Private Letter Ruling 201827008 Released July 6, 2018 Approved

Corporate separation preserves liquidations and active businesses

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This page covers one taxpayer's ruling from 2018, 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 publicly traded foreign parent proposed a 36-step transaction to separate two broad business groups through entity-classification elections, internal transfers, liquidations, contributions, distributions, borrowing, and a final demerger. The IRS addressed only several significant legal issues rather than the transaction's overall tax treatment. It ruled that two businesses acquired when a partnership terminated could still qualify as active trades or businesses under Section 355(b)(2)(C). It also ruled that transferring business assets to controlled entities would not prevent four subsidiary liquidations from qualifying under Section 332. Finally, the demerger would be treated for federal tax purposes as a contribution of disregarded-entity interests to the new controlled corporation followed by a distribution of all controlled stock to the parent's shareholders.

Ruling snapshot

Question: Would specified partnership, asset-transfer, liquidation, and demerger steps receive the requested Section 332 and Section 355 treatment?
Outcome: Approved on all six discrete ruling requests, without an opinion on the overall transaction.
Key authorities: IRC §§ 332, 355(b)(2)(C); Treas. Reg. § 301.7701-3; Rev. Rul. 57-311; Rev. Rul. 77-191; Rev. Rul. 2007-42

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201827008 Third Party Communication: None
Release Date: 7/6/2018 Date of Communication: Not Applicable
Index Number: 332.00-00, 355.00-00,
355.01-00, 355.03-00 Person To Contact:
--------------------------, ID No. ----------------
--------------------- -----------------
-------------------------------------------------- Telephone Number:
--------------- ----------------------
------------------------------------------ Refer Reply To:
-------------------------------------- CC:CORP:B05
PLR-132408-17
Date:
April 06, 2018

Legend

Distributing = ---------------
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Distributing 1 = --------------------------------
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Distributing 2 = ---------------------------------------
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Distributing 3 = -----------------------------
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Distributing 4 = -----------------------------------
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Distributing 5 = ---------------------------------------
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Distributing 6 = -----------------
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Distributing 7 = ---------------------------------
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Distributing 8 = -----------------------------------------
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Controlled = -------------------------
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Controlled 1 = ----------------------------
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Controlled 2 = ------------------------------------
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Controlled 3 = ---------------------------------------------
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Controlled 4 = --------------------------------------------------------
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Controlled 5 = ----------------------------
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Controlled 6 = ---------------------------------------
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Partnership = -------------------------------------
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FSub 1 = --------------------------------
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FSub 2 = -------------------------------------
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FSub 3 = ------------------------------------------------
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FSub 4 = -------------------------------------------
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FSub 5 = ---------------------------------------
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FSub 7 = ------------------------------
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Sub 8 = -------------------------------------------
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Sub 9 = -----------------------------------
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Sub 10 = ---------------------------------------------
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FSub 11 = -------------------------------------------------
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DRE 1 = ------------------------------------------------------
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DRE 2 = -------------------------------------
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DRE 3 = ---------------------------------------
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DRE 4 = ------------------------------
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DRE 5 = -------------------------------------
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DRE 6 = -----------------------------
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DRE 7 = -----------------------------
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DRE 8 = --------------------------------
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DRE 9 = ---------------------------------------------
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DRE 10 = -------------------------------------
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DRE 11 = -------------------------------------
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DRE 12 = ---------------------------------
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DRE 13 = -------------------------------------------------
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DRE 14 = ---------------------------------
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DRE 15 = --------------------------
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DRE 16 = ------------------------------------------------------
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DRE 17 = -----------------------------------------------
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DRE 18 = -----------------------------------------
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DRE 19 = -----------------------------------------------
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DRE 20 = ------------------------------
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Branch = ---------------------------------------------------------------------------------------------------
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Business A = ------------------------

