IRS rules on a Chapter 11 "Type G" bankruptcy reorganization

Plain-English summary

A corporate group in Chapter 11 bankruptcy asked the IRS for rulings on
the tax treatment of its court-approved restructuring, which is designed
to qualify as a "Type G" reorganization under § 368(a)(1)(G) (the
provision for reorganizations carried out in bankruptcy). Under the plan,
the parent's operating subsidiary contributes its assets to a new
corporation ("Newco") and distributes the Newco stock, debt, and cash to
its secured and unsecured creditors in satisfaction of their claims,
after which the old parent and subsidiary liquidate and existing
shareholders get nothing. The IRS ruled favorably on six significant
issues: the creditors count as holders of "proprietary interests" for the
continuity-of-interest test; property they receive is treated as passing
through the distributing entity; the group's earlier spin-off and asset
sale are ignored for the "substantially all" test; the cancelled
first-lien debt is treated as nonrecourse (triggering amount realized
under Tufts rather than cancellation-of-debt income); and, if the deal
qualifies as a G reorganization, the distributing entity recognizes no
gain or loss and § 357(c)/(d) does not apply. The ruling matters to
distressed companies structuring bankruptcy emergences to move assets to
creditors tax-efficiently.

Ruling snapshot

• Question: What are the federal income tax consequences (continuity
  of interest, "substantially all," debt cancellation, and nonrecognition)
  of the taxpayer's proposed Chapter 11 "Type G" reorganization?
• Outcome: Approved (six rulings granted, subject to stated
  assumptions and caveats)
• Key authorities: IRC § 368(a)(1)(G); §§ 354(b)(1)(A), 357(c)-(d),
  361(c), 1001, 108(a), 61(a)(12); Treas. Reg. §§ 1.368-1(e)(6)(i),
  1.1001-2; Commissioner v. Tufts, 461 U.S. 300 (1983)

Full text (IRS public release)

Internal Revenue Service                     Department of the Treasury
                                             Washington, DC 20224

Number: 202050014                            Third Party Communication: None
Release Date: 12/11/2020                     Date of Communication: Not Applicable

Index Number: 368.14-00, 354.00-00,
              354.05-00, 361.02-02,
              368.08-02

Person To Contact:
--------------------------, ID No. ----------------
Telephone Number:
--------------------
Refer Reply To:
CC:CORP:B05
PLR-117300-20
Date:
September 17, 2020


                                    Legend

Distributing              -----------------------------------

LLC1                      ------------------------------------

LLC2                      --------------------------------------

Newco                     --------------------------------------

Old Controlled            ------------------------------------------

Business                  ------------------------------------------------

Business Segment          ------------------------------------------------

Bankruptcy Court          ------------------------------------------------

DIP Facility              ------------------------------------------------

Distributable
Subscription Rights       ------------------------------------------------

State A                   -------------

Date 1                    -------------------------

Date 2                    --------------

Date 3                    ---------------------

Date 4                    --------------------------

Date 5                    -------------------------

Date 6                    ---------------------

Date 7                    ------------------

Date 8                    ------------------

a                         --

b                         --

c                         --------------

d                         -------------

e                         --------------

f                         -------------

g                         -------------

h                         -----------------

i                         --------------

j                         --------------

k                         --------------

l                         -----------------


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

This letter responds to your authorized representatives' request dated August 5, 2020,
requesting rulings on certain federal income tax consequences of a series of proposed
transactions. The information provided in that request and in subsequent
correspondence is summarized below.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalties of perjury statement
executed by an appropriate party. While this office has not verified any of the material
submitted in support of the request for rulings, it is subject to verification on
examination.

This letter is issued pursuant to § 6.03(2) of Rev. Proc. 2020-1, 2020-1 I.R.B. 1,
regarding one or more significant issues under section 368. The ruling contained in this
letter only addresses one or more significant issues involved in the transaction. This
office expresses no opinion as to the overall tax consequences of the transactions
described in this letter or as to any issue not specifically addressed by the ruling below.

