Private Letter Ruling
201637013
Released September 9, 2016
Approved
Business separations and related distributions receive favorable tax treatment
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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 proposed a series of internal and external distributions to separate three businesses, exchange securities of one controlled company for parent-company debt, and later convert one distributing company to a real estate investment trust. The IRS ruled that the relatively small size of two business segments would not prevent them from satisfying the active-trade-or-business requirement of IRC § 355(b). It also ruled that participating financial institutions and historic debt holders would be treated as creditors, and that securities and cash transferred in the restructurings would be treated as distributed under the relevant reorganization plans for purposes of § 361. A later cash-and-stock purging distribution would be treated as a property distribution under §§ 301 and 305, with stock valued at the cash shareholders could have elected to receive. The rulings depended on the transactions otherwise qualifying under §§ 355 and 368(a)(1)(D), and the IRS gave no ruling on whether the company qualified as a REIT or met the separate requirements of §§ 856 and 857.
Ruling snapshot
- Question: How would the active businesses, debt exchange, cash transfers, and cash-and-stock purging distribution be treated in the proposed business separations?
- Outcome: Approved, subject to the stated representations and the transactions otherwise qualifying under IRC §§ 355 and 368(a)(1)(D).
- Key authorities: IRC §§ 301, 305(b), 355(b), 361(b), 361(c), 368(a)(1)(D).
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 201637013 Third Party Communication: None
Release Date: 9/9/2016 Date of Communication: Not Applicable
Index Number: 355.01-00, 355.03-00,
361.00-00, 368.04-00, Person To Contact:
305.03-00 ---------------------, ID No. ----------------
Telephone Number:
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------------------------------------- Refer Reply To:
------------------------------------------ CC:CORP:BO1
----------------------------------- PLR-130090-15
------------------------------ Date:
February 24, 2016
LEGEND
Distributing 2 = --------------------------------------------------
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Distributing 1 = --------------------------------------
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Domestic Business = --------------------------
A Controlled ----------------------------------------
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Foreign Business = --------------------------
A Controlled ----------------------------------------
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Business C Controlled = ----------------------------------
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Sub 1 = ---------------------------------
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Sub 2 = --------------------------------------------
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PLR-130090-15 2
Sub 3 = ----------------------------------
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DRE 1 = --------------------------------------------------
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DRE 2 = ----------------------------------------------------
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DRE 3 = -------------------------------------------------
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Business A = ------------------------------------------------------------------------
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Business B = ------------------------------------------------------------------------
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Business C = ------------------------------------------------------------------------
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Segment 1 of Business B = -----------------------------------------------------------------------
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Segment 2 of Business B = -----------------------------------------------------------------------
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State A = --------------
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Debt A = ------------------------------------------------------------------------
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Debt B = ------------------------------------------------------------------------
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Business C = ------------------------------------------------------------------------
Controlled Securities ------------------------------------------------------------------------
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Excluded Assets = -----------------------------------------------------------------------
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Trademarks = ------------------------------------------------------------------------
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a = ----
b = --
c = --
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d = -----
e = --------------
f = -----
g = --------------
h = --
i = --
j = ----
k = --
l = ----
m = --
n = ----
o = ----
Commercial Matters = -----------------------------------------------------------
Agreement -----------------------------------------------------------------------
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Employee Matters = ------------------------------------------------------------------------
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Agreement ------------------------------------------------------------------------
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Non-compete = --------------------------------------------------------------------
Agreements ------------------------------------------------------------------------
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Separation Agreement = ------------------------------------------------------------------------
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Suretyship Agreement = ------------------------------------------------------------------------
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Tax Matters Agreement = ------------------------------------------------------------------------
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Transition Services = ------------------------------------------------------------------------
Agreement ------------------------------------------------------------------------
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D Agreements = ------------------------------------------
E Agreements = ------------------------------------------------------------
Day 1 = --------------------
Dear -------------------:
This letter responds to your authorized representatives’ letter dated September
11, 2015, requesting rulings on certain Federal income tax consequences of a proposed
transaction (the “Proposed Transaction”). The information provided in that request and
in subsequent correspondence is summarized below.
PLR-130090-15 6
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. 2015-1 I.R.B. 19,
regarding one or more significant issues under sections 301, 305, 355, 361, or 368.
