Private Letter Ruling
202421003
Released May 24, 2024
Approved
Corporate separation received tax-free spin-off rulings
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This page covers one taxpayer's ruling from 2024, 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 publicly traded parent company proposed separating three controlled businesses from its remaining business. It would first place the controlled businesses in a new corporation, then distribute all of that corporation's stock pro rata to its shareholders. The IRS issued 15 favorable rulings, including that the contribution and distribution qualify as a tax-free reorganization under Sections 368(a)(1)(D) and 355, and that the corporations and shareholders generally recognize no gain or loss. The ruling also addresses carryover basis and holding periods, earnings and profits, cash paid instead of fractional shares, continuing-arrangement payments, consolidated-return eligibility, and later public share repurchases. The IRS did not determine whether the transaction met the business-purpose, device, or Section 355(e) acquisition-plan requirements.
Ruling snapshot
- Question: Would the contribution of the controlled businesses and pro rata distribution of the new corporation qualify as a tax-free corporate spin-off?
- Outcome: approved
- Key authorities: IRC §§ 355, 357, 358, 361, 362, 368(a)(1)(D), 1001, 1032, 1223, 1504; Treas. Reg. §§ 1.355-2, 1.355-7, 1.358-2
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 202421003 Third Party Communication: None
Release Date: 5/24/2024 Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-00,
361.00-00, 368.00-00, Person To Contact:
368.04-00 -----------------------------, ID No. -------------
-----------------
--------------------------- Telephone Number:
------------------------------------- --------------------
----------------------------------- Refer Reply To:
---------------------------- CC:CORP:B01
------------------------------ PLR-115756-23
Date:
November 30, 2023
Distributing = --------------------------------------------------------------------------------------------
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Controlled = --------------------------------------------------------------------------------------------
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State A = -------------
State B = -------------
Business A = ---------------------------------
Business B = ----------------------------
Business C = --------------------------------------------
Business D = ---------------------------
Segment 1 = -------------------------------------------------------------------------------
Segment 2 = ---------------------------------------------------------------------
Preparatory = --------------------------------------------------------------------------------------------
Internal --------------------------------------------------------------------------------------------
Transactions --------------------------------------------------------------------------------------------
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Continuing = --------------------------------------------------------------------------------------------
Arrangements --------------------------------------------------------------------------------------------
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PLR-115756-23 8
Dear ------------------:
This letter responds to your letter dated August 1, 2023, as supplemented by additional
letters dated September 18, 2023 and November 2, 2023, submitted on behalf of
Distributing, its affiliates, and its shareholders, requesting rulings under sections 355
and 368(a)(1)(D), and related provisions of the Internal Revenue Code of 1986, as
amended (the “Code”), and related regulations with respect to a series of proposed
transactions (the “Proposed Transaction,” as described below). The material information
submitted in that request and subsequent correspondence is summarized below.
This letter is issued pursuant to Rev. Proc. 2023-1, 2023-1 I.R.B. 1, Rev. Proc. 2023-26,
2022-33 I.R.B. 486, and Rev. Proc. 2017-52, 2017-41 I.R.B. 283, regarding one or more
“Covered Transactions” under section 355 and/or section 368 of 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 penalties 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 the Proposed Transaction:
(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, widely held, State A corporation, is the parent company of
a worldwide group that includes both domestic and foreign entities (the “Distributing
Worldwide Group”). Distributing and its domestic affiliates join in the filing of a
consolidated U.S. federal income tax return. At the time of the Proposed Transaction,
Distributing will have a single class of voting common stock issued and outstanding.
The Distributing Worldwide Group is engaged in multiple businesses, including
Business A, Business B, Business C, and Business D (Business B, Business C, and
Business D, together, the “Controlled Businesses”).
PLR-115756-23 9
Distributing proposes to undertake the Proposed Transaction to separate the Controlled
Businesses from Business A pursuant to one overall plan of reorganization.
For purposes of satisfying the active trade or business requirement of section 355(b),
with respect to the External Spin-Off (defined below), Distributing and the members of
its “separate affiliated group” as defined in section 355(b)(3)(B) will rely on Segment 1 of
Business A, and Controlled and the members of its “separate affiliated group” as
defined in section 355(b)(3)(B) will rely on Segment 2 of Business B. Financial
information has been submitted in accordance with Rev. Proc. 2017-52 indicating that
each of Segment 1 and Segment 2 has had gross receipts and operating expenses
representing the active conduct of a trade or business for each of the past five years.
Proposed Transaction
In preparation for the Proposed Transaction, Distributing has undertaken and will
undertake the Preparatory Internal Transactions to separate the Controlled Businesses
from Business A.
