Corporate separation qualified as a tax-free reorganization and spin-off

Plain-English summary

A foreign public company's U.S. corporate group proposed separating one business from another. The distributing corporation would form a new controlled corporation, contribute subsidiaries and certain intercompany receivables to it, and distribute all of its stock to the foreign parent. Based on the submitted representations, the IRS ruled that the contribution and distribution would qualify as a section 368(a)(1)(D) reorganization and a section 355 spin-off. The rulings generally provided nonrecognition, carryover basis and holding periods, basis allocation between the two corporations' stock, and allocation of earnings and profits. The IRS did not rule on the transaction's business purpose, device, or section 355(e) acquisition-plan requirements.

Ruling snapshot

• Question: Would the contribution of one business to a new corporation and distribution of that corporation's stock qualify as a tax-free reorganization and spin-off?
• Outcome: approved
• Key authorities: IRC §§ 355, 357, 358, 361, 362, 368(a)(1)(D), 1032, 1223, and 1504

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 202351009                                             Third Party Communication: None
Release Date: 12/22/2023                                      Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-00,
              368.00-00, 368.04-00                            Person To Contact:
                                                              --------------------, ID No. -----------------
------------------, ----------------------------------------- Telephone Number:
-------------------------                                     ---------------------
-----------------------------------------                     Refer Reply To:
----------------------------                                  CC:CORP:2
---------------------------------                             PLR-112307-23
                                                              Date:
                                                              September 27, 2023




Legend


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

Distributing           = ------------------------------------------------------------------------------------------
                        ------------------------------------------------------------------------------------------
                        -------------------------------

Sub 1                  = ------------------------------------------------------------------------------------------
                        ------------------------------------------------------------------------------------------
                        --------------------------------

Sub 2                  = ------------------------------------------------------------------------------------------
                        ------------------------------------------------------------------------------------------
                        -------------------------------

Sub 3                  = ------------------------------------------------------------------------------------------
                        ------------------------------------------------------------------------------------------
                        ------------------------------------------------------------------------------------------
                        -------------------------------

Sub 4                  = ------------------------------------------------------------------------------------------
                        ------------------------------------------------------------------------------------------
                        -------------------------------

PLR-112307-23                                   2

Sub 5           = ------------------------------------------------------------------------------------------
                 ------------------------------------------------------------------------------------------
                 -------------------------------

FDRE 1          = ------------------------------------------------------------------------------------------
                 ------------------------------------------------------------------------------------------
                 ------------------------------------------------------

FDRE 2          = ------------------------------------------------------------------------------------------
                 ------------------------------------------------------------------------------------------
                 ------------------------------------------------------------------------------------------
                 ------------------------------------------------------

US DRE 1        = ------------------------------------------------------------------------------------------
                 ------------------------------------------------------------------------------------------
                 ------------------------------------------------

US DRE 2        = ------------------------------------------------------------------------------------------
                 ------------------------------------------------

Country A       = ------------

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

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

Business A      = --------------------------------------------

Business B      = --------------------------------

Business C      = ------------------------------------------------------------------------------------------
                 ------------------------------------------------------------------------------------------
                 ------

Business D      = ------------------------------------------------------------------------------------------
                 -------------------------

Intercompany    = ------------------------------------------------------------------------------------------
Payables          ------------------------------------------------------------------------------------------
                 ------------------------------------------------------------------------------------------
                 ------------------------------------------------------------------------------------------
                 ------------------------------------------------------------------------------------------
                 ------------------------------------------------------------------------------------------
                 --------------------------------------------------------------

PLR-112307-23                                          3

Intercompany          = ------------------------------------------------------------------------------------------
Receivables             ------------------------------------------------------------------------------------------
                        ------------------------------------------------------------------------------------------
                        ------------------------------------------------------------------------------------------
                        ----------------------------------------------------------------------------------

Seconded              = ------------------------------------------------------------------------------------------
Employees               -----------------------------------------------------------------------------


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

This letter responds to your letter dated June 9, 2023 and subsequent correspondence,
submitted by your authorized representatives, requesting rulings on certain US federal
income tax consequences of a proposed transaction, as defined and described 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), Rev. Proc. 2023-1, 2023-1 I.R.B. 1, and 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
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 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 for 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).

