Treats spin-off debt exchange and cash distribution under section 361

Plain-English summary

A publicly traded parent planned to separate one business into a newly formed controlled corporation and distribute that corporation's stock to its shareholders. The controlled corporation would issue securities and cash to the parent, which would exchange the securities for existing parent debt and use the cash to repay creditors. Based on the taxpayer's representations, the IRS ruled that the controlled corporation's notes would be securities for section 361 and that the securities-for-debt exchange would generally produce no gain or loss to the parent, apart from specified debt premium, discount, and interest items. It also ruled that the cash paid to creditors would be treated as distributed under the reorganization plan for purposes of section 361, without ruling on the transaction's overall tax consequences.

Ruling snapshot

• Question: How would section 361 apply to securities and cash received and used to retire parent debt in a planned corporate spin-off?
• Outcome: Approved on the three discrete issues presented.
• Key authorities: IRC §§ 355, 361, and 368

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201833011 Third Party Communication: None
Release Date: 8/17/2018 Date of Communication: Not Applicable
Index Number: 355.01-00, 361.00-00,
361.02-02 Person To Contact:
---------------------------, ID No. ---------------
---------------------------------------------- -------------------
------------------------------- Telephone Number:
--------------------- ----------------------
------------------------------------ Refer Reply To:
CC:CORP:1
PLR-126296-17
Date:
February 21, 2018

                                         Legend

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

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

Company A = ----------------------------------------

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Corporation B = ----------------------------------

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

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

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

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

State A = --------------
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Month 1 Notes = -----------------------------------------------------------------------------------

Month 2 Notes = -------------------------------------------------------------------------------------

Month 3 Notes = -------------------------------------------------------------------------------------

Month 4 Notes = -------------------------------------------------------------------------------------

Month 5 Notes = -------------------------------------------------------------------------------------

Month 6 Notes = -------------------------------------------------------------------------------------

Month 7 Notes = -------------------------------------------------------------------------------------

Month 8 Notes = -------------------------------------------------------------------------------------

Month 9 Notes = ---------------------------------------------------------------------------------

Revolving Credit Facility 1 = ------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------

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PLR-126296-17 3

Revolving Credit Facility 2 = ------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------

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Term Loan = ------------------------------------------------------------------------

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Investment Banks = ----------------------------

Date A = ---------------------

Date B = ---------------------------

Date C = ------------------------

Date D = --------------------------

Month 1 = ---------------------

Month 2 = -----------------

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

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

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

d= --

e= ----------------

f= --

g= ----

h= ----

i= ----
PLR-126296-17 4

j= ----

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

This letter responds to your representative’s August 25, 2017 letter requesting rulings
on certain federal income tax consequences of the Proposed Transaction (defined
below). The information provided in that letter and in later correspondence is
summarized below.

The rulings contained in this letter are based upon facts 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. 2017-1, 2017-1 I.R.B. 1
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
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, 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, Business C, and Business D
through its domestic and foreign subsidiaries (together, the “Distributing Group”).

Distributing and its worldwide group will engage in certain internal restructuring
transactions to align Business A, Business B, Business C, and Business D in
anticipation of the Proposed Transaction. Business D assets held indirectly by
Distributing will be separated through internal restructurings into Controlled, a newly
formed domestic corporation wholly owned by Distributing such that Controlled will own
all of the assets and operations of Business D.

Distributing publicly announced its intention to undertake the Proposed Transaction on
Date A.

Distributing has several tranches of debt owed to third parties (the “Distributing Debt”),
including: the Month 1 Notes, the Month 2 Notes, the Month 3 Notes, the Month 4
Notes, the Month 5 Notes, the Month 6 Notes, the Month 7 Notes, the Month 8 Notes,
and the Month 9 Notes (collectively, the “Notes”). In addition, Distributing has
outstanding commercial paper and has entered into Revolving Credit Facility 1,
PLR-126296-17 5

Revolving Credit Facility 2, and the Term Loan. Each tranche of Notes and the Term
Loan were borrowed before Date A.

