Multi-step product-line separation qualified for tax-free distribution treatment
Apply this to your situation
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.
Plain-English summary
A foreign corporate group planned to separate an established product line from an earlier-stage product line that needed substantial capital. The plan moved the development assets and cash into a new domestic subsidiary, distributed that subsidiary through several companies in the ownership chain, and then placed it under a newly formed foreign public company whose shares would go proportionately to the foreign parent's shareholders. The IRS ruled that the first contribution and distribution and the final foreign-company contribution and distribution would each qualify as a type D reorganization under section 368(a)(1)(D). It also ruled that the five distributions would generally produce no gain, loss, or income to the distributing corporations or recipients under sections 355 and 361, with carryover basis, holding-period, and earnings-and-profits consequences. Cash paid instead of fractional shares would be treated as proceeds from selling those fractional shares and could produce capital gain or loss. The ruling also addressed how the companies could identify relevant shareholders and measure ownership changes for the section 355(e) anti-acquisition rules. The IRS did not rule on the distributions' business purpose, device, or acquisition-plan requirements, the two later cash and asset contributions, section 267, or any issue not expressly covered.
Ruling snapshot
- Question: What federal tax consequences follow from a five-distribution, cross-border separation of two product lines?
- Outcome: Approved rulings on the specified contributions, distributions, reorganizations, shareholder consequences, and section 355(e) ownership rules
- Key authorities: IRC §§ 351, 355, 358, 361, 362, 368(a)(1)(D), 1001, 1032, 1221, 1222, and 1223; Rev. Proc. 2017-52
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 202349009 Third Party Communication: None
Release Date: 12/8/2023 Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-00,
368.00-00, 368.04-00 Person To Contact:
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------------------------------------------------------ ID No. -----------------
----------------- Telephone Number:
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------------------------------------ Refer Reply To:
CC:CORP:3
PLR-106745-23
Date:
September 13, 2023
Legend
Foreign Parent = ----------------------------------------------------------------------
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FSub1 = ----------------------------------------------------------------------
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FSub2 = ----------------------------------------------------------------------
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FSub3 = ----------------------------------------------------------------------
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FDE = ----------------------------------------------------------------------
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Parent = ----------------------------------------------------------------------
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Sub1 = ----------------------------------------------------------------------
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PLR-106745-23 2
Sub2 = ----------------------------------------------------------------------
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Business = --------------------------------------------------------
Product Line X = ------------------------------------
Product Line Y = -------------------------------------
Government Regulatory = -----------------------------------------------------------
Agency
Country A = ---------
Continuing Agreements = - -------------------------------------------------------------
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PLR-106745-23 3
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Date 1 = ------------------
Date 2 = -----------------------
Date 3 = -----------------------
Date 4 = -------------------------
Date 5 = ----------------------
Shareholder A = ---------------------------------------
Fund = ------------------------------------
Investment Advisor 1 = ------------------------------------------------
Investment Advisor 2 = ---------------------------
Investment Advisor 3 = ---------------------
Investment Advisor 4 = -----------------------------------------
a = -------------
b = --
c = -----------------
d = -----
e = --
f = ----
g = ---------
Dear -----------:
This letter responds to your authorized representatives’ letter dated March 23, 2023, as
supplemented by subsequent information and documentation requesting rulings on
certain federal tax consequences of a series of transactions (the “Proposed
PLR-106745-23 4
Transaction,” as defined below). The material information submitted in that letter and
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 section 6.03(2) of Rev. Proc. 2023-1, 2023-1 I.R.B. 1, regarding
one or more significant issues under section 368. 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
appropriate party. This office has not verified any of the material submitted in support of
the request for rulings. Verification of the information, representations, and other data
may be required as part of the audit process.
This office has made no determination regarding whether the First Distribution, Second
Distribution, Third Distribution, Fourth Distribution, or Fifth 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).
Facts
Foreign Parent wholly owns FSub1. FSub1 wholly owns FSub2 and FDE. Each of
Foreign Parent, FSub1, and FSub2 is a foreign corporation classified as a corporation
for U.S. federal income tax purposes. FDE is a foreign eligible entity that is disregarded
as separate from its owner for U.S. federal income tax purposes. FSub2 wholly owns
Parent.
