United States: The IRS Resumes Issuing Private Letter Rulings On ‘Leveraged' And ‘North-South' Spinoffs

The IRS announced in May that it will resume issuing private letter rulings (PLRs) on two types of spinoff transactions — leveraged spinoffs and north-south spinoffs — that had been on its "no-rule" list since 2013. In a spinoff transaction, one corporation (Distributing) distributes the stock or securities of a corporation that it controls (Controlled) to its shareholders and/or creditors. If the requirements for a tax-free spinoff are satisfied, neither Distributing nor its shareholders and/or creditors recognize gain or loss on the distribution of the stock or securities of Controlled.

Leveraged Spinoffs

In a leveraged spinoff, Distributing incurs debt in anticipation of the distribution of Controlled and distributes stock or securities of Controlled to its lender in exchange for, and in retirement of, that debt. If the spinoff satisfies the requirements to be tax-free, Distributing can monetize, on a tax-free basis, its interest in Controlled, or adjust the relative levels of debt between it and Controlled.

The IRS had previously issued favorable PLRs with respect to leveraged spinoffs. As a condition to those PLRs, the IRS at times required that the Distributing debt incurred in anticipation of the spinoff be held by the lender (1) for at least five days before Distributing and the lender enter into an agreement to exchange the stock (or securities) of Controlled for that debt and (2) for at least 14 days before the exchange is effected, and that the aggregate amount of Distributing debt repaid with stock or securities of Controlled not exceed the average amount of Distributing debt outstanding during the prior 12 months.

In 2013, the IRS announced that it would no longer issue PLRs in this area because it was an area under study. In May, the IRS removed leveraged spinoffs from the no-rule list, saying that even though it continues to study this area, it would issue PLRs "in the interest of sound tax administration." The IRS did not indicate whether its views have changed since it stopped issuing PLRs with respect to leveraged spinoffs, or what representations it may require from taxpayers seeking comfort with respect to such transactions.

North-South Spinoffs

In a revenue ruling issued in May, the IRS removed north-south spinoffs from its no-rule list. In contrast to its action with respect to leveraged spinoffs, the IRS did not simply indicate that it would resume issuing PLRs on this issue — it set forth in the revenue ruling its position with respect to two such transactions. The IRS had announced in 2013 that north-south transactions were under study and that it would not issue PLRs with respect to such transactions until it resolved the issue through publication of a revenue ruling, a revenue procedure, regulations or other means.

The specific issue that was previously on the IRS' no-rule list was whether to respect as separate transactions for tax purposes transfers of stock, money or other property by a person to a corporation, and transfers of stock, money or property by that corporation to that person (or a person related to such person), in what are ostensibly two separate transactions (so-called north-south transactions), where at least one of the transfers is a distribution with respect to the corporation's stock, a contribution to the corporation's capital or an acquisition of stock.

Even though the IRS will now rule on north-south transactions, not every taxpayer who requests a PLR with respect to such a transaction will necessarily receive a ruling; some ruling requests will be too fact-specific for the IRS to rule on, or may not present a "significant issue" (the IRS will only rule on "significant issues" in spinoff transactions). The IRS may also decline to issue a PLR addressing the integration of steps when appropriate in the interest of sound tax administration. It remains to be seen what representations the IRS will require in order to issue a favorable PLR; under its prior ruling practice, it required taxpayers to represent that there was no regulatory, legal, contractual or economic compulsion or requirement that one transfer be made as a condition to the other.

The Revenue Ruling

The IRS considered two north-south transactions in its recent revenue ruling. As described below, in Situation 1, the transfers were respected as separate transactions; in Situation 2, the transfers were regarded as steps in an integrated transaction. In both situations, a parent corporation (P) has a wholly owned subsidiary (D), which in turn has a wholly owned subsidiary (C).

In Situation 1, P transfers to D property worth $25X (including property constituting an active trade or business that is transferred so that one of the requirements for a tax-free spinoff can be satisfied) in exchange for additional D stock (the "south" part of the transaction) and, pursuant to the same overall plan, D immediately distributes all of the stock of C, worth $100X, to P (the "north" part of the transaction). The tax consequences of these transfers depend on whether they are treated as separate transactions or whether, because they are undertaken pursuant to the same overall plan, they are viewed as part of a single exchange of property.

If the two transfers are respected as separate transactions, both would be tax-free (the first under Section 351 of the Internal Revenue Code (the Code), and the second under Section 355 of the Code). But if they are integrated into a single exchange, both would be taxable — P would be treated as transferring the property to D in a taxable exchange for 25% of the C stock, and D's distribution of the remaining 75% of the C stock to P would not qualify as a tax-free spinoff because D would fail to meet the requirement of distributing "control" of C in the spinoff transaction.

The IRS respected the back-to-back transfers between P and D as separate, tax-free transactions, stating that the tax treatment of a transaction generally follows the taxpayer's chosen form unless (1) there is a compelling alternative policy, (2) the effect of the steps of the transaction is to avoid a particular result intended by otherwise-applicable provisions of the Code or (3) the effect of the steps of the transaction is inconsistent with the underlying intent of the applicable Code provisions. In this case, the IRS reasoned, each step provides for continued ownership in modified corporate form, the steps do not resemble a sale, and none of the interests are liquidated or otherwise redeemed; therefore, nonrecognition treatment under Sections 351 and 355 of the Code is not inconsistent with congressional intent of those Code provisions, and the effect of the steps is consistent with the policies underlying those Code sections.

The IRS noted that the tax consequences would be the same (qualification under Section 355 of the Code) if, instead of acquiring an active business from P in a Section 351 transfer, D acquires an active business from a subsidiary of P in a cross-chain reorganization. It is not clear how the IRS would view a transfer by P (or one of its subsidiaries) to D of property that did not include property constituting an active business.

In Situation 2, D and C have each been engaged in a business that satisfies the active trade or business requirement for a tax-free spinoff. On Date 1, C transfers money and property to D, pursuant to a dividend declaration, and D retains the money and property (the north transfer). On Date 2, D transfers appreciated property to C (the south transfer), and distributes all the C stock to P in a transaction qualifying as a tax-free reorganization under Sections 368(a)(1)(D) and 355 of the Code. C and D planned and executed the Date 1 transfer in pursuance of the plan of reorganization.

If the Date 1 distribution by C of money and other property to D is treated as separate from the Date 2 transactions, Section 301 of the Code would apply to D's receipt of the money and other property from C (which generally would not be taxable to D, although C could recognize gain on the property distributed as a result of the spinoff), and D would recognize no gain on the transfer of property to C. But if the Date 1 distribution is treated as made in pursuance of the plan of reorganization that includes the Date 2 distribution of C stock, the money and other property distributed by C to D would constitute "boot" to D because D retained the money and property, rather than distributing them to its shareholders. In that case, D would recognize gain on its transfer of property to C to the extent of the amount of money and the fair market value of the property it retained.

The IRS concluded that the Date 1 distribution was made in pursuance of the plan of reorganization — that is, the tax treatment followed the substance of the transaction — with the result that the distribution of money and property by C to D constituted a boot distribution to D. In its analysis, the IRS referenced case law to the effect that the boot rules are the exclusive measure of dividend income where cash is distributed to shareholders as an incident of a reorganization. The IRS stated that Section 361 of the Code broadly looks to whether transfers of money or other property occur in pursuance of the plan of reorganization or in connection with the reorganization.

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.

Authors
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
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must 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.

Disclaimer

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.

General

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