Tax-free spin-off/split-off of one business line into a new public company

Plain-English summary

A publicly traded parent company runs two business lines through a global web of domestic and foreign subsidiaries. For business reasons it wants to separate one line (Business B) from the other (Business A) and hand Business B to its public shareholders as a stand-alone company. To do that, it converts an existing subsidiary into a corporation called "Controlled," funds it with cash, and then distributes Controlled's stock to shareholders, either as a straight spin-off or as a split-off where shareholders swap parent stock for the new stock. The parent may keep a minority stake for a while to avoid taking on costly new debt, but must sell it within a set number of years. The IRS issued 14 rulings confirming the whole separation is a tax-free reorganization under Sections 368(a)(1)(D) and 355: neither the parent, the new company, nor the shareholders recognize gain or loss, and the ruling spells out how basis, holding period, and earnings and profits carry over. As is standard for these rulings, the IRS did not opine on the "business purpose," "device," or anti-abuse (Section 355(e)) tests, leaving those to be established on the facts.

Ruling snapshot

• Question: Does the proposed separation of one business line into a new corporation and its distribution to shareholders qualify as a tax-free reorganization and distribution?
• Outcome: approved (14 rulings granted; several standard issues expressly not addressed)
• Key authorities: IRC §§ 355, 368(a)(1)(D), 361, 362, 358, 1032, 1223; Treas. Reg. § 1.358-2

Full text (IRS public release)

Internal Revenue Service                                 Department of the Treasury
                                                         Washington, DC 20224

Number: 202429015                                        Third Party Communication: None
Release Date: 7/19/2024                                  Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-00,
              355.01-01, 361.00-00,                      Person To Contact:
              361.02-00, 368.00-00,                      ---------------------, ID No. -----------------
              368.04-00                                  Telephone Number:
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-------------------------                                Refer Reply To:
-----------------                                        CC:CORP:1
-------------------------                                PLR-125162-23
-----------------------------                            Date:
                                                         April 19, 2024




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Distributing                    = --------------------------------------------------------------------------
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DRE 1                           = --------------------------------------------------------------------------
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FSub 1                          = --------------------------------------------------------------------------
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US Sub                          = --------------------------------------------------------------------------
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FSub 2                          = --------------------------------------------------------------------------
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DRE 2                           = --------------------------------------------------------------------------
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Business A                      = --------------------------------------------------------------------------
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Business B                = --------------------------------------------------------------------------
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State A                   = -------------

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

Country B                 = --------------

Date 1                    = ----------------------

a                         = ------

b                         = ---

c                         = ------

d                         = --

Continuing Arrangements   = --------------------------------------------------------------------------
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Funding Requirement       = --------------------------------------------------------------------------
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PLR-125162-23                                    3

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

This letter responds to a letter from your authorized representatives dated December
22, 2023, requesting rulings on certain federal income tax consequences of the
Proposed Transaction (defined below). The material information provided in that letter
and in subsequent correspondence is summarized below.

This letter is issued pursuant to Rev. Proc. 2023-1, 2023-1 I.R.B. 1, Rev. Proc. 2022-10,
2022-6 I.R.B. 473, and Rev. Proc. 2017-52, 2017-41 I.R.B. 283, as amplified and
modified by Rev. Proc. 2018-53, 2018-43 I.R.B. 667, 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)
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-125162-23                                4

                                   Summary of Facts

Distributing, a publicly traded State A corporation, is the parent of a worldwide group
that includes both domestic and foreign entities. Distributing directly and indirectly owns
corporations, partnerships, and entities disregarded as separate from their sole
regarded owners under Treas. Reg. § 301.7701-3 for U.S. federal income tax purposes
("DREs"). Distributing and its eligible members join in the filing of a consolidated U.S.
federal income tax return.

Distributing is engaged directly and through members of its "separate affiliated group"
as defined in section 355(b)(3)(B) (the "DSAG") in Business A. On Date 1 (a date within
five years of the Separation, as defined below), Distributing acquired all of the assets of
Business B in a transaction in which gain or loss was recognized within the meaning of
section 355(b)(2)(C).

