S corporation’s business separation qualified as a tax-free spin-off

Plain-English summary

A privately held S corporation proposed separating two active businesses. It would contribute the subsidiary operating one business to a newly formed qualified subchapter S subsidiary and distribute the new company’s stock pro rata to its shareholders. The IRS ruled that the contribution and distribution would qualify as a reorganization and spin-off under IRC §§ 368(a)(1)(D) and 355, generally producing no gain or loss to the corporations or shareholders and carrying over asset bases and holding periods. The distribution would terminate the new company’s and transferred subsidiary’s existing QSub elections, but the new company could immediately elect S corporation status and then elect QSub treatment for the transferred subsidiary if they otherwise qualified. The ruling did not determine whether the transaction met the business-purpose requirement.

Ruling snapshot

• Question: Would the proposed separation qualify as a tax-free section 355 distribution and Type D reorganization, with immediate S corporation and QSub elections available afterward?
• Outcome: Approved, subject to the stated representations, qualifications, and caveats
• Key authorities: IRC §§ 355, 357, 358, 361, 362, 368, 1032, 1223, 1361, 1362; Treas. Reg. §§ 1.355-2, 1.358-2, 1.1361-5

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202511013 Third Party Communication: None
Release Date: 3/14/2025 Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-00,
368.00-00, 368.04-00 Person To Contact:
---------------, ID No. -----------------
--------------------------- Telephone Number:
------------------------------------------------------- --------------------
-------------------------------- Refer Reply To:
------------------------------- CC:CORP:BO3
PLR-115562-24
Date:
December 06, 2024

Legend

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

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

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

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

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

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

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

Business B = -----------------------
---------------------------------------------------------------------------------
--------------------------------------------------------------
PLR-115562-24 2

Shareholder 1 = ---------------------------------------------------------------------------------
-------------

Shareholder 2 = ---------------------------------------------------------------------------------
-----------------------------------

Shareholder 3 = ----------------------------

Shareholder 4 = ----------------------

a = --------

b = --------

c = --------

d = ------

Continuing = -----------------------------------------
Arrangements ---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
---------------------

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

PLR-115562-24 3

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

This letter responds to your letter dated September 5, 2024, as supplemented by
subsequent information and documentation, submitted on behalf of Distributing and its
subsidiaries, 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. 2024-1, 2024-1 I.R.B. 1, 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. 2024-24, 2024-21 I.R.B. 1214, regarding one or more “Covered
Transactions” under section 355 and/or section 368. Except as expressly provided
herein, no opinion is expressed or implied concerning the tax consequences of any
aspect of any transaction or item discussed or referenced in this letter.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty 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
satisfies the business purpose requirement of Treas. Reg. § 1.355-2(b).

                               Summary of Facts

Distributing is a privately held State A corporation that has made an election under
section 1362(a) to be treated as a subchapter S corporation within the meaning of
section 1361(a). Distributing has a single class of common stock issued and
outstanding, which is owned by Shareholder 1 (a%), Shareholder 2 (b%), Shareholder 3
(c%), and Shareholder 4 (d%).

Distributing directly owns all of the issued and outstanding stock of Sub 1, a State B
corporation engaged in Business A, and of Sub 2, a State B corporation engaged in
Business B. Each of Sub 1 and Sub 2 has elected to be treated as a qualified
subchapter S subsidiary for U.S. federal income tax purposes under section
1361(b)(3)(B) (“QSub”).

For purposes of satisfying the active trade or business requirements of section 355(b)
with respect to the Proposed Transaction, Distributing relies on Business A, and
Controlled relies on Business B. Distributing submitted financial information indicating
that each of Business A and Business B had gross receipts and operating expenses
representing the active conduct of a trade or business for each of the past five years.
PLR-115562-24 4

                           The Proposed Transaction

For what are represented to be valid business reasons, Distributing proposes to
separate Business A and Business B. The relevant steps of the Proposed Transaction
are set forth below.

Step 1: Distributing incorporated Controlled, a State B corporation, and timely elected to
treat Controlled as a QSub for U.S. federal income tax purposes as of the date of its
incorporation.

Step 2: Distributing will contribute all of the issued and outstanding stock of Sub 2 to
Controlled (the “Contribution”).

Step 3: Distributing will distribute all of the issued and outstanding stock of Controlled
pro rata to Distributing’s shareholders, Shareholders 1, 2, 3, and 4 (the “Distribution”).

Step 4: Controlled will timely elect to be treated as a subchapter S corporation for U.S.
federal income tax purposes, effective immediately after the Distribution (the “Controlled
S Election”).

Step 5: Controlled will timely elect to treat Sub 2 as a QSub for U.S. federal income tax
purposes, effective immediately after the Controlled S Election.

                                 Representations

The following representations have been made with respect to the Proposed
Transactions.

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 made the following alternative representations: 3(a), 8(a), 11(a), 22(a),
   31(a), and 41(b).

2. Distributing has not made the following representations, which do not apply to the
   Proposed Transaction: 7, 25, 35, 36, 37, 38, 39, and 40.

