Two internal upstream distributions of a subsidiary's stock qualify as tax-free spin-offs under section 355

Plain-English summary

A corporate group wanted to move one lower-tier subsidiary ("Controlled") up its ownership chain without triggering tax. After an internal merger, the group carried out two back-to-back distributions: the first corporation distributed all of Controlled's stock up to its parent, and that parent in turn distributed the Controlled stock up to the top-tier parent. The taxpayer asked the IRS to confirm these distributions qualify as tax-free spin-offs under section 355. The IRS ruled that neither distributing corporation recognizes gain or loss on distributing the stock, and neither recipient corporation is taxed on receiving it. It also ruled on the mechanics: how the recipients allocate their stock basis, that their holding periods carry over, and how the corporations' earnings and profits are split. As is standard for these rulings, the IRS did not rule on the deal's business purpose, whether it is a disguised earnings distribution (device), or whether it is part of a plan giving outsiders a 50-percent interest. This confirms a purely internal reshuffle of a subsidiary can be done tax-free.

Ruling snapshot

• Question: Do the two internal upstream distributions of the controlled corporation's stock qualify as tax-free distributions under section 355?
• Outcome: Approved (no gain or loss to the distributing or recipient corporations; basis, holding period, and earnings-and-profits rulings given).
• Key authorities: IRC § 355(a), (c); IRC §§ 358(b), 1223(1), 312(h); Treas. Reg. §§ 1.358-2, 1.312-10, 1.1502-33.

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202209002                                             Third Party Communication: None
 Release Date: 3/4/2022                                        Date of Communication: Not Applicable
 Index Number: 355.01-00
                                                               Person To Contact:
 ------------------                                            ------------------, ID No. -----------------
 -----------------------------                                 Telephone Number:
 -----------------------------------                           --------------------
 -------------------------                                     Refer Reply To:
 -------------------------------------                         CC:CORP:1
                                                               PLR-109775-21
                                                               Date:
                                                               September 10, 2021




Legend

Foreign Parent            =        ---------------
                                   --------------------------------------------
                                   ---------------------------------------------
                                   -----------------------

Parent                    =        -----------------------------------
                                   -------------------------------
                                   -----------------------

Distributing 1            =        ----------------------------------------------------
                                   ---------------------------------------------
                                   -----------------------

Distributing 2            =        -------------------------------------------------
                                   -------------------------------
                                   -----------------------

Controlled                =        --------------------------------------------------------------
                                   -------------------------------------------
                                   -----------------------

Sub                       =        ---------------------------------------------------------------
                                   ---------------------------------------------
                                   -----------------------

LLC                       =        --------------------------
                                   ------------------------------------------------
                                   -------------------------------------------------------
PLR-109775-21                                       2

                            ---------------------------------------


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

State B                =    ------------

State C                =    ------

Date 1                 =    ---------------------

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

This letter responds to a letter dated April 28, 2021, submitted on behalf of the taxpayer
(the "Submission"), requesting rulings under Section 355 and related provisions of the
Internal Revenue Code of 1986 (the "Code"), as amended, and related regulations, with
respect to the proposed transactions described below (the "Proposed Transactions").

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. 2021-1, 2021-1 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 any issue not specifically addressed
by the rulings below.

This office has made no determination regarding whether the Distributions (as defined
below) in each case: (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 Section
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. § 1.355-8 (see Section
355(e)(2)(A)(ii) and Treas. Reg. § 1.355-7).

Summary of Facts

Foreign Parent owns all the stock of Parent, the common parent of an affiliated group of
corporations that files a consolidated federal income tax return.
PLR-109775-21                                   3

As of immediately before Date 1: (i) Parent wholly owned Distributing 2, a State A
corporation, and LLC, a State B limited liability company that is classified as a disregarded
entity for U.S. federal income tax purposes, (ii) Distributing 2 wholly owned Sub, a State C
corporation, and Distributing 1, a State C corporation, and (iii) Sub wholly owned Controlled.

On Date 1, Sub merged with and into Distributing 1 with Distributing 1 surviving (the
"Merger"), in a transaction intended to qualify as a reorganization under section 368 of the
Code.

Thus, after Date 1: (i) Parent owns all the stock of Distributing 2 and LLC,
(ii) Distributing 2 owns all the stock of Distributing 1, and (iii) Distributing 1 owns all the
stock of Controlled.

The Proposed Transactions

   1) Distributing 1 will distribute all the stock of Controlled to Distributing 2 (the "First
      Distribution").

   2) Distributing 2 will distribute all the stock of Controlled to Parent (the "Second
      Distribution" and collectively with the First Distribution, the "Distributions").

   3) Parent will contribute the stock of Controlled to LLC.

   4) Controlled will file a check-the-box election on Form 8832 effective after the
      Distributions to be classified as a disregarded entity for U.S. federal income tax
      purposes (the "CTB election").

Representations

Except with respect to representations 3, 7, 17-20, 24-26, 30, 35, 39 of section 3 of the
Appendix to Rev. Proc. 2017-52, which have not been made, and the representations listed
below, which Distributing has modified as noted herein, Distributing makes all the
representations in section 3 of the Appendix to Rev. Proc. 2017-52. Capitalized terms used
but not defined herein shall have the meaning ascribed to such terms in section 2 of the
Appendix to Rev. Proc. 2017-52.

With respect to the representations that allow for alternative representations to be made,
Parent makes representations 8(b), 11(a), 15(b), 22(a), 31(a), 41(a), as modified below.