Parent is a domestic corporation and the parent of an affiliated group of corporations
that file a consolidated return for U.S. federal income tax purposes (the “Parent Group”).
Parent wholly owns Sub1, a domestic corporation.
Foreign Parent and its direct and indirect subsidiaries are engaged in Business, which
includes conducting research and development activities for the manufacture of
products under Product Line X and Product Line Y. Before these products may be
marketed or sold to the public, they must go through a series of steps in order to receive
approval from the Government Regulatory Agency. While certain Product Line X
PLR-106745-23 5
products have obtained approval and are marketed and sold to the public, Product Line
Y products are in an earlier stage of development.
For more than five years, Sub1 has been directly engaged in regular, continuing
operational and managerial activities with respect to Business, including each of
Product Line X and Product Line Y.
Financial information has been submitted indicating that Sub1’s Product Line X has had
gross receipts and operating expenses representing the active conduct of a trade or
business for each of the past five years, as well as information indicating that Sub1’s
Product Line Y has incurred substantial, continuing operating expenses representing
the active conduct of a trade or business with respect to researching and developing
Product Line Y for each of the past five years.
Foreign Parent has determined that Product Line Y needs significant capital to transition
to the commercialization stage. In order to raise capital for Product Line Y, Foreign
Parent intends to separate the activities of Product Line X from Product Line Y.
Foreign Parent has outstanding equity awards issued pursuant to its equity incentive
plans to its directors and to employees of its subsidiaries in connection with their
performance of services. Recipients of such awards include individuals that are not
subject to U.S. taxation.
Prior to Date 5, Shareholder A filed Schedule 13D reporting beneficial ownership for
U.S. securities law purposes of more than five percent (but less than ten percent) of
Foreign Parent’s total outstanding shares of common stock. On Date 5, Shareholder A
filed Schedule 13D reporting beneficial ownership for U.S. securities law purposes of
less than five percent of Foreign Parent’s total outstanding shares of common stock.
Prior to Date 2, Investment Advisor 1 filed Schedule 13G designating itself as a parent
holding company and reporting ownership for U.S. securities law purposes of more than
five percent (but less than ten percent) of Foreign Parent’s total outstanding shares of
common stock, with one shareholder (“Fund”) reporting ownership of more than five
percent (but less than ten percent) of the total outstanding shares. On Date 2,
Investment Advisor 1 filed Schedule 13G reporting ownership for U.S. securities law
purposes of less than five percent of Foreign Parent’s total outstanding shares of
common stock.
On Date 3, Investment Advisor 2 filed Schedule 13G designating itself as an investment
advisor and reporting beneficial ownership for U.S. securities law purposes of more than
five percent of Foreign Parent’s total outstanding shares of common stock. Item 6 stated
that no one person's interest in Foreign Parent was more than five percent of the total
outstanding common shares.
PLR-106745-23 6
Also on Date 3, Investment Advisor 3, filed Schedule 13G designating itself as a parent
holding company and reporting beneficial ownership for U.S. securities law purposes of
more than five percent of Foreign Parent’s total outstanding shares of common stock.
Item 6 stated that no one person's interest in Foreign Parent was more than five percent
of the total outstanding common shares.
Prior to Date 4, Investment Advisor 4, filed Schedule 13G designating itself as an
investment advisor and reporting beneficial ownership for U.S. securities law purposes
of more than five percent of Foreign Parent’s total outstanding shares of common stock.
Item 6 stated that no one person's interest in Foreign Parent was more than five percent
of the total outstanding common shares. On Date 4, Investment Advisor 4 filed
Schedule 13G reporting ownership for U.S. securities law purposes of less than five
percent of Foreign Parent’s total outstanding shares of common stock.
Foreign Parent has actual knowledge of directors and officers that own Foreign Parent
shares and participate in its management or operation (each a “Foreign Parent Officer”).
