Business separation and merger received nonrecognition rulings
Apply this to your situation
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.
Plain-English summary
A public company proposed separating one business from its retained businesses and combining the separated business with an unrelated public acquirer. An internal subsidiary would contribute the business to a new controlled corporation, receive stock, assumed liabilities, and borrowed cash, and distribute the controlled corporation to the public parent. The public parent would then distribute or exchange the controlled stock with its shareholders, followed immediately by a two-step merger into the acquirer's group. Based on the stated representations, the IRS ruled that the internal separation qualifies under sections 368(a)(1)(D) and 355, the external distribution qualifies under section 355, and the merger qualifies under section 368(a)(1)(A). The letter also provides nonrecognition, basis, holding-period, earnings-and-profits, consolidated-return, and fractional-share consequences for the corporations and shareholders. The IRS expressly did not determine whether the transaction satisfies the business-purpose requirement.
Ruling snapshot
- Question: Will the proposed internal spin-off, shareholder distribution or split-off, and merger qualify for tax-deferred treatment?
- Outcome: Approved for the 29 specified rulings, based on the submitted facts and representations
- Key authorities: IRC §§ 354, 355, 357, 358, 361, 362, 368(a)(1)(A), 368(a)(1)(D), 381, 1001, 1032, 1223, 1504
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 202441010 Third Party Communication: None
Release Date: 10/11/2024 Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-00,
355.01-01, 361.00-00, Person To Contact:
368.00-00, 368.01-00, -------------------------------, ID No. -----------
368.04-00 -----------------
Telephone Number:
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-------------------------------- Refer Reply To:
------------------------ CC:CORP:BO5
--------------------------------------- PLR-106495-24
Date:
July 05, 2024
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Dear ------------:
This letter responds to your representative’s letter dated March 28, 2024, as
supplemented by additional letters dated May 9, 2024 and June 14, 2024, submitted on
behalf of External Distributing, its affiliates, and its shareholders, requesting rulings
under sections 355 and 368(a)(1)(D), section 368(a)(1)(A), 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”). The material
information submitted in that request and subsequent correspondence is summarized
below.
This letter is issued pursuant to Rev. Proc. 2024-1, 2024-1 I.R.B. 1, Rev. Proc. 2024-3,
2024-1 I.R.B. 143, Rev. Proc. 2023-26, 2023-33 I.R.B. 486, 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 and Rev. Proc. 2024-3, 2024-1 I.R.B. 143. This office expresses no opinion as to
any issue not specifically addressed by the rulings below.
PLR-106495-24 9
The rulings contained in this letter are based on 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 materials 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 Proposed Transaction
satisfies the business purpose requirement of Treas. Reg. § 1.355-2(b).
Summary of Facts
External Distributing, a publicly traded, widely held, State A corporation, is the parent of
a worldwide group of foreign and domestic entities (the “External Distributing Group”).
External 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, External Distributing
will have a single class of voting common stock issued and outstanding. The External
Distributing Group is actively engaged in multiple businesses on a domestic and global
basis, including Business A, Business B, Business C, and Business D (Business B,
Business C, and Business D, together, the “Retained Businesses”).
Ownership Structure – External Distributing Group
The following summary describes the relevant ownership structure of the External
Distributing Group immediately prior to the Proposed Transaction. Except as described
below, each entity is treated as a corporation for U.S. federal income tax purposes.
External Distributing directly owns all of the issued and outstanding stock of Internal
Distributing, a State A corporation. Internal Distributing directly owns: (i) all of the issued
and outstanding stock of Sub 1, a State A corporation; and (ii) all of the issued and
outstanding stock of Sub 2, a State A corporation. Sub 1 and Sub 2 are each members
of the External Distributing Group that directly conduct Business A and own various
domestic and foreign entities that are engaged solely in Business A. Internal Distributing
also directly holds certain Business A assets and liabilities.
For purposes of satisfying the active trade or business requirements of section 355(b)
with respect to the Internal Spin-Off (defined below), Internal Distributing and the
members of its “separate affiliated group” as defined in section 355(b)(3)(B) (“SAG”) will
rely on Business B and Business C, and Controlled and the members of its SAG will
rely on Business A, which will include any activities performed for Business A by
employees of Internal Distributing and its SAG for each of the past five years.
