Private Letter Ruling
202310007
Released March 10, 2023
Approved
Tax-free spin-off separating two businesses of a public company
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This page covers one taxpayer's ruling from 2023, 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.
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Plain-English summary
A publicly traded parent company runs two distinct lines of business and wants to separate them so that one becomes a standalone public company. It plans to gather the second business (held through a chain of disregarded LLCs and partnerships) into a newly formed corporation, "Controlled," and then distribute all of Controlled's stock to the parent's public shareholders. The taxpayer asked the IRS to confirm the transaction qualifies as a tax-free reorganization and spin-off. The IRS issued 12 rulings: the contribution plus distribution is a "D" reorganization under § 368(a)(1)(D), the parent recognizes no gain or loss except where assumed liabilities exceed basis, the public shareholders recognize no gain or loss when they receive Controlled stock under § 355(a), and it set the basis, holding period, earnings-and-profits allocation, and cash-in-lieu-of-fractional-shares treatment. The IRS expressly did not rule on the business-purpose, device, or § 355(e) plan tests. This matters because a properly structured § 355 spin-off lets a company split in two without an immediate tax bill to the company or its shareholders.
Ruling snapshot
- Question: Do the contribution of a business to a new subsidiary and the distribution of that subsidiary's stock to public shareholders qualify as a tax-free reorganization and spin-off under §§ 368(a)(1)(D) and 355?
- Outcome: approved (12 favorable rulings; business-purpose, device, and § 355(e) issues not addressed)
- Key authorities: IRC §§ 355, 368(a)(1)(D), 361, 357, 358, 312(h), 1032, 1223; Treas. Reg. §§ 1.358-2, 1.312-10
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 202310007 Third Party Communication: None
Release Date: 3/10/2023 Date of Communication: Not Applicable
Index Number: 355.01-00, 368.04-00
Person To Contact:
------------------------- -----------------------------, ID No. ------------
------------------------------------------------ Telephone Number:
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---------------------------- Refer Reply To:
------------------------------- CC:CORP:B01
PLR-116094-22
Date:
December 13, 2022
Legend
Distributing = ---------------------------------------------------------------------------------------
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Controlled = ---------------------------------------------------------------------------------------
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DRE 1 = ---------------------------------------------------------------------------------------
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DRE 2 = ---------------------------------------------------------------------------------------
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DRE 3 = ---------------------------------------------------------------------------------------
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DRE 4 = ---------------------------------------------------------------------------------------
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PRS 1 = ---------------------------------------------------------------------------------------
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PLR-116094-22 2
PRS 2 = ---------------------------------------------------------------------------------------
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PRS 3 = ---------------------------------------------------------------------------------------
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PRS 4 = ---------------------------------------------------------------------------------------
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Entity 1 = ---------------------------------------------------------------------------------------
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Entity 2 = ---------------------------------------------------------------------------------------
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State A = -------------
State B = -------------
State C = ------------------
State D = ------------
Business A = ---------------------------------------------------------------------------------------
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Business B = ---------------------------------------------------------------------------------------
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Services = ---------------------------------------------------------------------------------------
Agreement ---------------------------------------------------------------------------------------
PLR-116094-22 3
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Overlapping = ---------------------------------------------------------------------------------------
Board Members -------------
a = --------
b = ------
c = --
d = ---
e = ---
f = --------
g = --------
h = ---
i = --
j = ---
k = --
Dear --------------:
This letter responds to your letter dated August 22, 2022, as supplemented by
subsequent information and documentation, requesting rulings on certain federal
income tax consequences of a series of transactions (the “Proposed 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”) and pursuant to Rev. Proc. 2022-10, 2022-6 I.R.B. 473. 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 facts and representations submitted
by the taxpayer and accompanied by a penalties of perjury statement executed by an
PLR-116094-22 4
appropriate party. This office has not verified any of the materials submitted in support
of the request for rulings. Verification of the information, representations, and other
data may be required on examination.
This Office has made no determination regarding whether the Distribution (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)
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
Distributing, a publicly traded State A corporation, is the parent of a worldwide group
that includes both domestic and foreign entities (the “Distributing Group”). Distributing
has shares of common stock and convertible preferred stock outstanding. As part of its
share-based compensation plan, Distributing also has outstanding restricted stock units
(“RSUs”), stock options, and restricted stock.
Distributing owns all of the outstanding equity interests in (i) DRE 1, a State B limited
liability company that is disregarded as an entity separate from Distributing for federal
income tax purposes (a “disregarded entity”); and (ii) DRE 2, a State C limited liability
company that is a disregarded entity.
DRE 2 directly owns all of the outstanding equity interests in DRE 3, a State D limited
liability company that is a disregarded entity. DRE 3 directly owns all of the outstanding
equity interests in DRE 4, a State B limited liability company that is a disregarded entity.
DRE 4 directly owns a percent (a “significant interest” within the meaning of Rev. Rul.
