Proposed split-off and debt exchange qualify for corporate nonrecognition

Plain-English summary

A publicly traded parent planned to separate one business by contributing its assets and subsidiaries to a newly formed controlled corporation. The controlled corporation would borrow money, transfer cash to the parent, and participate in an initial public offering. The parent would also exchange some controlled-company stock for existing parent debt and then distribute its remaining controlled-company stock through a shareholder split-off, followed by a pro rata distribution if necessary. Based on the submitted representations, the IRS ruled that the contribution and distribution would qualify as a section 368(a)(1)(D) reorganization and that the principal corporate and shareholder steps would receive nonrecognition treatment under sections 355 and 361. It also ruled on carryover basis, holding periods, earnings and profits allocation, and the debt-for-equity exchange. The IRS expressly did not determine whether the distribution satisfied the business-purpose, anti-device, or section 355(e) acquisition-plan requirements.

Ruling snapshot

• Question: Will the contribution, IPO-related steps, debt-for-equity exchange, and shareholder split-off qualify for the requested corporate nonrecognition treatment?
• Outcome: approved (13 nonrecognition, basis, holding-period, and earnings-and-profits rulings were issued, subject to stated caveats)
• Key authorities: IRC §§ 312, 355, 357, 358, 361, 362, 368, 1032, and 1223; Rev. Proc. 2017-52; Rev. Proc. 2018-53

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202019016 Third Party Communication: None
Release Date: 5/8/2020 Date of Communication: Not Applicable

                                                         Person To Contact:

Index Number: 355.00-00, 355.01-01,
361.00-00, 361.02-00, ----------------------, ID No. -----------------
Telephone Number:
361.02-02, 368.00-00,
368.04-00 --------------------
Refer Reply To:
------------------------- CC:CORP:B05
-------------------------- PLR-118410-19
-------------------------- Date:
------------------------- February 03, 2020

Legend

Distributing = --------------------------
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Controlled = --------------------------
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DRE1 = ------------------------------
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DRE2 = -------------------------------------------
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DRE3 = ---------------------------------------------
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PLR-118410-19 2

DRE4 = ----------------------------------------
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DRE5 = ---------------------------------------------
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Sub1 = ------------------------------
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Sub2 = ------------------------
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Sub3 = ---------------------------
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A Notes = ---------------------------------------------------------------------------------
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B Notes = ---------------------------------------------------------------------------------
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C Notes = ---------------------------------------------------------------------------------
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D Notes = ---------------------------------------------------------------------------------
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Date 1 = ---------------------

State A = -------------

Distributing Business = ---------------------------------------------------

PLR-118410-19 3

Controlled Business = --------------------------------------------

Business A = ------------------------------------------
Business B = ---------------------------
Agreements = ---------------------------------------------------------------------------------
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a = ---------------------

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

c = ---

d = ---

e = ---

Transition Services = ---------------------------------------------------------------------------------
Agreement ---------------------------------------------------------------------------------
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Intellectual Property = ---------------------------------------------------------------------------------
Matters Agreement ----------------------------------------------------------------------------- ----

PLR-118410-19 4

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DBS License = ---------------------------------------------------------------------------------
Agreement ---------------------------------------------------------------------------------
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Dear ----------------:

This letter responds to a letter dated August 6, 2019, submitted on behalf of Distributing,
its affiliates, and its shareholders, requesting rulings (the “Ruling Request”) on certain
federal income tax consequences of a series of proposed transactions (the “Proposed
Transaction,” as defined below). The material information submitted in that request and
subsequent correspondence is summarized below.

This letter is issued pursuant to Rev. Proc. 2017-52, 2017-41 I.R.B. 283, as amplified
and modified by Rev. Proc. 2018-53, 2018-43 I.R.B. 667, regarding one or more
“Covered Transactions” under section 355 and/or section 368 of the Internal Revenue
Code (the “Code”).

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.

PLR-118410-19 5

This office has made no determination regarding whether the Distribution (defined
below): (i) satisfies the business purpose requirement of Treas. Reg. section 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 section 355(a)(1)(B)
and Treas. Reg. section 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. section 1.355-8 (see
section 355(e)(2)(A)(ii) and Treas. Reg. section 1.355-7).