Immediately following the announcement of Distributing’s intention to undertake the
Proposed Transaction on Date A, Distributing drew approximately $a on its Revolving
Credit Facility 1 to refinance certain outstanding commercial paper. Since Date A, the
balance on Revolving Credit Facility 1 has fluctuated in the ordinary course of business.
Additional borrowings under Revolving Credit Facility 1 have financed (1) expenses
incurred by Distributing in the course of conducting and expanding its trades or
businesses, including the acquisition of Company A, (2) regular quarterly dividends to
its public shareholders, (3) share repurchases under a board-authorized share
repurchase program, and (4) general operating expenses. In addition, Distributing put
in place Revolving Credit Facility 2 on Date B in order to ensure available liquidity to
retire the Month 1 and Month 2 Notes, which are scheduled to mature in Month 1 and
Month 2, respectively (the “Maturing Notes”). Distributing currently plans to retire the
Maturing Notes with a combination of proceeds from borrowings under Revolving Credit
Facility 1 and Revolving Credit Facility 2 in a total amount of approximately $b.
Distributing may borrow additional amounts under both revolving credit facilities to fund
ongoing cash needs of its businesses.

On Date C, Distributing entered into an agreement pursuant to which Distributing (or, at
Distributing’s election, a subsidiary of Distributing) will acquire 100% of the outstanding
stock of Corporation B, a publicly traded corporation engaged in Business D (the
“Merger Agreement”). In the event that the acquisition of Corporation B closes prior to
the Distribution, Distributing expects to cause Controlled to acquire 100% of the
outstanding stock of Corporation B in accordance with the Merger Agreement. In the
event that the acquisition of Corporation B has not closed at the time of the Distribution,
Distributing expects to assign its rights under the Merger Agreement to Controlled at the
time of the Distribution such that Controlled will acquire 100% of the outstanding stock
of Corporation B following the Distribution. In each case, Distributing expects Controlled
to incur indebtedness of approximately $c to fund the acquisition of Corporation B.

On Date D, Distributing entered into an agreement pursuant to which certain
subsidiaries of Distributing will sell a division of Business B (the “Business B Sale”). In
the event the Business B Sale closes prior to the Distribution, Distributing intends to use
all or a portion of the proceeds of the Business B Sale to repay existing creditors of
Distributing. A portion of the proceeds from the Business B Sale may also be used to
fund share repurchases, to pay dividends to shareholders of Distributing, or to fund the
acquisition of Corporation B.

                             Proposed Transaction

In furtherance of the Plan of Reorganization (defined below), Distributing has
undertaken or proposes to undertake the following transactions pursuant to a single
PLR-126296-17 6

integrated plan (together, the “Proposed Transaction”), and certain of such steps may
take place in a different order in a manner that will not affect the rulings below:

   (i)     Distributing has formed Controlled, a State A corporation.

    (ii)     Prior to or on the effective date of the Plan of Reorganization and through

a series of internal reorganization transactions, the Business D assets will be
transferred between and among Distributing Group entities such that Distributing will
hold Business D through subsidiaries that neither own any assets nor are subject to any
of the liabilities of Businesses A, B, and C.

   (iii)   Controlled will issue new debt to third parties for cash.

    (iv)   Distributing will contribute Business D to Controlled in exchange for a

combination of (A) all of the stock of Controlled (the “Controlled Stock”), (B) senior
unsecured notes with a minimum term of d years (the “Controlled Securities”), and (C)
all or a portion (but in any case not exceeding $e) of the cash borrowed in step (iii) (the
“Controlled Cash”) (the “Contribution”). Because the Business D assets will consist, in
part, of certain entities that are disregarded for Federal income tax purposes, Controlled
will be treated as assuming certain liabilities as part of the transaction. To effectuate
the Contribution, Distributing and Controlled will enter into an agreement that will serve
as the plan of reorganization for purposes of Section 361 (which, in combination with
certain other documents effecting the Proposed Transactions, will constitute the “Plan of
Reorganization”).

