Tax-free split-off of two businesses via a section 368(a)(1)(D) reorganization and section 355 distribution

Plain-English summary

A privately held corporation (Distributing) owned by five related shareholders runs two separate businesses: one directly, and the other through a wholly owned LLC that is ignored for tax purposes. It asked the IRS to bless a plan to split the two businesses into two companies while letting some shareholders take the second business and the others keep the first. Under the plan, the LLC first becomes a corporation (Controlled), then Distributing hands out Controlled's stock to three of the shareholders in exchange for their Distributing shares. That kind of swap, where owners trade parent stock for the spun-out company's stock, is called a split-off. The IRS ruled that the conversion and the distribution, taken together, qualify as a tax-free reorganization under IRC §§ 368(a)(1)(D) and 355, so neither corporation nor the exchanging shareholders recognize gain or loss. The ruling also fixes the mechanical results: Controlled carries over Distributing's asset bases and holding periods, the shareholders carry their old stock basis into the new stock, and earnings and profits are split under § 312(h). The IRS expressly did not decide whether the split meets the separate business-purpose requirement, and the ruling binds only this taxpayer.

Ruling snapshot

• Question: Will separating two businesses, by converting a disregarded LLC into a corporation and then distributing that corporation's stock to some shareholders in exchange for their parent stock, qualify as a tax-free split-off?
• Outcome: approved
• Key authorities: IRC §§ 355, 368(a)(1)(D), 361, 357(a), 1032(a), 362(b), 1223, 358(a), 312(h); Treas. Reg. §§ 1.355-2(b), 1.312-10(a); Rev. Proc. 2017-52; Rev. Proc. 2025-30

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202622007 Third Party Communication: None
Release Date: 5/29/2026 Date of Communication: Not Applicable
Index Number: 355.00-00, 355.01-01,
368.00-00, 368.04-00 Person To Contact:
--------------------, ID No. -----------------
Telephone Number:
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---------------------------- Refer Reply To:
---------------------- CC:CORP:BO2
----------------------------- PLR-119258-25
Date:
March 02, 2026

                                             LEGEND

Distributing = --------------------------------------------------------------------------------------
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State A = -------------
Controlled LLC = --------------------------------------------------------------------------------------
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Shareholder A = ----------------
Shareholder B = -------------------
Shareholder C = ----------------
Shareholder D = -------------
Shareholder E = -------------------
Business A = --------------------------------------------------
Business B = --------------------------------------------------
a = --------
b = ------
c = --------
d = ------
e = --------
f = ---
g = ---
h = ---

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

This letter responds to your letter dated October 8, 2025, as supplemented by
subsequent information and documentation (the “Ruling Request”) requesting rulings on
PLR-119258-25 2

certain federal income tax consequences of a series of transactions (the “Proposed
Transaction” as described below). The material information submitted in the Ruling
Request is summarized below.

This letter is issued pursuant to Rev. Proc. 2025-1, 2025-1 I.R.B. 1, and Rev. Proc.
2017-52, 2017-41 I.R.B. 283, as amplified and modified by Rev. Proc. 2025-30, 2025-42
I.R.B. 489, regarding one or more “Covered Transactions” under sections 355 and 368
of the Internal Revenue Code of 1986, as amended (the “Code”). 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. 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 (as defined
below) satisfies the business purpose requirement of Treas. Reg. § 1.355-2(b).

                                      FACTS

Distributing is a privately held State A corporation with a single class of voting common
stock outstanding. Distributing’s voting common stock is held by five related
shareholders with Shareholder A holding a percent, Shareholder B holding b percent,
Shareholder C holding c percent, Shareholder D holding d percent, and Shareholder E
holding e percent.

Distributing is engaged in Business A, directly and through various disregarded entities.
Controlled LLC is a State A limited liability company that is disregarded as an entity
separate from Distributing. Controlled LLC conducts Business B, directly and through
various disregarded entities.

                           PROPOSED TRANSACTION

For valid business purposes, Distributing proposes to engage in the following steps to
separate Business A from Business B:

1. Immediately prior to the Distribution (described in Step 2), Controlled LLC will
   either convert to a corporation under State A law or elect to be classified as a
   corporation (“Controlled”) for federal income tax purposes (the “Conversion”).
   The Conversion will be treated for federal income tax purposes as a contribution
   by Distributing of all the assets of Controlled LLC to Controlled in exchange for all
   PLR-119258-25 3

   the stock of Controlled and the assumption by Controlled of all of the liabilities
   associated with Controlled LLC.