For purposes of satisfying the active trade or business requirements of section 355(b)
with respect to the External Distribution (defined below), External Distributing and the
members of its SAG will rely on Business B and Business C, and Controlled and the
members of its SAG will rely on Business A, which will include any activities performed
PLR-106495-24 10
for Business A by employees of External Distributing and its SAG for each of the past
five years.
External Distributing has submitted financial information in accordance with Rev. Proc.
2017-52 indicating that Business A, Business B, and Business C each had gross
receipts and operating expenses representing the active conduct of a trade or business
for each of the past five years.
Outstanding Debt
As of Date 1, Internal Distributing had outstanding a Term Loan in an aggregate amount
of a, and a Revolver in an amount of up to b. Internal Distributing also had eight
issuances of senior secured notes, including: (i) Senior Notes 1 in an aggregate
principal amount of c; (ii) Senior Notes 2 in an aggregate principal amount of d; (iii)
Senior Notes 3 in an aggregate principal amount of e; (iv) Senior Notes 4 in an
aggregate amount of f; (v) Senior Notes 5 in an aggregate principal amount of g; (vi)
Senior Notes 6 in an aggregate principal amount of h; (vii) Senior Notes 7 in the
aggregate principal amount of i; and (viii) Senior Notes 8 in the aggregate principal
amount of j (together with the Term Loan and the Revolver, the “Internal Distributing
Historical Debt”). At such time, Internal Distributing also had outstanding Bonds in an
aggregate principal amount of k.
Ownership Structure – Acquiring Group
Acquiring, a publicly traded, widely held, State A corporation, is the parent of a
worldwide group of domestic and foreign entities (the “Acquiring Worldwide Group”) that
is unrelated to the External Distributing Group. Acquiring is also the common parent of
an affiliated group of domestic corporations that file a U.S. consolidated federal income
tax return (the “Acquiring Consolidated Group”).
Immediately prior to the Proposed Transaction, Acquiring directly owns: (i) all of the
issued and outstanding stock of Merger Sub 1, a State A corporation; and (ii) all of the
issued and outstanding stock of Merger Sub 2, a State A limited liability company
treated as a disregarded entity for U.S. federal income tax purposes. Acquiring formed
Merger Sub 1 and Merger Sub 2 to facilitate the Proposed Transaction.
Proposed Transaction
For what are represented to be valid business reasons, External Distributing proposes
to separate Business A from the Retained Businesses (the “Separation”) and combine
the Business A operations with the business operations of Acquiring. Following the
Proposed Transaction, Internal Distributing and External Distributing will conduct the
Retained Businesses and Acquiring will conduct Business A. In the description of the
Proposed Transaction below, any repayment or retirement of Internal Distributing
PLR-106495-24 11
Historical Debt includes payments of principal, interest, market premiums, and
associated legal fees.
On Date 2, External Distributing, Controlled, and Acquiring entered into a separation
agreement (as amended, the “Separation Agreement”) governing certain terms of the
Proposed Transaction. On the same date, External Distributing, Controlled, Acquiring,
Merger Sub 1, and Merger Sub 2 entered into a merger agreement (as amended, the
“Merger Agreement”) and various other agreements governing certain terms of the
Proposed Transaction.
Pursuant to the Separation Agreement and the Merger Agreement, the relevant steps of
the Proposed Transaction are set forth below.
The Internal Transactions
Step 1: Internal Distributing will form Controlled, a State A corporation.
Step 2: Internal Distributing will contribute all of its assets related to Business A to
Controlled, including all of the issued and outstanding stock of Sub 1 and Sub 2, solely
in exchange for: (i) all of the issued and outstanding shares of Controlled stock; (ii) the
assumption by Controlled of liabilities associated with Business A (if any); and
(iii) Controlled Cash (as defined below) (the “Contribution”).
Step 3: Controlled will borrow cash in the approximate amount of m from third-party
lenders through capital markets borrowing (the “Controlled Borrowing”).
Step 4: Controlled will distribute approximately n of the proceeds of the Controlled
Borrowing to Internal Distributing (the “Controlled Cash”).
Step 5: Internal Distributing will distribute all of the issued and outstanding stock of
Controlled to External Distributing (the “Internal Distribution,” and, together with the
Internal Contribution, the “Internal Spin-Off”).