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 2, a publicly-traded State A corporation, is a holding company and
the parent of a worldwide group of entities (the “Distributing 2 Worldwide Group”).
Distributing 2 is also the common parent of an affiliated group of corporations that file a
consolidated Federal income tax return. Distributing 2 has a single class of stock
outstanding, its common stock.
Distributing 2 owns all of the member interests in DRE 1, an entity disregarded
as separate from Distributing 2 for Federal income tax purposes. DRE 1, in turn, owns
all of the stock of Distributing 1.
Distributing 1 directly and indirectly conducts Business A, Business B, and
Business C, domestically and internationally. Business B includes Segment 1 of
Business B and Segment 2 of Business B. Distributing 1 has outstanding indebtedness,
including Debt A and Debt B (“the Distributing 1 Debt”).
Sub 1, a wholly-owned subsidiary of Distributing 1, conducts Segment 2 of
Business B. Sub 2, a wholly-owned subsidiary of Distributing 1, and Sub 2’s regarded
and disregarded entities, conduct Business C. Domestic and foreign Trademarks,
which are used in Business C, are owned by DRE 2 and DRE 3, each of which is an
entity disregarded as separate from Distributing 1 for Federal income tax purposes.
Distributing 2 has submitted financial information indicating that both Segment 1
of Business B and Segment 2 of Business B annually had gross receipts and operating
expenses representative of the active conduct of a trade or business for each of the
past five years. Segment 1 of Business B currently has more than d full time employees
and has had annual operating revenues in excess of $e in each of the past five years.
Segment 2 of Business B currently has more than f full-time employees and annual
operating revenues in excess of $g in each of the past five years. The book value of the
assets of each of Segment 1 of Business B and Segment 2 of Business B are less than
PLR-130090-15 7
h% of the book value of the assets of the Distributing 1 SAG (defined below) following
the Business B External Distribution (defined below). It is expected that revenues from
each of Segment 1 of Business B and Segment 2 of Business B will constitute
approximately i% of the gross revenues of the Distributing 1 SAG after the Business B
External Distribution.
PROPOSED TRANSACTION
In the Proposed Transaction, Distributing 2 will distribute Business B and
Business C to its public shareholders, pursuant to an overall plan. The relevant steps of
the Proposed Transaction are set forth below:
(i) Through a series of restructuring transactions, the ownership of all assets used in
domestic Business A (including the Excluded Assets) and subsidiaries that
conduct domestic Business A (the “Domestic Business A Assets”) will be
separated from the assets used in domestic Business B and subsidiaries that
conduct domestic Business B (the “Domestic Business B Assets”) and any
domestic assets used in Business C (other than Trademarks held by DRE 2) and
subsidiaries that conduct domestic Business C.
(ii) Through a series of restructuring transactions, the ownership of all assets used in
foreign Business A and subsidiaries that conduct foreign Business A (the
“Foreign Business A Assets”) will be separated from the assets used in Foreign
Business B and subsidiaries that conduct foreign Business B (the “Foreign
Business B Assets”) and any foreign assets associated with Business C (other
than Trademarks held by DRE 3) and subsidiaries that conduct Foreign Business
C (the “Foreign Business C Assets”).
(iii) Distributing 1 will form Domestic Business A Controlled as a State A corporation
(which may occur earlier in the sequence of steps) and will contribute the
Domestic Business A Assets (including membership interests in DRE 2, which
owns the domestic Trademarks) to Domestic Business A Controlled in exchange
for Domestic Business A Controlled stock (the “Domestic Business A Controlled
Stock”), the assumption of associated liabilities, and potentially cash proceeds
funded by a borrowing from unrelated third party lenders (the “Cash Proceeds”)
by Domestic Business A Controlled. (This contribution is referred to as the
“Domestic Business A Contribution.”)
(iv) Distributing 1 will form Foreign Business A Controlled as a State A corporation
(which may occur earlier in the sequence of steps) and will contribute the Foreign
Business A Assets (including membership interests in DRE 3, which owns
foreign Trademarks) to Foreign Business A Controlled in exchange for Foreign
Business A Controlled stock (the “Foreign Business A Controlled Stock”), the
assumption of associated liabilities, and potentially Cash Proceeds funded by a
PLR-130090-15 8
borrowing by Foreign Business A Controlled. (This contribution is referred to as
the “Foreign Business A Contribution.”)
