Tax-free treatment for a corporate spin-off separating two business lines within a foreign-parented group

Plain-English summary

A domestic corporation inside a larger foreign-parented group ran two separate
business lines and wanted to split them apart so the group could be organized by
business rather than by geography. To do that, the corporation ("Distributing")
contributed one business to a subsidiary ("Controlled") and then distributed the
Controlled stock up the chain, a classic "spin-off" combined with a divisive
reorganization. The taxpayer asked the IRS to confirm the tax consequences of
this multi-step plan. The IRS issued a series of favorable rulings: the
contribution-plus-distribution qualifies as a tax-free reorganization under
§ 368(a)(1)(D), Distributing recognizes no gain or loss on the contribution or
the distribution (§§ 361, 357), Controlled takes carryover basis and holding
period in the assets, and the foreign parent recognizes no gain on receiving the
Controlled stock under § 355(a). Notably, the IRS expressly did NOT rule on
whether the spin-off meets the business-purpose test, the "device" test, or the
anti-abuse rules of § 355(e), leaving those to examination. This is the kind of
transactional ruling companies obtain for certainty before executing a large
internal restructuring.

Ruling snapshot

• Question: Do a contribution of one business line to a subsidiary and the spin-off distribution of that subsidiary's stock qualify for tax-free reorganization treatment?
• Outcome: Approved (11 favorable rulings; several standard § 355 issues expressly not ruled on)
• Key authorities: IRC §§ 355, 361, 368(a)(1)(D), 357, 362, 1032, 1223; Rev. Proc. 2017-52

Full text (IRS public release)

Internal Revenue Service                                   Department of the Treasury
                                                           Washington, DC 20224

Number: 201839006                                          Third Party Communication: None
Release Date: 9/28/2018                                    Date of Communication: Not Applicable
Index Number: 355.01-00, 361.00-00,
              361.02-00, 361.02-02,                        Person To Contact:
              368.00-00, 368.04-00                         ----------------------------, ID No. --------------
                                                           -----------------
-----------------------                                    Telephone Number:
-------------                                              ----------------------
-------------------------------                            Refer Reply To:
--------------------------------                           CC:CORP:2
-------------------                                        PLR-103866-18
------------------------------------                       Date:
                                                           July 02, 2018




Legend


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

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

Foreign Parent                         =   -----------------------------------------------
                                           --------------------------------

FSub 1                                 =   ----------------------------------------------------------------------
                                           -------------------------------------------------------------

Sub 1                                  =   ----------------------------------------------------------------------
                                           ----------------------------------------------------------

Sub 2                                  =   ----------------------------------------------------------------------
                                           -----------------------------------------------------

DE 1                                   =   ----------------------------------------------------------------------
                                           ----------------------------------------------------------------------

DE 2            =   ----------------------------------------------------------------------
                    -------------------------------------------------------

DE 3            =   ----------------------------------------------------------------------
                    ----------------------------------------------------------------------
                    ----------------------------------------------

DE 4            =   ----------------------------------------------------------------------
                    ----------------------------------------------------------

DE 5            =   ----------------------------------------------------------------------
                    ----------------------------------------------------------

DE 6            =   ----------------------------------------------------------------------
                    -------------------------------------------------------------

DE 7            =   ----------------------------------------------------------------------
                    -------------------------------------------------------------

DE 8            =   ----------------------------------------------------------
                    ------------
                    ------------------------------

DE 9            =   ----------------------------------------------------------------------
                    -------------------------------------------------

DE 10           =   ----------------------------------------------------------------------
                    ----------------------------------------------------------

DE 11           =   ----------------------------------------------------------------------
                    ----------------------------------------------------

DE 12           =   -----------------

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

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

Asset 1         =   -------------------------------------------------------

Asset 2         =   -------------------------------------

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


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

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

a                              =    ------

b                              =    ------

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



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

This letter responds to your letter dated January 19, 2018, requesting rulings on certain
federal income tax consequences of a series of transactions (the “Proposed
Transaction,” as defined below). The material information submitted in that request and
subsequent correspondence is summarized below.

The rulings contained in this letter are based upon facts and representations submitted
by the taxpayer and accompanied by a penalties of perjury statement executed by an
appropriate party. The office has not verified any of the materials submitted in support of
the request for rulings. Verification of the information, representations, and other data
may be required as part of the audit process.

This letter is issued pursuant to Rev. Proc. 2017-52, 2017-41 I.R.B. 283, regarding a
Transactional Ruling for a Covered Transaction.