Step 6: Within o months following the Internal Distribution, Internal Distributing will use
an amount of cash from its general accounts equal to the Controlled Cash to repay or
repurchase Internal Distributing Historical Debt from third-party lenders (the “Internal
Distributing Debt Repayment,” and, together with the formation of Controlled, the
Controlled Borrowing, the Contribution, and the Internal Distribution, the “Internal
Transactions”).
The External Transactions
Step 7: External Distributing will distribute all of the issued and outstanding stock of
Controlled to its shareholders through: (i) a pro rata distribution (the “Pro-Rata
Distribution”); and/or (ii) an offer to exchange shares of Controlled stock for outstanding
shares of External Distributing (the “Split-Off”). If External Distributing chooses to
PLR-106495-24 12
pursue a Split-Off, and the exchange offer is not fully subscribed, External Distributing
will transfer as soon as practical, but not later than p days after the Split-Off, all the
shares of Controlled not distributed in the Split-Off to its shareholders on a pro-rata
basis in accordance with their stock ownership (the “Clean-Up Distribution,” and,
together with the Pro-Rata Distribution and/or the Split-Off, as applicable, the “External
Distribution”).
Step 8: Immediately following the External Distribution, Merger Sub 1 will merge with
and into Controlled with Controlled surviving under State A law solely in exchange for
Acquiring stock (the “First Merger”).
Step 9: Immediately following the First Merger, Controlled will merge with and into
Merger Sub 2 with Merger Sub 2 surviving under State A law in exchange for no
consideration (the “Second Merger,” and, together with the First Merger, the “Merger”).
Following the Merger, the former shareholders of Controlled will own approximately q
percent of the issued and outstanding stock of Acquiring on account of their former
ownership in Controlled.
Step 10: Acquiring (or Merger Sub 2) will use proceeds from the Controlled Borrowing to
repay or repurchase historical debt of Acquiring in the approximate amount of r from
third-party lenders (the “Acquiring Debt Repayment,” and, together with the External
Distribution and the Merger, the “External Transactions”).
On Date 2, in connection with the Proposed Transaction, External Distributing,
Controlled, and Acquiring collectively with their affiliates, entered into certain
agreements intended to govern their relationship following the consummation of the
External Distribution and the Merger, including the Separation Agreement and a
Transition Services Agreement, a Tax Matters Agreement, an Employee Matters
Agreement, and a Supply Agreement (i.e., the Continuing Arrangements).
Representations
The Internal Transactions
Except as set forth below, External Distributing has made all of the representations in
Section 3 of the Appendix to Rev. Proc. 2017-52 with respect to the Internal
Transactions:
-
External Distributing has made the following alternative representations: 3(a), 8(a),
11(a), 15(a), 22(a), 31(a), and 41(a). -
External Distributing has not made the following representations, which do not apply
to the Internal Transactions: 7, 20, 24, 25, 35, and 39. -
External Distributing has made the following modified representations:
PLR-106495-24 13
Representation 32: No intercorporate debt will exist between Internal Distributing,
Controlled, and Acquiring (and their respective subsidiaries, as applicable) at the
time of, or subsequent to the Internal Distribution of Controlled stock, except for
amounts arising by reason of the Continuing Arrangements or ordinary course
receivables and payables.
Representation 33: Except with respect to certain payments made pursuant to
the Continuing Arrangements, payments made in connection with all continuing
transactions, if any, between Internal Distributing, Controlled, and Acquiring after
the Internal Distribution will be for fair market value based on arm’s-length terms.
Representation 34: Internal Distributing and Controlled each will pay its own
expenses, if any, incurred in connection with the Internal Distribution, except that
Internal Distributing and its affiliates may pay certain corporate-level expenses
that are solely and directly related (within the meaning of Rev. Rul. 73-54, 1973-1
C.B. 187) to the Internal Distribution (such as legal, accounting, and other
advisory fees and administrative expenses incurred in connection with the
Internal Distribution).
