Private Letter Ruling
201614017
Released April 1, 2016
Approved
Circular note transfers in a planned spin-off are disregarded
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This page covers one taxpayer's ruling from 2016, which can't be cited as precedent. Ezel answers your situation under the current Code and IRS guidance, with citations.
Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.
About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.
View official IRS release (PDF)
Plain-English summary
A public company planned to separate two businesses through a series of domestic and foreign restructuring steps followed by a distribution of a controlled corporation. One subsidiary would sell stock for a note, the note would move up the ownership chain to the parent, and the parent would contribute it down another chain to the note's issuer, where it would be canceled. Each leg would occur under a binding commitment, and the note was represented not to be stock or securities. The IRS ruled that the sale and circular note transfers would be disregarded for federal tax purposes. Instead, the stock would be treated as distributed up one chain and contributed down the other. The ruling addressed only that discrete legal issue and not the overall tax consequences of the spin-off.
Ruling snapshot
- Question: Should the binding circular sale, distribution, contribution, and cancellation of a note be respected as separate steps?
- Outcome: Approved: the circular steps are disregarded and replaced with deemed stock distributions and contributions.
- Key authorities: IRC § 355; Rev. Ruls. 57-311, 77-191, and 83-142; Rev. Proc. 2015-1 § 6.03
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 201614017 Third Party Communication: None
Release Date: 4/1/2016 Date of Communication: Not Applicable
Index Number: 356.01-02, 355.01-00
Person To Contact:
------------------- -----------------------, ID No. ----------------
------ Telephone Number:
---------------------------------------- ------------------
---------------- Refer Reply To:
----------------------------------------- CC:CORP:BR:2
PLR-125468-15
Date:
December 23, 2015
TY:------
LEGEND
Distributing = ----------------------------------------
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Controlled = --------------------------------------
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FSub1 = -----------------------------------
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FSub2 = -------------------------------------------------------------
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FSub3 = --------------------------------------
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FSub4 = ---------------------------------------------------------------------------------
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FSub5 = ----------------------------------------------------------------
--------------------------------------------------------------------
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PLR-125468-15 2
FDE1 = -----------------------------------------------------------------
-------------------------------------------------------------------
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FDE2 = ------------------------------------------------------------
-----------------------------------------------------------------------
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FDE3 = ------------------------------------------------------------
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FDE4 = -------------------------------
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FDE5 = ------------------------------------------------------
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FDE6 = --------------------------------------------------
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FDE7 = ------------------------------------------------------
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LLC 1 = ----------------------------------------------
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USSub1 = -------------------------
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USSub2 = ---------------------------------------------------------
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PLR-125468-15 3
State X = -------------
Country A = ------------
Country B = -----------
Country C = ----------------
Country D = ---------
Country E = ---------------------
Country F = -------------
Country G = -------
Business A = ------------------------------------------------------------------------------
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Business B = ---------------------------------------------------------------------------------
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Dear ---------------:
This letter responds to your authorized representatives’ letter dated July 24, 2015,
requesting rulings on certain Federal income tax consequences of a proposed
transaction (the “Proposed Transaction”). 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 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 ruling contained herein are issued pursuant to section 6.03 of Rev.
Proc. 2015-1, 2015-1 I.R.B. 1, 17, regarding a significant issue under section 355 and
only addresses a discrete legal issue involved in the transaction. This Office expresses
no opinion as to the overall tax consequences of the transaction described in this letter,
or as to any issue not specifically addressed by the ruling below.
PLR-125468-15 4
FACTS
Distributing is a State X corporation that is publicly traded and is the common parent of
an affiliated group the includible corporations of which join in the filing of a consolidated
Federal income tax return.
Distributing wholly owns FSub1, a Country A entity treated as a corporation for Federal
income tax purposes, and LLC 1.
