Overlap methodology approved for planned spin-offs

Plain-English summary

Two publicly traded corporate groups planned to combine under a new holding company and then separate three businesses through distributions intended to qualify under sections 355 and 368(a). Because many investors owned shares in both groups, the companies proposed principles for identifying overlapping shareholders and measuring which holding-company shares counted as acquired under a plan that included the distributions. The IRS approved analyzing each side of the combination separately, using the proposed ownership sources and look-through rules, and offsetting a shareholder's plan-related ownership increases with decreases during the section 355(e) comparison period. It also ruled that the specified preferred-stock conversion would not be combined with the later acquisition, public share repurchases would be allocated pro rata, and increases caused solely by share exchanges would be disregarded. The letter addressed only these discrete section 355 issues and did not rule on the transactions' overall tax consequences.

Ruling snapshot

• Question: How should overlapping ownership, stock conversions, repurchases, and share exchanges be measured under section 355(e) for the planned distributions?
• Outcome: approved
• Key authorities: IRC §§ 355(e)(2), 355(e)(3); Treas. Reg. § 1.355-7

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201740015                                             Third Party Communication: None
Release Date: 10/6/2017                                       Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-00,
              355.10-00                                       Person To Contact:
                                                              --------------------------, ID No. --------------
-----------------------                                       Telephone Number:
-----------------------------------------------------------   --------------------
------------------------                                      Refer Reply To:
-------------------------------                               CC:CORP:B03
                                                              PLR-113930-16
--------------------------------------------                  Date:
                                                              February 14, 2017




Holding Company                        = ------------------------------------------------------------------------
                                         ------------------------------------------------------------------------
                                         -----------------------

Combination Partner 1                  = ------------------------------------------------------------------------
                                         ------------------------------------------------------------------------
                                         -----------------------

Combination Partner 2                  = ------------------------------------------------------------------------
                                         ------------------------------------------------------------------------
                                         -----------------------

Subsidiary 1                           = ------------------------------------------------------------------------
                                         ------------------------------------------------------------------------
                                         -----------------------

Subsidiary 2                           = ------------------------------------------------------------------------
                                         ------------------------------------------------------------------------
                                         -----------------------

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

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

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

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

Date 2                                 = ---------------------------
PLR-113930-16                                     2


Date 3                         = ---------------------------

a percent                      = ------------------------------------

b percent                      = --------------

c percent                      = ---------------

d percent                      = ---------------

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

This letter responds to your authorized representatives’ letter dated April 26, 2016, as
supplemented on May 19, 2016, requesting rulings on certain federal income tax
consequences of a series of transactions (the “Proposed Transactions” as defined
herein). The material information provided in that request and in subsequent
correspondence is summarized below.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalties-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. 2016-1, 2016-1 I.R.B. 18,
regarding one or more significant issues under section 355 of the Internal Revenue
Code (the “Code”). 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

Combination Partner 1 and Combination Partner 2 are the respective parents of
worldwide groups that include both domestic and foreign entities, and the common
parents of domestic groups filing consolidated U.S. federal income tax returns. Each of
Combination Partner 1 and Combination Partner 2 is engaged, directly and/or indirectly,
in three main lines of business: Business A, Business B, and Business C.

Combination Partner 1 has a single class of common stock outstanding (the
“Combination Partner 1 Common Stock”), the shares of which are publicly traded and
widely held.
PLR-113930-16                               3

Prior to Date 3, Combination Partner 1 had shares of preferred stock outstanding (the
“Combination Partner 1 Preferred Stock”), which were held by the “Combination Partner
1 Preferred Shareholders”. The Combination Partner 1 Preferred Stock represented
approximately a percent of the total value of Combination Partner 1’s outstanding equity
on an as-converted basis. As of Date 3, the Combination Partner 1 Preferred Stock was
converted to Combination Partner 1 Common Stock pursuant to the terms of the
Combination Partner 1 Preferred Stock. (the “Conversion”).

Combination Partner 2 has a single class of common stock outstanding (the
“Combination Partner 2 Common Stock”), the shares of which are publicly traded and
widely held (the “Combination Partner 2 Common Shareholders”). Combination Partner
2 has two classes of non-voting preferred stock outstanding that are publicly traded
(collectively, the “Combination Partner 2 Preferred Stock”). The Combination Partner 2
Preferred Stock currently represents less than b percent of the total value of
Combination Partner 2’s outstanding equity. The Combination Partner 2 Preferred Stock
is not convertible and may be redeemed by Combination Partner 2 at any time. The
shareholders of Combination Partner 2 Preferred Stock, together with the Combination
Partner 1 Preferred Shareholders, are referred to as the “Preferred Shareholders.”

Based on currently available information, a substantial percentage of each of
Combination Partner 1 Common Stock and Combination Partner 2 Common Stock are
owned by holders of both Combination Partner 1 Common Stock and Combination
Partner 2 Common stock (such holders, “Overlapping Shareholders”).

                            PROPOSED TRANSACTIONS

Combination Partner 1 and Combination Partner 2 have proposed the following series
of transactions (together constituting the “Proposed Transactions”) which has been
partially consummated:

   (i)    On Date 1, Combination Partner 1 and Combination Partner 2 formed Holding
          Company and Holding Company formed two subsidiaries, Subsidiary 1 and
          Subsidiary 2, with cash necessary to meet minimum capital requirements.
          Prior to the Combination, Holding Company will hold no material assets, other
          than the stock of Subsidiary 1 and Subsidiary 2 and capital necessary to
          comply with minimum capital requirements, and will have conducted no
          business activities or operations other than those necessary to effectuate the
          Combination. Prior to the Combination, each of Subsidiary 1 and Subsidiary 2
          will have no assets, other than capital necessary to comply with minimum
          capital requirements and will have conducted no business activities or
          operations other than those necessary to effectuate the Combination. Each of
          Holding Company, Subsidiary 1, and Subsidiary 2 was formed as part of a
          plan that includes the Combination and solely for the purpose of effecting the
          Combination.
PLR-113930-16                                 4

   (ii)    On Date 2, Combination Partner 1 and Combination Partner 2 entered into an
           agreement pursuant to which Subsidiary 1 will merge with and into
           Combination Partner 1, with Combination Partner 1 surviving, and Subsidiary
           2 will merge with and into Combination Partner 2, with Combination Partner 2
           surviving, in exchanges that are intended to qualify for nonrecognition of gain
           and loss under section 351 or section 368(a), or both (the “Combination”).

   (iii)   In the Combination, Holding Company will acquire the Combination Partner 1
           Common Stock and the Combination Partner 2 Common Stock in exchange
           for Holding Company common stock (“Holding Company Common Stock”).
           The Combination Partner 2 Preferred Stock will remain preferred stock in
           Combination Partner 2 following the Combination. As a result of the
           Combination, the Combination Partner 1 shareholders and the Combination
           Partner 2 Common Shareholders will own, respectively, approximately c
           percent and d percent of the outstanding stock of Holding Company.

   (iv)    Following the Combination, Holding Company, Combination Partner 1, and
           Combination Partner 2 intend to undertake a series of taxable and tax-free
           internal restructuring transactions, including a number of distributions
           intended to qualify under section 355, in order to align the ownership of
           Business A, Business B, and Business C.

   (v)     Holding Company intends to pursue the separation of Business A, Business
           B, and Business C through one or more distributions intended to qualify under
           sections 355 and 368(a) (the “External Distributions” and, together with any
           distributions undertaken as part of the internal restructuring, the
           “Distributions”) resulting in three independent, publicly traded companies.
           These Distributions will occur following the internal restructuring transactions,
           subject to the approval by the Holding Company board of directors and
           receipt of any required regulatory approvals. Depending upon market
           conditions and other considerations, the External Distributions may be
           accomplished as pro-rata distributions and/or through one or more offers by
           which the Holding Company shareholders exchange shares of Holding
           Company Common Stock for shares of controlled corporation stock (“Share
           Exchanges”).

The Combination may be treated as an acquisition of Combination Partner 1 and
Combination Partner 2 that is part of a plan that includes the Distributions under section
355(e) and section 1.355-7 (a “Plan Acquisition” and the shares acquired in a Plan
Acquisition, “Plan Shares”).

Each of Combination Partner 1 and Combination Partner 2 has a pre-existing share
repurchase program pursuant to which Combination Partner 1 and Combination Partner
2 repurchase shares in order to achieve their respective appropriate capital structures
PLR-113930-16                                 5

and deliver attractive cash returns to shareholders. Prior to the Combination,
Combination Partner 1 and Combination Partner 2 may repurchase shares pursuant to
their existing programs. Following the Combination, the Holding Company Board of
Directors is expected to authorize a plan to repurchase Holding Company Common
Stock. It is also anticipated that the board of directors for one or more controlled
corporations will also authorize a plan to repurchase shares of such controlled
corporation. Any share repurchases by Combination Partner 1, Combination Partner 2,
Holding Company, or a controlled corporation distributed by Holding Company in the
Distributions are referred to as the “Share Repurchases.” Share Repurchases will be
made through (i) open market purchases, (ii) one or more accelerated share repurchase
(“ASR”) programs, (iii) one or more tender offers open to all holders of Combination
Partner 1 Common Stock, Combination Partner 2 Common Stock, Holding Company
Common Stock, or common stock of such controlled corporations, or (iv) a combination
thereof. It is expected that, under the ASR program, the corporation would purchase a
specified number or dollar amount of its shares from a third-party investment bank at a
price per share that is determined over a specified calculation period (which often may
be terminated early at the bank’s option) and may be subject to certain caps and/or
floors. The corporation would pay for the shares upfront, and the bank would obtain
shares that it delivers upfront by borrowing shares (e.g., from customers or mutual
funds). Then the bank would buy shares, generally in the open market, over time to
return the borrowed shares and to obtain any additional shares it owes to the
corporation. There may be a true-up adjustment as between the corporation and the
bank at maturity of the ASR program.

For purposes of applying section 355(e)(3)(A)(iv) (the “Overlap Rule”) and the
methodology of the example in the 1998 legislative history to section 355(e)(3)(A)(iv)
(the “Net Decrease Methodology”) to determine the extent of Overlapping Shareholders,
taxpayer will employ the principles described below (the “Overlap Counting Principles”).

(i)    Sources and Proof of Overlapping Shareholders. The taxpayer will rely upon
information that provides the taxpayer with actual knowledge of the existence and share
ownership of the Overlapping Shareholders. For this purpose, actual knowledge means
the actual knowledge of the Vice President of Investor Relations (or a functionally
similar position) of each of Holding Company, Combination Partner 1, and Combination
Partner 2.

To the extent taxpayer does not have actual knowledge of the Overlapping
Shareholders, taxpayer will rely on publicly available information (such as (i) Securities
and Exchange Commission filings made by institutional investment managers (Form
13F) and registered management investment companies (Form N-Q and Form N-CSR);
(ii) voluntary disclosures to investment research companies; and (iii) voluntary postings
on the publicly available portion of the investor’s or the investment advisor’s websites. If
the Combination closing does not coincide with a date for which a monthly or quarterly
filer has provided ownership information, the taxpayer will determine such filer’s
PLR-113930-16                                 6

ownership of Combination Partner 1 and Combination Partner 2 on the Combination
closing date by reference to the publicly available information provided for the most
recent filing prior to the Combination closing date and for the most recent filing following
the Combination closing date, treating such investor(s) as owning an amount of stock
on such date equal to the lesser of its stock ownership on the two dates for which filings
have been made.

(ii)    Look-Through Approach. In applying the Overlap Rule and the Net Decrease
Methodology, taxpayer will look through entities to the ultimate indirect owners of the
Holding Company stock, and will take into account the identified actual overlap in the
ultimate indirect ownership of Holding Company stock at that level, based on actual
knowledge, or if taxpayer does not have actual knowledge, then based upon the
sources of proof described above in paragraph (i). Notwithstanding the foregoing, in
proving the identity of Overlapping Shareholders, and the extent of their share
ownership for purposes of applying the Overlap Rule and the Net Decrease
Methodology, taxpayer will treat as the ultimate owner of Combination Partner 1,
Combination Partner 2, Holding Company, or controlled corporation stock: any
regulated investment company; any domestic pension trust described in section 401(a)
which is exempt from tax under section 501(a); any domestic charitable organization
described in section 501(c)(3) (including an endowment or private foundation); any
state, local, or foreign government (or agency or instrumentality thereof); and any
foreign trust or pension plan (provided that the beneficiaries of the trust or pension plan
have a pro-rata interest in the assets thereof).

(iii)  Computation of Overlap. In applying the Overlap Rule and the Net Decrease
Methodology to the Combination, the method for the application of the Overlap Rule to a
particular Overlapping Shareholder as a result of the Combination will be the
percentage of the value and voting power of shares that are not Plan Shares (“non-Plan
Shares”) (i.e., the value and voting power of non-Plan Shares as a percentage of all the
shares of the relevant company) in Combination Partner 1 or Combination Partner 2 (as
the case may be) held by the Overlapping Shareholder immediately prior to the time of
the Combination in comparison to the percentage of the value and voting power of
Holding Company shares held by that Overlapping Shareholder immediately after the
Combination.

(iv)    Certain Changes Disregarded. The Overlap Rule and the Net Decrease
Methodology will be applied to the Combination by reference to stock ownership at the
time of the Combination. Any pre-Combination or post-Combination changes in the
direct or indirect ownership of Combination Partner 1, Combination Partner 2, or
Holding Company stock will not affect the determination of the number of Plan Shares
and non-Plan Shares resulting from the Combination, so long as the acquisitions
resulting in those changes are not part of a plan (or series of related transactions) that
includes the Distributions (applying section 1.355-7(d)(7)).
PLR-113930-16                                7

                                 REPRESENTATIONS

a)    The Preferred Shareholders did not participate in management and did not
      influence the decision to undertake the Combination or the Distributions.

b)    The Share Repurchases were not, and will not be, motivated to any extent by a
      desire to increase or decrease the ownership percentage of any particular
      shareholder or group of shareholders.

                                        RULINGS

1. For purposes of applying section 355(e)(3)(A)(iv), to the extent the Combination is
   treated as a Plan Acquisition, the percentage of Holding Company stock acquired in
   the Combination will be analyzed separately from the perspective of each of
   Combination Partner 1 and Combination Partner 2 (without aggregating the
   calculations for the two sides) and will not be greater than the percentage obtained
   through a comparison of each Holding Company shareholder’s percentage interest
   in the stock of Combination Partner 1 or Combination Partner 2, as the case may be,
   immediately before the first Plan Acquisition with such shareholder’s post-
   Combination percentage interest in the stock of Holding Company.

2. The taxpayer may employ the Overlap Counting Principles in applying the Overlap
   Rule and the Net Decrease Methodology to the Combination.

3. During the section 355(e) comparison period, which begins immediately before the
   first acquisition of stock of the relevant company made by any shareholder of the
   relevant company that is part of a plan that includes that Distribution under section
   355(e) and section 1.355-7, and ends immediately after the later of (i) the last
   acquisition of stock of the relevant company made by any shareholder of the
   relevant company that is part of a plan that includes that Distribution under section
   355(e) and section 1.355-7 and (ii) that Distribution, any increase in ownership of
   stock, by vote or value, by a shareholder that occurs as a result of any Plan
   Acquisition during such period will be offset and reduced by any decrease in
   ownership of stock, by vote or value, by that shareholder during such period.

4. In applying section 1.355-7(d)(5) to a Conversion, the acquisition of Combination
   Partner 1 Common Stock pursuant to a Conversion will not be considered as
   occurring in connection with the acquisition of Combination Partner 1 Common
   Stock pursuant to the Combination for purposes of section 1.355-7(d)(5)(ii)(B).

5. To the extent the Share Repurchases are treated as part of a plan (or series of
   related transactions) with the Distributions for purposes of section 355(e), the Share
   Repurchases will be treated as being made from all public shareholders (defined as
   a shareholder who is not a “controlling shareholder” or “ten-percent shareholder”
PLR-113930-16                                  8

   within the meaning of section 1.355-7(h)(3) and (14)) of the repurchasing corporation
   on a pro rata basis for purposes of testing the effect under section 355(e) of the
   Share Repurchases on the Distributions.

6. In applying section 355(e) to the Distributions, any increase in ownership of Holding
   Company stock (or, by attribution, Combination Partner 1 or Combination Partner 2
   stock), by vote or value, by a Holding Company shareholder that occurs solely as a
   result of Share Exchanges will be disregarded (and not treated as an acquisition for
   purposes of section 355(e)(2)(A)(ii)).

                                         CAVEATS

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax treatment of the Proposed Transactions 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 Transactions 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 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 [PLR-113930-16].

                                       Sincerely,



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