2007-42, 2007-2 C.B. 44) of the outstanding equity interest in PRS 1, a State B limited
liability company that is classified as a partnership for federal income tax purposes. The
remaining b percent interest in PRS 1 is owned by Entity 1, an unaffiliated limited
liability company. In addition, certain employees of Business B hold management
incentive units structured as profits interests for federal income tax purposes (the “PRS
1 MIUs”), reflecting an equity interest in PRS 1 of less than c percent of the total
outstanding equity interest in PRS 1, which dilute proportionately the ownership interest
in PRS 1 held by DRE 4 and Entity 1.
DRE 1 owns approximately d percent and e percent, respectively, of the outstanding
equity interests in PRS 2 and PRS 3, each a State B limited partnership that is classified
as a partnership for federal income tax purposes. The remaining equity interests in
PRS 2 and PRS 3 are owned by unaffiliated persons. PRS 2 and PRS 3 own f and g
percent, respectively, of the outstanding equity interests in PRS 4, a State B limited
PLR-116094-22 5
liability company that is classified as a partnership for federal income tax purposes. The
remaining equity interests in PRS 4 are owned by Entity 2, an unaffiliated limited liability
company, and certain employees of PRS 4 that hold management incentive units
structured as profits interests for federal income tax purposes (the “PRS 4 MIUs”),
reflecting an ownership interest in PRS 4 of less than c percent of the total outstanding
equity interest in PRS 4, which dilute proportionately the ownership interest in PRS 4
held by PRS 2, PRS 3, and Entity 2.
The Distributing Group is engaged in Business A and Business B. For purposes of
satisfying the active trade or business requirement of section 355(b) with respect to the
Distribution (defined below), Distributing will rely on Business A conducted by
Distributing and members of its “separate affiliated group” as defined in section
355(b)(3)(B), and Controlled will rely on Business B conducted by Controlled through
PRS 1. Financial information has been submitted 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.
Prior to the Proposed Transaction, DRE 1 will merge with and into Distributing, with
DRE 1 ceasing to exist and Distributing as the surviving legal entity.
Proposed Transaction
For what are represented to be valid business reasons, Distributing will undertake the
following steps (the Proposed Transaction) to separate Business B from Business A:
1. Entity 1 will transfer its entire interest in PRS 1 to DRE 4 in repayment of loans owing
by Entity 1 to DRE 4.
2. Certain holders of the PRS 1 MIUs will transfer all or a portion of their interests in
PRS 1 to DRE 4 in repayment of loans owing by such holders to Distributing or a
subsidiary of Distributing.
3. DRE 4 will contribute its entire interest in PRS 1 (approximately h percent of the
issued and outstanding equity interests in PRS 1) to Controlled, a newly formed State B
corporation, solely in exchange for Controlled stock (the “First Contribution”).
4. The remaining holders of the PRS 1 MIUs will contribute their entire interest in PRS 1
(hereafter, “DRE 5”) to Controlled solely in exchange for approximately i percent of the
Controlled stock (the “Second Contribution”).
5. DRE 4 will distribute all of the Controlled stock received in the First Contribution to
DRE 3.
6. DRE 3 will distribute all of the Controlled stock received from DRE 4 to DRE 2.
PLR-116094-22 6
7. DRE 2 will distribute all of the Controlled stock received from DRE 3 to Distributing.
8. Each of PRS 2, PRS 3, Entity 2 and the holders of the PRS 4 MIUs will transfer their
entire interest in PRS 4 (hereafter, “DRE 6”) to Controlled solely in exchange for shares
of Controlled stock (the “Third Contribution”).
9. Each of PRS 2 and PRS 3 will distribute all of the Controlled stock received in the
Third Contribution to their partners, including Distributing, on a pro rata basis.
10. Controlled will enter into a new revolving credit facility, the proceeds of which will be
used by Controlled to repay the existing credit facilities of DRE 5 and DRE 6.
11. Distributing will distribute its entire interest in Controlled (constituting at least j
percent of the outstanding stock of Controlled) to the holders of Distributing common
stock (the “Public Shareholders”) (the “Distribution”).
In connection with the Distribution, certain employees and/or non-employee directors of
Controlled will receive Controlled RSUs (the “Controlled RSU Grant”), and certain
holders of Distributing RSUs, Distributing stock options, and Distributing restricted stock
will receive Controlled RSUs, Controlled stock options, and shares of Controlled
restricted stock (collectively, the “Equity Award Adjustment”).
Following the Distribution, certain individuals will serve as members of the boards of
each of Distributing and Controlled (the “Overlapping Board Members”). The
Overlapping Board Members will constitute a minority of the boards of each of
Controlled and Distributing and will be subject to reelection under normal board election
procedures. The Overlapping Board Members will at all times have a minority voting
power with respect to each of the boards of Distributing and Controlled.
Other than services performed by certain employees of Business B on behalf of a
majority owned subsidiary of Distributing pursuant to the Services Agreement, there will
be no other continuing relationships between Distributing and Controlled after the
Distribution. The Services Agreement will be based on arm’s length terms and
conditions.