PLR-112307-23                                  4

                                    Summary of Facts

Foreign Parent is a publicly-traded Country A corporation and the parent of a worldwide
group that includes both domestic and foreign entities (the Parent Worldwide Group).
The Parent Worldwide Group’s business operations include Businesses A, B, C, and D.

Foreign Parent indirectly owns, through a chain of entities that are each disregarded as
separate from Foreign Parent for US federal income tax purposes, FDRE 1, a Country A
entity that is also disregarded as separate from Foreign Parent. FDRE 1 owns all of the
stock of Distributing, a State A corporation. Distributing is the common parent of an
affiliated group of corporations that files a consolidated US federal income tax return
(the Distributing Consolidated Group).

Distributing wholly owns (i) Sub 1, a State B corporation; (ii) Sub 2, Sub 3, and Sub 4,
each a State A corporation; and (iii) US DRE 1 and US DRE 2, each a State A limited
liability company that is disregarded as separate from Distributing for US federal income
tax purposes.

Sub 2 wholly owns, directly and indirectly, the outstanding equity of various subsidiaries
that are (i) corporations or (ii) limited liability companies classified as either corporations
or disregarded entities for US federal income tax purposes (the “Sub 2 Subsidiaries”).
Sub 1, Sub 2, Sub 3, and the Sub 2 Subsidiaries are engaged in Business A and are
collectively referred to as the “Distributing Business A Entities.” Each of Sub 1, Sub 2,
Sub 3, Sub 4, and the regarded Sub 2 Subsidiaries is a member of the Distributing
Consolidated Group.

In addition, Distributing owns, directly and indirectly, various entities that, together with
Sub 4, US DRE 1, and US DRE 2, are engaged in Business B, collectively referred to
as the “Distributing Business B Entities.”

Foreign Parent also owns, indirectly through a chain of entities that are each
disregarded as separate from Foreign Parent for US federal income tax purposes,
FDRE 2, a Country A entity that is disregarded as separate from Foreign Parent for US
federal income tax purposes. FDRE 2 owns all of the stock of Sub 5, a State A
corporation. Sub 5 is the common parent of an affiliated group of corporations that files
a consolidated US federal income tax return (the Sub 5 Consolidated Group). Sub 5
and its direct and indirect subsidiaries are primarily engaged in Business A.

For purposes of satisfying the active trade or business requirement of section 355(b)
with respect to the Distribution (as defined and described below), (i) Distributing will rely
upon Business C, a subset of Business B, conducted by members of its “separate
affiliated group” as defined in section 355(b)(3)(B) (i.e., Distributing through US DRE 1
and US DRE 2, and Sub 4); and (ii) Controlled (as defined below) will rely upon
Business D, a subset of Business A, conducted by members of its “separate affiliated
group” as defined in section 355(b)(3)(B) (i.e., Sub 2 and regarded Sub 2 Subsidiaries,

PLR-112307-23                                 5

either directly or through disregarded entities). Financial information has been
submitted in accordance with Rev. Proc. 2017-52 indicating that each of Business C
and Business D has had gross receipts and operating expenses representing the active
conduct of a trade or business for each of the past five years.

After the formation of Controlled and prior to the Contribution (as defined and described
below), Distributing and the Distributing Business A Entities will enter into a series of
transactions in which the Distributing Business A Entities will distribute excess capital
and/or retained earnings, if any, to Distributing directly or through one or more other
Distributing Business A entities (the Pre-Separation Distributions). Distributing
represents that section 301 will apply to the Pre-Separation Distributions, if any. The
Pre-Separation Distributions will adjust intercompany balances owed between
Distributing and certain Distributing Business A Entities. The Pre-Separation
Distributions could reduce or eliminate an Intercompany Payable owed by Distributing to
a Distributing Business A Entity. The Pre-Separation Distributions could also increase
or create an Intercompany Receivable owed to Distributing by a Distributing Business A
Entity.

                                Proposed Transaction

For what are represented to be valid corporate business purposes, Distributing
proposes to undertake the following Proposed Transaction to separate the Distributing
Business A Entities from the Distributing Business B Entities (the Proposed
Transaction):

  (1) Distributing will form Controlled as a State A corporation with a single class of
      common stock issued and outstanding.

