Spin-off cash purge qualifies and prior conversions remain liquidations

Plain-English summary

A public corporation planned to separate one business into a newly formed subsidiary and distribute that subsidiary's stock to shareholders. Before the separation, several corporate subsidiaries would convert into disregarded limited liability companies, and the new subsidiary would borrow cash that would be transferred to the parent with the business assets. The parent would use the cash to repay third-party debt and, if cash remained, repurchase its stock within the represented periods. The IRS ruled that this cash purge would be treated as distributed under the reorganization plan for section 361(b). It also ruled that contributing the converted entities to the new subsidiary would not prevent their conversions from qualifying as complete liquidations under section 332, assuming the transaction otherwise qualified under sections 368(a)(1)(D) and 355.

Ruling snapshot

• Question: How will the cash purge and pre-spin subsidiary conversions be treated in a proposed section 355 separation?
• Outcome: approved, conditioned on the transaction otherwise qualifying under sections 368(a)(1)(D) and 355
• Key authorities: IRC §§ 332, 355, 361(b), and 368(a)(1)(D)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201802007                                              Third Party Communication: None
Release Date: 1/12/2018                                        Date of Communication: Not Applicable
Index Number: 355.01-00, 361.00-00,
              361.02-02, 332.00-00                             Person To Contact:
                                                               ---------------------, ID No. ----------------
---------------------------------                              Telephone Number:
------------------------------------------------------------   ----------------------
--------------                                                 Refer Reply To:
-------------------------------                                CC:CORP:B1
---------------------------------------                        PLR-118518-17
------------------------------------                           Date:
                                                               October 12, 2017



                                                    LEGEND

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

Controlled           = --------------------------------------------------------------------------------------------
                       --------------------------------------------------------------------------------------------
                       --------------------------

Business 1           = ---------------------------------------------------

Business 2           = ---------------------------------------------------------------------------------

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

Company              = --------------------------------------------------------------------------------------------
                       --------------------------------------------------------------------------------------------
                       ---------------------------

Partnership             --------------------------------------------------------------------------------------------
                        -----------------------------------------------------------

a                    = ----

b                    = -----

c                    = ----------------------------------

d                    = ----------------------------------
PLR-118518-17                                         2

e                  = --------------------------------------------------------------------------------------------
                     ---
f                  = ----

g                  = ----

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

This letter responds to your authorized representatives’ letter dated June 8, 2017,
requesting rulings on certain federal income tax consequences of a proposed
transaction (the “Proposed Transaction”). The relevant 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. 2017-1, 2017-1 I.R.B. 19,
regarding one or more significant issues under sections 332, 351, 355, 368, or 1036.
The rulings contained in this letter only address one or more discrete legal issues
involved in the Proposed Transaction. This office expresses no opinion as to the overall
tax consequences of the Proposed Transaction or as to any issue not specifically
addressed by the rulings below.


                                                  FACTS

Distributing is a publicly traded corporation and the common parent of an affiliated
group of corporations that file a consolidated United States federal income tax (“Federal
Tax”) return.

Distributing and its subsidiaries are engaged in Business 1 and Business 2. Distributing
currently conducts Business 1 through various domestic entities—some of which are
corporations (the “Regarded Business 1 Entities”), and some of which are disregarded
as separate from their respective owners for Federal Tax purposes (the “Disregarded
Business 1 Entities”). Additionally, Distributing holds an approximate a percent limited
partnership interest and b percent general partnership interest in Partnership. The
Regarded Business 1 Entities, Disregarded Business 1 Entities, and Partnership are
collectively referred to as the “Business 1 Entities.”
PLR-118518-17                                   3

                                   PROPOSED TRANSACTION

For what are represented to be valid corporate business purposes, Distributing intends
to engage in the Proposed Transaction to distribute Business 1 to its public
shareholders. The relevant steps of the Proposed Transaction are set forth below:


 (i)    On Date 1, Distributing formed Controlled as a direct wholly owned subsidiary.

(ii)    The Regarded Business 1 Entities, excluding Company, will convert under the
        relevant state statutes to limited liability companies (the “Conversions”) that will
        be disregarded as separate from their respective owners for Federal Tax
        purposes (the “Converted Business 1 Entities”).

(iii)   Controlled will borrow approximately $c from third-party financing sources.

(iv)    Distributing will contribute the Business 1 Entities and the related liabilities to
        Controlled in exchange for Controlled stock and approximately $d (the “Cash
        Proceeds”).

(v)     Distributing will distribute all of the Controlled stock pro rata to its shareholders
        (the “Distribution”).

(vi)    To accomplish certain deleveraging goals, within e months of the Distribution,
        Distributing will use the Cash Proceeds to pay down existing Distributing debt
        held by third-parties (the “Debt Repayments”). To the extent Distributing can
        accomplish its deleveraging goals without using all of the Cash Proceeds, and
        within f months of the Distribution, Distributing will use the remaining Cash
        Proceeds to redeem outstanding Distributing stock (the “Stock Repurchases”).
        The Stock Repurchases will be undertaken pursuant to a stock buyback program
        created in connection with the Distribution. The Debt Repayments and the Stock
        Repurchases will collectively be referred to as the Cash Proceeds Purge.


                                    REPRESENTATIONS

(i)     The sum of Distributing’s debt to be paid with the Cash Proceeds will not exceed
        the weighted quarterly average of the Distributing debt for the 12-month period
        ending upon the close of business on the last full business day before the date
        on which Distributing’s Board of Directors initially discussed the Proposed
        Transaction.
PLR-118518-17                                 4

(ii)    With respect to each debt retired in the Debt Repayments, Distributing will not
        have a commitment to secure new borrowings on the same terms with the
        holders of such debt prior to its repayment.

(iii)   Except as otherwise described in the Proposed Transaction, neither Distributing
        nor Controlled has any plan or intention to transfer, in the aggregate, more than
        g% of the fair market value of the respective assets of the Converted Business 1
        Entities to another corporation.
                                         RULINGS

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

(1)     The Cash Proceeds Purge will be treated as being distributed pursuant to the
        Distribution plan of reorganization for purposes of section 361(b).

(2)     The contribution of the Converted Business 1 Entities to Controlled will not
        preclude the Conversions from qualifying as complete liquidations within the
        meaning of section 332.


                                        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.

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-118518-17                                  5


In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.


                                           Sincerely,


                                          _______________________
                                          Julie T. Wang
                                          Assistant to the Branch Chief, Branch 1
                                          Office of Associate Chief Counsel (Corporate)