Internal and public spin-offs qualified for nonrecognition

Plain-English summary

A public corporate group proposed separating two businesses through financing transactions, an initial public offering of a controlled corporation, an internal spin-off to the public parent, and an external spin-off to public shareholders. The controlled group's borrowing and IPO proceeds would be used to repay intercompany and distributing-company debt before the distributions. Based on the taxpayer's representations, the IRS ruled that neither the internal nor external stock distribution would cause gain or loss to the distributing corporations or recipients under Section 355. It also ruled on stock basis, holding periods, earnings and profits, and the treatment of an excess loss account. The IRS expressly did not decide whether the transaction satisfied the business-purpose, anti-device, or Section 355(e) plan requirements.

Ruling snapshot

• Question: Would the proposed internal and external spin-offs qualify for nonrecognition and the related basis, holding-period, earnings, and excess-loss-account treatment?
• Outcome: approved
• Key authorities: IRC §§ 312, 355, 358, 1223; Treas. Reg. §§ 1.312-10, 1.355-2, 1.355-7, 1.355-8, 1.358-2, 1.1502-13, 1.1502-19, 1.1502-33

Full text (IRS public release)

Internal Revenue Service                                         Department of the Treasury
                                                                 Washington, DC 20224

Number: 202421007                                                Third Party Communication: None
Release Date: 5/24/2024                                          Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-00
                                                                 Person To Contact:
-----------------------                                          ----------------------, ID No. -----------------
------------------------------                                   Telephone Number:
-----------------------------------                              --------------------
                                                                 Refer Reply To:
                                                                 CC:CORP:B2
                                                                 PLR-118922-23
                                                                 Date:
                                                                 February 21, 2024




Legend

Parent                     =          -------------------------------------------------
                                      -----------------------
                                      -------------------------------------
Distributing               =          ------------------------------------
                                      -----------------------
                                      -------------------------------

Controlled                 =          ----------------------------------------------------
                                      -----------------------
                                      -------------------------------

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

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

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

Controlled Sub 4           =          ------------------------------------------
                                      -----------------------
                                      -----------------------------
PLR-118922-23                                     2

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


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

 Date 1               =      ------------------
 Date 2               =      --------------------------
 Date 3               =      -----------------------
 Date 4               =      --------------------------
 State A              =      -------------
 a                    =      -------------------
 b                    =      ---------------------
 c                    =      ------
 d                    =      ---
 Distributing Debt    =      ------------------------
 Continuing           =      ------------------------------------------------------------------------------
 Agreements                  ------------------------------------------------------------------------------
                             ------------------------------------------------------------------------------
                             ------------------------------------------------------------------------------
                             -------------------------------------------


Dear --------------

This letter responds to a letter from your authorized representatives dated September
18, 2023, as supplemented by subsequent information and documentation, requesting
rulings on certain federal tax consequences of a series of transactions (the “Proposed
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
“Covered Transaction[s]” under section 355 and section 368 of the Internal Revenue
Code (the “Code”). This office expresses no opinion as to any issue not specifically
addressed by the rulings below.
The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a 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 (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)
PLR-118922-23                                  3

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 such distributing corporation
or controlled corporation, within the meaning of Treas. Reg. § 1.355-8 (see section
355(e) and Treas. Reg. § 1.355-7)).


                                    Summary of Facts
Parent, a publicly traded State A corporation, is the parent of an affiliated group of
corporations that files a consolidated return for U.S. federal income tax purposes.
Parent owns all outstanding stock of Distributing. Distributing owns all the outstanding
stock of Controlled. Controlled owns all the outstanding stock of Controlled Sub 1.
Controlled Sub 1 owns all the outstanding stock of Controlled Sub 2. Controlled Sub 2
owns all the outstanding stock of Controlled Sub 3, and Controlled Sub 3 owns all the
outstanding stock of Controlled Sub 4.
Distributing has engaged directly and through members of its “separate affiliated group”
as defined in section 355(b)(3)(B) (the “DSAG”) in Business A and Business B.
Controlled has also engaged directly and through members of its “separate affiliated
group” as defined in section 355(b)(3)(B) (the “CSAG”) in Business A and Business B.
As part of a strategic expansion of Business A and Business B, through a series of
transactions commencing on Date 1 and culminating on Date 3, Distributing acquired all
the equity interests of Controlled. On Date 2, (a date within five years of the
Distribution, as defined below) Controlled became a member of the DSAG in a taxable
transaction.
On Date 4, Distributing extended a loan to Controlled Sub 3 (the “Controlled
Intercompany Loan”).
Financial information has been submitted in accordance with Rev. Proc. 2017-52
indicating that each of Business A and Business B as conducted by Distributing has had
gross receipts and operating expenses representing the active conduct of a trade or
business for each of the past five years.