-
External Distributing makes the following additional representations in lieu of
Representations 14 and 15 in Rev. Proc. 2017-52:Except with respect to any portion of the Controlled Borrowing retained by
Controlled to be used for the Acquiring Debt Repayment, the fair market value of
the business assets of each of Internal Distributing and Controlled will be greater
than 80 percent of the fair market value of its total assets immediately after the
Internal Distribution. For this purpose, the term “business assets” of a corporation
means its gross assets used in one or more businesses. Such assets include
cash and cash equivalents held as a reasonable amount of working capital for
one or more businesses. Such assets also include assets required (by binding
commitment or legal requirement) to be held to provide for exigencies related to
a business or for regulatory purposes with respect to a business.Except for the steps described in the Proposed Transaction and ordinary market
trading, there is no plan or intention by the shareholders or security holders of
Internal Distributing to sell, exchange, transfer by gift, or otherwise dispose of
any of their stock in, or securities of, either Internal Distributing or Controlled after
the transaction.There is no plan or intention by Internal Distributing or Controlled, directly or
through any related person (within the meaning of section 267(b) or section
707(b)(1)), to purchase any of its outstanding stock after the transaction. For
purposes of this representation, stock repurchases are not included if they meet
the following requirements: (i) there is a sufficient business purpose for the stock
purchase; (ii) the stock to be purchased is widely held; (iii) the stock purchases
will be made in the open market; and (iv) there is no plan or intention that the
PLR-106495-24 14
aggregate amount of stock purchases will equal or exceed 20 percent of the
outstanding stock of the corporation.
Except as described in the Proposed Transaction, there is no plan or intention to
liquidate either Internal Distributing or Controlled, to merge with any other
corporation, or to sell or otherwise dispose of assets after the transaction, except
in the ordinary course of business as part of each corporation’s routine
evaluation of its asset mix or pursuant to the Divestures.
-
External Distributing makes the following additional representation in lieu of
Representation 29 in Rev. Proc. 2017-52:Except as described in the Proposed Transaction and the Substantial
Negotiations, there was not and will not be any agreement, understanding,
arrangement, or substantial negotiations at any point during the two-year period
ending on the date of the distribution regarding an acquisition of either Internal
Distributing or Controlled (including a predecessor or successor within the
meaning of Treas. Reg. § 1.355-8) or a similar acquisition.
Except as set forth below, External Distributing has made all of the representations in
Section 3 of the Appendix to Rev. Proc. 2018-53 with respect to the Internal
Transactions:
-
External Distributing has made the following modified representations:
Representation 6: There are one or more substantial business reasons for any
delay in satisfying Internal Distributing Historical Debt with any Controlled Cash
beyond s days after the date of the first distribution of Controlled stock to Internal
Distributing’s shareholders. All the Internal Distributing Historical Debt that will be
satisfied with any Controlled Cash will be satisfied no later than t months after
such distribution in connection with the plan.
The External Transactions
Except as set forth below, External Distributing has made all of the representations in
Section 3 of the Appendix to Rev. Proc. 2017-52 with respect to the External
Transactions:
-
External Distributing has made the following alternative representations: 3(a), 8(a),
11(a), 15(a), 31(a), and 41(a). -
External Distributing has not made the following representations, which do not apply
to the External Transactions: 17, 18, 19, 20, 22, 24, 25, 35, 39, and 40. -
External Distributing has made the following modified representations:
PLR-106495-24 15
Representation 32: No intercorporate debt will exist between External
Distributing, Controlled, and Acquiring (and their respective subsidiaries, as
applicable) at the time of, or subsequent to the External Distribution of Controlled
stock, except for amounts arising by reason of the Continuing Arrangements or
ordinary course receivables and payables.
Representation 33: Except with respect to certain payments made pursuant to
the Continuing Arrangements, payments made in connection with all continuing
transactions, if any, between External Distributing, Controlled, and Acquiring after
the External Distribution will be for fair market value based on arm’s-length
terms.
Representation 34: External Distributing and Controlled each will pay its own
expenses, if any, incurred in connection with the External Distribution, except that
External Distributing and its affiliates may pay certain corporate-level expenses
that are solely and directly related (within the meaning of Rev. Rul. 73-54, 1973-1
C.B. 187) to the External Distribution (such as legal, accounting, and other
advisory fees and administrative expenses incurred in connection with the
External Distribution).
