United States: Internal Revenue Service Announces It Will Recommence Issuing Private Letter Rulings On Certain Spin-Off Debt Exchanges

The Internal Revenue Service has announced1 that it will recommence issuing private letter rulings concerning whether a distributing corporation's transfer of stock or securities of a controlled corporation (or "Spinco") in exchange for debt of the distributing corporation would qualify for tax-free treatment in cases where such distributing corporation debt is issued in anticipation of a spin-off transaction intended to qualify under Sections 368(a)(1)(D) and 355. This action reverses a policy adopted by the IRS in early 2013 when the IRS announced that it would no longer issue private letter rulings on debt exchanges in any case where the distributing corporation debt was issued in anticipation of the spin-off.2 The IRS recently has also announced that it will recommence issuing private letter rulings concerning North-South transactions (defined below) and published a Revenue Ruling3 setting forth in general the IRS's position on such transactions.

If sections 355 and 361 apply to the issuance of Spinco shares and/or debt securities to the distributing corporation and the subsequent exchange of such Spinco shares or securities for debt of the distributing corporation, the distributing corporation recognizes no gain. This result is notwithstanding that the Spinco shares or securities may have little or no tax basis in the hands of the distributing corporation after such tax basis is reduced to account for any cash received from, or liabilities assumed by, Spinco in exchange for Spinco's assets. As a commercial and financial matter, debt exchanges allow a distributing corporation to reduce its leverage to take into account the disposition of Spinco assets in the spin-off (including a disproportionate deleveraging). A deleveraging debt exchange allows the distributing corporation to increase its equity value without incurring corporate income tax, which is commonly referred to as a "monetization strategy." The distributing corporation also may implement as an additional monetization strategy the receipt of cash from Spinco, which is tax-free to the extent of the tax basis in the Spinco assets and so long as the cash is used to promptly repay creditors or distributed in pursuance of the plan of reorganization.

In several cases, before and after the 2013 policy change, distributing corporations have facilitated or enhanced their debt exchanges by issuing, usually to investment banks, short-term debt with a term of ninety or fewer days. After the bank held the debt for a minimum amount of time (typically 5 days), the parties then entered into an exchange agreement under which the bank was required to swap the distributing corporation's debt for Spinco equity or debt securities, typically 14 days after the bank had acquired the distributing corporation debt, if the spin-off was consummated. Immediately after the exchange, the bank would then sell the Spinco equity or debt securities (through its underwriting desk). Entering into a debt exchange with an initial purchaser of its short-term debt allows the distributing corporation to complete the debt exchange without negotiating with its existing creditors, who may have no interest in holding Spinco equity or debt securities and who may be difficult to locate and aggregate, and without bearing what amounts to a substantial premium to compensate an intermediary that has tendered for existing debt of the distributing corporation in anticipation of acquiring Spinco equity or debt securities in the debt exchange. 

When this type of debt exchange was added to the no-ruling list, the IRS indicated that it was studying whether to issue guidance related to such transactions. Although the IRS now will, in certain circumstances, issue private letter rulings on debt exchanges where the retired distributing corporation debt was issued in anticipation of the spin-off, Revenue Procedure 2017-38 does not indicate the situations in which the IRS may rule or the representations the IRS may require and does not articulate the legal analysis the IRS will apply to requests for such rulings. The availability of tax-free treatment for this type of debt exchange under section 361 is clearly rooted in the statute itself, which requires only that the Spinco securities be transferred to "creditors" of the distributing corporation. Any representations required by the IRS in this context may be related to confirming that the exchanging debt holder is in substance a creditor holding the debt of the distributing corporation for its own account as principal rather than an agent or conduit.

The IRS also recently issued guidance, in Revenue Ruling 2017-9, clarifying the treatment of so-called "North-South transactions," in which property is transferred to the distributing corporation either by the Spinco (before the transfer of assets to the Spinco pursuant to the reorganization) or by the controlling shareholder of the distributing corporation (before or in connection with the spin-off distribution of Spinco stock to that shareholder). Concerns had been raised in North-South transactions whether the ostensibly separate transactions should be integrated. As part of this Ruling, the IRS also removed North-South transactions from the list of no-rule areas; North-South transactions had been added to the no-rule list in early 2013 along with the debt exchanges discussed above. 

The Ruling concludes, in Situation 1, that a transfer of assets by a controlling shareholder to a distributing corporation that otherwise qualifies as a non-recognition transaction (if analyzed without taking into account the spin-off), will not be treated as part of an exchange for the Spinco stock received by the shareholder, regardless of whether the purpose of the asset transfer was to allow the spin-off to qualify under Section 355 or whether the asset transfer would not have occurred in the absence of the spin-off. As a result, the distribution-of-control requirement for spin-offs, which generally requires a distribution of 80% of the Spinco stock, will not be violated by such transfer because the amount of Spinco stock treated as distributed in the spin-off will not be reduced by treating some or all of the Spinco stock as exchanged for the assets received from the shareholder. 

In contrast, the Ruling concludes, in Situation 2, that where the Spinco transfers cash and/or other nonqualifying property to the distributing corporation in pursuance of the plan of reorganization pursuant to which the parties complete a divisive reorganization under Sections 368(a)(1)(D) and 355, the parties cannot treat Spinco's transfer as a distribution under Section 301 (regardless of whether the transfer might have occurred in the absence of the reorganization). Instead, Spinco will be treated as transferring unqualified property ("boot") to which Section 361(b) applies, with the result that the boot must be distributed to shareholders or creditors in order for the receipt of the boot to be tax-free. The IRS now will consider providing letter rulings on North-South transactions that apply the holdings and reasoning of Revenue Ruling 2017-9


1. Rev. Proc. 2017 38, 2017 22 I.R.B. 1 (May 9, 2009). Unless otherwise noted, all section references herein are to the Internal Revenue Code of 1986, as amended (the "Code").

2. Rev. Proc. 2013-3, section 5.01(10), 2013-3 I.R.B. 113 (Dec. 31, 2013).

3. Rev. Rul. 2017-9, 2017-21 I.R.B. 1 (May 3, 2017).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
McDermott Will & Emery
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
McDermott Will & Emery
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions