Specified spin-off funding and debt steps receive favorable treatment

Plain-English summary

A publicly traded parent planned to separate three businesses into three publicly traded corporations. It would contribute two businesses to newly formed subsidiaries, receive stock, cash proceeds, assumed liabilities, and possibly notes or securities, then distribute at least 80 percent of each subsidiary's stock to its shareholders. The IRS ruled favorably on the planned use of cash proceeds, possible net settlement payments, investment-bank and direct debt exchanges, and the treatment of specified deductible liabilities. It also ruled that later payments under continuing separation arrangements would be treated as adjustments to pre-distribution transfers when the stated conditions were met. Neither spun-off corporation would be treated as the parent's successor for the affiliated-group restriction in section 1504(a)(3). All rulings were conditioned on the reorganization otherwise satisfying sections 355 and 368(a)(1)(D).

Ruling snapshot

• Question: How would specified cash, debt, liability, post-closing, and affiliated-group aspects of a three-company separation be treated?
• Outcome: approved for the listed issues, provided the reorganization otherwise meets sections 355 and 368(a)(1)(D)
• Key authorities: IRC §§ 355, 357(c), 358(d), 361, 368(a)(1)(D), and 1504(a)(3); Arrowsmith v. Commissioner; Rev. Rul. 83-73

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201649012                                              Third Party Communication: None
Release Date: 12/2/2016                                        Date of Communication: Not Applicable
Index Number: 361.00-00, 1504.01-00
                                                               Person To Contact:
------------------------------                                 ------------------------, ID No. ------------------
------------------------------------                           ----------------------------------------------------
----------------------------------------------                 Telephone Number:
---------------------------------------                        --------------------
-----------------------------                                  Refer Reply To:
                                                               CC:CORP:BR:2
                                                               PLR-139743-15
                                                               Date:
                                                               June 06, 2016




Legend

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

Newco1                              =        -------------------

Newco2                              =        -------------------

Newco3                              =        -------------------

Controlled1                         =        -------------------

Controlled2                         =        -------------------

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

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

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

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

PLR-139743-15                                             2


Distributing Deductible Liability 1 =                 ---------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
--
                                                      ---------------------------------------------------------------
                                                      ---------------------------------------------------------------
                                                      ---------------------------------------------------------------
                                                      ---------------------------------------------------------------
                                                      ---------------------------------------------------------------
                                                      -----------------------

Distributing Deductible Liability 2 =        ---------------------------------------------------------------
                                    ------------------------------------------------------------------------
                                             ------------------------------------
                                             ---------------------------------------------------------------
                                             -------------------------------------------

y                                   =        ----

z                                   =        ----

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

This letter responds to your December 3, 2015, request, and subsequent
correspondence, submitted by your authorized representatives, for rulings under
sections 355, 357, 361, and 1504. 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. 2016-1, 2016-1 I.R.B. 1, 39,
regarding one or more significant issues under sections 355 and 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.

                                                     FACTS

PLR-139743-15                                 3

Distributing, a publicly traded State A corporation, is the common parent of an affiliated
group of corporations that files a consolidated Federal income tax return. Distributing is
directly and indirectly engaged in Business A, Business B, and Business C through its
domestic and foreign subsidiaries.

Distributing and its worldwide group will engage in certain internal restructurings to align
Business A, Business B, and Business C in anticipation of the Proposed Transaction
(as defined below). Business B and Business C assets held indirectly by Distributing
will be separated through internal restructurings into three domestic corporations (or
entities treated as corporations for Federal income tax purposes) wholly owned by
Distributing: Newco1, Newco2, and Newco3. Newco1 will own certain assets and
operations of Business B. Newco2 and Newco3 will each own certain assets and
operations of Business C.


                               PROPOSED TRANSACTION

Distributing will enter into the following transactions to separate the worldwide
operations of Business A, Business B, and Business C (the “Proposed Transaction”),
which will result in three separate publicly traded corporations.

(i)     Distributing will form two new wholly owned domestic corporations, Controlled1
        and Controlled2.

(ii)    Controlled1 will issue a note to an unrelated third party for cash (the “C1 Cash
        Proceeds”).

(iii)   Controlled2 will issue a note to an unrelated third party for cash (the “C2 Cash
        Proceeds,” together with the C1 Cash Proceeds, the “Cash Proceeds”).

(iv)    Distributing will contribute Newco1 and Business B assets (the “First
        Contribution”) to Controlled1 in exchange for a combination of: (a) Controlled1
        stock; (b) liability assumption by Controlled1 (including a portion of the
        Distributing Deductible Liability 1); and (c) C1 Cash Proceeds. Distributing may
        also receive debt of Controlled1 (“Controlled1 Notes”) and securities of
        Controlled1 in the First Contribution.

(v)     Distributing will contribute Newco2, Newco3, and Business C assets (the
        “Second Contribution”) to Controlled2 in exchange for a combination of: (a)
        Controlled2 stock; (b) liability assumption by Controlled2 (including a portion of
        the Distributing Deductible Liability 1 and all of the Distributing Deductible
        Liability 2); and (c) C2 Cash Proceeds. Distributing may also receive debt of
        Controlled2 (“Controlled2 Notes”) and securities of Controlled2 in the Second
        Contribution.

PLR-139743-15                                   4


(vi)     Distributing will distribute stock representing at least 80 percent of the
         outstanding stock of each of Controlled1 and Controlled2 pro rata to
         Distributing’s shareholders (the “External Distribution,” together with the First
         Contribution and the Second Contribution, the “Reorganization”).

(vii)    Following the First Contribution and the Second Contribution, and within y
         months following the date of the External Distribution, Distributing will use the
         Cash Proceeds to (a) satisfy any Distributing indebtedness (including accrued
         trade payables) existing at the time of the receipt of the Cash Proceeds or
         subsequently incurred in the ordinary course of business, (b) redeem any
         Distributing stock, or (c) make distributions to Distributing shareholders (the
         “Cash Proceeds Purge”). Distributing will not set aside or otherwise segregate
         the Cash Proceeds.

(viii)   One or more investment banks (the “Investment Banks”), acting as principals for
         their own account, may purchase a portion of Distributing publicly traded debt
         (such acquisition, the “Investment Bank Tender,” and such debt, the “Investment
         Bank Debt”). If such Investment Bank Tender occurs, Distributing will enter into
         an exchange agreement with the Investment Banks (the “Investment Bank Debt
         Exchange Agreement”) no sooner than five days after the Investment Bank
         Tender. Pursuant to the Investment Bank Debt Exchange Agreement, if any, the
         Investment Banks will exchange the Investment Bank Debt for stock and/or
         securities in Controlled1 and/or Controlled2 (the “Investment Bank Debt
         Exchange”). The exchange, if any, will occur at least 14 days after the
         Investment Bank Tender.

(ix)     Distributing may exchange the Controlled1 Notes and/or the Controlled2 Notes, if
         any, to pay off certain Distributing debt (the “Distributing External Debt”) by
         entering into exchange agreements with targeted existing Distributing security
         holders. (The “Distributing Direct Debt Exchange”).

Distributing’s use of either stock or securities of Controlled1 or Controlled2 after the
External Distribution shall, in no event, exceed z months following the External
Distribution, by which time the Controlled1 and Controlled2 stock and securities will be
distributed to Distributing’s creditors (including Investment Banks) and/or shareholders
or otherwise disposed of.

Following the External Distribution, Distributing, Controlled1 and Controlled2, as well as
their respective subsidiaries, will have certain continuing relationships that will be
formalized in agreements between them (the “Continuing Relationships”). The
Continuing Relationships will include certain agreements to separate the operations of
Distributing, Controlled1, and Controlled2 (the “Separation Agreements”). The
Separation Agreements will provide for Distributing, Controlled1, and Controlled2 to

PLR-139743-15                                 5

make net payments due between them, determined upon expiration of such
agreements. A Net Excess will exist if taking into account all amounts due from
Distributing to Controlled1 or Controlled2, respectively, and from Controlled1 or
Controlled2 to Distributing, respectively, pursuant to the Separation Agreements (offset
by any cash Distributing transfers to Controlled1 or Controlled2 in the First Contribution
and Second Contribution, respectively), the total amount that Distributing owes to
Controlled1 or Controlled2 is less than the total amount that Controlled1 or Controlled2
owes to Distributing, respectively.


                                   REPRESENTATIONS

Taxpayer makes the following representations:

(a)    The Investment Bank Debt was not issued in anticipation of the External
       Distribution.
(b)    The Distributing External Debt was not issued in anticipation of the External
       Distribution.
(c)    The Controlled1 Notes and the Controlled2 Notes have the same terms, except
       for obligor and interest rate, as the Distributing External Debt exchanged
       therefor.
(d)    The Distributing External Debt qualifies as “securities” for U.S. Federal income
       tax purposes.
(e)    The Controlled1 securities issued to Distributing in Step (iv) of the Proposed
       Transaction, if any, will qualify as “securities” for purposes of section 361(a).
(f)    The Controlled2 securities issued to Distributing in the Step (v) of the Proposed
       Transaction, if any, will qualify as “securities” for purposes of section 361(a).
(g)    Distributing Deductible Liability 1 did not result in the creation of or increase in
       the basis of any asset prior to the allocation of Distributing Deductible Liability 1
       to Controlled1 in the First Contribution or to Controlled2 in the Second
       Contribution.
(h)    Distributing Deductible Liability 1 is an accrued liability for financial accounting
       purposes by Distributing, but will not meet the timing requirement for a deduction
       by Distributing before the First Contribution under Distributing’s method of tax
       accounting. Distributing Deductible Liability 1 will meet the timing requirements
       for a deduction by Controlled1 after the First Contribution under Controlled1’s
       method of tax accounting.
(i)    Distributing Deductible Liability 1 is an accrued liability for financial accounting
       purposes by Distributing, but will not meet the timing requirement for a deduction
       by Distributing before the Second Contribution under Distributing’s method of tax
       accounting. Distributing Deductible Liability 1 will meet the timing requirements

