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In considering single, discrete issue, IRS rules on distributing corporation’s retention of stock in spinoff

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Tax Hot TopicsIn a private letter ruling released on Jan. 16 (PLR 201503006), the IRS considered a single, discrete legal issue related to a proposed Section 355 spin-off transaction. The IRS ruled that the distributing corporation’s (Distributing) retention of certain shares of stock in the controlled corporation (Controlled) was not in pursuance of a plan that had as one of its principal purposes the avoidance of U.S. federal income tax under Section 355(a)(1)(D)(ii).

In the facts of the PLR, Distributing owned 100% of the outstanding stock of Controlled. Distributing distributed some, but not all, of Controlled’s stock to Distributing’s public shareholders. The amount of Controlled stock distributed by Distributing was at least equal to, or in excess of, the amount needed to constitute control of Controlled as defined in Section 368(c).

Distributing retained a certain amount of Controlled stock to accomplish various business purposes. Distributing said it intended to eventually dispose of the retained stock in Controlled through (1) transferring the stock to a director trust, (2) awarding the stock to various participants in a restricted stock plan, and/or (3) selling the stock on the open market. Distributing represented that its business purposes for the retention of stock in Controlled were to reflect the diminution of value, because of the spinoff, of shares of Distributing stock held by the director trust, to support Distributing’s obligations with respect to its restricted stock award plan, to facilitate the reduction of debt, to enhance liquidity and to maintain its credit rating.

The IRS did not rule on whether the spin-off transaction qualified under Section 355 and did not review information pertaining to the overall tax consequences of the spin-off. Instead the IRS merely ruled on a single, discrete legal issue with respect to the transaction, ruling that Distributing’s retention of Controlled stock was not in pursuance of a plan that had as one of its principal purposes the avoidance of U.S. federal income tax under Section 355(a)(1)(D)(ii).

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Andy Cordonnier
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E andy.cordonnier@us.gt.com

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