                              Summary of Facts

Organizational Structure

Distributing, a State A corporation, is the common parent of a business group that
includes corporations, and entities disregarded as separate from their sole regarded
owners for U.S. federal income tax purposes (each, a "disregarded entity") (the
"Distributing Group"). The Distributing Group is engaged in Business, which included
Business Segment. Distributing has owned all of the membership interests of LLC1 as a
disregarded entity for U.S. federal income tax purposes since Date 1 (a date over a
years ago). Distributing owns no other material assets other than all of the membership
interests of LLC2, formed on Date 7 and treated as a disregarded entity. LLC1 owns,
directly and indirectly, all of Distributing Group's remaining subsidiaries (collectively, the
"LLC1 Subsidiaries"), most of which are disregarded entities. The substantial majority of
the Distributing Group's assets are held by disregarded entities of LLC1.

The Prior Transactions

On Date 2 (a date over a years ago), Old Controlled was formed in connection with the
separation of a business from the Distributing Group (the "Prior Separation"). Pursuant
to the Prior Separation, LLC1 and the LLC1 Subsidiaries contributed certain assets to
Old Controlled. Thereafter, LLC1 distributed the stock of Old Controlled to Distributing,
and then Distributing distributed the stock of Old Controlled to Distributing's
shareholders. The Distributing Group did not expect to file for bankruptcy or to
consummate the Proposed Transaction at the time of the Prior Separation.

On Date 4 (a date about b years ago), the Distributing Group sold Business Segment
for $c (the "Prior Sale"). The Prior Sale was entered into to allow the Distributing Group
to focus on its core business, and the proceeds of the Prior Sale were used to pay
outstanding debt. The Distributing Group did not expect to file for bankruptcy or to
consummate the Proposed Transaction at the time of the Prior Sale.

Bankruptcy Proceeding

On Date 5, Distributing, LLC1, and the LLC1 Subsidiaries (collectively, the "Debtors")
filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy
Code with the Bankruptcy Court (the "Bankruptcy Proceeding").

As of Date 6, LLC1 had approximately $d of outstanding debt (the "LLC1 Debt"), not
including the DIP Facility. The LLC1 Debt is composed of approximately $e of first lien
debt (the "LLC1 First Lien Debt," and the creditors with respect to such debt, the "LLC1
First Lien Creditors"), $f of second lien debt (the "LLC1 Second Lien Debt," and the
creditors with respect to such debt, the "LLC1 Second Lien Creditors"), and $g of
unsecured debt (the "Unsecured Debt," and the creditors with respect to such debt, the
"Unsecured Creditors"). The LLC1 First Lien Debt (other than, potentially, borrowings
under a revolving credit facility), the LLC1 Second Lien Debt, and $h of the Unsecured
Debt was issued by LLC1 after Date 1. Approximately half of the LLC1 Subsidiaries
guarantee the LLC1 Debt. The LLC1 Debt is not, and never has been, guaranteed by
Distributing. A direct subsidiary of LLC1, treated as a corporation for U.S. federal
income tax purposes, also has outstanding debt (the "Subsidiary Debt").

                            Proposed Transaction

For what are represented to be valid business reasons, and in connection with the
restructuring in the Bankruptcy Proceeding, Distributing has proposed the following
transaction (the "Proposed Transaction"). The Proposed Transaction will be effected
pursuant to the Bankruptcy Plan of Reorganization (the "Plan") confirmed by the
Bankruptcy Court. Unless otherwise indicated, the Proposed Transaction is occurring on
the effective date of the Plan.

   (i)     On Date 7, Distributing formed LLC2, a State A limited liability company
           treated as a disregarded entity.

   (ii)    On Date 8, LLC1 formed Newco, a State A limited liability company treated as
           a disregarded entity.

   (iii)   To fund cash distributions under the Plan and to provide for operational
           liquidity, Newco (or one or more entities wholly owned by Newco) will issue (i)
           a $i revolver (undrawn upon issuance), and (ii) Exit Financing Debt,
           consisting of (a) an offering of senior notes (the "Exit Notes," and the
           aggregate net proceeds of such notes, the "Exit Notes Proceeds") in
           accordance with standard market practices, (b) a term loan facility (the "Term
           Loan Facility"), and (c) first lien replacement term loans being issued in
           satisfaction of the Subsidiary Debt (the "Take-Back Debt"), in an amount such
           that, together with the Exit Notes and Term Loan Facility, there will be at least
           $j of aggregate principal in Exit Financing Debt.

   (iv)    Newco will make an election to be treated as a corporation for U.S. federal
           income tax purposes, effective no later than the beginning of the date the Exit
           Notes are issued and also no later than the beginning of the date of the
           Reorganization (defined in Step (xiii)).