                               The Proposed Transaction
For what are represented to be valid business reasons, Distributing proposes to engage
in the following steps to separate Business A from Business B (collectively, the
“Proposed Transaction”):


1. Controlled will convert from a State A limited liability company to a State A
   corporation.
PLR-118922-23                                  4

2. Controlled Sub 4 will borrow approximately $a from a third-party lender under a new
   loan facility (the “New Controlled Sub 4 Borrowing”).
3. The proceeds of the New Controlled Sub 4 Borrowing will be distributed by
   Controlled Sub 4 to Controlled through a series of intercompany distributions.

4. Controlled will distribute to Distributing: (A) proceeds of the New Controlled Sub 4
   Borrowing, and (B) a note with a face value equal to the excess of the expected net
   proceeds from the Controlled IPO (defined below) over the amount of the Controlled
   Intercompany Loan outstanding at the time of the Controlled IPO (the “Controlled
   Note”). Distributing will use the cash received with respect to the New Controlled
   Sub 4 Borrowing to pay Distributing Debt. This step will create an excess loss
   account in some of Distributing’s stock of Controlled.

5. Pursuant to an initial public offering (the “Controlled IPO”), Controlled will issue
   common stock worth approximately $b to the public representing not more than c
   percent of its sole class of stock. Thereafter, (i) Controlled will contribute a portion of
   the proceeds from the Controlled IPO (net of applicable expenses) equal to the
   balance of the Controlled Intercompany Loan at the time of the Controlled IPO to
   Controlled Sub 1, (ii) Controlled Sub 1 will contribute such proceeds to Controlled
   Sub 2, (iii) Controlled Sub 2 will contribute such proceeds to Controlled Sub 3, and
   Controlled Sub 3 will use such cash to repay the Controlled Intercompany Loan, and
   (iv) Controlled will distribute the remaining proceeds from the Controlled IPO to
   Distributing in complete satisfaction of the Controlled Note. Distributing will, in turn,
   use the cash received from Controlled Sub 3 and Controlled to pay Distributing Debt.

6. No later than d months following the Controlled IPO, Distributing will distribute all the
   Controlled stock held by it to Parent (the “Internal Spin-off”).

7. Parent will distribute Controlled to the Public Stockholders (the “External Spin-off”
   and together with the Internal Spin-off, the “Distribution”).


In connection with the Proposed Transaction, Distributing and Controlled will enter into
Continuing Agreements.


                                     Representations


The following representations have been made with respect to the Proposed
Transaction:
PLR-118922-23                                 5

Internal Spin-off


Except as otherwise set forth below, Distributing has made all the representations in
section 3 of the Appendix to Rev. Proc. 2017-52.
Distributing has made the following alternative representations:
       Representations: 3(a), 8(b), 11(b), 15(a), 22(a), 31(a), 41(a)
Distributing has not made the following representations, which do not apply to the
Internal Spin-off:
       Representations: 7, 18, 19, 20, 24, 25
Distributing has made the following modified representations:
       Representation 13 – Neither Business A or Business B conducted by the DSAG
       nor control of an entity conducting that business will have been acquired during
       the five-year period ending on the date of the Internal Spin-off in a transaction in
       which gain or loss was recognized (or treated as recognized) in whole or in part,
       except in connection with acquisitions of Controlled).
       Representation 46 – Controlled will not issue stock or securities to a person other
       than the public in respect of the Controlled IPO.
Distributing does not make Representation 38.