Parent makes:

       (i)    representations 1, 4, 6, 13, 27, and 45 with respect to Distributing 1 and the
              First Distribution and Distributing 2 and the Second Distribution,
       (ii)   representations 9, 10, and 12 with respect to Distributing 1 or the Distributing
              1 Separate Affiliated Group (the "D1SAG") and Distributing 2 or the
              Distributing 2 Separate Affiliated Group (the "D2SAG"),
PLR-109775-21                                    4

       (iii)   representations 14, 21, 29, 31(a), 33, 41(a), 42, and 43 with respect to
               Distributing 1, Distributing 2, and Controlled or Distributing 1, Distributing 2, or
               Controlled, as applicable, and
       (iv)    representations 28, 36, 37, 40, and 44 with respect to each of the First
               Distribution and the Second Distribution.

Parent makes the following modified representations:

2. In the First Distribution, Distributing 1 will distribute on the same day all the stock of
Controlled that it holds immediately before the First Distribution. In the Second Distribution,
Distributing 2 will distribute on the same day all the stock of Controlled that it holds
immediately before the Second Distribution.

5. None of the Controlled stock to be distributed in the Distributions will be received in any
capacity other than that of a shareholder of Distributing 1 or Distributing 2, as applicable.

8(b). Should Distributing 1 or Distributing 2 have securities outstanding, they will not
distribute Controlled stock, Controlled securities or Other Property to any holder of such
securities in the Distributions, in satisfaction thereof.

11(a). Following the Distributions, Distributing 1 or the D1SAG, Distributing 2 or the D2SAG,
and Controlled or the Controlled Separate Affiliated Group each will continue, independently
and with its separate employees (including employees of affiliates), the active conduct of
the business on which it relies to meet the active trade or business requirement of Section
355(b).

15(b). Immediately after the Distributions, the fair market value of the gross assets of the
trade or business on which each of Distributing 1, Distributing 2, and Controlled relies to
satisfy the active trade or business requirement of Section 355(b) will be 10 percent or more
of the fair market value of its gross investment assets. See section 5.01(3) of Rev. Proc.
2017-3.

22(a). No Property will be transferred by Distributing 1 or Distributing 2 to Controlled as part
of the Distributions for which an investment credit determined under § 46 has been (or will
be) claimed.

23. Other than potentially as a result of a Continuing Transaction (as described in the
Submission), the transaction does not involve and will not result in a situation in which one
party recognizes income but another party recognizes the deductions associated with such
income or a situation in which one party owns Property but another party recognizes the
income associated with such Property.

32. Other than intercorporate debt arising in the ordinary course of business, no
intercorporate debt will exist between Distributing 1 or Distributing 2, on the one hand, and
Controlled, on the other hand, at the time of, or subsequent to, the Distributions of
Controlled stock.
PLR-109775-21                                    5

34. Distributing 1, Distributing 2, and Controlled each will pay its own expenses (or bear the
economic cost through allocation or otherwise), if any, incurred in connection with the
Distributions.

46. Controlled will not issue stock or securities to a person in anticipation of the
Distributions.

Additionally, Distributing makes the following representations:

1. The Merger was undertaken for reasons independent of the reasons for the Proposed
Transactions and would have occurred regardless of whether the Proposed Transactions
are undertaken or abandoned, and the Proposed Transactions will be undertaken for
reasons independent of the reasons for the Merger and would be undertaken even if the
Merger did not occur.
2. The Distributions would be undertaken even if Controlled did not make the CTB Election.
3. Controlled will not adopt a formal plan of liquidation prior to either of the Distributions.

Rulings

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

The First Distribution

   1) No gain or loss will be recognized by Distributing 1 on the First Distribution.
      Section 355(c).

   2) No gain or loss will be recognized by (and no amount will be included in the
      income of) Distributing 2 upon its receipt of the Controlled stock in the First
      Distribution. Section 355(a).

   3) The aggregate basis of the Distributing 1 stock and the Controlled stock in the
      hands of Distributing 2 after the First Distribution will equal the aggregate
      adjusted basis of the Distributing 1 stock held by Distributing 2 immediately
      before the First Distribution, allocated in the manner described in Treas. Reg.
      § 1.358-2(a)(2). Section 358(b).

   4) Distributing 2's holding period in the Controlled stock received will include the
      holding period of the Distributing 1 common stock with respect to which the
      distribution of the Controlled stock is made. Section 1223(1).

   5) The earnings and profits of Distributing 1 and Controlled will be determined in
      accordance with section 312(h) and Treas. Reg. §§ 1.312-10(b) and 1.1502-
      33(e)(3).
PLR-109775-21                                 6

The Second Distribution

   6) No gain or loss will be recognized by Distributing 2 on the Second Distribution.
      Section 355(c).

   7) No gain or loss will be recognized by (and no amount will be included in the
      income of) Parent upon its receipt of the Controlled stock in the Second
      Distribution. Section 355(a).

   8) The aggregate basis of the Distributing 2 stock and the Controlled stock in the
      hands of Parent after the Second Distribution will equal the aggregate adjusted
      basis of the Distributing 2 stock held by Parent immediately before the Second
      Distribution, allocated in the manner described in Treas. Reg. § 1.358-2(a)(2).
      Section 358(b).

   9) Parent's holding period in the Controlled stock received will include the holding
      period of the Distributing 2 common stock with respect to which the distribution of
      the Controlled stock is made. Section 1223(1).

   10) The earnings and profits of Distributing 2 and Controlled will be determined in
       accordance with section 312(h) and Treas. Reg. §§ 1.312-10(b) and 1.1502-
       33(e)(3).

Caveats

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, copies of this letter are
being sent to your authorized representatives.
PLR-109775-21                                 7

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,

                                       Gerald B. Fleming
                                       Gerald B. Fleming
                                       Senior Technician Reviewer, Branch 2
                                       (Corporate)


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