Regulatory business separation qualified as a tax-free spin-off

Plain-English summary

A privately held corporate group operated two active businesses and wanted to separate one business to satisfy regulatory requirements for the other. Subsidiaries would distribute two operating-company interests up the ownership chain, the parent would contribute them to a controlled corporation, and the parent would distribute the controlled corporation’s stock pro rata to its shareholders. The IRS ruled that the contribution and distribution would qualify as a section 368(a)(1)(D) reorganization and a section 355 spin-off. The transactions generally would not create gain or loss, and the ruling addressed basis, holding periods, earnings and profits, and the controlled corporation’s ability to head a new consolidated group. The IRS did not decide the business-purpose, device, or section 355(e) acquisition-plan issues.

Ruling snapshot

• Question: Would the contribution and pro rata distribution of the controlled corporation qualify for tax-free reorganization and spin-off treatment?
• Outcome: approved, subject to the stated representations and caveats
• Key authorities: IRC §§ 355, 357, 358, 361, 362, 368(a)(1)(D), 1032, 1223, 1504; Rev. Proc. 2017-52

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201920009                                             Third Party Communication: None
Release Date: 5/17/2019                                       Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-00,
              368.00-00, 368.04-00                            Person To Contact:
                                                              ----------------------------, ID No. --------------
------------------                                            ----------------
--------------------------------------                        Telephone Number:
------------------                                            --------------------
--------------------------------------                        Refer Reply To:
                                                              CC:CORP:B01
                                                              PLR-132809-18
                                                              Date:
                                                              February 19, 2019




                                                   Legend

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

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

Corp1            = ----------------

Corp2            = ----------------------------------------

Corp3            = --------------------------------------

Corp4            = ----------------------------------

Corp5            = --------------------------------------------

StateA           = ---------

StateB           = -----------

BusinessA        = ------------------------

BusinessB        = --------------

FamilyA          = -------------------------

AgencyA          = ------------------------------------------------------

PLR-132809-18                                 2



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

This letter responds to your letter dated November 1, 2018, as supplemented by
subsequent submissions, requesting rulings on certain federal income tax
consequences of the Proposed Transaction (as defined below). The information
provided in that letter and in subsequent correspondence is summarize below.

This letter is issued pursuant to Rev. Proc. 2017-52, 2017-41 I.R.B. 283 regarding one
or more “Covered Transactions” under §§ 355 and 368 of the Internal Revenue Code
(the “Code”). This office expresses no opinion as to any issue not specifically addressed
by the rulings below.

The rulings contained in this letter are based on facts and representations submitted by
the taxpayer and accompanied by a penalties of perjury statement executed by an
appropriate party. This 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 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 primarily 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, a StateA corporation, is the common parent of an affiliated group whose
includible corporations join in filing a consolidated federal income tax return (the
“Distributing Group”). Distributing has one class of privately-held common stock
outstanding owned directly and indirectly by three generations of FamilyA.

Distributing wholly owns Corp1, a StateA corporation, and Controlled, a StateB
corporation.

Corp1 wholly owns Corp2, a StateA corporation.

Corp2 wholly owns Corp3 and Corp4, StateA corporations.

PLR-132809-18                                 3


Corp3 wholly owns Corp5, a StateA corporation.

The Distributing Group is engaged in two businesses: BusinessA and BusinessB.
BusinessA is conducted by Distributing, Corp1, Corp2, and Corp3. BusinessB is
conducted by Controlled, Corp4, and Corp5. The financial information submitted by
Distributing indicates that BusinessA and BusinessB each have had gross receipts and
operating expenses representing an active trade or business for each of the past five
years.

Distributing intends to apply to AgencyA to change its business status for BusinessA.
The Proposed Transaction will allow Distributing to meet certain regulatory
requirements so that its application may be approved.

                               The Proposed Transaction

To achieve the business purpose described above, the following series of steps are
proposed:

(i) Corp3 will distribute Corp5 stock to Corp2.

(ii) Corp2 will distribute Corp4 and Corp5 stock to Corp1.

(iii) Corp1 will distribute Corp4 and Corp5 stock to Distributing.

(vi) Distributing will contribute Corp4 and Corp5 stock to Controlled (the “Contribution”).

(v) Distributing will distribute Controlled stock to Distributing Shareholders (the
“Distributees”), pro rata (the “Distribution”).

                                     Representations

With respect to the Distribution, except as otherwise 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.

(1) Distributing has made the following alternative representations:

       Representations 3(a); 8(a); 11(a); 15(b); 22(a); 31(a); 41(a)

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

       Representations 7; 17; 19; 20; 24; 25; 35; 39

PLR-132809-18                                 4


                                         Rulings

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

2. No gain or loss will be recognized by Distributing on the Contribution (§§ 361(a) and
357(a)).

3. No gain or loss will be recognized by Controlled on the Contribution (§1032(a)).

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

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

6. No gain or loss will be recognized by Distributing on the Distribution (§ 361(a)(1)).

7. No gain or loss will be recognized by (and no amount will otherwise be included in the
income of) any Distributee upon receipt of Controlled stock in the Distribution
(§ 355(a)(1)).

8. The aggregate basis of the Distributing shares and the Controlled shares in the
hands of each Distributee (including any fractional share interest in Controlled to which
the Distributee may be entitled) immediately after the Distribution will equal the
aggregate basis of the Distributing shares held by the Distributee immediately before
the Distribution, allocated between the shares of Distributing and Controlled in
proportion to the fair market value of each immediately following the Distribution in
accordance with Treas. Reg. § 1.358-2(a)(2) (§ 358(b)(2) and (c)).

9. The holding period of the Controlled shares received by each Distributee in the
Distribution (including any fractional share interest in Controlled to which the Distributee
may be entitled) will include the holding period of the Distributing shares on which the
Distribution is made, provided the Distributing shares are held by the shareholder as a
capital asset on the date of the Distribution (§ 1223(1)).

10. Earnings and profits, if any, will be allocated between Distributing and Controlled in
accordance with § 312(h) and Treas. Reg. §§ 1.312-10(a) and 1.1502-33(e)(3).

11. Following the Distribution, Controlled will not be a successor of Distributing for
purposes of § 1504(a)(3). Therefore, Controlled and its direct and indirect subsidiaries

PLR-132809-18                                  5

that are “includible corporations” under §1504(b) and satisfy the ownership
requirements of § 1504(a)(2) will be members of an affiliated group of corporations
entitled to file a consolidated federal income tax return with Controlled as the common
parent.

                                          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 addressed by this letter.

                                 Procedural Statements

This ruling is directed only to the taxpayer requesting it. § 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

A copy of this letter should be attached to the federal income tax return of each
taxpayer involved for the taxable year in which the transaction covered by this ruling
letter is consummated. 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 this letter ruling.

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

                                       Sincerely,


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