The IRS prospectively narrows a prior nonrecognition ruling for cash contributed to subsidiaries

Plain-English summary

The IRS previously issued a ruling on a corporate separation involving a contribution, distribution, initial public offering, and use of cash proceeds to repurchase stock or repay group debt. That ruling stated that the distributing parent would recognize no gain or loss on the contribution under sections 361 and 357. The IRS later modified the ruling by revoking that conclusion to the extent it covered cash proceeds contributed to two subsidiaries, whether or not those funds were used to repay specified subsidiary debt or commercial paper. Under section 7805(b), the IRS limited the effect of the partial revocation. The change applies prospectively from the date of this letter and does not retroactively alter the earlier ruling.

Ruling snapshot

• Question: Does the earlier nonrecognition ruling continue to cover cash proceeds contributed to two subsidiaries as part of the planned debt repayment steps?
• Outcome: revocation (the earlier ruling is partially revoked prospectively)
• Key authorities: IRC §§ 357(a), 361(a), 361(b), 7805(b); Rev. Proc. 2020-1 §§ 11.04, 11.06

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 202022005                                              Third Party Communication: None
Release Date: 5/29/2020                                        Date of Communication: Not Applicable
Index Number: 355.00-00, 361.00-00,
              361.02-02, 7805.00-00,                           Person To Contact:
              7805.01-01                                       -------------------------, ID No. -----------------
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----------------------------                                   Refer Reply To:
------------------------------------------------               CC:CORP:5
-----------------------------------                            PLR-134289-18
                                                               Date:
                                                               February 25, 2020




Legend

Distributing Parent                 =         ----------------------------
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Sub 1                               =         ----------------------
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FSub 2                              =         -------------------------------
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Dear ---------------:

This letter refers to a private letter ruling issued by the Internal Revenue Service to
Distributing Parent on August 30, 2019 (PLR 201948001, the “Letter Ruling”). In the
Letter Ruling, step (xxii) of the Proposed Transaction is described as follows:

         Following the IPO and no later than q months after the Distribution, Distributing
         Parent will use the Cash Proceeds to (a) repurchase common stock of
         Distributing Parent, (b)(1) repay Distributing Parent Debt A or Distributing Parent
         Debt B, (2) contribute a portion of the Cash Proceeds to Sub 1 to allow Sub 1 to
         repay the Sub 1 Debt, or (3) contribute a portion of the Cash Proceeds to FSub 2
         to allow FSub 2 to repay the FSub 2 Debt and/or a portion of the FSub 2
         Commercial Paper (collectively, the “Distributing Parent Group Purged Debt”), or
         (c) some combination thereof (all such uses of the Cash Proceeds, the “Cash

PLR-134289-18                                  2

       Boot Purge,” and the Cash Boot Purge together with the Contribution and
       Distribution, the “Reorganization”).

Ruling (3) in the Letter Ruling states: “Distributing Parent will recognize no gain or loss
on the Contribution. Sections 361(a), 361(b), and 357(a).”

In step (xviii) of the Proposed Transaction, the Letter Ruling defines the term
“Contribution” as the transfer by Distributing Parent to External Controlled of certain
property in exchange for stock of External Controlled, the “Cash Proceeds” (also
defined in step (xviii)), and assumption by External Controlled of certain liabilities of
Distributing Parent. Other terms defined in the Letter Ruling are used in the above-
quoted excerpts from the Letter Ruling and in this letter.

Section 11.04 of Rev. Proc. 2020-1, 2020-1 I.R.B. 1, 62-63 provides that a letter ruling
found to be in error or not in accord with the current views of the Service may be
revoked or modified. If a letter ruling is revoked or modified, the revocation or
modification applies to all years open under the period of limitation unless the Service
uses its discretionary authority under section 7805(b) to limit the retroactive effect of the
revocation or modification.

Section 7805(b) provides that the Secretary may prescribe the extent, if any, to which
any ruling relating to the internal revenue laws shall be applied without retroactive
effect.

Accordingly, the Letter Ruling is modified to revoke Ruling (3) to the extent it applied to
the portions of the Cash Proceeds contributed to Sub 1 and FSub 2, regardless of
whether such Cash Proceeds were or will be used to repay Sub 1 Debt, FSub 2 Debt or
FSub Commercial Paper.

Pursuant to section 7805(b), the partial revocation of Ruling (3) will not be given
retroactive application and shall be effective on the date of this letter. See section 11.06
of Rev. Proc. 2020-1.

PLR-134289-18                                            3

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.

                                                Sincerely,


                                                 William W. Burhop
                                                William W. Burhop
                                                Senior Technician Reviewer
                                                Office of Associate Chief Counsel
                                                (Corporate)


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