In a private letter ruling released on Sept. 11, 2015 (PLR 201537004), the IRS said that a change of the obligor on an existing debt was treated as a new issuance of debt for purposes of Section 361.
Under the facts of the PLR, a publicly traded corporation (Public) operated three businesses — A, B and C. Public also had publicly traded debt outstanding (known as a distributing note). Public intended to spin off A and B by contributing them to a newly formed corporation (Controlled) in exchange for the stock of Controlled, and then distributing Controlled's stock to Public's shareholders on a pro-rata basis.
As part of the transaction, Public's outstanding debt was divided between Public and Controlled based on the expected values of each after the transaction. Specifically, Controlled issued a note (debt) to the holders of the distributing note to cancel a portion of the Distributing Note. Public received consent from a majority of the distributing note holders to effectuate the transaction. Those distributing note holders that consented received a fee based on the amount of their principal. The debt had the same terms as the distributing note except for the identity of its obligor (Controlled) and the identification numbers on the note.
The IRS ruled that for purposes of Section 361, the substitution of the debt for the distributing note was treated as if Controlled issued had the note to Public as partial consideration for the initial asset contribution of Controlled, followed by a distribution by Public of the notes to the distributing note holders. The IRS also ruled that the notes were treated as securities for purposes of Section 361.
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