IRS approves nonrecognition treatment for a corporate business separation structured as a Type D reorganization and spin-off

Plain-English summary

A publicly traded corporate parent proposed separating one business from another by transferring the separated business to a controlled corporation, potentially selling a minority stake in public offerings, and then distributing the remaining controlled-corporation stock to its shareholders. The controlled corporation would provide stock, debt proceeds, possible offering proceeds, and an assumption of related liabilities in exchange for the business assets. The IRS ruled that the contribution and distribution would qualify as a reorganization under §§ 368(a)(1)(D) and 355, with no gain or loss to the corporations or shareholders on the specified exchanges and distribution. It also ruled on carryover basis and holding periods, earnings and profits, cash paid for fractional shares, consolidated-group status, and later payments under separation agreements. The rulings relied entirely on the submitted facts and representations. The IRS expressly did not determine whether the distribution met the business-purpose and anti-device requirements or whether it was part of a plan involving a 50-percent acquisition, so those important § 355 conditions remained outside the ruling.

Ruling snapshot

• Question: Would the proposed transfer and distribution of a business qualify for nonrecognition treatment as a Type D reorganization and § 355 spin-off?
• Outcome: approved (the IRS granted the requested reorganization and related tax rulings, subject to stated representations and caveats)
• Key authorities: IRC §§ 355, 357, 358, 361, 362, 368(a)(1)(D), 1001, 1032, 1223, 1504; Treas. Reg. §§ 1.312-10, 1.355-2, 1.355-7, 1.355-8T, 1.358-2

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 202051011                                            Third Party Communication: None
Release Date: 12/18/2020                                     Date of Communication: Not Applicable
Index Number: 355.01-00, 368.04-00
                                                             Person To Contact:
---------------------                                        -------------------------, ID No. -----------------
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---------------                                              Telephone Number:
------------------------------                               ----------------------
----------------------------------                           Refer Reply To:
                                                             CC:CORP:2
                                                             PLR-133731-18
                                                             Date:
                                                             May 13, 2019

                  TY: ----------------


Distributing                    = --------------------------------------------------------------------------------
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Controlled                      = --------------------------------------------------------------------------------
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Sub 1                           = --------------------------------------------------------------------------------
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Sub 2                           = --------------------------------------------------------------------------------
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Sub 3                           = --------------------------------------------------------------------------------
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FSub 1                          = --------------------------------------------------------------------------------
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LLC 1                           = --------------------------------------------------------------------------------
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                                  ------------------------------------

LLC 2                           = --------------------------------------------------------------------------------
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Business A          = --------------------------------------------------------------------------------
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                      ------------------

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

Distributing        = --------------------------------------------------------------------------------
Preferred Stock       -------------------------------------------

Other Property      = --------------------------------------------------------------------------------
                      ---------

Accelerated Share   = --------------------------------------------------------------------------------
Repurchase            --------------------------------------------------------------------------------
Program               --------------------------------------------------------------------------------
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Hook Stock          = --------------------------------------------------------------------------------
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Compensation Plan   = --------------------------------------------------------------------------------
Equity                --------------------------------------------------------------------------------
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State A             = --------------

Country A           = ------------------------

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

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

Country D           = --------------------

Exchange            = ---------------------------------------------
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a               = --------------------------------------------------------------------------------
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b               = ----

c               = --------------------------------------------------------------------------------
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d               = ----

e               = --

f               = --------------------------------------------------------------------------------
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g                  --------------------------------------------------------------------------------
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h               = --

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PLR-133731-18                                4


m                        = ----


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

This letter responds to your representative’s November 14, 2018 letter, as
supplemented on February 22, 2019, March 14, 2019, April 15, 2019, May 3, 2019, and
May 9, 2019, requesting rulings under Sections 355 and 368(a)(1)(D), and related
provisions of the Internal Revenue Code of 1986, as amended, and related regulations
with respect to the proposed transaction described below (the “Proposed Transaction”).

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 Rev. Proc. 2019-1, 2019-1 I.R.B. 1, and Rev. Proc.
2017-52, 2017-41 I.R.B. 283, regarding a Transactional Ruling for a Covered
Transaction. This office expresses no opinion as to the overall tax consequences of the
Proposed Transaction or 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

Distributing is a State A corporation and the parent of a worldwide group of entities (the
“Distributing Worldwide Group”) and is also the common parent of a group of affiliated
corporations that join in filing a consolidated U.S. federal income tax return (the
“Distributing Group”).     The outstanding capital stock of Distributing consists of
Distributing common stock, which is publicly traded on Exchange and widely held, and
Distributing Preferred Stock.