Immediately prior to the Proposed Transaction, Distributing owns all the equity interests
in DRE 1, a State A limited liability company. DRE 1 owns all of the stock of FSub 1, a
Country A entity that is classified as a corporation for U.S. federal income tax purposes.
DRE 1 and FSub 1 conduct Business B.

Distributing also owns all the stock of: (i) US Sub; and (ii) FSub 2, a Country A entity
that is classified as a corporation for U.S. federal income tax purposes. FSub 2 owns all
the equity interests in DRE 2, a Country B DRE. Distributing, US Sub, FSub 2, and
DRE 2 conduct Business A.

Financial information has been submitted in accordance with Rev. Proc. 2017-52
indicating that Business A as conducted by the DSAG 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 transaction (the "Proposed Transaction") to separate Business A from
Business B and distribute Business B to its public shareholders. The relevant steps of
the Proposed Transaction are set forth below.

1.    Distributing will cause DRE 1 to convert into a State A corporation (the
"Conversion"). Following the Conversion, DRE 1 is referred to as "Controlled."

2.     Distributing will contribute cash to Controlled (the "Funding Requirement") in
exchange for no additional stock of Controlled (together with the Conversion, the
"Contribution").
PLR-125162-23                                5

3.     Controlled may engage in a private placement, pursuant to which Controlled will
issue new shares constituting no more than a percent of Controlled stock by vote and
by value to one or more investors in exchange for cash (the "Private Placement").

4.     Distributing will distribute at least b percent of the common stock of Controlled
pro rata to its holders of common stock or pursuant to an exchange by Distributing in
redemption of its shares (the "Distribution" and, together with the Contribution, the
"Separation"). Distributing may retain up to c percent of the common stock of Controlled
(the "Retained Shares"), but in no event shall the Retained Shares together with any
shares issued in the Private Placement exceed a percent of Controlled stock.

5.     Distributing will dispose of the Retained Shares in one or more public or private
sales as soon as warranted, but in no event later than d years after the date of the
Distribution.

In the absence of the Retention, Distributing believes that Distributing would be required
to incur incremental indebtedness at a significant cost and on potentially less favorable
terms (the "Retention Business Purpose").

                                    Representations

Distributing has made the following representations with respect to the Proposed
Transaction:

Rev. Proc. 2017-52 Representations

With respect to the Separation, except as set forth below, Distributing has made all the
representations in section 3 of the Appendix to Rev. Proc. 2017-52.

(a)    Distributing has made the following alternative representations: Representations
3(a); 8(b); 11(a); 15(a); 22(a); 31(a); and 41(a).

(b)    Distributing has not made the following representations because they do not
apply to the Separation: Representations 24; 25; and 40.

(c)   Distributing has made the following modified representations:

      Representation 2: In the Distribution, Distributing will distribute at least 80% of
      the stock and securities of Controlled; provided that, in the case that a split-off
      results in the exchange of stock constituting less than Control of Controlled,
      Distributing will effect a pro rata distribution of Controlled stock to ensure that
      Control is distributed as promptly as practicable after such split-off, taking into
      account applicable stock exchange and clearing agency requirements.
PLR-125162-23                                  6

       Representation 6: To the extent the Distribution is effected as a spin-off, no
       shareholder of Distributing will surrender Distributing stock in the Distribution.

       Representation 7: To the extent the Distribution is effected as a split-off, the fair
       market value of Controlled stock, Controlled securities, or Other Property to be
       received by each shareholder of Distributing that surrenders Distributing stock
       will be approximately equal to the fair market value of Distributing stock
       surrendered by the shareholder in the transaction.

       Representation 32: No intercorporate debt will exist between Distributing and
       Controlled (and their respective affiliates, as applicable) at the time of, or
       subsequent to the Separation, except for payables and receivables arising by
       reason of the Continuing Arrangements or payables and receivables incurred in
       the ordinary course of business.