                              Summary of Facts

Distributing, a publicly-traded State A corporation, is the parent company of a worldwide
group of foreign and domestic affiliates (the “Distributing Group”). Distributing and its
domestic affiliates join in the filing of a consolidated U.S. federal income tax return. At
the time of the Proposed Transaction, Distributing will have a single class of voting
common stock issued and outstanding (the “Distributing Common Stock”). Prior to the
Proposed Transaction, Distributing and its subsidiaries will be engaged in the
Distributing Business and the Controlled Business.

Immediately before the Proposed Transaction will be undertaken, Distributing directly
will own all of the issued and outstanding equity interests in DRE1, DRE2, DRE3,
DRE4, DRE5, Sub1, Sub2, and Sub3. DRE1, DRE2, DRE3, DRE4, DRE5, Sub1, Sub2,
and Sub3 directly or indirectly will hold all the assets, liabilities, and entities that
constitute the Controlled Business.

As of Date 1, which was the date of Distributing’s last fiscal quarter-end prior to the date
that Distributing’s board of directors first had discussions with respect to the Proposed
Transaction, Distributing had amounts outstanding under: (i) a delayed-draw term loan
facility due in 2020 in an aggregate principal amount of a (as such facility may be
modified to extend its maturity through the date of the Debt-for-Equity Exchange
(defined below), the “Term Loan”), (ii) a U.S. dollar-denominated commercial paper
program (the “US CP Program”), (iii) a Euro dollar-denominated commercial paper
program (the “Euro CP Program,” and, together with the US CP Program, the “CP
Programs”), and (iv) a five-year b senior unsecured term facility maturing in 2022 (the
“Foreign Term Loan”). Additionally, as of Date 1, the A Notes, the B Notes, the C Notes,
and the D Notes (collectively and together with the Term Loan, the CP Programs, and
the Foreign Term Loan, the “Distributing Debt”) issued by Distributing were outstanding.

For purposes of satisfying the active trade or business requirements of section 355(b)
with respect to the Distribution, Distributing and the members of its “separate affiliated
group” as defined in section 355(b)(3)(B) have relied on Business A, and Controlled and
the members of its “separate affiliated group” as defined in section 355(b)(3)(B) have
relied 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

PLR-118410-19 6

receipts and operating expenses representing the active conduct of trade or business
for each of the past five years.

                              Proposed Transaction

The following transactions (the “Proposed Transaction”) occurred or will occur to
separate the Controlled Business from the Distributing Group:

 Step 1: Distributing formed Controlled with one authorized class of common
 stock (the “Controlled Stock”) and no authorized classes of preferred stock.

 Step 2: Distributing will contribute all of the ownership interests in DRE1, DRE2,
 DRE3, DRE4, DRE5, Sub1, Sub2, and Sub3 to Controlled (the “Contribution”) in
 exchange for all of the issued and outstanding shares of Controlled Stock and
 cash (the “Controlled Cash”) in an amount not to exceed the Controlled Proceeds
 (defined below).

 Step 3: Controlled will borrow cash (the “Controlled Debt Proceeds”) from third-
 party lenders through capital markets borrowing and/or certain senior secured
 credit facilities.

 Step 4: Distributing will transfer shares of the Controlled Stock representing up to
 c percent of the total combined voting power of all Controlled Stock, less the
 percentage of Controlled Stock sold by Controlled in the IPO (defined below), to
 the Exchange Banks in exchange for (and in retirement of) a portion of the
 Distributing Debt (such exchange, the “Debt-for-Equity Exchange” and such
 portion, the “Distributing Exchange Debt”). Thereafter, Distributing understands
 that the Exchange Banks will sell their shares of the Controlled Stock to third-
 party investors for cash as part of an initial public offering (the “IPO”).

 Step 5: In the IPO, Distributing expects that Controlled will also issue and sell
 shares of Controlled Stock to third-party investors for cash (the “Controlled Stock
 Proceeds” and, together with the Controlled Debt Proceeds, the “Controlled
 Proceeds”). The total amount of Controlled Stock sold in the IPO by the
 Exchange Banks and Controlled will represent less than c percent of the total
 combined voting power of all Controlled Stock.