This office has made no determination regarding whether the Distribution (as defined
below): (i) satisfies the business purpose requirement of Treas. Reg. § 1.355-2(b); (ii) is
used principally as a device for the distribution of the earnings and profits of the
distributing corporation or the controlled corporation or both (see § 355(a)(1)(B) and
Treas. Reg. § 1.355-2(d)); or (iii) is part of a plan (or series of related transactions)
pursuant to which one or more persons will acquire directly or indirectly stock
representing a 50-percent or greater interest in the distributing corporation or the
controlled corporation, or any predecessor or successor of the distributing corporation
or the controlled corporation, within the meaning of Treas. Reg. § 1.355-8T (see
§ 355(e)(2)(A)(ii) and Treas. Reg. § 1.355-7).

                                   Summary of Facts

Distributing is a domestic corporation and the common parent of an affiliated group of
corporations filing a consolidated federal income tax return. Distributing wholly owns DE
1, which wholly owns DE 2, which wholly owns DE 3 and DE 4, which wholly owns DE

5. DE 1, DE 2, DE 4, and DE 5 are limited liability companies treated as disregarded
entities for federal tax purposes. DE 3 is a Country A company treated as a disregarded
entity for federal tax purposes. DE 2 actively conducts the majority of Business A and
Business B. Consequently, Distributing is viewed for federal tax purposes as directly
conducting Business A and Business B.

Foreign Parent is a Country B company that is engaged in Business A and Business B
through direct and indirect domestic and foreign subsidiaries (the “Foreign Parent
Group”). Foreign Parent owns all of the outstanding stock of FSub 1, a Country B
company, and all of the interests in DE 6, DE 7, and DE 8, each a Country B company
treated as a disregarded entity for federal tax purposes.

DE 6 wholly owns Distributing and DE 9, a Country B company treated as a disregarded
entity for federal tax purposes. DE 6 and DE 9 own a% and b%, respectively, of the
equity interests in DE 10, a Country C company treated as a disregarded entity for
federal tax purposes. Distributing is indebted to DE 10 (the “DE 10 Debt”).

FSub 1 wholly owns Sub 1, a limited liability company treated as an association taxable
as a corporation for federal tax purposes and the common parent of an affiliated group
of corporations filing a consolidated federal income tax return (the “Sub 1 Group”). Sub
1 wholly owns Sub 2, a domestic corporation, and Sub 2 wholly owns DE 11, a limited
liability company treated as a disregarded entity for federal tax purposes.

Controlled, a limited liability company currently treated as a disregarded entity for
federal tax purposes, is wholly owned by DE 2. As part of the Proposed Transaction,
Distributing will contribute Business B to Controlled.

For purposes of satisfying the active trade or business requirements of § 355(b),
Distributing will rely on Business A and Controlled will rely on Business B. Financial
data for Business A and Business B show each has had gross receipts and operating
expenses representing the active conduct of a trade or business for each of the past
five years.

The Distribution is motivated, in whole or substantial part, by the following corporate
business purposes: (i) to improve management fit and focus by reorganizing the Foreign
Parent Group along business lines, rather than geographic lines; (ii) to continue the
growth of Business B and capture synergies with the Sub 1 Group; (iii) to create new
growth platforms for Business A; (iv) to increase transparency and accountability; (v) to
facilitate and increase options for transactions with third parties; and (vi) to facilitate a
potential initial public offering of less than 20 percent of the stock of DE 7 and DE 8.

                                 Proposed Transaction

For what are represented to be valid business purposes, Distributing proposes to
engage in the following transactions (each a “Step” in the “Proposed Transaction”):


   (i)   DE 4 will contribute Asset 1 to DE 5.
  (ii)   DE 4 will distribute the DE 5 membership interests to DE 2.
 (iii)   Controlled will file an entity classification election to be treated as an association
         taxable as a corporation for federal tax purposes.
 (iv)    DE 2 will contribute Asset 2, the DE 5 membership interests, and the equity
         interests in DE 3 to Controlled in exchange for Controlled membership interests
         (the “Controlled Stock”) and newly created long-term debt of Controlled (the
         “Controlled Securities”) (together, the “Contribution”).
  (v)    DE 2 will distribute the Controlled Stock and Controlled Securities to DE 1.
 (vi)    DE 1 will distribute the Controlled Stock and Controlled Securities to Distributing.
(vii)    Distributing will form DE 12, a foreign company that will file an initial entity
         classification election to be treated as a disregarded entity for federal tax
         purposes.
(viii)   Distributing will contribute the Controlled Securities to DE 12.
 (ix)    Distributing will distribute its Controlled Stock to DE 6 (the “Distribution”) and
         transfer the shares of DE 12 to DE 10 in partial repayment of the DE 10 Debt (the
         “Controlled Securities Exchange”).
  (x)    DE 6 will distribute the Controlled Stock to Foreign Parent.
 (xi)    Foreign Parent will contribute the equity interests in FSub 1 and the Controlled
         Stock to DE 7.
(xii)    Within approximately 12 months following the Distribution, DE 7 will contribute
         the Controlled Stock to FSub 1
(xiii)   Immediately after Step (xii), FSub 1 will contribute the Controlled Stock to Sub 1.
(xiv)    Immediately after Step (xiii), Sub 1 will contribute the Controlled Stock to Sub 2.