-
External Distributing makes the following additional representations in lieu of
Representations 14 and 15 in Rev. Proc. 2017-52:Except with respect to any portion of the Controlled Borrowing retained by
Controlled to be used for the Acquiring Debt Repayment, the fair market value of
the business assets of each of External Distributing and Controlled will be greater
than 80 percent of the fair market value of its total assets immediately after the
External Distribution. For this purpose, the term “business assets” of a
corporation means its gross assets used in one or more businesses. Such assets
include cash and cash equivalents held as a reasonable amount of working
capital for one or more businesses. Such assets also include assets required (by
binding commitment or legal requirement) to be held to provide for exigencies
related to a business or for regulatory purposes with respect to a business.Except for the steps described in the Proposed Transaction and ordinary market
trading, there is no plan or intention by the shareholders or security holders of
External Distributing to sell, exchange, transfer by gift, or otherwise dispose of
any of their stock in, or securities of, either External Distributing, Controlled, or
Acquiring after the transaction.There is no plan or intention by External Distributing, Controlled, or Acquiring,
directly or through any related person (within the meaning of section 267(b) or
section 707(b)(1)), to purchase any of its outstanding stock after the transaction.
For purposes of this representation, stock repurchases are not included if they
meet the following requirements: (i) there is a sufficient business purpose for the
stock purchase; (ii) the stock to be purchased is widely held; (iii) the stock
PLR-106495-24 16
purchases will be made in the open market; and (iv) there is no plan or intention
that the aggregate amount of stock purchases will equal or exceed 20 percent of
the outstanding stock of the corporation.
Except as described in the Proposed Transaction, there is no plan or intention to
liquidate either External Distributing, Controlled, or Acquiring, to merge with any
other corporation, or to sell or otherwise dispose of assets after the transaction,
except in the ordinary course of business as part of each corporation’s routine
evaluation of its asset mix or pursuant to the Divestures.
-
External Distributing makes the following additional representation in lieu of
Representation 29 in Rev. Proc. 2017-52:Except as described in the Proposed Transaction and the Substantial
Negotiations, there was not and will not be any agreement, understanding,
arrangement, or substantial negotiations at any point during the two-year period
ending on the date of the distribution regarding an acquisition of either External
Distributing or Controlled (including a predecessor or successor within the
meaning of Treas. Reg. § 1.355-8) or a similar acquisition.
The Merger
With respect to the Merger, External Distributing makes the following representations:
-
At the time of the Second Merger, Merger Sub 2 will be a single member limited
liability company that is disregarded as an entity separate from Acquiring (within the
meaning of Treas. Reg. § 1.368-2(b)(1)(i)(A)) for U.S. federal income tax purposes. -
The Second Merger will be effectuated pursuant to the laws of Delaware and will
qualify as a statutory merger under applicable Delaware law. Pursuant to the plan of
merger, by operation of law, the following will occur simultaneously at the effective
time of the Second Merger: (i) all the assets and liabilities of Controlled immediately
before the Second Merger will become the assets and liabilities of Acquiring
(through Merger Sub 2); and (ii) Controlled will cease its separate legal existence for
all purposes. -
The Second Merger will be undertaken pursuant to a plan of reorganization, as
described in Treas. Reg. §§ 1.368-1(c) and 1.368-2(g), that was adopted by the
taxpayer and each of its affiliates as necessary, before the Second Merger. -
The aggregate fair market value of Acquiring stock provided to Controlled
Shareholders will be at least 40 percent of the fair market value, as of the relevant
testing date, of the total consideration received by such Controlled Shareholders in
exchange for their Controlled stock in connection with the Merger. For purposes of
this representation cash or other property furnished by Acquiring (or any related
person, as defined in Treas. Reg. § 1.368-1(e)(4)) for redemptions of Controlled
stock (including Controlled stock surrendered by dissenters or exchanged for cash in
PLR-106495-24 17
lieu of fractional shares), is treated as nonstock consideration received by such
Controlled Shareholders, and is taken into account in determining the total
consideration received by such Controlled Shareholders in exchange for their
Controlled stock.
