Tax-free spin-off rulings for an internal cross-border corporate restructuring

Plain-English summary

A corporate parent group planned an internal reorganization that ends with one
foreign subsidiary ("Distributing") spinning off a lower-tier foreign corporation
("Controlled") up the chain to the parent. Spin-offs can be tax-free to both the
distributing company and its shareholders if they meet the requirements of Section

355. The parent asked the IRS to confirm the core tax consequences. Consistent
     with the IRS's current "transactional ruling" practice, the IRS did not rule on
     the big-picture questions (business purpose, whether the deal is a disguised
     dividend "device," or whether it is part of a plan for a 50% ownership shift).
     Instead it gave five specific rulings: the distributing corporation recognizes no
     gain or loss on the distribution, the parent recognizes no gain or loss on
     receiving the shares, the parent's stock basis is allocated between the two
     companies, the holding period carries over, and earnings and profits are split
     between them. In short, the mechanical, non-judgmental pieces of the spin-off
     qualify for tax-free treatment.

Ruling snapshot

• Question: Do the distribution and related steps of the internal
  restructuring qualify for the standard tax-free spin-off consequences under
  Section 355 and related provisions?
• Outcome: Approved (five transactional rulings granted; business
  purpose/device/plan questions expressly not addressed)
• Key authorities: IRC §§ 355(a), 355(c), 358(b), 312(h), 1223(1), 332, 337,
  368(a)(1)(F); Rev. Proc. 2017-52

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202210012                                              Third Party Communication: None
 Release Date: 3/11/2022                                        Date of Communication: Not Applicable
 Index Number: 355.01-00
                                                                Person To Contact:
 ----------------------                                         ------------------, ID No. -----------------
 ----------------------------------------                       Telephone Number:
 --------------------------------                               --------------------
 ---------------------------------                              Refer Reply To:
 ---------------------                                          CC:CORP:1
 -------------------------                                      PLR-114503-21
                                                                Date:
                                                                December 14, 2021




Legend

Parent                     =         ---------------------------------
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Sub 1                      =         ----------------------------------
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Sub 2                      =         ---------------------------------
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Sub 3                      =         -------------------------------------------
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DRE 1                      =         ---------------------------------------------
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DRE 2                      =         -----------------------------------------------------------------
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PLR-114503-21                                             2

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

Distributing               =         --------------------------------------------------
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Controlled                 =         -------------------------------
----------------------------------------------------------------------
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State 1                     =       --------------
---------------------------
Country 1 Entity            =       -----------------------------------------------

Country 2                  =        ----------

Country 3 Entity 1         =        ---------------------------------

Country 3 Entity 2         =        ---------------------------------------

a                          =        ---------------------------


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

This letter responds to a letter dated June 28, 2021, as supplemented by subsequent
information and documentation, submitted on behalf of the taxpayer, requesting rulings
under Section 355, and related provisions of the Internal Revenue Code of 1986, as
amended, and related regulations, with respect to the proposed transaction described
below.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty 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 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 Section 355(a)(1)(B)
PLR-114503-21                                  3

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

Parent is a State 1 corporation that is the common parent of both a U.S. consolidated
group, as defined in Treas. Reg. § 1.1502-1(h), and an expanded affiliated group of
corporations (collectively, the "Parent Group").

Parent owns all the outstanding equity interests in Sub 1, a State 1 limited liability
company that is classified as a corporation for U.S. Federal income tax purposes. Sub 1
owns all the outstanding equity interests in Sub 2, a State 1 limited liability company that
is classified as a corporation for U.S. Federal income tax purposes. Sub 2 owns all the
outstanding equity interests of DRE 1, a State 1 limited liability company that is
classified as a disregarded entity for U.S. Federal income tax purposes. DRE 1 owns all
the outstanding equity interests of Distributing, a Country 1 Entity that is classified as a
corporation for U.S. Federal income tax purposes.

Immediately prior to the Distribution, the Distributing separate affiliated group (within the
meaning of Section 355(b)(3)) includes DRE 2 and Sub 3. DRE 2 is a Country 1 Entity
that is classified as a disregarded entity for U.S. Federal income tax purposes. Sub 3 is
a Country 2 corporation that is classified as a corporation for U.S. Federal income tax
purposes. Distributing intends to rely on the active trade or business ("ATB") of Sub 3 to
satisfy the ATB requirement of Section 355(b).

Distributing owns all the outstanding equity interests of Controlled, which is classified as
a Country 3 Entity 1. Controlled is also classified as a corporation for U.S. Federal
income tax purposes.