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

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

Business D = ---------------------------------------------------

Segment A = -------------------------------

Segment B = ------------------------------------

Country A = ----------

Country B = ------------------

Country C = -------------

Country D = -----------------------

a = ------------

b = ----------

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

d = ----

e = --------

f = ----

g = ------

h = --------

i = ------

j = --

k = -----------------

l = ---------------------------------------

m = ---------------------------------------

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

Date 2 = -------------------

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

Date 4 = -----------------

Date 5 = -----------------

Date 6 = ----------------------------

Date 7 = --------------------------

Entity Type A = ------------------------

Entity Type B = ------------------------------------------

Service Provider = ------------------------------------------

Foreign Tax = -------------------------------

Notes = ---------------------------------------------------------------------------------------------------
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Foreign Court = ---------------

Preparatory = ---------------------------------------------------------------------------------------------------
Transactions ---------------------------------------------------------------------------------------------------
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Dear -------------:

   This letter responds to your request, dated October 23, 2017, submitted by your

authorized representatives on behalf of Distributing, for rulings on certain federal
income tax consequences of a series of transactions (the “Proposed Transaction”). The
material information provided in that request 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 penalties of perjury
statement executed by an appropriate party. While this office has not verified any of the
materials 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. 1, regarding one or more significant issues under sections 332 and 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 transactions described herein. This
office expresses no opinion as to the overall tax consequences of these transactions
described in this letter or as to any issue not specifically addressed by the rulings below.

                                  Summary of Facts

   Distributing, a publicly-traded Country A company, is the ultimate parent of a

worldwide group that includes corporations, entities disregarded for federal income tax
purposes from their sole regarded owner under Treas. Reg. § 301.7701-3 (each, a
“DRE”), and partnerships for federal income tax purposes (the “Distributing Group”).
The Distributing Group conducts Business A and Business B. Business B consists of
two legacy business lines, Segment A and Segment B.

    Distributing owns all of the stock of DRE 1.

    DRE 1 owns all of the stock of FSub 1 and FSub 2.

    FSub 1 owns all of the stock of FSub 3.

   FSub 3 owns all of the stock or interests in FSub 4 and the Branch.

   FSub 4 owns all of the stock of Distributing 8.

  Distributing 8 owns all of the stock of FSub 5 and Distributing 7. Distributing 7 is

the common parent of an affiliated group of corporations that file a consolidated federal
income tax return.

     FSub 5 owns all of the stock of Sub 6. Sub 6 is the common parent of an

affiliated group of corporations that file a consolidated federal income tax return.

   Distributing 7 owns all of the stock of Distributing 6.

   Distributing 6 owns all of the stock of or interests in Controlled 4, FSub 7, Sub 8,

Distributing 5, and DRE 2.

   Controlled 4 owns all of the stock of Sub 9.

   Distributing 5 owns all of the stock of Distributing 4.

   Distributing 4 owns all of the stock of Distributing 3.

   Distributing 3 owns all of the stock of Distributing 2 and Sub 10.

   Distributing 2 owns all of the interests in DRE 3 and a percent of the interests in

Distributing 1. DRE 3 owns the remaining b percent interest in Distributing 1.

    Distributing 1 owns all of the interests in DRE 4, c percent of the interests in

FSub 11, and d percent of the interests in Partnership (a “significant interest” within the
meaning of Rev. Rul. 2007-42, 2007-2 C.B. 44). DRE 4 owns the remaining e percent
interest in FSub 11 and FSub 11 owns the remaining f percent interest in Partnership.
Prior to Date 1, an unrelated third party owned g percent of the interests in Partnership.
Distributing 1, through a DRE, purchased this g percent interest in Partnership and as a
result Distributing 1 and FSub 11 owned all of the outstanding interests in Partnership,
which remained classified as a partnership for federal income tax purposes.

   Partnership owns all of the interests in DRE 5.

   DRE 5 owns all of the interests in DRE 6.

   DRE 6 owns all of the interests in DRE 7 and DRE 8.

   DRE 7 owns all of the interests in DRE 9 and DRE 10.

   DRE 8 owns all of the interests in DRE 11, DRE 12, and h percent of the

interests in DRE 13. DRE 6 owns the remaining i percent of the interests in DRE 13.

   DRE 11 owns all of the interests in DRE 14.

  DRE 14 owns all of the interests in DRE 15 and DRE 16. FSub 2 owns a general

partnership interest in DRE 16 with no equity value.

   DRE 15 and DRE 16 collectively own all of the interests in DRE 17.

