Private Letter Ruling
202246005
Released November 18, 2022
Approved
Tax-free two-step spin-off separating a business line and pushing it up to a foreign parent
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This page covers one taxpayer's ruling from 2022, which can't be cited as precedent. Ezel answers your situation under the current Code and IRS guidance, with citations.
Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.
About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.
View official IRS release (PDF)
Plain-English summary
A domestic corporate group, ultimately owned by a foreign parent through
a chain of disregarded entities, wanted to separate one of its two active
businesses (Business B) from the other (Business A). It did this in a
series of steps: a subsidiary contributed Business B to a newly formed
corporation and distributed that corporation's stock up to the domestic
parent (the "First Distribution"), and the parent then distributed that
same corporation's stock up to the foreign parent (the "Second
Distribution"). The IRS ruled that the contribution plus First
Distribution qualify as a tax-free reorganization under Section
368(a)(1)(D) with a Section 355 spin-off, and that the Second
Distribution also qualifies as a tax-free Section 355 distribution.
Across all 16 rulings, no gain or loss is recognized at any level, basis
and holding periods carry over, and earnings and profits are allocated
between the companies. The IRS also agreed to enter a closing agreement
with the parent and the new subsidiary. As usual, the IRS did not rule on
business purpose, the "device" test, or the Section 355(e) 50-percent
acquisition rule. This lets a multinational reorganize its structure and
move a business up to its foreign parent without an immediate tax hit.
Ruling snapshot
- Question: Do a contribution-and-spin-off of one business, plus a further distribution of that business up to the foreign parent, qualify as tax-free under Sections 355 and 368?
- Outcome: Approved (16 rulings granted plus a closing agreement; business-purpose, device, and § 355(e) issues expressly not decided)
- Key authorities: IRC §§ 355(a), (c), 368(a)(1)(D), 361, 357(a), 358, 362(b), 312(h), 1223; Treas. Reg. § 1.358-2(a); Rev. Rul. 77-191; Rev. Proc. 2017-52
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 202246005 Third Party Communication: None
Release Date: 11/18/2022 Date of Communication: Not Applicable
Index Number: 355.01-00, 312.06-00,
357.00-00, 358.02-00, Person To Contact:
361.02-00, 362.01-00, ---------------------------, ID No. ---------------
1223.10-00 Telephone Number:
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---------------- Refer Reply To:
-------------------------------------- CC:CORP:1
-------------------------------------- PLR-105260-22
------------------------------------ Date:
----------------------------- August 24, 2022
Parent = ----------------------------------------------------------------------------------------
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Sub 1 = ----------------------------------------------------------------------------------------
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Sub 2 = ----------------------------------------------------------------------------------------
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DE = ----------------------------------------------------------------------------------------
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Foreign Parent = ----------------------------------------------------------------------------------------
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FDE 1 = ----------------------------------------------------------------------------------------
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FDE 2 = ----------------------------------------------------------------------------------------
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FDE 3 = ----------------------------------------------------------------------------------------
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PLR-105260-22 2
Business A = -----------------------------------------------------------------
Business B = -------------------------------------------------------------------
Date 1 = -----------------------
Date 2 = --------------------------
Date 3 = --------------------------
Date 4 = --------------------------
Date 5 = --------------------------
Continuing Relationships = ----------------------------------------------------------------------------------------
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PLR-105260-22 3
Dear --------------:
This letter responds to your authorized representative's letter dated March 11,
2022, requesting rulings on certain federal income tax consequences of a completed
transaction (the "Transaction"). The material information submitted in that request and in
subsequent correspondence is summarized below.
This letter is issued pursuant to Rev. Proc. 2017-52, 2017-41 I.R.B. 283,
regarding one or more "Covered Transactions" under sections 355 and 368 of the
Internal Revenue Code (the "Code"). This office expresses no opinion as to any issue
not specifically addressed by the rulings 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 office has made no determination regarding whether any distribution (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, 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, 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 section 355(e)(2)(A)(ii)
and Treas. Reg. § 1.355-7.