In the j-month period following the Domestic Business A Contribution and the
Foreign Business A Contribution, as the case may be, Distributing 1 will use an
amount of cash equal to or greater than any Cash Proceeds to make distributions
to its shareholders, pay its liabilities to third party creditors (which could include
ordinary course liabilities whenever incurred and principal, interest, and
associated consent and other fees on bank debt, bonds, and other borrowings),
or a combination thereof. Distributing 1 will not set aside, trace or otherwise
segregate the actual Cash Proceeds.
(v) a. One or more financial institutions (collectively, the “Financial Institution”) may
acquire Distributing 1 Debt composed of some or all of Debt A, a portion of Debt
B, or a combination thereof (which may occur earlier in the sequence of steps).
Financial Institution may (i) enter into hedging (interest and/or credit risk) or
financing arrangements with respect to the Distributing 1 Debt, provided that
neither Distributing 1 nor any member of its affiliated group or other entity related
to Distributing 1 will be a party to such arrangements, or (ii) transfer Distributing 1
Debt to an affiliate of Financial Institution for legal or regulatory reasons. At least
k days after the Financial Institution acquires the Distributing 1 Debt (if any),
Financial Institution and Distributing 1 will enter into an exchange agreement (the
“Securities Exchange Agreement”) pursuant to which Distributing 1 and
Financial Institution will agree to exchange an amount of Distributing 1 Debt for
the Business C Controlled Securities received by Distributing 1 in the Business C
Controlled Contribution (the “Business C Securities Exchange”). A portion of the
Business C Controlled Securities may be exchanged with historic holders of Debt
A, in which case such holders would become party to the Securities Exchange
Agreement and will participate in the Business C Securities Exchange. The
pricing for the Business C Securities Exchange likely will be a fixed ratio
determined on the date the Securities Exchange Agreement is entered into
based on the fair market values for the Business C Controlled Securities and the
Distributing 1 Debt on that date. The fair market value of the Distributing 1 Debt
is expected to be determined taking into account relevant factors that are
intended to reflect the costs to Financial Institution of acquiring the Distributing 1
Debt.
Distributing 1 also is expected to make representations in the Securities
Exchange Agreement, including representations as to the absence of material
non-public information and Distributing 1’s intention to complete the Business
C Securities Exchange. Distributing 1 will indemnify Financial Institution for any
losses arising out of any breaches of such representations (including any
material misstatements or omissions in Distributing 1’s filings with the
Securities & Exchange Commission). Additionally, Distributing 1 will reimburse
PLR-130090-15 9
Financial Institution for certain expenses (including legal expenses) for which
Financial Institution would customarily receive reimbursement in similar
transactions. Financial Institution is not expected to make representations
as to the Federal income tax treatment or status of their customary inventory
financing activities. Prior to entering into the Securities Exchange Agreement,
Financial Institution will conduct due diligence with Business C Controlled at a
level consistent with an underwriting of debt securities.
If the Securities Exchange Agreement is entered into, it is also expected that an
underwriting agreement with Financial Institution (and any participating historic
holders of Distributing 1 Debt) will be entered into at the same time, pursuant to
which there will be an offering of the Business C Controlled Securities to
investors.
b. Distributing 1 will form Business C Controlled (which may occur earlier in the
sequence of steps) and will contribute all of the stock of Sub 2 to Business C
Controlled and potentially certain other assets related to Business C in exchange
for (i) Business C Controlled stock (“the Business C Controlled Stock”), (ii) the
assumption of associated liabilities, and (iii) potentially the Business C Controlled
Securities. (This contribution is referred to as the “Business C Controlled
Contribution.”)
(vi) Distributing 1 will distribute to DRE 1: (i) the Domestic Business A Controlled
Stock (the “Internal Domestic Business A Distribution”), (ii) the Foreign Business
A Controlled Stock (the “Internal Foreign Business A Distribution”), and (iii) the
Business C Controlled Stock (“the Internal Business C Distribution”; collectively
the “Internal Distributions”). DRE 1, in turn, will distribute the Business C
Controlled Stock and Distributing 1 to Distributing 2. In connection with this step,
an additional disregarded entity may be interposed between Distributing 2 and
DRE 1 for financing reasons.