  DRE 10, DRE 12, and DRE 13 are primarily engaged in Business C (a part of

Business B). DRE 9 is primarily engaged in Business D (a part of Business A).

                             Proposed Transaction

  For what are represented to be valid corporate business purposes, Distributing

proposes to separate Business A and Business B in the following steps, some of which
have already occurred:

On Date 2, Controlled was formed with nominal shares issued to Service Provider.
On Date 3, an election pursuant to Treas. Reg. § 301.7701 (an “Election”) was made
for FSub 4 to be treated as a DRE (“Liquidation 1”).
On Date 4, an Election was made for FSub 3 to be treated as a DRE (“Liquidation
2”).
On Date 5, an Election was made for FSub 1 to be treated as a DRE (“Liquidation 3”)
and FSub 1converted from an Entity Type A to an Entity Type B.
On Date 6, DRE 5 formed Controlled 1 and on Date 7, DRE 5 formed Controlled 2,
each a Country B entity with an initial Election to be classified as a DRE.
FSub 11 will make an Election to be treated as a DRE (“Liquidation 4”).
Subsequently, Partnership and FSub 11 will be formally liquidated under Country C
law, and DRE 4 will be formally liquidated under state law. As a result of Liquidation
4, Distributing 1 will be treated for federal income tax purposes as owning all of the
outstanding interests in Partnership. As a result, Partnership will be deemed to
terminate as a partnership for federal income tax purposes (the “Partnership
Termination”).
For Foreign Tax purposes, DRE 1 will make a contribution of cash to DRE 17 in
exchange for a j percent preferred ownership interest in DRE 17.
Distributing 1 will engage in Preparatory Transactions which will result in its Business
A assets and liabilities (including Business D) being transferred to Controlled 1.
Controlled 1 will be treated as a DRE at the time of the transfers. Accordingly, these
transactions will not be regarded for federal income tax purposes (“disregarded
transactions”). Certain assets related to Business A held by corporate subsidiaries of
Distributing 1 will be sold to entities held by Distributing that will be contributed to
Controlled as part of Step 36.
DRE 5 will contribute all of the interests in Controlled 1 to Controlled 2, and will
distribute all of the interests in Controlled 2 to Distributing 1 in disregarded
transactions.
Controlled 1 will make an Election to be classified as a corporation for federal income
tax purposes (the “Internal Contribution 1”).
Distributing 1 will distribute all of the interests of Controlled 2 to Distributing 2, a
percent of Controlled 2 will be distributed directly to Distributing 2 and the remaining
b percent of Controlled 2 will be distributed to DRE 3 which will then be distributed to
Distributing 2, in a disregarded distribution.
Controlled 2 will make an Election to be treated as a corporation for federal income
tax purposes.
Distributing 2 will distribute all of the stock of Controlled 2 to Distributing 3.
Distributing 3 will contribute all of the stock of Controlled 2 to Controlled 3, a newly
formed corporation.
Distributing 3 will distribute all of the stock of Controlled 3 to Distributing 4.
Distributing 4 will distribute all of the stock of Controlled 3 to Distributing 5.
Distributing 5 will distribute all of the stock of Controlled 3 to Distributing 6.
Distributing 6 will contribute its stock of Controlled 3, and its interests in FSub 7 and
DRE 2 to Controlled 4.
Distributing 6 will distribute all of the stock of Controlled 4 to Distributing 7.
Distributing 7 will contribute all of the stock of Controlled 4 to a newly formed
corporation, Controlled 5, in exchange for Controlled 5 stock and the assumption of
approximately k of Distributing 7 debt owed to Distributing 8.
Distributing 7 will distribute all of the stock of Controlled 5 to Distributing 8.
Distributing 8 will form Controlled 6 and contribute all of the interests in FSub 5. An
Election will be made for FSub 5 to be treated as a DRE of Controlled 6.
Distributing 8 will contribute all of the stock of Controlled 5 and certain Notes to
Controlled 6. Controlled 5 will be further contributed to FSub 5 in a disregarded
transaction.
Distributing 8 will distribute all of the stock of Controlled 6 to FSub 4, a DRE of
Distributing.
FSub4 will form DRE 18 and contribute all of the interests in Controlled 6 to it in a
disregarded transaction.
FSub 4 will distribute all of the interests of DRE 18 to FSub 3 in a disregarded
transaction.
FSub3 will form DRE 19 and contribute its Business A assets, including all of the