   (v)     Distributing will contribute any assets (other than equity of LLC1 or LLC2) it
           directly owns to LLC1 or LLC2. Holdings will then contribute LLC2 to LLC1.

   (vi)    Immediately after Step (v), LLC1 will contribute all of its assets to LLC2, and
           LLC2 will assume all the liabilities from LLC1 that are not being discharged in
           connection with the Bankruptcy Proceeding (the "Continuing Liabilities").

   (vii)   Immediately after Step (vi), LLC1 will contribute the equity of LLC2 to Newco
           (the "Contribution") in exchange for (i) newly-issued equity in Newco and
           regulatory warrants to purchase equity of Newco, which will be distributed to
           foreign LLC1 First Lien Creditors and are exercisable at a nominal price upon
           necessary regulatory approval (the "Regulatory Warrants") (the newly-issued
           equity of Newco and the Regulatory Warrants collectively, "Newco Equity"),
           (ii) Distributable Subscription Rights, (iii) the Exit Notes Proceeds released in
           Step (ix), (iv) the Remaining Exit Proceeds (defined below) received in Step
           (xii), and (v) the Take-Back Debt received in Step (xii) (collectively, the
           "Newco Consideration"). LLC2 will not assume any liabilities of LLC1 in the
           Contribution other than the Continuing Liabilities.

  (viii)   In connection with the Contribution, and pursuant to the Plan, liabilities
           (including guarantees) of the direct and indirect subsidiaries of LLC2 that are
           not being reinstated or otherwise paid in full in connection with the Bankruptcy
           Proceeding will be released, in each case, consistent with the rights of LLC1
           First Lien Creditors and LLC1 Second Lien Creditors (the LLC1 First Lien
           Creditors and the LLC1 Second Lien Creditors collectively, the "LLC1
           Creditors") to receive recoveries pursuant to the Plan (and other creditors, as
           applicable), with such creditors to receive recoveries from LLC1 in Step (xiii).

  (ix)     In connection with the Contribution, the Exit Notes Proceeds received in Step
           (iii) will be released to LLC1 by Newco (or one or more entities wholly owned
           by Newco).

  (x)      In connection with the Contribution, and pursuant to the Plan, LLC2 will issue
           any remaining Exit Financing Debt (other than the Take-Back Debt) in
           exchange for cash (the "Remaining Exit Proceeds").

  (xi)     Immediately after Step (x), LLC2 will distribute the Remaining Exit Proceeds
           and will issue the Take-Back Debt to Newco.

  (xii)    Immediately after Step (xi), and in connection with the Contribution, Newco
           will transfer the Remaining Exit Proceeds and the Take-Back Debt to LLC1.

  (xiii)   Immediately after Steps (vii) through (xii), LLC1 will (i) distribute (a) the
           Newco Consideration, (b) cash on hand, and (c) the Rights Offering Cash
           (defined below) received in Step (xv) to the LLC1 First Lien Creditors, and (ii)
           distribute cash to the LLC1 Second Lien Creditors, consistent with the terms
           of the Plan, and in final satisfaction of LLC1's obligations under the LLC1
           Debt (the "Distribution," together with the Contribution, the "Reorganization").
           Certain distributions will be made to other creditors.

  (xiv)    In connection with the Distribution, the cash funded in connection with the
           exercise of the Distributable Subscription Rights (the "Rights Offering Cash")
           will be released to Newco in exchange for Newco Equity.

  (xv)     Newco will transfer the Rights Offering Cash to LLC1 as part of the
           Contribution, and LLC1 will transfer the Rights Offering Cash to the LLC1
           First Lien Creditors (and other creditors, as applicable) as part of the
           Distribution, and consistent with the terms of the Plan.

  (xvi)    Following the Distribution, Distributing and LLC1 will liquidate and any equity
           in Distributing will be cancelled for no consideration.


                                Representations

Distributing has made the following representations in connection with the Proposed
Transaction:

   (a) Distributing is subject to the jurisdiction of the Bankruptcy Court under title 11 of
       the U.S. Code, and will be under that jurisdiction at the time of the Proposed
       Transaction.

   (b) The Proposed Transaction will occur pursuant to the Plan and will be confirmed
       by the Bankruptcy Court as part of the Bankruptcy Proceeding.

   (c) The Reorganization is being consummated for the business purpose of
       facilitating a successful chapter 11 restructuring of the Debtors' business.

   (d) Under all applicable state law, Distributing has never been obligated on, or liable
       for, the LLC1 Debt.