Immediately prior to the Proposed Transactions, Distributing will wholly own (i) Sub 1, a
State A corporation, (ii) Sub 2, a State A corporation, (iii) LLC 1, a State A limited
PLR-133731-18                                5

liability company, that for U.S. federal income tax purposes will be disregarded as an
entity separate from Distributing, and (iv) Controlled, a State A corporation. Controlled
will have no assets or activities prior to the Proposed Transactions.

Sub 1 will wholly own (i) FSub 1, a Country A corporation, and (ii) Sub 3, a State A
corporation. Sub 3 will wholly own LLC 2, a State A limited liability company, that for
U.S. federal income tax purposes will be disregarded as an entity separate from Sub 3.
Distributing, directly and indirectly through its subsidiaries, is engaged in, among other
things, Business A and Business B. Immediately prior to the Proposed Transactions,
Sub 1, Sub 2, Sub 3, FSub 1, LLC 1 and LLC 2, directly and indirectly through their
subsidiaries, will be engaged in Business B.

Financial information has been submitted in accordance with Revenue Procedure 2017-
52.

                                Proposed Transaction

Distributing proposes to carry out the Proposed Transaction to separate Business B
from Business A, which is comprised of the following steps:

    1. Controlled will incur third-party debt financing through a combination of bonds
      and/or term loans (the “Permanent Debt”), and if Controlled undertakes both the
      First IPO and the Second IPO (each as defined below), a short-term loan (the
      “Bridge Loan,” and together with the Permanent Debt, the “Controlled Debt”).

    2. Distributing will transfer the stock of Sub 1 and Sub 2, the membership interests
      of LLC 1 and cash (the “Contributed Assets”) to Controlled in exchange for
      (i) shares of Controlled common stock, (ii) all or a portion of the cash proceeds of
      the Controlled Debt (such portion, the “Debt Cash Proceeds”), (iii) if Controlled
      undertakes the First IPO, all or a portion of the cash proceeds from such First
      IPO (and together with the Debt Cash Proceeds, the “Cash Proceeds”), and
      (iv) the assumption by Controlled of any liabilities of Distributing that are related
      to Business B (the “Contribution”).

    3. Immediately following the Contribution, Controlled may issue shares of
      Controlled common stock to the public in the first of up to two public offerings
      (the “First IPO”). One such public offering would be on the Exchange (the
      “Country D IPO”), and if the Country D IPO is undertaken, Controlled may also
      undertake a public offering on the Country B stock exchange (the “Country B
      IPO”). The Country D IPO and the Country B IPO may be undertaken in either
      order (or not at all). The cash proceeds from the First IPO, if any, will be
      transferred to Distributing as part of the consideration for the Contribution in
      step (2).
PLR-133731-18                                6

    4. On Date a, Controlled may issue shares of Controlled common stock to the
      public in a second IPO (the “Second IPO” and together with the First IPO, the
      “IPOs”). Controlled will use all or a portion of the cash proceeds from the Second
      IPO, if any, to repay the Bridge Loan. Following the IPOs, Distributing will own at
      least b% of the Controlled common stock and Controlled will have no other
      classes of stock outstanding.

    5. On Date c, Distributing will either (i) distribute all of the Controlled common stock
      owned by Distributing pro rata to its shareholders (other than with respect to
      Hook Stock or the Compensation Plan Equity) (the “Regular Spin”); or (ii) offer to
      its shareholders to exchange Distributing common stock for Controlled common
      stock (the “Split-Off”) and, if necessary, distribute as soon as possible after the
      closing of the Split-Off any remaining Controlled common stock owned by
      Distributing pro rata to its shareholders (other than with respect to Hook Stock or
      the Compensation Plan Equity) in a clean-up spin-off (the “Clean-Up Spin,” and
      the Regular Spin or the Split-Off and the Clean-Up Spin, as the case may be, the
      “Distribution”). If Controlled does not undertake any IPOs, Distributing will
      distribute all of the Controlled common stock owned by Distributing through a
      Regular Spin shortly after the Contribution in step (2).

    6. No later than d days after the first distribution of Controlled common stock in the
      Distribution, Distributing will (i) use some or all of the Cash Proceeds to
      (A) repurchase common stock of Distributing, including potentially through an
      Accelerated Share Repurchase Program, or (B) make pro rata special cash
      distributions to its shareholders, and (ii) use the remaining Cash Proceeds to
      repay or repurchase debt (including principal, interest and associated premiums
      and fees) from third-party lenders, including by repurchasing commercial paper
      (such debt, the “Distributed Purged Debt,” and all such uses of the Cash
      Proceeds, the “Cash Boot Purge,” and the Cash Boot Purge along with the
      Contribution and the Distribution, the “Reorganization”).