   (v)     The Investment Banks may acquire certain Distributing Debt (together,

with any such Distributing Debt currently held by the Investment Banks, the “Distributing
Exchange Debt”) from existing holders for their own accounts and not as agents of
Distributing. The Distributing Exchange Debt may include a portion or all of the Term
Loan and Distributing’s various tranches of then-outstanding Notes.

  (vi)   No fewer than f days after the Investment Banks acquire the Distributing

Exchange Debt, Distributing and the Investment Banks are expected to enter into an
exchange agreement (the “Securities-for-Debt Exchange Agreement”) pursuant to
which the parties would agree to exchange the Distributing Exchange Debt for the
Controlled Securities.

   (vii) No fewer than g days after the Investment Banks acquire the Distributing

Exchange Debt, Distributing is expected to transfer the Controlled Securities to the
Investment Banks pursuant to the Securities-for-Debt Exchange Agreement and in
satisfaction of the Distributing Exchange Debt (the “Securities-for-Debt Exchange”). The
Investment Banks are expected to sell the Controlled Securities received in the
Securities-for-Debt Exchange to third party investors. The Investment Banks may hedge
various risks related to holding the Distributing Exchange Debt with third parties.
PLR-126296-17 7

   (viii) Distributing will distribute the Controlled Stock to holders of the

Distributing stock on a pro rata basis (the “Distribution”).

    (ix)     Distributing will distribute the Controlled Cash to creditors of Distributing in

full or partial repayment of some or all of the following Distributing Debt: the Term Loan,
outstanding balances under Revolving Credit Facility 1 and Revolving Credit Facility 2,
and the Notes (including interest and associated fees, such as consent fees, as well as
principal), in each case not to exceed the sum of (A) the amount outstanding with
respect to such Distributing debt on Date A (the “Announcement Date Distributing
Debt”) and (B) the amount of such Distributing debt incurred after Date A to refinance
Announcement Date Distributing Debt (the “Boot Purge”). The Boot Purge will be
completed within h months of the Distribution. Distributing will distribute at least i% of
the Controlled Cash within j days of the Distribution to creditors in satisfaction of its debt
under Revolving Credit Facility 1 and Revolving Credit Facility 2.

                                 Representations

The following representations are made with respect to the Proposed Transaction:

(a) Together with the Distribution, the Contribution will qualify as a reorganization
under § 368(a)(1)(D).

(b) The Distribution will qualify under § 355.

(c) All of the Distributing Debt was issued in the ordinary course of business,
including for purposes of refinancing existing debt, and to finance acquisitions,
regular quarterly dividends to its public shareholders, share repurchases under
existing plans, and operating expenses.

(d) The total adjusted bases and the fair market value of the assets transferred to
Controlled each equals or exceeds the sum of (i) the liabilities assumed (within the
meaning of § 357(d)) by Controlled plus any liabilities to which the transferred assets
are subject (excluding liabilities to which § 357(c)(3) applies) and (ii) the total amount
of cash and the fair market value of other property (within the meaning of § 361(b))
received by Distributing in the Contribution.

(e) The sum of Distributing Debt to be paid with Controlled Cash will not exceed the
weighted quarterly average of the Distributing Debt for the 24-month-period ending
on 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.

                                        Rulings

PLR-126296-17 8

Based solely on the information submitted and the representations made, we rule as
follows:

  (1) The Controlled Securities will constitute “securities” for purposes of § 361(a).

  (2) No gain or loss will be recognized by Distributing in the Securities-for-Debt
  Exchange pursuant to § 361(c)(3) other than any (i) deductions attributable to the
  fact that the Distributing Exchange Debt may be redeemed at a premium, (ii) income
  attributable to the fact that the Distributing Exchange Debt may be redeemed at a
  discount, and (iii) interest expense accrued with respect to the Distributing Exchange
  Debt.

  (3) The Controlled Cash will be treated as being distributed by Distributing pursuant
  to a plan of reorganization for purposes of § 361(b) and 361(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 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.

                                     Sincerely,



                                     Richard K. Passales
                                     Senior Counsel, Branch 4
                                     Office of Associate Chief Counsel (Corporate)

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