Retained spin-off shares did not evidence a tax-avoidance plan

Plain-English summary

A public company proposed separating businesses into a controlled corporation, distributing at least 80 percent of the controlled stock, and combining the separated business with an acquiring company. The distributing company would temporarily retain some shares, later converted into acquiring-company shares, to raise cash for debt service, working capital, regulatory capital, and reduced borrowing needs. It committed to dispose of the shares within specified periods, vote them proportionately with other shareholders, avoid overlapping directors and officers, and distribute enough controlled stock to satisfy the control requirement. On those representations, the IRS ruled that the retention was not part of a plan having tax avoidance as a principal purpose under section 355(a)(1)(D)(ii).

Ruling snapshot

• Question: Would the distributing corporation’s temporary retention of controlled-company shares be treated as part of a principal-purpose tax-avoidance plan?
• Outcome: no, based on the stated business purposes, disposition commitments, voting limits, and governance separation
• Key authorities: IRC §§ 355(a)(1)(D)(ii), 355(e), 368(a)(1)(D); Treas. Reg. §§ 1.355-2(e), 1.336-1(b)

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 201919008                                              Third Party Communication: None
 Release Date: 5/10/2019                                        Date of Communication: Not Applicable
 Index Number: 355.00-00
                                                                Person To Contact:
 ------------------                                             ------------------------, ID No.-------------------
 -------------------------------------                          ---------------------------------------------------
 -----------------------------------                            Telephone Number:
 ----------------------------                                   --------------------
 ------------------------------                                 Refer Reply To:
 In Re:                                                         CC:CORP:BO1
          -----------------------------------                   PLR-126698-18
                                                                Date:
                                                                November 16, 2018


Distributing                                 =         -----------------------------------
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Controlled                                   =         --------------------------------------------------
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Acquiring                                    =         ---------------------------------------------------------------
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State A                                      =        -------------

State B                                      =        -------------

Segment A                                    =        ----------------------------------------------------------------
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Date 1                                       =        ------------------

a                                            =        -------

b                                            =        ------

c                                            =        ------

x                                            =        --

y                                            =        --
PLR-126698-18                                   2


z                                  =       --

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

      This letter responds to your authorized representatives’ August 3, 2018 letter
requesting a ruling on certain Federal income tax consequences of a series of proposed
transactions (collectively, the “Proposed Transactions”). Additional information was
submitted in a letter dated September 20, 2018. The information provided in these
submissions is summarized below.

       The rulings contained in this letter is based on facts and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. This office has not verified any of the materials submitted in
support of the request for ruling. Verification of the information, representations, and
other data may be required on examination.

        This letter is issued pursuant to Section 6.03 of Rev. Proc. 2018-1, 2018-1 I.R.B.
1, regarding one significant issue under Section 332, 351, 355, 368 or 1036 of the
Internal Revenue Code of 1986, as amended (the “Code”). The ruling contained in this
letter only addresses one significant issue 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 ruling below.

                                  Summary of the Facts

         Distributing is a publicly traded State A corporation and the common parent of a
worldwide group of affiliated entities (the “Distributing Worldwide Group”), including an
affiliated group of corporations that join in the filing of a consolidated U.S. Federal
income tax return. The Distributing Worldwide Group is engaged in multiple businesses
worldwide, including the businesses in Segment A (the “Separated Businesses”).

        Controlled is a State B corporation that was formed on Date 1 for the sole purpose
of facilitating the Proposed Transactions.

         Acquiring is a publicly traded State B corporation and the common parent of a
worldwide group of affiliated entities (the “Acquiring Worldwide Group”), including an
affiliated group of corporations that join in the filing of a consolidated U.S. federal income
tax return. The Acquiring Worldwide Group is engaged in multiple businesses worldwide,
including businesses complementary to the Separated Businesses.

       For non-tax business reasons, Distributing, Controlled, and Acquiring are entering
into the Proposed Transactions to (i) separate the Separated Businesses from the other
businesses conducted by the Distributing Worldwide Group and (ii) combine the
Separated Businesses with the businesses conducted by the Acquiring Worldwide
PLR-126698-18                                  3

Group.

                                 Proposed Transactions

       (i)    Following a series of internal restructuring transactions, members of the
Distributing Worldwide Group will sell to members of the Acquiring Worldwide Group
certain assets associated with the Separated Businesses (the “Direct Sale Assets”) in
exchange for cash and the assumption by the purchasing members of the Acquiring
Worldwide Group of certain liabilities associated with the Separated Businesses (the
“Direct Sale Liabilities”). This transaction is the ”Direct Sale.”

       (ii)   Pursuant to a plan of reorganization, Distributing will contribute certain of
the assets and liabilities related to the Separated Businesses, other than Direct Sale
Assets, Direct Sale Liabilities and certain excluded assets and liabilities, to Controlled
(the “Controlled Transfer”). Members of the Distributing Worldwide Group will sell other
assets related to the Separated Businesses directly to Controlled or its subsidiaries.