In connection with the Proposed Transactions, Distributing and Controlled will enter into
continuing commercial arrangements (the “Continuing Commercial Arrangements”),
Delayed Asset Transfer Arrangements, as defined below, and other customary
agreements including a separation and distribution agreement, a transition services
agreement, a tax matters agreement, and an employee matters agreement (the
“Continuing Arrangements”). All of the Continuing Commercial Arrangements and the
Continuing Arrangements will be based on arm’s-length terms and conditions, including
arm’s-length pricing, except for (i) certain arrangements that may be priced at cost or
cost-plus for up to e years after the Distribution and (ii) certain Delayed Asset Transfer
Arrangements.
PLR-133731-18                                7

Pursuant to the Continuing Commercial Arrangements, Controlled will provide to
Distributing f services at arm’s-length terms and conditions and Distributing will provide
to Controlled g services at arm’s-length terms and conditions, in each case except as
described above.

In certain countries, local separations of Business B from Business A will not occur until
after the Distribution primarily due to local regulatory requirements and the need to
obtain consents from local governments.            In these countries, the Continuing
Arrangements will include one or more agreements providing for the conduct of certain
continuing relationships and the delayed transfer of certain assets (the “Delayed Asset
Transfer Arrangements”). These Delayed Asset Transfer Arrangements will be
terminated in a particular country once the necessary consents from local governments
are received, generally expected within h - i years after the Distribution, though in
Country C, it is expected that this relationship may last for up to approximately k – l
years.

                                    Representations

Distributing makes all of the representations in section 3 of the Appendix to Revenue
Procedure 2017-52, except with respect to (i) representations 20, 24, 25, 39, and 40 of
section 3 of the Appendix to Revenue Procedure 2017-52, which are inapplicable to the
Proposed Transaction, (ii) representation 6 is only made with respect to the Regular
Spin and any Clean-Up Spin, and representation 7 is only made with respect to the
Split-Off, (iii) representations 2, 5, 8, 19, 32, 33, and 46 of section 3 of the Appendix to
Revenue Procedure 2017-52, which Distributing has modified below, and subject to the
additional representation (9), below. With respect to the representations that allow for
alternative representations to be made and are not otherwise modified below,
Distributing makes representations 3(a), 11(a), 15(a), 22(b), 31(a), and 41(a).

    1. Representation 2: In the Distribution, Distributing will distribute on the same day
      all of the stock and securities of Controlled that it holds immediately before the
      Distribution; provided that in the case of a Split-Off that is undersubscribed, the
      Clean-Up Spin with respect to such Split-Off will occur as promptly as practical
      after such Split-Off taking into account applicable stock exchange and clearing
      agency (e.g., DTC) requirements.

    2. Representation 5: None of the stock or securities of Controlled or Other Property
      to be distributed in the Distribution will be received in any capacity other than that
      of a shareholder of Distributing; except that Distributing may transfer Cash
      Proceeds to holders of Distributing Purged Debt in the Cash Boot Purge.

    3. Representation 8: Distributing has securities outstanding, but it will not distribute
      stock or securities of Controlled or Other Property to any holder of such
      securities in the Distribution in satisfaction thereof; except that Distributing may
PLR-133731-18                               8

      transfer Cash Proceeds to holders of Distributing Purged Debt that qualifies as a
      security in the Cash Boot Purge.

    4. Representation 19: Any Other Property issued or transferred by Controlled to
      Distributing in pursuance of the plan of reorganization will be transferred by
      Distributing to its shareholders in pursuance of the plan of reorganization, except
      to the extent transferred by Distributing to repay or repurchase the Distributing
      Purged Debt as described herein.

    5. Representation 32: No intercorporate debt will exist between Distributing and
      Controlled (and their respective affiliates, as applicable) at the time of, or
      subsequent to the Distribution, except for payables and receivables arising by
      reason of the Continuing Arrangements or payables and receivables incurred in
      the ordinary course of business.

    6. Representation 33: Payments made in connection with all continuing
      transactions, if any, between Distributing and Controlled after the Reorganization
      will be for fair market value based on arm’s-length terms, except for payments
      contemplated by certain Continuing Commercial Arrangements and Continuing
      Arrangements made no more than m months after the Distribution.

    7. Representation 46: Other than in connection with (i) the IPOs and (ii) the
      Controlled Debt, Controlled will not issue stock or securities to any person other
      than Distributing in connection with the Reorganization.

Except with respect to (i) representation 6 of section 3 of the Appendix to Revenue
Procedure 2018-53, which is inapplicable to the Proposed Transaction, and
(ii) representation 4 of section 3 of the Appendix to Revenue Procedure 2018-53, which
Distributing has modified below, and subject to the additional representation (9), below,
Distributing makes all of the representations in section 3 of the Appendix to Revenue
Procedure 2018-53.