(vii) No earlier than at least l days after the acquisition of Distributing 1 Debt by
Financial Institution in step (v) a, the Business C Securities Exchange will close.
It is expected that the Business C Securities Exchange will occur close in time to
the Internal Business C Distribution, but, depending on market conditions, could
occur up to m months prior to, or up to n months following, the Internal Business
C Distribution, as part of the plan of reorganization.
(viii) Distributing 2 will distribute the Business C Controlled Stock to Distributing 2’s
shareholders pro rata (the “External Business C Distribution”).
(ix) Distributing 1 will form Sub 3 as a State A corporation (which may occur earlier in
the sequence of steps). Distributing 1 will lease to Sub 3 the Domestic Business
B Assets and the Foreign Business B Assets other than assets associated with
PLR-130090-15 10
Segment 1 of Business B or Segment 2 of Business B or certain assets which
may be contributed to Sub 3 or owned by another regarded subsidiary of
Distributing 1 (“the Leases”). Sub 3 will enter into D Agreements with Domestic
Business A Controlled and Foreign Business A Controlled to manage the day-to-
day operations of Sub 3’s Business B assets. Distributing 1 will enter into E
Agreements with Domestic Business A Controlled regarding Segment 1 of
Business B. Distributing 1 will contribute certain assets associated with Segment
2 of Business B to Sub 1. These Leases, D Agreements, and E Agreements will
be effective as of the beginning of the day following the date of the External
Business B Distribution (described below).
(x) Distributing 2 will distribute the Distributing 1 stock to Distributing 2’s
shareholders (“the External Business B Distribution”). The External Business B
Distribution will be made pro rata to Distributing 2’s shareholders, will be effected
as an exchange for Distributing 2 shares held by one or more shareholders
(pursuant to a generally applicable exchange offer or a negotiated agreement), or
a combination thereof.
(xi) Distributing 1 will elect to be taxed under Section 856(c)(1) as a real estate
investment trust (“REIT”) for its first taxable year following the External Business
B Distribution (the “First REIT Year”). Each of Sub 1 and Sub 3 will elect to be
taxed as a taxable REIT subsidiary within the meaning of Section 856(l). Other
previously regarded corporate subsidiaries of Distributing 1 will become qualified
REIT subsidiaries within the meaning of Section 856(i).
(xii) Distributing 1 will declare during the First REIT Year, and pay no later than Day 1
of the following year, a dividend payable in cash or stock at the election of its
shareholders (the “Purging Distribution”). The amount of the Purging Distribution
is intended to be at least equal to Distributing 1’s earnings and profits in years
prior to its First REIT Year.
Distributing 1 intends to make the Purging Distribution with a combination of cash
and Distributing 1 shares. Each Distributing 1 shareholder will be allowed to
elect to receive such shareholder’s distribution in either cash or Distributing 1
shares of equivalent value, subject to a limitation on the amount of cash to be
distributed in the aggregate to all shareholders (the “Cash Limitation”). If a
shareholder fails to make a valid election by the election deadline, that
shareholder will be deemed to have made an election to be determined by
Distributing 1 at Distributing 1’s sole discretion. To the extent necessary,
Distributing 1 will issue cash in lieu of fractional shares of stock. Although
Distributing 1 has not yet determined the amount of the Cash Limitation, it will not
be less than a percent of the Purging Distribution (without regard to any cash that
may be paid in lieu of fractional shares).
PLR-130090-15 11
If the total number of shares for which an election is made to receive a
distribution in cash would result in the payment of cash in an aggregate amount
that is less than or equal to the Cash Limitation, then all shareholders electing to
receive cash will receive cash on all such shares. On the other hand, if too many
shareholders elect to receive cash, each shareholder electing to receive cash will
receive a pro rata amount of cash corresponding to the shareholder’s respective
entitlement under the Purging Distribution declaration, but in no event will any
shareholder electing to receive cash receive less than o percent of the
shareholder’s Purging Distribution amount in cash.