Each Foreign Parent Officer owns less than five percent of the shares of Foreign
Parent. Neither Investment Advisor 1, Fund, Investment Advisor 2, Investment Advisor
3, nor Investment Advisor 4 is represented on Foreign Parent’s board of directors or
otherwise participates in Foreign Parent’s management or operation.
Proposed Transaction
For what are represented to be valid corporate business purposes, Foreign Parent
proposes to engage in the following steps, some of which have been completed, to
separate Product Line X from Product Line Y (collectively, the “Proposed Transaction”):
-
Sub1 will form a domestic corporation (“Sub2”), which will have one class of
common stock outstanding. -
FDE will transfer assets associated with Product Line Y to Foreign Parent in
exchange for cash or a note equal to the fair market value of the assets
transferred. -
Sub1 will contribute all its assets associated with Product Line Y to Sub2 solely in
exchange for shares of common stock of Sub2. -
Sub 1 will contribute an amount of cash not in excess of $a to Sub2 solely in
exchange for shares of common stock of Sub2 (Steps 3 and 4, together, the
“First Contribution”). -
Sub1 will distribute all the stock of Sub2 to Parent (the “First Distribution”).
-
The board of directors of Parent and FSub2 will approve an amendment to
Parent’s certificate of incorporation to split Parent’s single class of issued and
PLR-106745-23 7outstanding common stock into two classes of stock: common stock and Class A
common stock (the “Stock Split”). In connection with the Stock Split, Parent will
allocate additional paid in capital to the Class A common stock so that for
Country A law purposes, the nominal value of the Class A common stock will
equal the fair market value of the stock of Sub2.Pursuant to the same plan as the Stock Split, and no later than b days of the
Stock Split, Parent will repurchase the Class A common stock, for Country A law
purposes, at a nominal value, by transferring the stock of Sub2 to FSub2 (the
“Repurchase”, and together with the Stock Split, the “Second Distribution”). The
repurchased Class A common stock will be retired. -
FSub2 will distribute all the stock of Sub2 to FSub1 (the “Third Distribution”).
-
FSub1 will distribute all the stock of Sub2 to Foreign Parent (the “Fourth
Distribution”). -
Foreign Parent will contribute all its assets associated with Product Line Y (that it
received in Step 2 of the Proposed Transaction) to Sub2 in exchange for shares
of common stock of Sub2 (“Contribution 1”). -
Foreign Parent will contribute an amount of cash not in excess of $c to Sub2
solely in exchange for shares of Sub2 common stock (“Contribution 2”). -
On Date 1, a third-party corporate service provider (“Initial Shareholder”) formed
FSub3, a foreign corporation. Initial Shareholder holds all the equity interests in
FSub3, consisting of d ordinary shares (with a par value of €e per share), which
will be acquired by FSub3 for zero consideration and immediately cancelled
following the issuance of the Initial Ordinary Shares (defined below). FSub3 will
issue the following equity interests to the Initial Shareholder:(a) b ordinary shares (with a par value of $f per share) (the “Initial Ordinary Shares”) (b) g non-voting deferred shares (with a par value of €e per share) (the “Initial Deferred Shares”); and (c) e preferred share (with a par value of $f per share) (the “Initial Preferred Share”).Following the share issuances, FSub3 will reregister as a publicly traded
company under Country A law. -
In exchange for all of Foreign Parent’s shares in Sub2 (the “Sub2 Transfer”),
FSub3 will issue shares of common stock (and potentially cash in lieu of
PLR-106745-23 8fractional FSub3 shares) to Foreign Parent’s shareholders in proportion to their
interest in Foreign Parent (the “Fifth Distribution”). -
FSub3 will issue e preferred share with par value of $f per share (the “Bonus
Share”) to the Initial Shareholder. -
FSub3 will acquire the Initial Deferred Shares and the Initial Ordinary Shares
held by the Initial Shareholder for zero consideration and cancel them. -
FSub3 will acquire the Initial Preferred Share and the Bonus Share held by the
Initial Shareholder for zero consideration and cancel them (Steps 11 through 15,
collectively, the “Demerger”).