After the Preparatory Internal Transactions are completed, Distributing will directly own
all of the issued and outstanding membership interests of Controlled, a State B limited
liability company treated as a disregarded entity for U.S. federal income tax purposes.
Controlled will directly and indirectly own (through domestic and foreign entities)
domestic and foreign assets associated with the Controlled Businesses, including
Segment 2.
For what are represented to be valid business reasons, Distributing proposes to engage
in the following transactions to separate the Controlled Businesses from Business A.
Following the Proposed Transaction, Distributing will conduct Business A and
Controlled will conduct the Controlled Businesses.
Step 1: Controlled will convert, under State B law, from a State B limited liability
company to a State B corporation (the “Contribution”). As a result, Distributing will own
all of the issued and outstanding stock of Controlled. Prior to such conversion,
Controlled may make an election under Treas. Reg. § 301.7701-3 to be treated as an
association taxable as a corporation.
Step 2: Distributing will distribute all of the issued and outstanding stock of Controlled
pro rata to its shareholders (the “Distribution”).
The Contribution and the Distribution are together referred to as the “External Spin-Off.”
In connection with the External Spin-Off, Distributing and Controlled (or their respective
affiliates, as applicable) will enter into certain agreements that will continue after the
completion of the External Spin-Off in order to effect an orderly transition of Controlled
PLR-115756-23 10
to a standalone public company, including a transitional services agreement, a tax
matters agreement, and other agreements (i.e., the Continuing Arrangements).
Distributing and Controlled will operate as independent companies having separate
boards of directors. The separate boards of directors will have no overlapping
membership with the exception of one overlapping board member (the “Overlapping
Board Member”). The Overlapping Board Member will represent a minority share of the
overall composition of Distributing’s and Controlled’s board of directors. The
Overlapping Board Member will serve in this capacity to benefit both Business A and
the Controlled Businesses as Controlled transitions into an independent public
company. The Overlapping Board Member will at all times have a minority voting power
with respect to each of the boards of Distributing and Controlled. Under Controlled's
governing documents the Overlapping Board Member will be subject to re-election in a
manner consistent with Controlled's other board members.
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(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, 39, and 40.
3. Distributing has not made representation 37, but provided the required explanation.
4. Distributing has made the following modified representations:
Representation 22(b): With respect to Property being transferred by Distributing
to Controlled as part of the External Spin-Off for which an investment credit
determined under section 46 has been (or will be) claimed, the income tax
obligation for the taxable year in which the Property is transferred will be adjusted
pursuant to section 50(a)(1) or (a)(2) as required to reflect an early disposition of
the Property.
Representation 23: Other than potentially as a result of a Continuing
Arrangement, the External Spin-Off does not involve and will not result in a
situation in which one party recognizes income, but another party recognizes the
deductions associated with such income or a situation in which one party owns
Property, but another party recognizes the income associated with such
Property.
PLR-115756-23 11
Representation 32: Except for debt potentially incurred under the Continuing
Arrangements or ordinary course payables and receivables, no intercorporate
debt will exist between Distributing and Controlled at the time of, or subsequent
to, the External Spin-Off.
Representation 33: Except as contemplated by the Continuing Arrangements,
payments made in connection with all continuing transactions, if any, between
Distributing and Controlled after the External Spin-Off will be for fair market value
based on arm’s-length terms.
Distributing has made the following additional representations:
5. With respect to any repurchase of shares of stock of Distributing or Controlled, as
applicable, after the External Spin-Off, including potentially in the open market or
through an accelerated share repurchase (an “ASR” and together with any other
repurchase, a “Post-Closing Share Repurchase”), Distributing represents that:
(a) Any Post-Closing Share Repurchase will be motivated by a business purpose, and
the stock that will be repurchased by Distributing, or acquired by a counterparty
pursuant to an ASR, will be widely held.
(b) To the extent that any Post-Closing Share Repurchases are made on the open
market (including through a Rule 10b5-1 plan, a purchase in compliance with Rule 10b-
18, or a tender offer), Distributing or Controlled, as applicable, does not expect to know
the identity of any shareholder from which stock will be repurchased. To the extent that
any Post-Closing Share Repurchases are made through an ASR, Distributing or
Controlled, as applicable, does not expect to know with certainty the identity of any
shareholder from which stock is borrowed or purchased by each counterparty that
participates in such ASR.
(c) There is no plan or intention that the aggregate amount of stock purchased or
acquired through Post-Closing Share Repurchases will equal or exceed 20 percent of
the outstanding stock of Distributing or Controlled, as applicable.
(d) No Post-Closing Share Repurchase will be motivated to any extent by a desire to
increase or decrease the ownership percentage of any particular shareholder or group
of shareholders.