PLR-139743-15                                6

      for a deduction by Controlled2 after the Second Contribution under Controlled2’s
      method of tax accounting.
(j)   The Distributing Deductible Liability 1 will be allocated partially to Controlled1 and
      partially to Controlled2 pursuant to several factors, including certain legal
      requirements.
(k)   Distributing Deductible Liability 2 did not result in the creation of or increase in
      the basis of any asset prior to the allocation of Distributing Deductible Liability 2
      to Controlled2 in the Second Contribution.
(l)   Distributing Deductible Liability 2 is an accrued liability for financial accounting
      purposes by Distributing, but will not meet the timing requirement for a deduction
      by Distributing before the Second Contribution under Distributing’s method of tax
      accounting. Distributing Deductible Liability 2 will meet the timing requirements
      for a deduction by Controlled2 after the Second Contribution under Controlled2’s
      method of tax accounting.
(m)   The Distributing Deductible Liability 2 assumed by Controlled2 was incurred in
      the ordinary course of business and is associated with the assets transferred to
      Controlled2 in the Second Contribution.

                                        RULINGS

Based solely on the information submitted and the representations set forth above, and
provided that the Reorganization otherwise meet the requirements of sections
368(a)(1)(D) and 355, we rule as follows:

(1)   The Cash Proceeds Purge will be treated as being pursuant to the
      Reorganization for purposes of section 361(b) and (c).

(2)   Provided that the Net Excess, if any, with respect to either Controlled1 or
      Controlled2, is used within y months of the date of receipt and in the same
      manner as the Cash Proceeds, the Net Excess will be treated as being
      distributed pursuant to the Reorganization for purposes of section 361(b) and (c).

(3)   The involvement of an Investment Bank in the Investment Bank Debt Exchange
      described in Step (viii) above will not preclude the application of section 361(c)(3)
      to the Investment Bank Debt Exchange.

(4)   The Controlled1 Notes and Controlled2 Notes will constitute “securities” for
      purposes of sections 355 and 361.

(5)   Distributing’s completion of the Investment Bank Debt Exchange, and, if
      applicable, distribution of the stock or securities of Controlled1 or Controlled2 to
      Distributing’s creditors and/or shareholders following the date of the External

PLR-139743-15                                  7

       Distribution will not preclude the Reorganization and the Investment Bank Debt
       Exchange from qualifying under sections 355 and 361.

(6)    Distributing Deductible Liability 1 assumed by Controlled1 and Controlled2,
       respectively, will be excluded in determining the amount of liabilities of
       Distributing assumed by Controlled1 or Controlled2 for purposes of sections
       357(c), 358(d), and 361(b)(3).

(7)    Distributing Deductible Liability 2 will be excluded in determining the amount of
       liabilities of Distributing assumed by Controlled2 for purposes of sections 357(c),
       358(d), and 361(b)(3).

(8)    Except for purposes of section 355(g), amounts transferred between Distributing
       and Controlled1 or Distributing and Controlled2 (and their respective affiliates)
       under any of the Continuing Relationships regarding liabilities, indemnities, or
       other obligations that (i) have arisen or will arise for a taxable period ending on or
       before the External Distribution, and (ii) will not become fixed and ascertainable
       until after the External Distribution, will be treated as adjustments to amounts
       contributed by Distributing to Controlled1 or Controlled2 or distributed by
       Controlled1 or Controlled2 to Distributing immediately before the External
       Distribution (Arrowsmith v. Commissioner, 344 U.S. 6 (1952); Rev. Rul. 83-73,
       1983-1 C.B. 84).

(9)    Following the External Distribution, neither Controlled1 nor Controlled2 will be a
       successor of Distributing for purposes of section 1504(a)(3).


                                         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.

                              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-139743-15                               8



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,



                                                Julie T. Wang
                                                Assistant to the Branch Chief, Branch 6
                                                Office of Associate Chief Counsel
                                                (Corporate)