Following the Fifth Distribution, one or more third-party investors may provide financing
to FSub3 via a share subscription.
In connection with the Proposed Transaction, FSub3 and Sub2 on the one hand, and
Foreign Parent and its subsidiaries on the other hand, will enter into certain Continuing
Agreements.
Representations
First Contribution and First Distribution
Except as otherwise set forth below, Foreign Parent has made all the representations in
section 3 of the Appendix to Rev. Proc. 2017-52.
Foreign Parent has made the following alternative representations:
Representations 3(a), 8(a), 11(a), 15(b), 22(a), 31(a), and 41(a).
Foreign Parent has not made the following representations, which do not apply to the
First Contribution and First Distribution:
Representations 7, 19, 20, 24, 25, 35, 39, and 40.
Foreign Parent has made the following modified representations:
Representation 32: No intercorporate debt will exist between Sub1 and Sub2 at
the time of, or subsequent to, the First Distribution, other than any payables that
may arise under the Continuing Agreements.
Representation 33: Except for certain payments made pursuant to the
Continuing Agreements, payments made in connection with all continuing
PLR-106745-23 9
transactions between Sub1 and Sub2 after the First Distribution will be for fair
market value based on arm’s length terms.
Second Distribution
Except as otherwise set forth below, Foreign Parent has made all the representations in
section 3 of the Appendix to Rev. Proc. 2017-52.
Foreign Parent has made the following alternative representations:
Representations 3(a), 8(a), 11(a), 15(b), 31(a), and 41(a).
Foreign Parent has not made the following representations, which do not apply to the
Second Distribution:
Representations 17, 18, 19, 20, 22, 24, 25, 26, 35, 39, and 40.
Foreign Parent has made the following modified representations:
Representation 32: No intercorporate debt will exist between Parent (or a
member of its SAG) and Sub2 at the time of, or subsequent to, the Second
Distribution, other than any payables that may arise under the Continuing
Agreements.
Representation 33: Except for certain payments made pursuant to the
Continuing Agreements, payments made in connection with all continuing
transactions between Parent (or a member of its SAG) and Sub2 after the
Second Distribution will be for fair market value based on arm’s length terms.
Third Distribution
Except as otherwise set forth below, Foreign Parent has made all the representations in
section 3 of the Appendix to Rev. Proc. 2017-52.
Foreign Parent has made the following alternative representations:
Representations 3(a), 8(a), 11(a), 15(b), 31(a), and 41(a).
Foreign Parent has not made the following representations, which do not apply to the
Third Distribution:
Representations 7, 17, 18, 19, 20, 22, 24, 25, 26, 35, 36, 37, 38, 39, and 40.
Foreign Parent has made the following modified representations:
PLR-106745-23 10
Representation 32: No intercorporate debt will exist between FSub2 (or a
member of its SAG) and Sub2 at the time of, or subsequent to, the Third
Distribution, other than any payables that may arise under the Continuing
Agreements.
Representation 33: Except for certain payments made pursuant to the
Continuing Agreements, payments made in connection with all continuing
transactions between FSub2 (or a member of its SAG) and Sub2 after the Third
Distribution will be for fair market value based on arm’s length terms.
Fourth Distribution
Except as otherwise set forth below, Foreign Parent has made all the representations in
section 3 of the Appendix to Rev. Proc. 2017-52.
Foreign Parent has made the following alternative representations:
Representations 3(a), 8(a), 11(a), 15(b), 31(a), and 41(a).
Foreign Parent has not made the following representations, which do not apply to the
Fourth Distribution:
Representations 7, 17, 18, 19, 20, 22, 24, 25, 26, 35, 36, 37, 38, 39, and 40.
Foreign Parent has made the following modified representations:
Representation 32: No intercorporate debt will exist between FSub1 (or a
member of its SAG) and Sub2 at the time of, or subsequent to, the Fourth
Distribution, other than any payables that may arise under the Continuing
Agreements.