Rulings
Based solely on the information submitted and representations made, we rule as follows
on the Proposed Transaction:
1. The Contribution, together with the Distribution, will qualify as a tax-free
reorganization within the meaning of section 368(a)(1)(D) and section 355. Distributing
PLR-115756-23 12
and Controlled will each be a “party to a reorganization” within the meaning of section
368(b).
2. No gain or loss will be recognized by Distributing on the Contribution. Sections 357(a)
and 361(a).
3. No gain or loss will be recognized by Controlled on the Contribution. Section 1032(a).
4. The basis of each asset received by Controlled in the Contribution will equal the basis
of such asset in the hands of Distributing immediately before the Contribution. Section
362(b).
5. The holding period in each asset received by Controlled in the Contribution will
include the period during which the asset was held by Distributing. Section 1223(2).
6. No gain or loss will be recognized by (and no amount will be included in the income
of) Distributing’s shareholders on their receipt of the Controlled stock in the Distribution.
Section 355(a).
7. No gain or loss will be recognized by Distributing on the Distribution. Section 361(c).
8. Each Distributing shareholder’s aggregate basis in the Distributing stock and the
Controlled stock immediately after the Distribution (including any fractional share
interest in the Controlled stock to which the shareholder may be entitled) will equal such
shareholder’s aggregate basis of the Distributing stock immediately before the
Distribution. Section 358(a). The basis will be allocated between the Distributing stock
and the Controlled stock in proportion to their fair market values. Section 358(b) and (c);
Treas. Reg. § 1.358-2.
9. If a holder of Distributing stock that purchased or acquired shares on different dates
or at different prices is not able to identify which particular share of Controlled stock is
received as a distribution with respect to a particular share of Distributing stock, the
holder may designate which particular share of Controlled stock is received as a
distribution with respect to a particular share of Distributing stock, provided the
designation is consistent with the terms of the Distribution. Treas. Reg. § 1.358-
2(a)(2)(vii).
10. Each Distributing shareholder’s holding period in its Controlled stock received in the
Distribution (including any fractional share interest in Controlled stock to which the
shareholder may be entitled) will include the holding period of the Distributing stock with
respect to which the distribution of Controlled stock was made, provided that such
Distributing stock is held by such Distributing shareholder as a capital asset on the date
of the Distribution. Section 1223(1).
PLR-115756-23 13
11. The 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)(3).
12. Any payments made between any of Distributing and Controlled and their respective
affiliates under the Continuing Arrangements regarding liabilities, indemnities, or other
obligations that: (i) have arisen or will arise for a taxable period ending on or before the
Distribution or for taxable year beginning before and ending after the Distribution; and
(ii) will not become fixed and ascertainable until after the Distribution, will be
characterized in a manner consistent with the proper treatment as if such payments had
occurred immediately before the Distribution. See Arrowsmith v. Commissioner, 344
U.S. 6 (1952); Rev. Rul. 83-73, 1983-1 C.B. 84.
13. The receipt by Distributing shareholders of cash in lieu of fractional shares, if any, of
Controlled stock will be treated for U.S. federal income tax purposes as if the fractional
shares had been distributed to the Distributing 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. The 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 shareholder.
Such gain (or loss) will be short-term or long-term capital gain (or loss) determined
using the holding period determined in Ruling 10.
14. 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) will be members of an affiliated group of
corporations eligible to file a consolidated U.S. federal income tax return with Controlled
as the common parent.
15. To the extent any Post-Closing Share Repurchases are treated as part of a plan (or
series of related transactions) with the External Spin-Off for purposes of section 355(e),
such Post-Closing Share Repurchases will be treated as being made from all public
shareholders (defined as a shareholder who is not a “controlling shareholder” or
“ten-percent shareholder” within the meaning of Treas. Reg. §§ 1.355-7(h)(3) and (14))
of Distributing or Controlled, as applicable, on a pro rata basis for purposes of testing
the effect of such Post-Closing Share Repurchases on the External Spin-Off under
section 355(e) and Treas. Reg. § 1.355-7.
PLR-115756-23 14
Caveats
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 is not specifically covered by the above rulings.
Procedural Statements
This letter ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the
Code provides that this letter may not be used or cited as precedent.
A copy of this letter ruling 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 returns that provides the date and control
number (PLR-115756-23) of this letter ruling.
In accordance with the Power of Attorney on file with this office, copies of this letter are
being sent to your authorized representatives.
Sincerely,
Brian R. Loss
Brian R. Loss
Senior Technician Reviewer, Branch 4
Office of Associate Chief Counsel (Corporate)
cc:
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