interests in DRE 18, to it in a disregarded transaction.
FSub 3 will distribute all of the interests in DRE 19 to FSub 1 in a disregarded
transaction.
FSub1 will form DRE 20 and contribute its Business A assets to it in a disregarded
transaction.
DRE 20 will borrow l from third-party lenders.
FSub 1 will contribute all of the interests in DRE 19 to DRE 20 in exchange for
interests in DRE 20 and $m (including the amount borrowed in Step 30) in a
disregarded transaction. FSub 1 will use the cash received to repay a portion of its
third-party debt.
FSub 1 will distribute all of the interests in DRE 20 to DRE 1 in a disregarded
transaction.
DRE 1 will distribute all of its interests in DRE 20 to Distributing in a disregarded
transaction.
Prior to step 35, Controlled will establish its tax residency in Country D.
Controlled will issue one preferred share (the “First Preferred Share”) with nominal
value to Service Provider. The First Preferred Share will be held by the Service
Provider prior to the completion of Step 36. Subsequent to the issuance of the First
Preferred Share and pursuant to Country A corporate law, Distributing will transfer all
of the interests in DRE 20 to Controlled and Controlled will simultaneously issue its
common stock pro rata to the shareholders of Distributing. No earlier than one day
after the issuance of the Controlled common stock to Distributing common
shareholders, Controlled will issue a second preferred share (the “Second Preferred
Share”) to the holder of the First Preferred Share, which will create a “share
premium” for Country A corporate law purposes. Immediately after the issuance of
the Second Preferred Share, the First Preferred Share and Second Preferred Share
will be cancelled for no consideration, collectively the “Demerger.”
DRE 17 will redeem the j percent preferred interest issued to DRE 1 in Step 7 for
cash in an amount equal to the purchase price of such interest in Step 7.
```
                                 Rulings

Based solely on the information submitted and the representations made, we rule
```
as follow on the Proposed Transaction:
1. The acquisition by Distributing 1 of Business C and Business D in the
  Partnership Termination will not preclude either business from qualifying as an
  active trade or business within the meaning of section 355(b)(2)(C).
2. The contribution of FSub 4’s Business A assets to Controlled will not preclude
  Liquidation 1 from qualifying as a complete liquidation within the meaning of
  section 332.
3. The contribution of FSub 3’s Business A assets to Controlled will not preclude
  Liquidation 2 from qualifying as a complete liquidation within the meaning of
  section 332.
4. The contribution of FSub 1’s Business A assets to Controlled will not preclude
  Liquidation 3 from qualifying as a complete liquidation within the meaning of
  section 332.
5. The contribution of FSub 11’s Business A assets to Controlled 1 in Internal
  Contribution 1 will not preclude Liquidation 4 from qualifying as a complete
  liquidation within the meaning of section 332.
6. For federal income tax purposes, the Demerger will be treated as if Distributing
  contributed the interests of DRE 20 to Controlled and then distributed all of the
  Controlled stock to its shareholders. See Rev. Ru. 77-191, 1971-1 C.B. 94, Rev.
  Rul. 57-311, 1957-2 C.B. 243.
```
                            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 conditions existing at the time of, or
effects resulting from, the Proposed Transaction that are not specifically covered by the
above rulings.
```
                         Procedural Statements
```
This letter ruling is directed only to the taxpayers who requested it.
Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

A copy of this ruling 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-132408-17].

Pursuant to the power of attorney on file in this matter, a copy of this letter is being sent
to each of your authorized representatives.

                                   Sincerely,


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

cc:

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Apply this to your situation

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On this page

Document type

Private Letter Ruling

IRS subject

Complete Liquidation of Subsidiaries; Distribution of Stock and Securities of a Controlled Corporation; Spin-Off; Active Business

Topics

Corporate transactions and reorganizations

Code sections

§ 332, § 355, § 6110, § 7701

Ruling dated

April 6, 2018

Publicly released

July 6, 2018

View Official PDF