Representation 33: Except for certain payments made pursuant to the
Continuing Agreements, payments made in connection with all continuing
transactions between FSub1 (or a member of its SAG) and Sub2 after the Fourth
Distribution will be for fair market value based on arm’s length terms.
Fifth Distribution
Except as otherwise set forth below, Foreign Parent has made all the representations in
section 3 of the Appendix to Rev. Proc. 2017-52.
Foreign Parent has made the following alternative representations:
Representations 3(a), 8(a), 11(a), 15(b), 22(a), 31(a), and 41(a).
PLR-106745-23 11
Foreign Parent has not made the following representations, which do not apply to the
Fifth Distribution:
Representations 7, 17, 18, 19, 20, 24, 25, 36, 37, 38, 39, and 40.
Foreign Parent has made the following modified representations:
Representation 32: No intercorporate debt will exist between Foreign Parent (or a
member of its SAG) and FSub3 (and its subsidiary, Sub2) at the time of, or
subsequent to, the Fifth Distribution, other than any payables that may arise
under the Continuing Agreements.
Representation 33: Except for certain payments made pursuant to the
Continuing Agreements, payments made in connection with all continuing
transactions between Foreign Parent (or a member of its SAG) and FSub3 (or a
member of its SAG) after the Fifth Distribution will be for fair market value based
on arm’s length terms.
Representation 35: The payment of cash in lieu of fractional shares of FSub3 is
solely for the purpose of avoiding the expense and inconvenience of issuing
fractional shares and does not represent separately bargained-for consideration.
The fractional share interests of each Foreign Parent shareholder will be
aggregated and no Foreign Parent shareholder of record will receive cash in an
amount equal to or greater than the value of one full share of Foreign Parent
(with the possible exception of shareholders who hold Foreign Parent shares in
multiple accounts or with multiple brokers).
Additionally, Foreign Parent has made the following representations:
(a) Each of Contribution 1 and Contribution 2 will qualify as a transaction under
section 351(a).
(b) The amount of cash contributed to Sub2 in Step 4 and 10 of the Proposed
Transaction (i.e., an amount not in excess of the sum of $a and $c) represents
an amount Foreign Parent estimates is necessary for Sub2’s present and
reasonably anticipated future needs to progress towards regulatory approval and
to bring Product Line Y products to market.
(c) None of the cash received in Steps 4 or 10 of the Proposed Transaction will be
used by FSub3 to fund any distributions to its shareholders.
(d) The steps of the Demerger will occur pursuant to a single, integrated, and
prearranged plan such that no step of the Demerger will occur unless each and
every step of the Demerger occurs in the order described in any relevant legal
agreements.
PLR-106745-23 12
(e) To Foreign Parent’s knowledge, none of its shareholders that own an economic
interest of more than 5 percent of the issued and outstanding shares immediately
before the Fifth Distribution have a plan or intention to sell or exchange any
shares of Foreign Parent or FSub3 following the Fifth Distribution.
Rulings
First Contribution and First Distribution
-
The First Contribution, together with the First Distribution, will constitute a
reorganization within the meaning of section 368(a)(1)(D). Sub1 and Sub2 will each
be “a party to a reorganization” under section 368(b). -
Sub1 will not recognize gain or loss on the First Contribution. Section 361(a).
-
Sub2 will not recognize gain or loss on the First Contribution. Section 1032(a).
-
Sub2’s basis in each asset received in the First Contribution will be the same as the
basis of the asset in the hands of Sub1 immediately before the First Contribution.
Section 362(b). -
Sub2’s holding period in each asset received in the First Contribution will include the
period during which Sub1 held the asset. Section 1223(2). -
Sub1 will not recognize gain or loss on the First Distribution. Section 361(c).
-
Parent will not recognize gain or loss (and no amount otherwise will be includable in
its income) upon receipt of the Sub2 stock in the First Distribution. Section 355(a). -
Parent’s holding period in the Sub2 stock received will include its holding period in
the Sub1 stock with respect to which the First Distribution is made, provided that
such Sub1 stock is held by Parent as a capital asset on the date of the First
Distribution. Section 1223(1). -
Earnings and profits (“E&P”), if any, will be allocated between Sub1 and Sub2 in
accordance with section 312(h), Treas. Reg. § 1.312-10(a), and Treas. Reg.