Summary of Facts
Foreign Parent is a foreign entity treated as a corporation for federal income tax
purposes. Foreign Parent is the parent of a large, worldwide group of business entities
(the "Worldwide Group").
Foreign Parent wholly owns FDE 1, which wholly owns FDE 2, which wholly
owns FDE 3, which wholly owns Parent. Each of FDE 1, FDE 2, and FDE 3 is a foreign
eligible entity that is disregarded as an entity separate from its owner for federal tax
purposes under Treas. Reg. § 301-7701-3(b)(2)(i)(C).
Parent is a domestic corporation and the common parent of a consolidated group
(the "Parent Group"). Parent wholly owns Sub 1. Prior to the Transaction, the Parent
Group conducted Business A and Business B. Other businesses and members of the
Parent Group not relevant to the requested rulings are not described in this letter.
PLR-105260-22 4
Sub 1 is a domestic corporation that, prior to the Transaction, wholly owned DE
and conducted the domestic operations of Business A and Business B.
DE is a domestic eligible entity that is disregarded as an entity separate from its
owner for federal tax purposes under Treas. Reg. § 301.7701-3(b)(1)(ii). DE conducts
Business B.
Parent has submitted financial information in accordance with Rev. Proc. 2017-
52 indicating that each of Business A and Business B has had gross receipts and
operating expenses representing the active conduct of a trade or business for each of
the past five years.
The Transaction
For what are represented to be valid business reasons, the Parent Group
separated Business B from Business A in the following steps:
1. On Date 1, Parent formed Sub 2, a domestic limited liability company.
2. Effective Date 1, Sub 2 elected to be treated as a corporation for federal tax
purposes under Treas. Reg. § 301.7701-3(c).
3. On Date 2, Sub 1 contributed Business B assets, liabilities, and employees to
DE.
4. On Date 3, Sub 1 distributed the equity interests in DE to Parent.
5. On Date 4, Parent contributed the equity interests in DE to Sub 2.
6. On Date 5, Parent distributed the stock of Sub 2 to FDE 3 (the "Second
Distribution").
Subsequent to the Transaction, the Parent Group and Sub 2 will engage in the
Continuing Relationships. Additionally, further realignment related to Business B will
occur within the Worldwide Group.
Representations
First Distribution
With respect to the First Distribution and except as set forth below, Parent has
made all the representations in section 3 of the Appendix to Rev. Proc. 2017-52. These
representations were made contingent on the granting of the first ruling.
PLR-105260-22 5
a. Parent has made the following alternative representations: 3(a), 8(a), 11(a),
15(b), 22(a), 31(a), and 41(a).
b. Parent has not made the following representations, which do not apply: 7, 19, 20,
24, 25, 35, 36, 37, 38, and 39.
c. Parent has not made representation 40 but provided the required explanation.
Second Distribution
With respect to the Second Distribution and except as set forth below, Parent has
made all the representations in section 3 of the Appendix to Rev. Proc. 2017-52.
d. Parent has made the following alternative representations: 3(a), 8(a), 11(a),
15(b), 22(a), 31(a), and 41(a).
e. Parent has not made the following representations, which do not apply: 7, 17, 18,
19, 20, 24, 25, 35, and 39.
f. Parent has not made representation 40 but provided the required explanation.
Contribution
With respect to the Contribution and except as set forth below, Parent has made
the following representation in Rev. Proc. 2018-53, 2017-43 I.R.B. 667.
g. Parent has not made representation 6, which does not apply.
h. Parent has not made representations 2 and 4 but provided the required
explanation.
Additional Representations
i. Sub 2 held no assets or liabilities (other than what was needed for corporate
formalities) until Parent contributed DE to Sub 2 in step 5 of the Transaction.
j. Any officers described in the Continuing Relations will provide ministerial or
service functions for Parent and Sub 2 and will not have managerial or
operational responsibilities for the domestic operations of either Business A or
Business B.