3. Distributing has made the following additional representations in lieu of
   representations 14, 15, and 29:

   a. Immediately after the Distribution, the fair market value of the business assets
   of each of Distributing and Controlled will be greater than 80 percent of the
   fair market value of its total assets. 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
   PLR-115562-24 5

     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.
   

   b. There is no plan or intention by the shareholders or security holders of
   Distributing to sell, exchange, transfer by gift, or otherwise dispose of any of
   their stock in, or securities of, either Distributing or Controlled after the
   Distribution.

   c. There is no plan or intention by 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 Distribution.

   d. There is no plan or intention to liquidate either Distributing or Controlled, to
   merge either corporation with any other corporation, or to sell or otherwise
   dispose of the assets of either corporation after the Distribution, except in the
   ordinary course of business.

   e. There will have been no agreement, understanding, arrangement, substantial
   negotiations, or any plan or series of related transactions (within the meaning
   of Treas. Reg. § 1.355-7) at any point during the two-year period prior to the
   date of the Distribution regarding an acquisition of either Distributing or
   Controlled (including a predecessor or successor within the meaning of
   Treas. Reg. § 1.355-8) or a similar acquisition.

4. Distributing has made the following modified representations:

   Representation 23: Distributing, Controlled and Sub 2 use and will continue to
   use the cash method of accounting. Except for any mismatch of income and
   deductions with respect to Sub 2’s account receivables arising in the ordinary
   course of business, the Proposed Transaction 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.

   Representation 32: Other than any amounts payable under the Continuing
   Arrangements, no intercorporate debt will exist between Controlled and
   Distributing (or their respective affiliates, as applicable) at the time of, or
   subsequent to, the Distribution.

In addition, except as set forth below, Distributing has made all of the representations in
section 3 of Rev. Proc. 2024-24 with respect to the Proposed Transaction:
PLR-115562-24 6

5. Distributing has made the following alternative representations: 1A and 15A.

6. Distributing has not made the following representations, which do not apply to the
   Proposed Transaction: 2, 3, 4, 5, 6, 17, 18, 19, 20, 25, 26, and 27.

                                     Rulings
   

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

1. The Distribution will cause a termination of Controlled’s and Sub 2’s QSub elections
   because they will cease to be wholly owned, direct and indirect subsidiaries of a
   subchapter S corporation. For U.S. federal income tax purposes, Controlled will be
   treated as a new corporation acquiring all of its assets and assuming all of its liabilities
   from Distributing immediately before the termination of Controlled’s QSub election in
   exchange for Controlled stock. Sections 1361(b)(3)(B) and (C); Treas. Reg. § 1.1361-
   5(b)(1)(i).

2. The Contribution, together with the Distribution, will qualify as a reorganization and
   distribution pursuant to sections 368(a)(1)(D) and 355. Distributing and Controlled will
   each be a “party to the reorganization” within the meaning of section 368(b).

3. No gain or loss will be recognized by Distributing on the Contribution. Sections 357(a)
   and 361(a).

4. No gain or loss will be recognized by Controlled on the Contribution. Section 1032(a).

5. The basis in each asset received by Controlled from Distributing in the Contribution
   will equal the basis of the asset in the hands of Distributing immediately before the
   Contribution. Section 362(b).

6. The holding period in each asset received by Controlled from Distributing in the
   Contribution will include the period during which such asset was held by Distributing.
   Section 1223(2).

7. No gain or loss will be recognized by Distributing upon its distribution of the stock of
   Controlled on the Distribution. Section 361(c).

8. No gain or loss will be recognized by (and no amount otherwise will be included in the
   income of) the shareholders of Distributing upon the receipt of Controlled stock in the
   Distribution. Section 355(a)(1).

9. Each shareholder’s aggregate basis in the Distributing stock and Controlled stock
   immediately after the Distribution will equal such shareholder's aggregate basis in the
   Distributing stock immediately before the Distribution. Section 358(a). The basis will be
   PLR-115562-24 7

allocated between the Distributing stock and Controlled stock in proportion to their fair
market values. Section 358(b) and (c); Treas. Reg. § 1.358-2.

10. Each Distributing shareholder’s holding period in its Controlled stock received in the
    Distribution will include the holding period of the Distributing stock with respect to which
    the Distribution will be made, provided that such Distributing stock was held as a capital
    asset on the date of the Distribution. Section 1223(1).

11. Distributing’s momentary ownership of the stock of Controlled, as part of the
    reorganization under section 368(a)(1)(D), will not cause Controlled to have an ineligible
    shareholder for any portion of its first taxable year under section 1361(b)(1)(B), and will
    not, in itself, render Controlled ineligible to elect to be a subchapter S corporation for its
    first taxable year. If Controlled otherwise meets the requirements of a small business
    corporation under section 1361, Controlled will be eligible to make a subchapter S
    election under section 1362(a) for its first taxable year, provided that such election is
    made effective immediately upon the Distribution. For this purpose, Controlled will not
    be treated as a subchapter C corporation.

12. Immediately after the Distribution, Controlled may elect to treat Sub 2 as a QSub for
    U.S. federal income tax purposes under section 1361(b)(3)(B), provided that Sub 2
    otherwise meets the requirements under section 1361 and such election is made
    effective immediately following the Distribution. For this purpose, the deemed formation
    of Sub 2 resulting from the termination of the Sub 2 QSub election in connection with
    the Distribution and the deemed liquidation of Sub 2 resulting from the subsequent Sub
    2 QSub election following the Distribution will be disregarded, such that Sub 2 will not
    be treated as a subchapter C corporation. Treas. Reg. § 1.1361-5(b)(3), Ex. 9; Rev. Rul.
    2004-85, 2004-2 C.B. 189 (Situation 2).

                                      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 ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) 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 returns that provides the date and control
number (PLR-115562-24) of this letter ruling.
PLR-115562-24 8

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
                                            Branch Chief, Branch 5
                                            Office of Associate Chief Counsel (Corporate)

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

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

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