§ 1.1502-33.
Second Distribution
-
Parent will not recognize gain or loss on the Second Distribution. Section 355(c).
PLR-106745-23 13 -
FSub2 will not recognize gain or loss (and no amount otherwise will be includable in
its income) upon receipt of the Sub2 stock in the Second Distribution. Section
355(a). -
FSub2’s holding period in the Sub2 stock will include its holding period in the Parent
stock with respect to which the Second Distribution is made, provided that such
Parent stock is held by FSub2 as a capital asset on the date of the Second
Distribution. Section 1223(1). -
E&P, if any, will be allocated between Parent and Sub2 in accordance with section
312(h), Treas. Reg. § 1.312-10(b), and Treas. Reg. § 1.1502-33(e)(3).
Third Distribution
-
FSub2 will not recognize gain or loss on the Third Distribution. Section 355(c).
-
FSub1 will not recognize gain or loss (and no amount otherwise will be includable in
its income) upon receipt of the Sub2 stock in the Third Distribution. Section 355(a). -
FSub1’s holding period in the Sub2 stock will include its holding period in the FSub2
stock with respect to which the Third Distribution is made, provided that such FSub2
stock is held by FSub1 as a capital asset on the date of the Third Distribution.
Section 1223(1). -
E&P, if any, will be allocated between FSub2 and Sub2 in accordance with section
312(h) and Treas. Reg. § 1.312-10(b).
Fourth Distribution
-
FSub1 will not recognize gain or loss on the Fourth Distribution. Section 355(c).
-
Foreign Parent will not recognize gain or loss (and no amount otherwise will be
includable in its income) upon receipt of the Sub2 stock in the Fourth Distribution.
Section 355(a). -
Foreign Parent’s holding period in the Sub2 stock received will include its holding
period in the FSub1 stock with respect to which the Fourth Distribution is made,
provided that such FSub1 stock is held by Foreign Parent as a capital asset on the
date of the Fourth Distribution. Section 1223(1). -
E&P, if any, will be allocated between FSub1 and Sub2 in accordance with section
312(h) and Treas. Reg. § 1.312-10(b).
PLR-106745-23 14
Fifth Distribution
-
For U.S. federal income tax purposes, the Demerger will be treated as if (i) Foreign
Parent contributes Sub2 to FSub3 in exchange for all the shares of FSub3 (the
“FSub3 Contribution”), followed by (ii) a pro rata distribution by Foreign Parent of all
the FSub3 shares to its shareholders (the “Fifth Distribution”). See Rev. Rul. 77-191,
1971-1 C.B. 94, Rev. Rul. 57-311, 1957-2 C.B. 243. -
The FSub3 Contribution, together with the Fifth Distribution, will constitute a
reorganization within the meaning of section 368(a)(1)(D). Foreign Parent and
FSub3 will each be “a party to a reorganization” under section 368(b). -
Foreign Parent will not recognize gain or loss on the FSub3 Contribution. Section
361(a). -
FSub3 will not recognize gain or loss on the FSub3 Contribution. Section 1032(a).
-
FSub3’s basis in each asset received in the FSub3 Contribution will be the same as
the basis of the asset in the hands of Foreign Parent immediately before the FSub3
Contribution. Section 362(b). -
FSub3’s holding period in each asset received in the FSub3 Contribution will include
the period during which Foreign Parent held the asset. Section 1223(2). -
Foreign Parent will not recognize gain or loss on the Fifth Distribution. Section
361(c). -
Foreign Parent’s shareholders will not recognize gain or loss (and no amount
otherwise will be includable in their income) upon receipt of the FSub3 stock in the
Fifth Distribution. Section 355(a). -
The aggregate basis of the Foreign Parent stock and FSub3 stock in the hands of
each Foreign Parent shareholder immediately after the Fifth Distribution will equal
the shareholder’s aggregate basis in the Foreign Parent stock immediately before
the Fifth Distribution, allocated between the Foreign Parent stock and the FSub3
stock in proportion to the fair market value of each immediately following the Fifth
Distribution in accordance with Treas. Reg. § 1.358-2(a). Section 358(a)(1). -
Each Foreign Parent shareholder’s holding period in the FSub3 stock will include
the holding period of the Foreign Parent stock with respect to which the Fifth
Distribution is made, provided that such Foreign Parent stock is held as a capital
asset on the date of the Fifth Distribution. Section 1223(1).