Representations relating to the Retained Shares

With respect to the Retained Shares, Distributing has made the following
representations:

(a) Distributing will keep the Retained Shares, if any, to facilitate the Retention
    Business Purpose.

(b) None of Distributing's directors or officers will serve as directors or officers of
    Controlled as long as Distributing retains the Retained Shares.

(c) Distributing will dispose of the Retained Shares as soon as a disposition is
    warranted consistent with the Retention Business Purpose, but in any event, not
    later than d years after the Distribution.

(d) Distributing will vote the Retained Shares in proportion to the votes cast by
    Controlled's other shareholders.

                                           Rulings

Based solely on the information and representations submitted, we rule as follows:

1. The Separation will qualify as a tax-free reorganization under sections 368(a)(1)(D)
   and 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. Section 361(a).

3. Controlled will recognize no gain or loss on the Contribution. Section 1032(a).
PLR-125162-23                                  7

4. Controlled's basis in each asset received in the Contribution will be equal to the
   basis of that asset in the hands of Distributing immediately before the Contribution.
   Section 362(b).

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

6. Distributing's shareholders will recognize no gain or loss (and no amount will be
   includible in income) upon the receipt of Controlled stock in the Distribution. Section
   355(a).

7. Distributing will recognize no gain or loss upon the Distribution. Section 361(c).

8. To the extent the Distribution is effected as a spin-off, the aggregate basis of the
   Distributing common stock and the Controlled stock in the hands of each Distributing
   shareholder immediately after the Distribution (including any fractional share interest
   in Controlled stock to which the shareholder may be entitled) will equal the
   aggregate adjusted basis of the Distributing common stock held by such Distributing
   shareholder immediately before the Distribution, allocated between the stock of
   Distributing and Controlled in proportion to the fair market value of each immediately
   after the Distribution in accordance with Treas. Reg. § 1.358-2(a)(2)(iv). Section
   358(b)(2) and (c).

9. To the extent the Distribution is effected as a split-off, immediately after the
   Distribution, the basis of the Controlled stock in the hands of a holder of Distributing
   stock who exchanges Distributing stock for Controlled stock in the Distribution will be
   the same as the basis of the Distributing common stock exchanged therefor.
   Section 358(a).

10. The holding period of the Controlled stock received by Distributing's shareholders in
    the Distribution (including any fractional share interest in Controlled stock to which
    shareholders may be entitled) will equal the holding period of the Distributing
    common stock with respect to which the Distribution will be made, provided that the
    Distributing common stock is held as a capital asset on the date of the Distribution.
    Section 1223(1).

11. Earnings and profits, if any, will be allocated between Distributing and Controlled in
    accordance with section 312(h) and Treas. Reg. §§ 1.312-10(a) and 1.1502-33, as
    applicable.

12. The receipt by Distributing's 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 Distributing's 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 (determined using the basis
PLR-125162-23                                 8

   allocated to the fractional shares in Ruling 8 or 9) 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.

13. Distributing's continuing ownership of any Retained Shares until its disposition within
    d years after the Distribution will not adversely impact the qualification of the
    Distribution under sections 355 and 368(a)(1)(D) and will not be in pursuance of a
    plan having as one of its principal purposes the avoidance of U.S. federal income tax
    for purposes of section 355(a)(1)(D)(ii).

14. The tax consequence for the year in which any adjustment to the Funding
    Requirement is made between Distributing and Controlled will be characterized in a
    manner consistent with the proper treatment if such payment had occurred
    immediately before the Distribution pursuant to the Separation. See Arrowsmith v.
    Commissioner, 344 U.S. 6 (1952) and Rev. Rul. 83-73, 1983-1 C.B. 84.

                                          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 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 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, copies of this letter are
being sent to your authorized representatives.
PLR-125162-23                                         9


A copy of this ruling letter must be attached to any income tax return for which it is
relevant. Alternatively, a taxpayer filing its return electronically may satisfy this
requirement by attaching a statement to its return that provides the date and control
number (PLR-125162-23) of this ruling letter.


                                                Sincerely,



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


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