute to Controlled all of its Sub stock and other assets
          (the “Contribution”).
PLR-119393-15                                  4


   (iii)   Except for the Retained Stock, Distributing will distribute all the stock of
           Controlled to its public shareholders pro rata (the “Distribution”).

   (iv)    Subsequent to the Distribution, Controlled will elect to be treated as a RIC
           under section 851.

In connection with the Distribution, Controlled will enter into Certain Agreements with
Distributing (through LLC).

                                     Representations

   (a) The business purpose for the retention by Distributing of the Retained Stock is to
       align the interests of Distributing’s and LLC’s employees with those of the
       stockholders of Distributing and of the Funds that Distributing and LLC are
       managing and to compensate their employees based on the performance of such
       Funds.

   (b) The Retained Stock will represent b percent of all of Controlled’s issued and
       outstanding stock immediately after the Distribution.

   (c) The Retained Stock will be disposed of as soon as a disposition is warranted
       consistent with the business purpose of the retention, but in any event not later
       than 5 years after the Distribution.

   (d) The Retained Stock will, prior to the distribution from the Distributing DCP Trust
       and the LLC DCP Trusts, be voted in proportion to the votes cast by Controlled’s
       other shareholders.

   (e) Each of the Distributing DCP Trust and the LLC DCP Trusts has qualified as a
       grantor trust under section 671, with Distributing as its owner, at all times since
       its formation.

   (f) In no event will the retention of the Retained Stock prevent Distributing from
       distributing an amount of Controlled stock that represents control under section
       368(c).

   (g) Distributing’s accumulated earnings and profits and its projected current earnings
       and profits in the year of the Distribution will be negative. In addition, the
       aggregate adjusted basis of property transferred in the Contribution will be
       greater than the fair market value of such property.

   (h) If the fair market value of property held by Controlled exceeds the property’s
       aggregate adjusted basis immediately before it makes an election to be treated
PLR-119393-15                                  5

       as a RIC under section 851, it will make an election under Treas. Reg. §
       1.337(d)-7 to treat the election as a taxable event.

                                          Rulings

Based solely on the information submitted and the representations set forth above, and
provided that the relevant transactions otherwise qualify under sections 368(a)(1)(D)
and 355, we rule as follows:

   (1) 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 qualifying as an active trade or business for purposes of section 355(b).

   (2) The retention of Controlled stock by the Distributing DCP Trust and the LLC DCP
       Trusts will not be in the pursuance of a plan having as one of its principal
       purposes the avoidance of Federal income tax within the meaning of section
       355(a)(1)(D)(ii).

                                          Caveats

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter. In addition, no opinion is expressed or implied with regard to whether
Controlled will qualify as a RIC under subchapter M of the Code. Further, no opinion is
expressed or implied regarding the application of section 409A of the Code.

                                 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 representatives.
PLR-119393-15                                 6

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,



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