The calculation of the number of shares to be received by any shareholder will be
determined, over a period of up to b weeks, ending as close as practicable to the
payment date of the Purging Distribution, based on a formula using market prices
that is designed to equate the value of the number of shares to be received with
the amount of cash that could be received instead. The charter for Distributing 1
will contain ownership limitations and transfer restrictions, and the stock
distributed to a shareholder pursuant to the Purging Distribution will be subject to
such ownership limitations and transfer restrictions.
In connection with the Proposed Transaction, Distributing 2, Business C
Controlled, and Distributing 1 will enter into certain post-separation agreements and
arrangements (the “Continuing Arrangements”), which will include: a Separation
Agreement, a Transition Services Agreement for a period not to exceed c years unless
extended by mutual agreement by the parties on arms’ length terms; a Tax Matters
Arrangement; an Employee Matters Agreement; Commercial Matters Agreements;
Suretyship Agreements; and Non-compete Agreements. In addition, with respect to
Distributing 2, Distributing 1, and Business C Controlled, it is possible that the board of
directors of one company will have a minority of members who constitute a minority of
the members of another company. The officers of Distributing 2, Distributing 1, and
Business C Controlled are not expected to overlap.
REPRESENTATIONS
(i) The five years of financial information submitted on behalf of Segment 1 of
Business B and Segment 2 of Business B conducted by the Distributing 1’s
separate affiliated group, within the meaning of section 355(b)(3) (the
“Distributing 1 SAG”), 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.
(ii) The Distributing 1 SAG neither acquired Segment 1 of Business B nor Segment
2 of Business B nor acquired control of an entity conducting Segment 1 of
Business B or Segment 2 of Business B during the five-year period prior to the
PLR-130090-15 12
Proposed Transaction in a transaction in which gain or loss was recognized (or
treated as recognized) in whole or in part.
(iii) Following the External Business B Distribution, the Distributing 1 SAG will
continue Segment 1 of Business B independently and with its separate
employees (except as provided pursuant to the Continuing Arrangements).
(iv) Any Distributing 1 Debt exchanged for Business C Controlled Securities pursuant
to the Business C Securities Exchange was not incurred in anticipation of the
Business C Securities Exchange.
(v) The Business C Controlled Securities will qualify as securities for purposes of the
application of section 361(a).
RULINGS
Based solely on the information submitted and the representations set forth
above, and provided 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 Segment 1 of Business B as
compared to the fair market value of the gross assets of the Distributing 1 SAG
will not prevent Segment 1 of Business B from qualifying as an active trade or
business for the purposes of section 355(b) with respect to the Internal
Distributions and the External Business B Distribution.
(2) Taking into account the involvement of Financial Institution in the Business C
Securities Exchange, Financial Institution and each participating historic holder of
the Distributing 1 Debt will be treated as a Distributing 1 creditor to which
Business C Securities are transferred in connection with the Internal Business C
Distribution for purposes of Section 361(c)(3), and the Business C Securities will
be treated as being distributed in pursuance of the Internal Business C
Distribution plan of reorganization for purposes of section 361(c).
(3) The cash received by Distributing 1 in the Domestic Business A Contribution and
the Foreign Business A Contribution will be treated as being distributed pursuant
to the Internal Domestic Business A Distribution plan of reorganization and the
Internal Foreign Business A Distribution plan of reorganization, respectively,
under sections 361(b)(1) and 361(b)(3).
(4) Any and all of the cash and stock distributed in the Purging Distribution by
Distributing 1 to its shareholders will be treated as a distribution of property with
respect to its stock to which section 301 applies (sections 301 and 305(b)).
PLR-130090-15 13
(5) The amount of the distribution of the stock received by any stockholder pursuant
to the Purging Distribution will be considered to equal the amount of money
which the stockholder could have received instead.
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. Additionally, no opinion is expressed concerning whether
Distributing 1 otherwise qualifies as a REIT under subchapter M, part II of Chapter 1 of
the Code. Furthermore, this letter does not provide any rulings under sections 856 or
857. No opinion is expressed as to whether the Purging Distribution will satisfy the
requirements of section 857(a)(1). Finally, no opinion is expressed as to whether the
Purging Distribution is to be considered preferential under section 562(c).
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.
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,
_______________________
Isaac W. Zimbalist
Senior Technician Reviewer, Branch 1
Office of Associate Chief Counsel (Corporate)
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