-
There is no plan or intention by Acquiring (or any related person, as defined in
Treas. Reg. § 1.368-1(e)(4)) to acquire any of the Acquiring stock received by
Controlled Shareholders in exchange for their Controlled stock in connection with the
Merger that will reduce the former Controlled Shareholders’ ownership of Acquiring
stock to a number of shares having a value, of less than 40 percent of the fair
market value, as of the relevant testing date, of the total consideration received by
such Controlled Shareholders in exchange for their Controlled stock in connection
with the Merger, except for acquisitions by Acquiring where: (i) there is a sufficient
business purpose for the stock purchase; (ii) the stock to be purchased is widely
held; (iii) the stock purchases will be made in the open market; and (iv) there is no
plan or intention that the aggregate amount of stock purchases will equal or exceed
20 percent of the outstanding stock of Acquiring. For purposes of this representation
cash or other property furnished by Acquiring (or any related person, as defined in
Treas. Reg. § 1.368-1(e)(4)) for redemptions of Controlled stock (including
Controlled stock surrendered by dissenters or exchanged for cash in lieu of
fractional shares), is treated as nonstock consideration received by such Controlled
Shareholders, and is taken into account in determining the total consideration
received by such Controlled Shareholders in exchange for their Controlled stock. -
Except for stock acquired in the Merger, neither Acquiring nor any related person of
Acquiring as defined in Treas. Reg. § 1.368-1(e)(4) has acquired or will acquire any
stock of Controlled in connection with the Merger. -
Acquiring will continue the historic business(es) of Controlled or use a significant
portion of Controlled's historic business assets in a business within the meaning of
Treas. Reg. § 1.368-1(d). -
There is no plan or intention to sell or otherwise dispose of any of the Controlled
assets acquired in the Merger, except for dispositions made in the ordinary course of
business or transfers of assets to which section 368(a)(2)(C) or Treas. Reg. § 1.368-
2(k) applies. -
The liabilities of Controlled that will be assumed by Acquiring, within the meaning of
section 357(d), were incurred by Controlled in the ordinary course of business and
are associated with the assets transferred. -
Immediately before the Merger, the total fair market value of the assets of Controlled
to be transferred to Acquiring will exceed the sum of: (i) the total amount of liabilities
(if any) to be assumed (as determined under section 357(d)) by Acquiring, plus any
liabilities to which the transferred assets will be subject; (ii) the total amount of
liabilities (if any) owed by Controlled to Acquiring that will be discharged or
PLR-106495-24 18
extinguished in connection with the Merger; and (iii) the amount of cash and the fair
market value of any other property (other than property permitted to be received
under section 361(a) without the recognition of gain) to be received by the Controlled
shareholders in connection with the Merger.
-
Immediately after the Merger, the aggregate fair market value of the assets of
Acquiring will exceed the sum of liabilities of Acquiring, plus the other liabilities, if
any, to which the assets of Acquiring will be subject. -
Controlled, Merger Sub 1, Merger Sub 2, and Acquiring will each pay their own
expenses incurred in connection with the Merger. -
There will be no intercorporate indebtedness existing between Controlled and
Acquiring that will be issued, acquired, or settled at a discount. -
Controlled has not made, and will not make, any dividend or other distribution with
respect to its stock other than any regular, normal dividends, and neither Controlled
nor any related person of Controlled, as defined in Treas. Reg. § 1.368-1(e)(4)
(determined without regard to Treas. Reg. § 1.368-1(e)(4)(i)(A)), will acquire any
stock of Controlled, in each case, in connection with the Merger. -
The Merger is motivated, in whole or substantial part, by one or more bona fide
nonfederal income tax purposes as described in this request for ruling. -
At the time of the Merger, none of Controlled, Merger Sub 1, Merger Sub 2, or
Acquiring will be under the jurisdiction of a court in a Title 11 or similar case within
the meaning of section 368(a)(3)(A). -
No party to the Merger will be an investment company as defined in section
368(a)(2)(F) or section 351(e) and Treas. Reg. § 1.351-1(c)(1)(ii). -
The receipt of cash in lieu of fractional shares of Acquiring will be solely for the
purpose of avoiding the expense and inconvenience of issuing and maintaining
fractional shares and will not represent separately bargained-for consideration. The
total cash consideration that will be received in connection with the Merger in lieu of
fractional shares of Acquiring stock will not exceed one percent of the total
consideration that will be distributed to holders of Controlled stock in the Merger.
Any fractional share interests of each Controlled shareholder will be aggregated, and
no Controlled shareholder of record will receive cash in an amount equal to or
greater than the value of one full share of Controlled stock. -
Acquiring and its subsidiaries will properly elect to file a consolidated U.S. federal
income tax return for the tax year beginning the day after the Merger.