                                  Proposed Transaction

1.     (i) Sub 2 will merge with and into Sub 1, with Sub 1 surviving. Parent represents
       that this merger will qualify as a tax-free liquidation under Section 332 and that
       neither Sub 2 nor Sub 1 will recognize gain or loss under Sections 332 and 337;
       and,

       (ii) Sub 1 will then merge with and into Parent, with Parent surviving. Parent
       represents that this merger will qualify as a tax-free liquidation under Section 332
       and that neither Sub 1 nor Parent will recognize gain or loss under Sections 332
       and 337;

2.     (i) Distributing has loaned a to Controlled;
PLR-114503-21                                   4

       (ii) later that same day, Controlled distributed the a of loan proceeds to
       Distributing as a return of a of Distributing's investment in Controlled's shares;

       (iii) Distributing contributed a to Controlled;

       (iv) Controlled repaid the a loan owing to Distributing; and

       (v) Upon completion of steps 2(i) through 2(iv), Controlled will convert from a
       Country 3 Entity 1 to a Country 3 Entity 2. Parent represents that this conversion
       will qualify as tax-free under Section 368(a)(1)(F).

3. Distributing will make a pro rata distribution of all the outstanding shares of
Controlled to DRE 1 (the "Distribution").

4. DRE 1 will make a pro rata distribution of all the outstanding shares of
Controlled to Parent.

                                      Representations

Except as otherwise set forth below, Parent makes all the representations in section 3
of the Appendix to Rev. Proc. 2017-52 in the form set forth therein.

A. Inapplicable Representations

1. Representation 7 is inapplicable because neither the Distribution nor any other
aspect of the proposed transaction constitutes a split-up or a split-off.

2. Representations 17 – 20 are inapplicable because the Distribution is not part of a
reorganization qualifying under Section 368(a)(1)(D).

3. Representation 35 is inapplicable as no cash will be paid in lieu of fractional shares
of Controlled.

4. Representations 36 – 39 are inapplicable because neither Distributing nor Controlled
is a member of the Parent U.S. consolidated group.

B. Alternative Representations

Parent is relying on the following Alternative Representations: 3(a), 8(a), 11(a), 15(a),
22(a), 31(a) and 41(a).

C. Modified Representations

1. Representation 32 is modified to read as follows:
PLR-114503-21                                 5

       No intercorporate debt will exist between Distributing and Controlled at the
       time of, or subsequent to, the Distribution of Controlled stock, except for (i)
       amounts attributable to the cash pool, with respect to which Distributing is
       the leader and Controlled is a member; and (ii) ordinary course
       receivables and payables.

2. Representation 34 is modified to read as follows:

       Distributing and Controlled each will pay its own expenses, if any, incurred
       in connection with the Distribution, except that (i) corporate legal service
       fees directly related to the proposed transaction will be borne by DRE 2;
       and (ii) tax service fees directly related to the proposed transaction will be
       borne by Parent.

D. Additional Representation

For purposes of Treas. Reg. § 1.367(b)-5(c), Parent's predistribution amount with
respect to Distributing or Controlled will not exceed Parent's postdistribution amount
with respect to both entities, or, if the predistribution amount does exceed the
postdistribution amount, Parent will reduce its basis, or include an amount in income as
a deemed dividend, to the extent provided in Treas. Reg. § 1.367(b)-5(c)(2).

                                          Rulings

1. Distributing will recognize no gain or loss upon the Distribution. Section
355(c).

2. No gain or loss will be recognized by (and no amount will be otherwise includible
in the income of) Parent upon its receipt of Controlled shares pursuant to the
Distribution. Section 355(a).

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

4. The holding period of the Controlled stock received by Parent in the Distribution will
include the holding period of the Distributing stock held by Parent, provided that such
Distributing stock was held as a capital asset on the date of the Distribution. Section
1223(1).

5. The earnings and profits of Distributing will be allocated between Distributing and
Controlled in accordance with Section 312(h) and Treas. Reg. § 1.312-10(b).

                                          Caveats
PLR-114503-21                                  6

No opinion is expressed or implied about the tax treatment of the proposed transaction
under any other provision of the Code or regulations or effects resulting from the
proposed transaction that are not specifically covered by the above rulings.

                                 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.

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,


                                       Robert M. Rhyne
                                       Robert M. Rhyne
                                       Assistant to the Branch Chief, Branch 2
                                       (Associate Chief Counsel (Corporate))




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