 Step 6: After the expiration of the lock-up period associated with the IPO,
 Distributing will distribute shares of Controlled Stock representing d percent or
 more of the total combined voting power of all Controlled Stock to its
 shareholders in exchange for Distributing Common Stock pursuant to a
 registered exchange offer (the “Split-Off”), and, if necessary, the Back-End
 Distribution (defined below). Assuming the exchange offer is fully subscribed,
 Distributing will distribute all issued and outstanding shares of Controlled Stock
 that it owns pursuant to the Split-Off.

PLR-118410-19 7

  Step 7: If Distributing retains any Controlled Stock following the Split-Off,
  Distributing will distribute any such remaining Controlled Stock to its
  shareholders on a pro rata basis (the “Back-End Distribution” and together with
  the Split-Off, the “Distribution”).

  Step 8: Distributing will use an amount of cash (from its general accounts) equal
  to or greater than the amount of the Controlled Cash to repay outstanding
  Distributing Debt, make distributions to Distributing shareholders, and/or
  repurchase shares of Distributing Common Stock within e days following the
  Distribution.

Distributing and Controlled will enter into an agreement that sets forth the terms of the
Proposed Transaction and will govern the allocation of various items including liabilities
(the “Separation Agreement”). Distributing also will enter into certain customary
agreements (the “Agreements”) with Controlled regarding tax (the “Tax Matters
Agreement”) and employee matters (the “Employee Matters Agreement”). Following the
Distribution, Distributing will have certain continuing business relationships with
Controlled. The specific agreements include the Transition Services Agreement, the
Intellectual Property Matters Agreement, and the DBS License Agreement.

Following the Distribution, a majority of Controlled’s board of directors will consist of
independent board members. Under Controlled’s governing documents, Controlled’s
board will be empowered to manage the corporation’s business, except with respect to
certain matters traditionally reserved to shareholders.

                               Representations

The following representations have been made with respect to the Proposed
Transaction:

Except as otherwise provided below, Distributing has made all the representations
provided in section 3 of the Appendix to Rev. Proc. 2017-52, as of immediately prior to
the Distribution.

Distributing has made the following alternative representations set forth in section 3 of
the Appendix to Rev. Proc. 2017-52, as of immediately prior to the Distribution:

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

Distributing has made the following representations as applied to the Back-End
Distribution but not to the Split-Off, to which they do not apply:

  Representations 5 and 6.

Distributing has made the following representation as applied to the Split-Off but not to
the Back-End Distribution, to which it does not apply:

PLR-118410-19 8

 Representation 7.

Distributing has not made the following representations:

 Representations 25, 40, 45, and 46.

Distributing has made the following modified representations:

 Representation 32: No intercorporate debt will exist between Distributing and
 Controlled at the time of the Distribution, and no intercorporate debt has existed
 or will exist between Distributing and Controlled subsequent to the Distribution,
 except in each case for (i) amounts payable under the Agreements and (ii) trade
 payables arising in the ordinary course of business.

 Representation 33: Except with respect to certain payments made pursuant to
 the Transition Services Agreement, payments made in connection with all
 continuing transactions, if any, between Distributing and Controlled after the
 Distribution will be for fair market value based on arm’s-length terms.

Distributing has made the following additional representation:

 Distributing will use an amount of cash (from its general accounts) equal to or
 greater than the amount of the Controlled Cash to repay outstanding Distributing
 debt, make distributions to Distributing shareholders, and/or repurchase shares
 of Distributing Common Stock.

Except as otherwise provided below, Distributing has made all the representations
provided in Rev. Proc. 2018-53 as of immediately prior to the Distribution. For purposes
of the representations below, terms used but not otherwise defined herein have the
meanings set forth in Rev. Proc. 2018-53.

Distributing has made the following modified representations:

 Representation 3: The holder of the Distributing Exchange Debt that will be
 assumed or satisfied will not hold the debt for the benefit of Distributing,
 Controlled, or any Related Person. With respect to the Debt-for-Equity Exchange,
 the Exchange Banks will not acquire the Distributing Exchange Debt from
 Distributing, Controlled, or any Related Person. Neither Distributing, nor
 Controlled, nor any Related Person will participate in any profit gained by the
 Exchange Banks upon an exchange of Section 361 Consideration; nor will any
 such profit be limited by agreement or other arrangement. The value of the
 Section 361 Consideration received by the Exchange Banks in satisfaction of the
 Distributing Exchange Debt will be determined pursuant to arm’s length
 negotiations.