FSub1 wholly owns FSub2, a Country B entity treated as a corporation for Federal
income tax purposes. FSub2 owns FDE1, a Country C entity treated as a disregarded
entity for Federal income tax purposes (a “disregarded entity”), FDE2, a Country D
disregarded entity, and FDE5, a Country E disregarded entity. FDE1 and FDE2
cumulatively own all of the interests in FDE3, a Country D disregarded entity. FDE3
wholly owns FDE4, a Country D disregarded entity. FDE4 wholly owns FSub3, a
Country D corporation. FSub3 wholly owns FDE6, a Country F disregarded entity.
FDE6 wholly owns FDE7, a Country G disregarded entity. FDE6 also wholly owns
FSub4, a Country G corporation.
LLC 1 wholly owns USSub1. USSub1 wholly owns USSub2. USSub2 wholly owns
FSub5, a Country F corporation.
Distributing has been engaged in the conduct of Business A and Business B.
PROPOSED TRANSACTION
Distributing is entering into the Proposed Transaction in order to separate Business A
from Business B in Country G. The relevant steps of the Proposed Transaction are set
forth below:
(i) Distributing will form Controlled.
(ii) FDE7 and FSub4 will distribute cash and/or reserves to FDE6 under Country
G law.
(iii) FDE6 will contribute all of the shares of FSub4 to FDE7 in exchange for
additional shares in FDE7. FDE7 will elect to be regarded as a corporation
for Federal income tax purposes.
(iv) FDE6 will sell the shares of FDE7 to FSub5 in exchange for an unsecured
interest-bearing note with a principal amount equal to the fair market value of
100 percent of the shares of FDE7 (the “Note”).
PLR-125468-15 5
(v) FDE 6 will distribute the Note through the corporate ownership chain through
each intermediary holding company to Distributing in a series of distributions,
as follows:
a. FDE6 will distribute the Note to FSub3.
b. FSub3 will distribute the Note to FDE4.
c. FDE4 will transfer the Note to FDE5 in partial payment of pre-existing debt
owed by FDE4 to FDE5.
d. FDE5 will distribute the Note to FSub2.
e. FSub2 will distribute the Note to FSub1.
f. FSub1 will distribute the Note to Distributing.
(vi) Distributing will contribute the Note down through the corporate ownership
chain through each intermediary company to FSub5 in a series of
contributions, as follows:
a. Distributing will contribute the Note to LLC 1 for no consideration.
b. LLC 1 will contribute the Note to USSub1 for no consideration.
c. USSub1 will contribute the Note to USSub2 for no consideration.
d. USSub2 will contribute the Note to its wholly owned subsidiary FSub5 in
exchange for additional shares in FSub5 (which it already wholly owned).
The Note in the hands of FSub5 will be cancelled.
(vii) Distributing will contribute LLC 1 to Controlled.
(viii) Distributing will distribute the stock of Controlled to Distributing’s
shareholders.
REPRESENTATIONS
(a) The Note issued as part of the Proposed Transaction by FSub5 to FDE6 will not
constitute stock or securities for Federal income tax purposes.
(b) Steps (iv), (v), and (vi) will each occur pursuant to a binding commitment.
RULING
Based solely on the information submitted and the representations set forth above, we
rule that for Federal income tax purposes, the transactions described in Steps (iv)
through (vi) are circular and therefore disregarded for Federal income tax purposes.
See Rev. Rul. 77-191, 1977-1 C.B. 94; Rev. Rul. 57-311, 1957-2 C.B. 243; and Rev.
Rul. 83-142, 1983-2 C.B. 68. Accordingly, the transaction in Steps (iv) through (vi) will
be treated as if:
(a) FSub3 distributed the shares of FDE7 to FSub2;
(b) FSub2 distributed the shares of FDE7 to FSub1;
PLR-125468-15 6
(c) FSub1 distributed the shares of FDE7 to Distributing;
(d) Distributing contributed the shares of FDE7 to USSub1;
(e) USSub1 contributed the shares of FDE7 to USSub2;
(f) USSub2 contributed the shares of FDE7 to FSub5.
CAVEATS
Except as expressly stated in the ruling section 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.
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.
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.
In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.
Sincerely,
_Mark J. Weiss_______
Mark J. Weiss
Chief, Branch 2
Office of Associate Chief Counsel (Corporate)
cc:
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