       (iii)   Pursuant to a plan of reorganization, Distributing will distribute at least a
percent (more than 80 percent) of the outstanding shares of Controlled common stock to
Distributing’s shareholders in a pro rata spin-off, a non-pro rata exchange offer (in which
Distributing shareholders may surrender their Distributing stock in exchange for
Controlled stock) or a combination of the foregoing (the “Distribution”). In furtherance of
the Retention Business Purposes described below, Distributing will retain any shares of
Controlled common stock (the “Retained Controlled Shares”) not distributed in the
Distribution (the “Retention”).

        The Controlled Transfer and the Distribution, taken together, are intended to
qualify as a “reorganization” within the meaning of Section 368(a)(1)(D) of the Code. The
Distribution is also intended to qualify as a distribution described in Section 355(a) of the
Code to which Section 355(e) of the Code applies and a “qualified stock disposition”
within the meaning of Treasury Regulation § 1.336-1(b)(6) by reason of the application of
Treasury Regulation § 1.336-1(b)(5)(ii). Distributing will make, and will cause Controlled
and each of its affiliated, domestic corporate subsidiaries to make, an election under
Section 336(e) of the Code with respect to the Distribution.

       (iv)    Merger Sub, a wholly owned subsidiary of Acquiring, will merge with and
into Controlled, with Controlled surviving (the “Merger”). Shares of Controlled common
stock will be converted into shares of Acquiring common stock in the Merger, including
the Retained Controlled Shares held by Distributing (as converted, the “Retained
Acquiring Shares”).

       Immediately after the Merger and subject to Distributing’s obligation to sell
Retained Acquiring Shares as described below, Distributing and its shareholders will
hold, collectively, approximately b percent of the vote and value of the common stock of
PLR-126698-18                                   4

Acquiring, and Acquiring shareholders will hold approximately c percent of the vote and
value of the common stock of Acquiring.

       (v)     Contractual arrangements between Distributing and Acquiring will require
Distributing to sell (i) within x years of the Distribution, a number of Retained Acquiring
Shares intended to result in the application of Section 355(e) to the Distribution and (ii)
within y years of the Distribution, all Retained Acquiring Shares. Pending such sales,
Distributing will be required to vote the Retained Acquiring Shares in the same proportion
as the votes cast of all shares of Acquiring common stock not owned or controlled by
Distributing. Contractual arrangements between Distributing and Acquiring will require
Acquiring to appoint z individuals designated by Distributing to the Acquiring board of
directors at the effective time of the Distribution. After the Distribution, Distributing will
have no rights to appoint directors of Controlled or Acquiring.

                              Retention Business Purposes

       Distributing’s retention of the Retained Controlled Shares is integral to its near-
term strategy of raising cash to reduce its liabilities and strengthen its overall balance
sheet. In particular, sales of the Retained Acquiring Shares will generate cash proceeds,
which are expected to be used to (i) service or retire existing Distributing obligations, (ii)
fund working capital and regulatory capital requirements and/or (iii) reduce Distributing’s
future borrowing needs (the “Retention Business Purposes”).

                                      Representations

       Distributing makes the following representations in connection with the Retention:

       (a)     Distributing’s plan to retain the Retained Controlled Shares is motivated by
the Retention Business Purposes. Consistent with Distributing’s publicly stated goals,
the use of proceeds from the disposition of the Retained Acquiring Shares is integral to
Distributing’s near-term strategy to reduce its leverage and strengthen its overall balance
sheet

      (b)     None of Distributing’s directors or officers will serve as a director or officer
of Controlled as long as Distributing retains the Retained Acquiring Shares.

       (c)    The Retained Acquiring Shares will be disposed of as soon as a disposition
is warranted consistent with the Retention Business Purposes, but in any event not later
than y years after the Distribution.

       (d)    Distributing will vote the Retained Acquiring Shares in proportion to the
votes cast by Acquiring’s other shareholders.

     (e)    In no event will the Retention prevent Distributing from distributing an
amount of Controlled stock that represents “control” under section 368(c).
PLR-126698-18                                  5

                                           Ruling

       Based solely on the information submitted, we rule that the retention by
Distributing of the Retained Controlled Shares will not be in pursuance of a plan having
as one of its principal purposes the avoidance of federal income tax within the meaning
of section 355(a)(1)(D)(ii) of the Code and Treasury Regulation § 1.355-2(e).

                                          Caveats

        We express no opinion otherwise about the tax treatment of the Proposed
Transactions under any authority of the tax law, including 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 Transactions that are not specifically covered by the above
ruling.

                                  Procedural Statements

      This letter ruling is directed only to the taxpayer 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 letter must be attached to any income tax return to which it is
relevant. Alternatively, a taxpayer filing its return electronically may satisfy this
requirement by attaching a statement to the return that provides the date and control
number of the letter ruling.

        In accordance with the power of attorney on file with this office, copies of this
letter have been sent to two of your authorized representatives.

                                                   Sincerely,



                                                   ____________________________
                                                   Mark S. Jennings
                                                   Senior Technician Reviewer, Branch 1
                                                   Office of Associate Chief Counsel
                                                   (Corporate)




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