 Representation 4: Except with respect to amounts outstanding under the Term
 Loan and the CP Programs that, in each case, will not exceed the aggregate

PLR-118410-19 9

 amounts outstanding under the Term Loan or the CP Programs, as applicable,
 as of the submission of the Ruling Request or the following dates, Distributing
 incurred the Distributing Exchange Debt (a) before the submission of the Ruling
 Request and (b) no later than 60 days before the earliest of the following dates:
 (i) the date of the first public announcement (as defined in section 1.355-7(h)(10))
 of the Divisive Reorganization or a similar transaction, (ii) the date of the entry by
 Distributing into a binding agreement to engage in the Divisive Reorganization or
 a similar transaction, and (iii) the date of approval of the Divisive Reorganization
 or a similar transaction by the board of directors of Distributing.

                                    Rulings

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

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

 2.     No gain or loss will be recognized by Distributing on the Contribution.
        Section 361(a); Section 361(b); Section 357(a).

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

 4.     The basis in each asset received by Controlled in the Contribution will
        equal the basis of that asset in the hands of Distributing immediately
        before the transfer. Section 362(b).

 5.     The holding period in each asset received by Controlled in the
        Contribution will include the period during which the asset was held by
        Distributing. Section 1223(2).

 6.     No gain or loss will be recognized by Distributing upon the distribution of
        the Controlled Stock in the Distribution. Section 361(c).

 7.     No gain or loss will be recognized by (and no amount otherwise will be
        included in the income of) holders of Distributing Common Stock upon the
        receipt of Controlled Stock in the Distribution. Section 355(a).

 8.     The basis of the Controlled Stock in the hands of a holder of Distributing
        Common Stock who exchanges Distributing Common Stock for Controlled
        Stock in the Distribution immediately after the Distribution will be the same
        as the basis of the Distributing Common Stock exchanged therefor.
        Section 358(a).

PLR-118410-19 10

 9.     To the extent that Controlled Stock is distributed to holders of Distributing
        Common Stock on a pro rata basis pursuant to the Back-End Distribution,
        the aggregate basis of the Distributing Common Stock and the Controlled
        Stock in the hands of such holders immediately after the Back-End
        Distribution will be the same as the basis of the Distributing Common
        Stock immediately before the Back-End Distribution on which such
        distribution was made, allocated in proportion to the fair market values of
        the Distributing Common Stock and the Controlled Stock. Sections 358(a)-
        (c) and Treas. Reg. section 1.358-2(a)(2).

 10.    If a holder of Distributing Common Stock that purchased or acquired
        shares on different dates or at different prices is not able to identify which
        particular share of Controlled Stock is received in exchange for, or as a
        distribution with respect to, a particular share of Distributing Common
        Stock, the holder may designate which particular share of Controlled
        Stock is received in exchange for, or as a distribution with respect to, a
        particular share of Distributing Common Stock, provided the designation is
        consistent with the terms of the Distribution. Treas. Reg. section 1.358-
        2(a)(2)(vii).

 11.    The holding period of each holder of Distributing Common Stock in the
        Controlled Stock received in the Distribution will include the holding period
        of the Distributing Common Stock exchanged therefor or with respect to
        which a distribution of Controlled Stock was made, provided that such
        Distributing Common Stock is held as a capital asset on the date of such
        Distribution. Section 1223(1).

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

 13.    No gain or loss will be recognized by Distributing in the Debt-for-Equity
        Exchange other than any (i) deductions attributable to the fact that the
        Distributing Exchange Debt may be redeemed at a premium, (ii) income
        attributable to the fact that the Distributing Exchange Debt may be
        redeemed at a discount, and (iii) interest expense accrued with respect to
        the Distributing Exchange Debt. Section 361(c).

                                   Caveats

No opinion is expressed or implied about the tax treatment of the Proposed Transaction
under any other provisions of the Code or regulations or the tax treatment of any
conditions existing at the time of, or effects resulting from, the Proposed Transaction
that are not specifically covered by the above rulings.

PLR-118410-19 11

                            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 ruling letter must be attached to any federal 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 this ruling letter.

                                  Sincerely,

                                  Mark J. Weiss
                                  Branch Chief
                                  (Corporate)

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