Business separation qualifies as Type D reorganization and spin-off

Plain-English summary

A foreign-parented corporate group proposed separating two businesses by having a domestic distributing corporation form a controlled corporation, contribute four subsidiaries to it, and distribute all controlled stock to its shareholder. Additional steps would move the controlled corporation through the foreign ownership chain and use sale proceeds to repay intercompany debt. Based on the submitted representations, the IRS ruled that the contribution and distribution qualified as a Type D reorganization and section 355 spin-off. The specified steps received nonrecognition, carryover-basis, holding-period, and earnings-and-profits treatment, and the controlled corporation's eligible subsidiaries could form a new consolidated group.

Ruling snapshot

• Question: Would the domestic contribution and distribution qualify for tax-free Type D reorganization and spin-off treatment?
• Outcome: Approved on the eleven specified rulings.
• Key authorities: IRC §§ 312, 355, 358, 361, 362, 368, 1032, 1223, and 1504; Rev. Proc. 2017-52.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201949014 Third Party Communication: None
Release Date: 12/6/2019 Date of Communication: Not Applicable
Index Number: 355.01-00, 355.00-00,
361.00-00, 361.02-00, Person To Contact:
368.00-00, 368.04-00 ---------------------, ID No. ------------------
Telephone Number:
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----------------------------------- Refer Reply To:
---------------------------------------- CC:CORP:2
-------------------------------------- PLR-106631-19
Date:
September 04, 2019

Legend

Distributing = --------------------------------------------------------------------------------------
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Controlled = --------------------------------------------------

Foreign = --------------------------------------------------------------------------------------
Parent --------------------------------------------------------------------------------------
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FDRE1 = --------------------------------------------------------------------------------------
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FDRE2 = --------------------------------------------------------------------------------------
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FSub1 = --------------------------------------------------------------------------------------
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FSub2 = --------------------------------------------------------------------------------------
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FSub3 = --------------------------------------------------------------------------------------
PLR-106631-19 2

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FSub4 = --------------------------------------------------------------------------------------
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FSub5 = --------------------------------------------------------------------------------------
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Sub1 = --------------------------------------------------------------------------------------
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Sub2 = --------------------------------------------------------------------------------------
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Sub3 = --------------------------------------------------------------------------------------
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Sub4 = --------------------------------------------------------------------------------------
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Sub5 = --------------------------------------------------------------------------------------
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Sub6 = --------------------------------------------------------------------------------------
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Sub7 = --------------------------------------------------------------------------------------
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Sub8 = --------------------------------------------------------------------------------------
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DRE1 = --------------------------------------------------------------------------------------
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PLR-106631-19 3

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DRE2 = --------------------------------------------------------------------------------------
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PRS1 = --------------------------------------------------------------------------------------
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Country A = -----------------------

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

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

a = ----

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

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

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

Services 1 = -------------------------

Services 2 = ---------------------------

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

This letter responds to your letter dated March 25, 2019, requesting rulings on certain
federal income tax consequences of a proposed transaction (the “Proposed
Transaction”). The material information provided in that letter and in 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. 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.
PLR-106631-19 4

This letter is issued pursuant to Rev. Proc. 2017-52, 2017-42 I.R.B. 283, regarding a
“Covered Transaction” 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.

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 privately-owned, Country A entity that is treated as a corporation for
federal income tax purposes. Foreign Parent is the parent of a worldwide group of
entities that is engaged in Business A and Business B through direct and indirect
domestic and foreign subsidiaries (the “Foreign Parent Worldwide Group”).

Foreign Parent owns all of the outstanding stock of FSub1and FSub2, each of which is
a Country A entity treated as a corporation for federal income tax purposes. Foreign
Parent also wholly owns FDRE1, an entity that is treated as separate from its owner for
US federal income tax purposes (a “disregarded entity”).

FDRE1 owns all of the outstanding stock of FDRE2, a disregarded entity. FDRE2 owns
all of the outstanding stock of FSub5.

FSub5 directly owns all of the outstanding stock of Distributing, the common parent of
an affiliated group of corporations whose includible corporations join in filing a
consolidated federal income tax return (the “Distributing Consolidated Group”).
Distributing wholly owns Sub1, Sub2, Sub3, Sub4, Sub5, Sub6, and Sub7. Sub1 wholly
and directly owns Sub8. Each of Sub1, Sub2, Sub3, Sub4, Sub5, Sub6, Sub7, and
Sub8 are members of the Distributing Consolidated Group.