PLR-106745-23 15 -
E&P, if any, will be allocated between Foreign Parent and FSub3 in accordance with
section 312(h) and Treas. Reg. § 1.312-10(a). -
The receipt by Foreign Parent’s shareholders of cash in lieu of fractional shares of
FSub3 stock will be treated for U.S. federal income tax purposes as if the fractional
shares had been distributed as part of the Fifth 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, will be treated as capital gain (or loss),
provided that such Foreign Parent 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). Sections 1221 and 1222. -
For purposes of applying section 355(e) and determining the identity of, and number
of shares owned by, relevant shareholders over the two-year period preceding the
Proposed Transaction (in the case of Foreign Parent) and the two-year period
following the Proposed Transaction (in the case of Foreign Parent and FSub3),
Foreign Parent and FSub3 may look through entities to the ultimate indirect owners
of Foreign Parent stock or FSub3 stock based on actual knowledge, or if Foreign
Parent or FSub3 does not have actual knowledge, then based upon on information
that is “publicly available.”
Actual Knowledge means the actual knowledge of the Chief Financial Officer,
General Counsel, or person in a functionally similar position at Foreign Parent and
FSub3, respectively, of the existence of a Controlling Shareholder or Ten-Percent
Shareholder. Publicly available information includes the filing of a Schedule 13D,
Schedule 13G, Form 3, or Form 4, indicating the shareholder holds enough shares
to be considered a five-percent shareholder within the meaning of Treas. Reg. §
1.355-7(h)(8) (and such shareholder actively participates in the management or
operation of Controlled as described in Treas. Reg. § 1.355-7(h)(3)) (a “Controlling
Shareholder”) or a ten-percent shareholder within the meaning of Treas. Reg.
section 1.355-7(h)(14) (a “Ten-Percent Shareholder”). For purposes of determining
whether a Controlling Shareholder or a Ten-Percent Shareholder exists, Foreign
Parent and FSub3 may disregard a Schedule 13G unless Item 6 reports such a
shareholder or is left blank, or the filer discloses its status as a Controlling
Shareholder or a Ten-Percent Shareholder on Form 3 or Form 4.
-
Any direct or indirect increase in the percentage of either voting power or value of
the stock of Foreign Parent or FSub3 owned by a shareholder by virtue of
acquisitions of Foreign Parent or FSub3 stock, as part of a plan (or series of related
transactions) with the Fifth Distribution, will be taken into account for purposes of
section 355(e) only after reducing such increase for any direct or indirect reduction
in such percentage interest resulting from any disposition of Foreign Parent or
PLR-106745-23 16FSub3 stock by such shareholder as part of a plan (or series of related transactions)
with the Fifth Distribution. -
Neither the grant of equity awards by Foreign Parent pursuant to its equity incentive
plans nor the acquisition of Foreign Parent stock pursuant to the exercise of the
equity awards will be taken into account for purposes of applying section 355(e).Caveats
Except as expressly provided herein, no opinion is expressed or implied concerning the
tax treatment of the Proposed Transaction under any provision of the Code and
regulations or the tax treatment of any condition existing at the time of, or effects
resulting from, the Proposed Transaction that is not specifically covered by the above
rulings. In addition, no opinion is expressed concerning the tax treatment of Contribution
1 and Contribution 2, or the application of section 267 to the Continuing Agreements.
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.
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.
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,
__________________________
Richard K. Passales
Senior Counsel, Branch 4
Office of Associate Chief Counsel (Corporate)
PLR-106745-23 17
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