         The Contemplated Merger

 In addition, Distributing represents that it may engage in the following Step within c
 years after the Distribution:

   (i)   Controlled will merge into DE 11, with DE 11 surviving the merger (the
         “Contemplated Merger”). This Step is intended to qualify as a reorganization
         under § 368(a)(1).

                                       Representations

 With respect to the Distribution, except as set forth below, Distributing has made all of
 the representations in § 3 of the Appendix to Rev. Proc. 2017-52, 2017-41 I.R.B. 283.

Distributing has made the following alternative representations set forth in § 3 of the
Appendix to Rev. Proc. 2017-52:

       Representations 3(a), 11(a), 15(a), 22(b), 31(a), and 41(a).

Distributing has not made the following representations, which do not apply to the
Proposed Transaction:

       Representations 7, 24, 25, 35, and 38.

Distributing has not made the following representation:

       Representation 40.

Distributing has modified the following representation:

       Representation 8(b): Distributing has debt outstanding and it intends to transfer
       the Controlled securities in partial satisfaction of Distributing’s outstanding debt.
       The sum of the amount of Distributing debt that is assumed under § 357 and the
       amount of Distributing debt satisfied under § 361 does not exceed the historic
       average of the total amount of debt owed by Distributing and other members of
       Distributing’s separate affiliated group (as defined in § 355(b)(3)(B)). The historic
       average will be computed as of the close of the eight fiscal quarters immediately
       before the date that is at least 60 days before the Proposed Transaction or a
       similar transaction is disclosed or announced to the public or approved by
       Distributing’s board of directors (whichever is earlier).

                                         Rulings

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

   (1) The Contribution, together with the Distribution, will be a “reorganization” within
       the meaning of § 368(a)(1)(D). Distributing and Controlled will each be “a party
       to a reorganization” within the meaning of § 368(b).

   (2) Distributing will recognize no gain or loss on the Contribution. § 361(a) and
       § 357(a).

   (3) Controlled will recognize no gain or loss on the Contribution. § 1032(a).

   (4) Controlled’s basis in each asset received in the Contribution will be the same as
       the basis of that asset in the hands of Distributing immediately before the
       Contribution. § 362(b).

   (5) Controlled’s holding period in each asset received from Distributing in the
       Contribution will include the period during which Distributing held that asset.
       § 1223(2).

   (6) Distributing will recognize no gain or loss on the Distribution. § 361(c)(1).

   (7) Distributing will recognize no gain or loss on the Controlled Securities
       Exchange. § 361(c)(3). However, to the extent permitted or required under
       general tax principles, Distributing will recognize any (i) deductions attributable
       to the fact that the DE 10 Debt may be redeemed at a premium, (ii) income
       attributable to the fact that the DE 10 Debt may be redeemed at a discount, and
       (iii) interest expense accrued with respect to the DE 10 Debt.

   (8) No gain or loss will be recognized by (and no amount will be included in the
       income of) Foreign Parent upon receipt of the Controlled Stock in the
       Distribution. § 355(a).

   (9) The holding period of the Controlled Stock received by Foreign Parent will
       include the holding period of the Distributing stock with respect to which the
       Distribution is made, provided that the Distributing stock is held as a capital
       asset on the date of the Distribution. § 1223(1).

   (10) Earnings and profits will be allocated between Distributing and Controlled in
        accordance with § 312(b) and Treas. Reg. §§ 1.312-10(a) and 1.1502-33(e).

   (11) The qualification of the Contribution, together with the Distribution, as a
        “reorganization” within the meaning of § 368(a)(1)(D) will not be affected by the
        Contemplated Merger.

                                          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 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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