IRS rules on loss related to a spin-off

Tax Hot Topics newsletterThe IRS has ruled (PLR 2018-18-010) that a loss was taken into account by a corporation immediately before the corporation distributed the stock of a subsidiary to its shareholders under Section 355.

The private letter ruling addressed a corporation that was widely held and publicly traded. The corporation was the parent of a worldwide group of corporations and the common parent of a consolidated group. The parent corporation owned all of the stock of several subsidiaries. The proposed transaction had several steps, which resulted in a distribution by the corporation to its shareholders of the stock of a newly formed corporation, Spinco. The distribution was intended to qualify as a tax-free spinoff under Section 355.

Among the steps in the proposed transaction, the parent corporation, Distributing, proposed to form a new corporation, Holdco, and then transfer the stock of two subsidiaries and other assets to Holdco in exchange for Holdco common stock and Holdco preferred stock. Prior to such contribution, Holdco would enter into a binding commitment to sell the Holdco preferred stock to unrelated third parties. Distributing expected to recognize a significant loss with respect to the subsidiary stock transferred to Holdco. After Distributing sold the Holdco preferred stock, it proposed to contribute the Holdco common stock, and potentially other assets, to Spinco.  Distributing would then distribute a specified amount of the Spinco stock to its shareholders under Section 355.

The IRS ruled that Distributing’s sale of the Holdco preferred stock would preclude its transfer of property to Holdco from satisfying the requirements of Section 351.  Therefore, Distributing’s transfer of property to Holdco was presumably a taxable transaction.

The IRS also ruled that Distributing’s loss related to its subsidiary transferred to Holdco was taken into account immediately before its distribution of Spinco stock. The IRS ruled that the loss was taken into account because it would not be re-determined to be nondeductible or non-capital (e.g., pursuant to Section 311(a)) and would not be deferred any longer under Section 267(f) or Treas. Reg. Sec. 1.1502-13.

Contact Jeff Borghino
Director, Washington National Tax Office
T +1 202 521 1532

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