2. Distributing will distribute: (1) approximately f percent of the stock of Controlled to
   Shareholder E in exchange for all of Shareholder E’s stock of Distributing and (2)
   approximately g percent of the stock of Controlled to Shareholders A and B in
   exchange for approximately h percent of each Shareholder A’s and B’s stock of
   Distributing (the “Distribution”). Shareholders A, B, and E are collectively referred
   to as the “Controlled Shareholders”.

3. After the Distribution, Distributing will be owned by Shareholders A, B, C, and D
   and Controlled will be owned by the Controlled Shareholders.

                             REPRESENTATIONS
   

The following representations have been made with respect to the Proposed
Transaction:

                       Rev. Proc. 2017-52 Representations

Except as set forth below and except for all the representations superseded by Rev.
Proc. 2025 -30, Distributing has made all the representations in section 3 of the
Appendix to Rev. Proc. 2017-52.

Representations 6, 25, 36, 37, 38, 39, 40, and 42 in Section 3 of the Appendix to Rev.
Proc. 2017-52 are not applicable.

With respect to representations 3, 8, 11, 15, 22, 31, and 41 in Section 3 of the Appendix
to Rev. Proc. 2017-52, Distributing makes the following alternative representations:
3(a); 8(a); 11(b); 15(a); 22(a); 31(a); and 41(a).

In lieu of Representation 14 in section 3 of the Appendix to Rev. Proc. 2017-52,
Distributing made the following representations: (1) There is no plan or intention by the
shareholders and 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 transaction. (2) 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 transaction. (3)
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 transaction, except in the ordinary course of business.

In lieu of Representation 15 in section 3 of the Appendix to Rev. Proc. 2017-52,
Distributing made the following representation: Immediately after the Distribution, the
fair market value of the business assets of each of Distributing and Controlled will be
PLR-119258-25 4

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 and all members of such corporation’s separate affiliated group (within the
meaning of section 355(b)(3)(B)) are treated as one corporation. 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.

In lieu of Representation 29 in section 3 of the Appendix to Rev. Proc. 2017-52,
Distributing made the following representation: There was no 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
Distributing or Controlled (including a predecessor or successor within the meaning of
Treas. Reg. § 1.355-8) or a similar acquisition.

                       Rev. Proc. 2025-30 Representations

Except as set forth below, Distributing has made all the representations in section 3.04
of Rev. Proc. 2025-30 (which restates the guidance originally provided in Section 3 of
Rev. Proc. 2018-53, 2018-43 I.R.B. 667).

The second representation in Section 3.04(3) and the representation in section 3.04(6)
of Rev. Proc. 2025-30 are not applicable.

Distributing has made all the representations in section 4 of Rev. Proc. 2025-30 (which
restate the guidance originally provided in Representations 2, 4, and 17 through 21 in
section 3 of the Appendix to Rev. Proc. 2017-52).

                                    RULINGS

Based solely on the information submitted and the representations set forth below, we
rule as follows regarding the Proposed Transaction:

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

2. Distributing will not recognize gain or loss on the Conversion. Sections 361(a)
   and 357(a).

3. Controlled will not recognize gain or loss on the Conversion. Section 1032(a).
   PLR-119258-25 5

4. Controlled’s basis in each asset received from Distributing in the Conversion will
   equal the basis of that asset in the hands of Distributing immediately before the
   Conversion. Section 362(b).

5. Controlled’s holding period for each asset received from Distributing in the
   Conversion will include the holding period during which Distributing held that
   asset. Section 1223(2).

6. The Controlled Shareholders will not recognize gain or loss on the receipt of
   Controlled stock in the Distribution. Section 355(a)(1).

7. Distributing will not recognize gain or loss on the Distribution. Section 361(c).

8. The basis of the shares of Controlled stock in the hands of each of the Controlled
   Shareholders immediately after the Distribution will be the same as the basis of
   the Distributing stock held by the Controlled Shareholders surrendered in
   exchange therefor. Section 358(a)(1).

9. The holding period of the Controlled shares received by each of the Distributee
   Shareholders in the Distribution will include the holding period of the Distributing
   shares surrendered in exchange therefor, provided that the Distributing shares of
   stock were held as a capital asset on the date of the Distribution. Section
   1223(1).

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

                                     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 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 must be attached to any income tax return to 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-
119258-25) of the letter ruling.
PLR-119258-25 6

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.

                                       Sincerely,



                                       Jonathan M. Kushner
                                       Senior Technician Reviewer, Branch 5
                                       Office of Associate Chief Counsel (Corporate)

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