Sub7 owns all of the interests in DRE1 and DRE2, each a disregarded entity. DRE1
owns a% of PRS1 (an amount constituting ownership of a significant amount of the
interests of PRS1). The remaining interests in PRS1 are owned by an unrelated
person.
PLR-106631-19 5

Distributing is engaged in Business A and Business B through the Distributing
Consolidated Group. Business A is conducted by DRE1, DRE2, PRS1, Sub5, and
Sub6. Business B is conducted by Sub1, Sub2, Sub3, Sub4, and Sub8.

Financial information has been received indicating that Business A and Business B, as
conducted by the Distributing Consolidated Group have had gross receipts and
operating expenses representing the active conduct of a trade or business for at least
the past five years.

                                Proposed Transaction

For what are represented to be valid business purposes, Foreign Parent proposes to
engage in the following transactions, some of which has been consummated, to
separate Business A and Business B (such steps comprise the “Proposed
Transaction”):

(i) Foreign Parent formed FSub4, an entity organized under the laws of Country C
and treated as a corporation for federal income tax purposes. FSub4 will form
FSub3, an entity organized under the laws of Country A and treated as a
corporation for federal income tax purposes.

(ii) Distributing will form Controlled and will contribute the stock of Sub1, Sub2,
Sub3, and Sub4 to Controlled in exchange for all of the stock of Controlled (the
“Contribution”).

(iii) Distributing will distribute all of the Controlled stock to FSub5 (the “Distribution”).

(iv) FSub5 will distribute all of the Controlled stock to FDRE2.

(v) Foreign Parent will borrow approximately $b from FSub1.

(vi) Foreign Parent will purchase all of the Controlled stock from FDRE2 in exchange
for $b.

(vii) Foreign Parent will contribute all of the Controlled stock to FSub4.

(viii) FSub4 will contribute all of the Controlled stock to FSub3.

(ix) FDRE2 will transfer the $b of proceeds from Step 6 to partially repay a debt it
owes to FSub1.

Following the Proposed Transaction, one employee of DRE1 will provide Services 1 to
the members of Controlled’s affiliated group (in addition to the individual’s performance
of Services 1 to the members of Distributing’s affiliated group), at arm’s length pricing.
PLR-106631-19 6

In addition, Sub8 will provide Services 2 to Sub5 and Sub6 upon terms, conditions, and
pricing consistent with those arrived at by parties bargaining at arm’s length.

                                Representations

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

Distributing has made the following alternative representations:

   Representations 3(a), 8(a), 11(a), 15(a), 22(a), 31(a), and 41(a).

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

   Representations 7, 19, 20, 24, 25, and 35.

Distributing has made the following modified representation:

  Representation 44: The Distribution is not part of a plan (or series of related

transactions) resulting in a foreign corporation being treated as a surrogate foreign
corporation or a domestic corporation pursuant to § 7874(a)(2)(B) or (b).

                                     Rulings

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

(1) The Contribution together with the Distribution will qualify as 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 not recognize gain or loss in the Contribution. § 361(a).

(3) Controlled will not recognize gain or loss in the Contribution. § 1032(a).

(4) Controlled’s basis in each asset received from Distributing in the Contribution will
be the same as Distributing’s basis in that asset 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 such asset.
§ 1223(2).
PLR-106631-19 7

(6) Distributing will not recognize gain or loss upon the Distribution. § 361(c)(1);
Treas. Reg. § 1.367(e)-1(c).

(7) FSub5 will not recognize gain or loss (and no amount will be included in its
income) upon its receipt of Controlled stock in the Distribution. § 355(a)(1).

(8) FSub5’s basis in its Distributing stock and Controlled stock immediately after the
Distribution will be the same as its basis in its Distributing stock immediately
before the Distribution, allocated between its Distributing stock and 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). § 358(b)(2), (c).

(9) FSub5’s holding period in its Controlled stock will include the holding period of its
Distributing stock with respect to which the Distribution is made, provided FSub5
holds the Distributing stock as a capital asset on the date of the Distribution.
§ 1223(1).

(10) The earnings and profits of Distributing will be allocated between
Distributing and Controlled in accordance with § 312(h) and Treas.
Reg. §§ 1.312-10(a) and 1.1502-33.

(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 that are “includible corporations” under § 1504(b) and satisfy
the ownership requirements of § 1504(a)(4) will be members of an affiliated
group of corporations eligible to file a consolidated U.S. 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 the above
rulings.

                                Procedural Matters

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 representatives.
PLR-106631-19 8

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,




                                   Mark J. Weiss
                                   Chief, Branch 2
                                   (Office of Associate Chief Counsel (Corporate))

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