  (2) Distributing will contribute to Controlled (a) 100 percent of the outstanding stock
      of each of Sub 1, Sub 2, and Sub 3; and (b) any Intercompany Receivables (the
      Contribution). The Contribution will be effected in part as a contribution to capital
      and in part in exchange for the assumption of any remaining Intercompany
      Payables.

  (3) Distributing will distribute 100 percent of the outstanding stock of Controlled to
      FDRE 1 (the Distribution, together with the Contribution, the Spin-Off).

Following the Proposed Transaction, it is expected that Foreign Parent will combine
Controlled and Sub 5 in a tax-free manner.

                                   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 Spin-Off.

PLR-112307-23                                6

    1. Distributing has made the following alternative representations: 3(a), 8(b), 11(a)
     (subject to the modification described below), 15(a), 22(a), 31(a), and 41(a).

    2. Distributing has not made the following representations, but provided the
     required explanations: 7, 19, 20, 24, 25, 35, 39, and 40.

    3. Distributing has made the following modified representations:

Representations 11(a): Following the Distribution, Distributing or the DSAG and
Controlled or the CSAG each will continue, independently and with its separate
employees (and, in the case of the CSAG, with the Seconded Employees), the active
conduct of the business on which it relies to meet the active trade or business
requirement of section 355(b).

Representation 32: No intercorporate debt will exist between Distributing and
Controlled at the time of, or subsequent to, the Distribution of Controlled stock, other
than intercompany debt arising from payments for the Seconded Employees or in the
ordinary course of operations.

                                        Rulings

Based solely on the information submitted and the representations made, we rule as
follows with respect to the Proposed Transaction:

    1. The Contribution, together with the Distribution, will be a reorganization within the
     meaning of section 368(a)(1)(D) and section 355. 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 Contribution. Sections 361(a)
     and 357(a).

    3. Controlled will recognize no gain or loss on the Contribution. Section 1032(a).

    4. Controlled’s basis in each asset received from Distributing in the Contribution will
     be the same as the basis of the asset in the hands of Distributing immediately
     before the Contribution. Section 362(b).

    5. Controlled’s holding period for each asset received in the Contribution will include
     the period during which Distributing held such asset. Section 1223(2).

    6. Distributing will recognize no gain or loss on the distribution of Controlled stock in
     the Distribution. Section 361(c) and Treas. Reg. § 1.367(e)-1(c).

PLR-112307-23                                 7

    7. Foreign Parent will recognize no gain or loss, and no amount will be included in
     its income, on the receipt of Controlled stock in the Distribution. Section
     355(a)(1).

    8. The aggregate basis of the Controlled stock and the Distributing stock in the
     hands of Foreign Parent immediately after the Distribution will equal the
     aggregate basis of the Distributing stock held by Foreign Parent immediately
     before the Distribution. Section 358(a). The basis will be allocated between
     Distributing stock and Controlled stock in proportion to the fair market value of
     each immediately after the Distribution in accordance with Treas. Reg. § 1.358-
     2(a)(2). Sections 358(a), (b), and (c).

    9. Foreign Parent’s holding period in the Controlled stock received in the
     Distribution will include the holding period of the Distributing stock held by
     Foreign Parent with respect to which the Distribution is made, provided that such
     Distributing stock is held as a capital asset on the date of the Distribution.
     Section 1223(1).

    10. Earnings and profits of Distributing will be allocated between Distributing and
      Controlled in accordance with section 312(h). Treas. Reg. § 1.312-10(a) and
      Treas. Reg. § 1.1502-33(e).

    11. Following the Distribution, Controlled will not be a successor of Distributing for
      purposes of section 1504(a)(3). Therefore, Controlled and its direct and indirect
      subsidiaries that are “includible corporations” under section 1504(b) and satisfy
      the ownership requirements of section 1504(a)(2) will be members of an affiliated
      group of corporations entitled to file a consolidated US federal income tax return
      with Controlled as the common parent.

                                         Caveat

No opinion is expressed or implied about the tax treatment of the Proposed Transaction
under any 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 preceding 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 letter is
being sent to your authorized representative.

PLR-112307-23                                            8

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
                                                General Attorney, Branch 3
                                                Office of Associate Chief Counsel (Corporate)


cc: ----------------------------
    --------------------------
    -----------------------------------------
    ----------------------------------

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

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