PLR-106495-24 19
-
All other transactions undertaken contemporaneously with, in anticipation of, in
conjunction with, or in any way related to the Proposed Transaction for which the
letter ruling is requested have been fully disclosed. -
Except with respect to certain payments made pursuant to the Agreements, all
exchanges effectuating the Proposed Transaction will be on a value-for-value basis
under arm’s length terms. -
No party to the Proposed Transaction is an organization exempt from U.S. federal
income tax within the meaning of section 501. -
No party to the Proposed Transaction will be a “personal service corporation” within
the meaning of section 269A. -
No party to the Proposed Transaction will have any outstanding fast-pay stock as
defined in Treas. Reg. § 1.7701(l)-3. -
None of the steps of the Proposed Transaction will be undertaken
contemporaneously with, in anticipation of, in conjunction with, or in any way related
to a transaction designated as a “listed transaction” for purposes of Treas. Reg. §§
1.6011–4T(b)(2) and 301.6111–2T.Rulings
Based solely on the information submitted and the representations made, we rule as
follows with respect to the Proposed Transaction:
The Internal Transactions
-
The Contribution, together with the Internal Distribution, will qualify as a
reorganization and distribution within the meaning of section 368(a)(1)(D) and
section 355. Internal Distributing and Controlled will each be “a party to a
reorganization” within the meaning of section 368(b). -
No gain or loss will be recognized by Internal Distributing on the Contribution.
Sections 361(a), 361(b), and 357(a). -
No gain or loss will be recognized by Controlled on the Contribution. Section
1032(a). -
The basis in each asset received by Controlled in the Contribution will equal the
basis of that asset in the hands of Internal Distributing immediately before the
Contribution. Section 362(b).
PLR-106495-24 20
-
The holding period in each asset received by Controlled in the Contribution will
include the period during which such asset was held by Internal Distributing. Section
1223(2). -
No gain or loss will be recognized by Internal Distributing on the Internal Distribution
or the Internal Distributing Debt Repayment. Section 361(c). -
No gain or loss will be recognized by (and no amount will be includible in the income
of) External Distributing on the receipt of Controlled stock in the Internal Distribution.
Section 355(a)(1). -
External Distributing’s aggregate adjusted basis in its Internal Distributing stock and
Controlled stock immediately after the Internal Distribution will equal External
Distributing’s aggregate basis in its Internal Distributing stock immediately prior to
the Internal Distribution. Section 358(a). The basis will be allocated between Internal
Distributing stock and Controlled stock in proportion to the fair market values of each
immediately after the Internal Distribution in accordance with Treas. Reg. § 1.358-
2(a)(2). Sections 358(a) through (c). -
External Distributing’s holding period in the Controlled stock received in the Internal
Distribution will include the holding period of the Internal Distributing stock held by
External Distributing with respect to which the distribution is made, provided that
such Internal Distributing stock is held as a capital asset on the date of the Internal
Distribution. Section 1223(1). -
Earnings and profits, if any, will be allocated between Controlled and Internal
Distributing in accordance with section 312(h) and Treas. Reg. §§ 1.312-10(a) and
1.1502-33.
The External Transactions
-
No gain or loss will be recognized by (and no amount will otherwise be included in
the income of) the External Distributing shareholders upon receipt of Controlled
stock in the External Distribution. Section 355(a)(1). -
No gain or loss will be recognized by External Distributing on the distribution of
Controlled stock to its shareholders in the External Distribution. Section 355(c)(1). -
Each participating shareholder’s aggregate basis in the Controlled stock it receives
in exchange for External Distributing stock pursuant to the Split-Off (including any
fractional share interest in Controlled stock to which a shareholder may be entitled)
will equal such shareholder’s aggregate basis in the External Distributing stock
surrendered in the Split-Off and will be allocated among the shares received in the
manner described in Treas. Reg. § 1.358-2(a). Section 358(a)(1) and (b)(1). -
If the Pro-Rata Distribution or Clean-Up Distribution is undertaken, the aggregate
basis of the External Distributing stock and the Controlled stock in the hands of the
PLR-106495-24 21
External Distributing shareholders immediately after the Pro-Rata Distribution or
Clean-Up Distribution (including any fractional share interest in Controlled stock to
which a shareholder may be entitled) will be the same as the External Distributing
shareholders’ basis in the External Distributing stock immediately before the
Pro-Rata Distribution or Clean-Up Distribution, allocated between the External
Distributing stock and the Controlled stock in proportion to the fair market value of
each immediately following the Pro-Rata Distribution or Clean-Up Distribution.
