LTR 201347005 is a straightforward ruling on multiple internal spin-offs of Controlled holding one of the two businesses of a domestic group. The spins only push Controlled up to two levels below the Parent, and do not appear to involve any unusual features. The stated reason for the spins is to allow the spun business to grow and avoid some regulatory burdens. The spinoffs had occurred before the ruling was issued.
Why did this taxpayer go to the trouble to obtain these rulings? The only hint is the fact that the group previously experienced losses. An Investor previously bought common, preferred and debt of the Parent. The cash received was contributed down to parts of the business that was not spun off.
Could it be that the taxpayer is setting itself up to distribute Controlled to redeem the Investor’s stock with the more healthy part of the business? Of course the ruling does not say that. In fact, the taxpayer represented that it had no plans to dispose of Controlled.
The ruling is dated August 23, 2013 and Rev. Proc. 2013-32, 2013-28 IRB 55, set that as the last date for submitting requests for rulings on section 355 spinoffs. Perhaps the taxpayer thought if it got this ruling, it would not need to request another ruling on a future transaction; or alternatively, if it did these spins and got this ruling, it could plan another prospective transaction that would be treated as an independent transaction, on which it might get a separate ruling, requested on August 23, 2013. That future transaction might be another internal spin and split off with the Investor.
There were plenty of corporations that needed capital infusions in the last five years. There are plenty of Investors who made such infusions and have been looking for their payback. Exchanging stock for subsidiaries of the corporation can be a great payback. Getting a letter ruling on an internal spinoff does not totally protect the taxpayer with respect to follow on events, but it can’t hurt—unless the taxpayer makes a misrepresentation to the IRS.
So, presumably, Parent never agreed to take out the Investor with a distribution of this part of its business, but it may work out that way, particularly if the Investor has been invested long enough to avoid the two-year and five-year limits that can apply.
Written by Jack Cummings, Partner, Tax | Alston & Bird LLP