    8. Representation 4: Distributing incurred the Distributing Debt that will be
      assumed or satisfied (i)(A) before the date hereof and (B) no later than 60 days
      before the earliest of the following dates: (x) the date of the first public
      announcement (as defined in Treas. Reg. § 1.355-7(h)(10)) of the
      Reorganization or a similar transaction, (y) the date of the entry by Distributing
      into a binding agreement to engage in the Reorganization or similar transaction
      by the Distributing board of directors, and (z) the date of approval of the
      Reorganization or a similar transaction by the Distributing board of directors, or
      (ii) on a date later than such date described in clause (i) and the proceeds of
      such Distributing Debt were used to repay Distributing Debt incurred prior to the
      relevant date described in clause (i) (“Distributing Refinancing Debt”) or were
PLR-133731-18                                9

        used to repay or refinance (including through successive refinancing) Distributing
        Refinancing Debt.

    9. In the Distribution, Controlled shares will not be distributed to holders of Hook
        Stock or with respect to Compensation Plan Equity.

                                         Rulings

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

   1)    The Contribution and the Distribution will be a “reorganization” within the
         meaning of Sections 368(a)(1)(D) and 355. Distributing and Controlled will
         each be “a party to the reorganization” within the meaning of Section 368(b).

   2)    Distributing will recognize no gain or loss (i) on its receipt of the Controlled
         stock and the Cash Proceeds, or (ii) the assumption by Controlled of any
         liabilities of Distributing in connection with the Contribution. Sections 361(a),
         361(b) and 357(a).

   3)    Controlled will recognize no gain or loss upon the Contribution.          Section
         1032(a).

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

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

   6)    Distributing will recognize no gain or loss upon the Distribution. Section 361(c).

   7)    Distributing shareholders will recognize no gain or loss (and no amount will be
         includible in income) upon the receipt of Controlled stock in the Distribution.
         Section 355(a).

   8)    The aggregate basis of the Distributing stock and the Controlled stock in the
         hands of each Distributing shareholder immediately after the Distribution
         (including any fractional share interest in Controlled Stock to which the
         shareholder may be entitled) will equal the aggregate basis of the Distributing
         stock held by such Distributing shareholder immediately before the Distribution,
         allocated between the stock of Controlled and Distributing in proportion to the
PLR-133731-18                                10

       fair market value of each immediately following the Distribution in accordance
       with Treas. Reg. § 1.358-2(a). Section 358(b)(2) and (c).

  9)   The holding period of the Controlled stock received by each Distributing
       shareholder in the Distribution (including any fractional share interest in
       Controlled stock to which the shareholder may be entitled) will include the
       holding period the Distributing stock held by such shareholder, provided that
       such Distributing stock was held as a capital asset on the date of the
       Distribution. Section 1223(1).

  10) Earnings and profits will be allocated between Controlled and Distributing in
      accordance with Section 312(h) and Treas. Reg. §§ 1.312-10(a) and 1.1502-
      33(e)(3).

  11) The receipt by Distributing shareholders of cash in lieu of fractional shares of
      Controlled stock will be treated for federal income tax purposes as if the
      fractional shares had been distributed to the Distributing shareholders as part of
      the Distribution and then had been disposed of by such shareholders for the
      amount of such cash in a sale or exchange. The gain (or loss) recognized, if
      any (determined using the basis allocated to the fractional shares in ruling 8),
      will be treated as capital gain (or loss), provided the stock was held as a capital
      asset by the selling shareholder. Section 1001. Such gain (or loss) will be
      short-term or long-term capital gain (or loss) (determined using the holding
      period provided in ruling 9).

  12) Following the Distribution, Controlled will not be a successor of Distributing for
      purposes of Section 1504(a)(3). Therefore, Controlled and its direct and
      indirect subsidiaries that are “includable corporations” under Section 1504(b)
      and satisfy the ownership requirements of Section 1504(a)(2) will be members
      of an affiliated group of corporations entitled to file a consolidated federal
      income tax return with Controlled as the common parent.

  13) Payments made between any of Distributing and Controlled and their
      respective affiliates under any of the Continuing Arrangements regarding
      liabilities, indemnities, or other obligations that (i) have arisen or will arise for a
      taxable period ending on or before the Distribution or for a taxable period
      beginning before and ending after the Distribution and (ii) will not become fixed
      and ascertainable until after the Distribution, will be viewed as occurring
      immediately before the Distribution. See Arrowsmith v. Comm’r, 344 U.S. 6, 73
      (1952); Rev. Rul. 83-73, 1983-1 C.B. 84.

                                         Caveats
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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.

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 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,



                                      Douglas C. Bates
                                      Branch Chief
                                      (Corporate)