   (e) Pursuant to the Plan, Newco will never be obligated on the LLC1 Debt.

   (f) The Prior Separation and Prior Sale were not consummated in anticipation of the
       filing of the Bankruptcy Proceeding or the Plan. Excluding the Prior Sale, the
       Distributing Group has not made any asset dispositions that exceed $k in the
       aggregate since Date 3 (a date over b years ago).

   (g) The Distributing Group will sell certain assets to Old Controlled for approximately
       $l. This asset disposition will be taken into account in determining whether the
       Reorganization satisfies the "substantially all" requirement under section
       354(b)(1)(A).

   (h) At least a portion of the Newco Equity will be received by LLC1 First Lien
       Creditors holding an instrument that constitutes a "security" of Distributing for
       U.S. federal income tax purposes.

   (i) The Regulatory Warrants are treated as newly issued equity in Newco for U.S.
       federal income tax purposes.

   (j) Each LLC1 First Lien Creditor will receive equity in Newco in the Proposed
       Transaction.

   (k) Distributing's existing shareholders will receive no recovery.


                                     Rulings

   (1) The LLC1 Creditors and Unsecured Creditors will be treated as holders of
       proprietary interests in Distributing for purposes of the continuity of interest
       requirement under Treas. Reg. § 1.368-1(e)(6)(i).

   (2) Assuming the Reorganization otherwise satisfies the requirements of section
       368(a)(1)(G), the property received by the LLC1 Creditors pursuant to the Plan
       shall be treated as having been received by Distributing, and distributed by
       Distributing to the LLC1 Creditors.

   (3) The Prior Separation and the Prior Sale will not be taken into account in
       determining whether the Reorganization satisfies the "substantially all"
       requirement under section 354(b)(1)(A).

   (4) Assuming Distributing is not personally liable on any portion of the LLC1 Debt in
       light of state law limitations on liability, the LLC1 Debt will be treated as
       nonrecourse liabilities of Distributing for purposes of Treas. Reg. § 1.1001-2. The
       cancellation of the LLC1 First Lien Debt pursuant to the Distribution will result in
       amount realized under section 1001 with respect to the property transferred by
       LLC1 to the LLC1 First Lien Creditors in the amount of such outstanding debt.
       See Commissioner v. Tufts, 461 U.S. 300 (1983). Section 61(a)(12) and Section
       108(a) are not applicable to the cancellation of the LLC1 First Lien Debt with
       respect to which the LLC1 First Lien Creditors received property from LLC1 in the
       Distribution.

   (5) Provided the Reorganization qualifies as a reorganization under section
       368(a)(1)(G), Distributing will not recognize any gain or loss with respect to the
       consideration transferred to the LLC1 First Lien Creditors in the Distribution
       (including any gain or loss attributable to the amount realized under section 1001
       with respect to property transferred by LLC1 to the LLC1 First Lien Creditors, as
       provided in Ruling (4)). Section 361(c).

   (6) Provided the Reorganization qualifies as a reorganization under section
       368(a)(1)(G) and section 354, section 357(c) and (d) will not apply to the
       Reorganization.

                                     Caveats

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of the Proposed Transaction under other provisions of the Code or
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.
Specifically, no opinion is expressed concerning the federal tax consequences with
respect to (i) any debt other than the LLC1 Debt, including (but not limited to) the
Continuing Liabilities, the DIP Facility, the Subsidiary Debt, and the Take-Back Debt,
and (ii) the LLC1 Creditors' basis in the stock of Newco as a result of the Proposed
Transaction.

Temporary or final regulations pertaining to one or more of the issues addressed in this
ruling have not yet been adopted. Therefore, this ruling may be modified or revoked by
the adoption of temporary or final regulations, to the extent the regulations are
inconsistent with any conclusion in the letter ruling. See section 11.04 of Rev. Proc.
2020-1, 2020-1 I.R.B. 1, 62. However, when the criteria in section 11.06 of Rev. Proc.
2020-1, 2020-1 I.R.B. 1, 63 are satisfied, a ruling is not revoked or modified
retroactively, except in rare or unusual circumstances.

                              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 should be attached to the 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 on and
control number (PLR-117300-20) 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 representatives.


                                        Sincerely,



                                        Susan E. Massey
                                        Branch Chief, Branch 3
                                        Office of Associate Chief Counsel (Corporate)



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