Representations
Except as set forth below, Distributing has made all of the representations in section 3
of the Appendix to Rev. Proc. 2017-52 with respect to the Proposed Transaction.
1. Distributing has made the following alternative representations: 3(a), 8(b), 11(a),
15(b), 22(a), 31(a) and 41(a).
2. Distributing has not made the following representations, which do not apply to the
Proposed Transaction: 7, 19, 20, 24, 25 and 40.
PLR-116094-22 7
3. Distributing has made the following modified representations and provided the
required explanation:
Representation 35: The payment of cash in lieu of fractional shares of Controlled stock
will be solely for the purpose of avoiding the expense and inconvenience of issuing
fractional shares and will not represent separately bargained-for consideration. The
fractional share interests of each of the Public Shareholders will be aggregated, and
none of the Public Shareholders will receive cash in an amount equal to or greater than
the value of one full share of Controlled stock (with the possible exception of
shareholders who hold Controlled stock in multiple accounts or with multiple brokers).
Representation 42: Distributing will not have been a U.S. real property holding
corporation (as defined in section 897(c)(2)) at any time during the five-year period
preceding the Distribution, and Distributing will not be a U.S. real property holding
corporation immediately after the Distribution.
Representation 46: Other than shares of Controlled stock issued in the Second
Contribution and Third Contribution, pursuant to which transferors other than
Distributing will receive, in the aggregate, shares of Controlled common stock
constituting no more than k percent of the total issued and outstanding stock of
Controlled, Controlled will not issue stock or securities to a person other than
Distributing in anticipation of the Distribution.
Rulings
Based solely on the information submitted and the representations made, we rule as
follows with respect to the Proposed Transaction:
1. The First Contribution, together with the Distribution, will be a “reorganization” within
the meaning of section 368(a)(1)(D). Distributing and Controlled will each be a “party to
a reorganization” within the meaning of section 368(b).
2. Distributing will recognize no gain or loss on the First Contribution except that gain
will be recognized to the extent that liabilities of Distributing assumed by Controlled
exceed Distributing’s basis in the property transferred. Sections 361(a) and 357(a) and
(c). Rev. Rul. 80-323, 1980-2 C.B. 124.
3. Controlled will recognize no gain or loss on the First Contribution. Section 1032(a).
4. Controlled’s basis in the h percent undivided interest in the assets of PRS 1 received
by Controlled attributable to Distributing’s interest in PRS 1 will equal the basis of
Distributing in its PRS 1 interest allocated in accordance with section 732(c). Rev. Rul.
84-111 Situation 3, 1984-2 C.B. 88 and section 362(b).
5. Controlled’s holding period for the h percent undivided interest in the assets of PRS
1 received by Controlled attributable to Distributing’s interest in PRS 1 will include the
PLR-116094-22 8
period during which PRS 1 held the assets. Rev. Rul. 84-111 Situation 3 and section
1223(2).
6. Distributing will recognize no gain or loss upon the Distribution. Section 361(c).
7. The Public Shareholders will recognize no gain or loss (and no amount will be
included 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 the Public Shareholders 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 the Public Shareholders
immediately before the Distribution, allocated between the Distributing stock and
Controlled stock in proportion to the fair market value of each immediately following the
Distribution in accordance with Treas. Reg. § 1.358-2(a)(2). Section 358(a) through (c).
9. The holding period of the Controlled stock received by the Public Shareholders in the
Distribution (including any fractional share interest in Controlled stock to which the
Public Shareholders may be entitled) will equal the holding period of the Distributing
stock with respect to which the distribution of the Controlled stock will be made,
provided that the Distributing stock is held as a capital asset on the date of the
Distribution. Section 1223(1).
10. Earnings and profits will be allocated between Distributing and Controlled in
accordance with section 312(h) and Treas. Reg. § 1.312-10(a).
11. The receipt by the Public Shareholders of cash in lieu of fractional shares, if any, of
Controlled stock will be treated for federal income tax purposes as if the fractional
shares had been distributed to the Public 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. Gain (or loss) recognized (determined using the basis allocated to the
fractional shares in Ruling 8), if any, will be treated as capital gain (or loss) under
section 1001, provided the stock was held as a capital asset by the selling Public
Shareholder. 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. The Controlled stock options and Controlled RSUs issued as part of the Equity
Award Adjustment and Controlled RSU Grant (and any Controlled shares underlying or
issued pursuant to any such rights) are not taken into account for purposes of
determining whether Distributing distributed an amount of Controlled stock constituting
control under section 368(c) in the Distribution.
PLR-116094-22 9
Caveats
No opinion is expressed about the tax treatment of the Proposed 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 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, a copy of this ruling
letter is 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 this
ruling letter.
Sincerely,
Kelly E. Madigan
Kelly E. Madigan
Senior Counsel, Branch 1
Office of Chief Counsel (Corporate)
cc:
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