Sections 358(a)(1), (b), and (c); Treas. Reg. § 1.358-2(a)(2).
-
The holding period of the Controlled stock received by the External Distributing
shareholders in the External Distribution will include the holding period of the
External Distributing stock held by the External Distributing shareholders with
respect to which the distribution will be made, provided that such External
Distributing stock is held as a capital asset on the date of the External Distribution.
Section 1223(1). -
Earnings and profits, if any, will be allocated between External Distributing and
Controlled in accordance with section 312(h) and Treas. Reg. §§ 1.312-10(b) and
1.1502-33. -
Following the External Distribution, Controlled will not be a successor of External
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 join in the filing of a consolidated U.S.
federal income tax return.
The Merger
-
The Merger will constitute a reorganization under section 368(a)(1)(A), treated as:
(i) the transfer by Controlled of all of its assets to Acquiring solely in exchange for
stock of Acquiring and the assumption of Controlled’s liabilities; followed by (ii) the
distribution by Controlled of the Acquiring stock to its shareholders in cancellation of
their Controlled stock. Acquiring and Controlled will each be a “party to a
reorganization” within the meaning of section 368(b). -
No gain or loss will be recognized by Controlled upon the transfer of its assets to
Acquiring solely in exchange for Acquiring stock and the assumption of liabilities.
Sections 357(a) and 361(a). -
No gain or loss will be recognized by Acquiring on its receipt of Controlled’s assets
solely in exchange for Acquiring stock and the assumption of liabilities. Section
1032(a).
PLR-106495-24 22
-
Acquiring’s basis in each asset received from Controlled in the Merger will equal the
basis of such asset in the hands of Controlled immediately before the Merger.
Section 362(b). -
Acquiring’s holding period in each asset received from Controlled in the Merger will
include the period during which such asset was held by Controlled. Section 1223(2). -
No gain or loss will be recognized by Controlled upon the distribution of Acquiring
stock to its shareholders in the Merger. Section 361(c). -
No gain or loss will be recognized by the Controlled shareholders upon the
surrender of their Controlled stock in exchange for Acquiring stock in the Merger.
Section 354(a)(1). -
The Controlled shareholders’ basis in the Acquiring stock received in the Merger
(including any fractional share interest in Acquiring stock to which a shareholder may
be entitled) will be the same as the basis in the Controlled stock surrendered in
exchange therefor. Section 358(a)(1). -
If a holder of Controlled stock that purchased or acquired shares on different dates
or at different prices is not able to identify which particular share of Acquiring stock is
received in exchange for a particular share of Controlled stock, the holder may
designate which particular share of Acquiring stock is received in exchange for a
particular share of Controlled stock, provided the designation is consistent with the
terms of the Merger. Treas. Reg. § 1.358-2(a)(2)(vii). -
The Controlled shareholders’ holding period in the Acquiring stock received in the
Merger (including any fractional share interest in Acquiring stock to which a
shareholder may be entitled) will include the holding period of the Controlled stock
surrendered in exchange therefor, provided that the Controlled stock is held as a
capital asset on the date of the Merger. Section 1223(1). -
The receipt by the shareholders of Controlled of cash in lieu of fractional shares, if
any, of Acquiring stock will be treated for U.S. federal income tax purposes as if the
fractional shares had been issued to such shareholders as part of the Merger 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), determined using the basis
allocated to the fractional shares in Rulings 25-26, 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 provided in Ruling 27). -
Acquiring will succeed to and take into account the items of Controlled enumerated
in section 381(c), subject to the provisions and limitations of sections 381, 382, 383,
384, and 1502, and the regulations thereunder.
PLR-106495-24 23
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 are 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.
A copy of this letter ruling must be attached to any federal 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 (PLR-106495-24) of this 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,
_Brian R. Loss____
Brian R. Loss
Senior Technician Reviewer, Branch 4
Office of Associate Chief Counsel (Corporate)
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