Foreign parent's receipt of controlled subsidiary stock qualified as a tax-free distribution

Plain-English summary

A foreign parent owned a U.S. holding company whose group conducted two separate businesses. To separate the second business, the U.S. company proposed distributing all stock of the subsidiary conducting that business to the foreign parent, which would then contribute the stock to another foreign subsidiary. Based on the submitted representations, the IRS ruled that neither the foreign parent nor the U.S. distributing company would recognize gain or loss on the stock distribution under section 355. The foreign parent's existing basis would be allocated between the distributing and controlled company stock by relative fair market value, and its holding period would carry over if the distributing stock was a capital asset. The IRS did not rule on the transaction's business purpose, device, acquisition-plan questions, or any consequences of the later contribution not expressly addressed.

Ruling snapshot

• Question: Will the distribution of the controlled subsidiary's stock to the foreign parent qualify for nonrecognition under section 355?
• Outcome: approved, with basis allocation, holding-period carryover, and earnings-and-profits allocation rules
• Key authorities: IRC §§ 312(h), 355(a)(1), 355(c)(1), 358(b) and (c), and 1223(1); Treas. Reg. §§ 1.312-10, 1.358-2, and 1.1502-33

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201943011                                              Third Party Communication: None
Release Date: 10/25/2019                                       Date of Communication: Not Applicable
Index Number: 355.01-00
                                                               Person To Contact:
---------------------------------------                        --------------------, ID No. ------------------
------------------------------------------------               Telephone Number:
---------------------------                                    ----------------------
                                                               Refer Reply To:
----------------------------------                             CC:CORP:04
-----------------------------------------------------------    PLR-106078-19
-----                                                          Date:
                                                               July 24, 2019




Legend

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

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

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

Foreign Sub                =        ------------------

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

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

State                      =        ---------------

Country                    =        ---------
PLR-106078-19                                 2



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

This letter responds to your letter dated March 20, 2019, requesting rulings on certain
federal income tax consequences of the proposed transaction defined below. The
information submitted in that letter is summarized below.

This letter is issued pursuant to Rev. Proc. 2017-52, 2017-41 I.R.B. 283, regarding one
or more “Covered Transactions” as defined in § 2.03(1)(a) of Rev. Proc. 2017-52. 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 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

Foreign Parent is a Country corporation and the parent of a worldwide group of
corporations. Foreign Parent wholly owns Distributing, a State corporation, and Foreign
Sub, a Country corporation.

Distributing is a U.S. holding company and the common parent of an affiliated group of
includible corporations that file a consolidated federal income tax return (within the
meaning of Treas. Reg. § 1.1502-1(h)) (the “Distributing Group”). Among other entities,
Distributing wholly owns Controlled, a State corporation.

The Distributing Group is engaged in two separate business lines: Business A and
Business B. Business A is conducted by various direct and indirect subsidiaries of
Distributing and Business B is conducted by Controlled and Foreign Sub (and other
PLR-106078-19                                3

subsidiaries of Foreign Parent). Controlled is the only subsidiary of Distributing that is
engaged in Business B. For purposes of satisfying the active trade or business
requirements of § 355(b) with respect to the Distribution (as defined below), Distributing
and the members of its “separate affiliated group” as defined in § 355(b)(3)(B) will rely
on Business A, and Controlled will rely on Business B. Financial information has been
submitted in accordance with Rev. Proc. 2017-52 indicating that each of Business A
and Business B has had gross receipts and operating expenses representing the active
conduct of a trade or business for each of the past five years.

                                 Proposed Transaction

The following transactions will occur to separate Business B from Business A (the
“Proposed Transaction”):

   (i) Distributing will distribute all of the outstanding stock of Controlled to Foreign
        Parent (the “Distribution”).
   (ii) Immediately following the Distribution, Foreign Parent will contribute all of the
        stock of Controlled to Foreign Sub (the “Contribution”).

                                    Representations

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

    1. Distributing has made the following alternative representations set forth in § 3 of
      the Appendix to Rev. Proc. 2017-52: 3(a), 8(a), 11(a), 15(a), 22(a), 31(a), and
      41(a).
    2. Distributing has not made the following representations, which do not apply to the
      Proposed Transaction: 7, 20, 24, 25, 32, and 35.

                                         Rulings

Based solely on the information submitted and representations made, we rule as follows
with respect to the Distribution:

    1. No gain or loss will be recognized by (and no amount will be included in the
      income of) Foreign Parent on the receipt of Controlled stock in the Distribution.
      Section 355(a)(1).
    2. No gain or loss will be recognized by Distributing on the distribution of the
      Controlled stock in the Distribution. Section 355(c)(1).
    3. The aggregate basis of the Distributing stock and the Controlled stock in the
      hands of Foreign Parent immediately after the Distribution will be the same as
      Foreign Parent’s basis in the Distributing stock immediately before the
PLR-106078-19                                   4

         Distribution, allocated between the Distributing stock and the Controlled stock in
         proportion to the fair market value of each immediately following the Distribution
         in accordance with Treas. Reg. § 1.358-2(a)(2)(iv). Section 358(b)(2) and (c).
        4. The holding period of the Controlled stock received by Foreign Parent in the
         Distribution will include the holding period of the Distributing stock held by
         Foreign Parent with respect to which the Distribution will be made, provided that
         such Distributing stock is held as a capital asset on the date of the Distribution.
         Section 1223(1).
        5. Earnings and profits, if any, will be allocated between Distributing and Controlled
         in accordance with § 312(h), Treas. Reg. § 1.312-10(b) and
         Treas. Reg. § 1.1502-33(e)(3).

                                           Caveats

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

                                   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.

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.

In accordance with the Power of Attorney on file with this office, copies of this letter are
being sent to your authorized representatives.


                                         Sincerely,



                                         Robert Rhyne
                                         Assistant to Branch Chief, Branch 2
                                         Office of Chief Counsel (Corporate)


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