External Spin-off
Except as otherwise set forth below, Parent has made all the representations in section
3 of the Appendix to Rev. Proc. 2017-52 with respect to the External Spin-off.
Parent has made the following alternative representations:
       Representations: 3(a), 8(b), 11(b), 15(a), 22(a), 31(a), 41(a)
Parent has not made the following representations, which do not apply to the External
Spin-off:
       Representations: 7, 18, 19, 20, 24, 25
Parent has made the following modified representations:
       Representation 13 – Neither Business A or Business B conducted by the DSAG
       nor control of an entity conducting that business will have been acquired during
       the five-year period ending on the date of the External Spin-off in a transaction in
       which gain or loss was recognized (or treated as recognized) in whole or in part,
       except in connection with acquisitions of Controlled.
       Representation 46 – Controlled will not issue stock or securities to a person other
       than the public in respect of the Controlled IPO.
PLR-118922-23                                6

Additional Representations
The sum of (1) the distribution from the proceeds of the New Controlled Sub 4
Borrowing and (2) the amount distributed by way of the Controlled Note will not exceed
(3) the aggregate basis of Distributing in the stock of Controlled.


                                         Rulings
Internal Spin-off

1. No gain or loss will be recognized by (and no amount will be included in the income
   of) Parent upon its receipt of the Controlled Stock in the Internal Spin-off (section
   355(a)).

2. No gain or loss will be recognized by Distributing on the Internal Spin-off (section
   355(c)).

3. The aggregate basis of the Distributing stock and the Controlled stock in the hands
   of Parent immediately after the Internal Spin-off will equal the aggregate adjusted
   basis of the Distributing stock held by Parent immediately before the Internal Spin-
   off, allocated in the manner described in Treas. Reg. § 1.358-2(a)(2) (section
   358(b)).

4. The holding period of the Controlled stock received by Parent in the Internal Spin-off
   will include the holding period of Controlled stock held by Distributing with respect to
   which the Internal Spin-off will be made, provided that such Controlled stock is held
   as a capital asset on the date of the Internal Spin-off (section 1223(1)).

5. Earnings and profits will be allocated between Distributing and Controlled in
   accordance with section 312(h) and Treas. Reg. § 1.312-10(b) and 1.1502-33(e)(3).

6. Distributing will not take into account as income or gain the excess loss account in
   the stock of Controlled immediately before the Internal Spin-off (Treas. Reg. §
   1.1502-19(b)(2) and Treas. Reg. § 1.1502-19(g), Ex. 3).


External Spin-off

7. No gain or loss will be recognized by Public Stockholders upon receipt of the
   Controlled Stock in the External Spin-off (section 355(a)).
PLR-118922-23                                 7

8. No gain or loss will be recognized by Parent on the distribution of Controlled Stock in
   the External Spin-off other than any deferred intercompany gains or losses (section
   355(c) and Treas. Reg. § 1.1502-13(d)).

9. The aggregate basis of the Parent stock and the Controlled stock in the hands of the
   Public Stockholders immediately after the External Spin-off will equal the aggregate
   adjusted basis of the Parent stock held by such Public Stockholders immediately
   before the External Spin-off, allocated in the manner described in Treas. Reg. §
   1.358-2(a)(2) (section 358(b)).

10. The holding period of the Controlled stock received by the Public Stockholders in the
    External Spin-off will include the holding period of Controlled stock held by Parent
    with respect to which the External Spin-off will be made, provided that such
    Controlled stock is held as a capital asset on the date of the External Spin-off
    (section 1223(1)).

11. Earnings and profits will be allocated between Parent and Controlled in accordance
    with section 312(h), Treas. Reg. § 1.312-10(b), and Treas. Reg. § 1.1502-33(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.
                                 Procedural Statements
This ruling is directed only to the taxpayer who requested 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.
PLR-118922-23                                  8

Pursuant to the power of attorney on file in this matter, a copy of this letter is being sent
to your authorized representatives.


                                           Sincerely,




                                           Mark J. Weiss
                                           Chief, Branch 2
                                           Office of Associate Chief Counsel (Corporate)




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