Rulings
Based solely on the information submitted and the representations set forth
above, we rule as follows:
PLR-105260-22 6
Contribution and First Distribution
1. For federal tax purposes, steps 3 through 5 of the Transaction will be treated as if
(i) Sub 1 contributed Business B assets (including the equity interests in DE),
liabilities, and employees to Sub 2 in exchange for all the stock of Sub 2 (the
"Contribution") and (ii) Sub 1 distributed all the stock of Sub 2 to Parent (the "First
Distribution"). See Rev. Rul. 77-191, 1977-1 C.B. 94.
2. The Contribution and the First Distribution together will constitute a
reorganization within the meaning of section 368(a)(1)(D) of the Code. Sub 1 and
Sub 2 will each be a "party to a reorganization" within the meaning of section
368(b).
3. Sub 1 will not recognize gain or loss on the Contribution. Sections 357(a) and
361(a).
4. Sub 2 will not recognize gain or loss on the Contribution. Section 1032(a).
5. Sub 2's basis in each asset received in the Contribution will be the same as the
basis of the asset in the hands of Sub 1 immediately before the Contribution.
Section 362(b).
6. Sub 2's holding period in each asset received in the Contribution will include the
period during which Sub 1 held the asset. Section 1223(2).
7. Sub 1 will not recognize gain or loss on the First Distribution. Section 361(c).
8. Parent will not recognize gain or loss (and no amount otherwise will be includable
in its income) on the receipt of the stock of Sub 2 in the First Distribution. Section
355(a).
9. The aggregate basis of the Sub 1 stock and the Sub 2 stock in the hands of
Parent immediately after the First Distribution will equal the aggregate adjusted
basis of the Sub 1 stock held by Distributing 2 immediately before the First
Distribution, allocated between the Sub 1 stock and the Sub 2 stock in proportion
to the fair market value of each immediately following the First Distribution in
accordance with Treas. Reg. § 1.358-2(a). Section 358(a)(1) and (b).
10. Parent's holding period in the Sub 2 stock received will include the holding period
of the Sub 1 stock with respect to which the First Distribution is made, provided
that such Sub 1 stock was held by Parent as a capital asset on the date of the
First Distribution. Section 1223(1).
PLR-105260-22 7
11. Earnings and profits will be allocated between Sub 1 and Sub 2 in accordance
with section 312(h) and Treas. Reg. §§ 1.312-10(a) and 1.1502-33.
Second Distribution
12. Parent will not recognize gain or loss on the Second Distribution. Section
355(c)(1).
13. Foreign Parent will not recognize gain or loss (and no amount otherwise will be
includable in its income) on the receipt of Sub 2 in the Second Distribution.
Section 355(a).
14. The aggregate basis of the Parent stock and the Sub 2 stock in the hands of
Foreign Parent immediately after the Second Distribution will equal the aggregate
adjusted basis of the Parent stock held by Foreign Parent immediately before the
Second Distribution, allocated between the Parent stock and the Sub 2 stock in
proportion to the fair market value of each immediately following the Second
Distribution in accordance with Treas. Reg. § 1.358-2(a). Section 358(a)(1) and
(b).
15. Foreign Parent's holding period in the Sub 2 stock received will include the
holding period of the Parent stock with respect to which the Second Distribution
is made, provided that such Parent stock was held by Foreign Parent as a capital
asset on the date of the Second Distribution. Section 1223(1).
16. The earnings and profits of each of Parent and Sub 2 will be adjusted in
accordance with section 312(h) and Treas. Reg. §§ 1.312-10(b) and 1.1502-33.
Closing Agreement
We will, accordingly, approve a closing agreement with Parent and Sub 2 with
respect to certain of those issues affecting their tax liability on the basis set forth above.
The necessary closing agreement for Parent has been prepared in triplicate and is
enclosed.
Caveat
No opinion is expressed about the tax treatment of the Transaction under other
provisions of the Code or regulations or the tax treatment of any conditions existing at
the time of, or effects resulting from, the Transaction that are not specifically covered by
the above rulings.
Procedural Statements
PLR-105260-22 8
This letter 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 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 (PLR-105260-22) of this letter.
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,
Lisa A. Fuller
Lisa A. Fuller
Deputy Associate Chief Counsel (Corporate)
cc:
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