LTR 201203004 rules favorably on a spinoff of Controlled to public shareholders in which Controlled will be allowed to use in its corporate name the trade name of Distributing, which will be licensed to Controlled by Distributing. This appears to be the first time that a section 355 ruling has explicitly allowed such a close continuing connection between two corporations that split up for the business purpose of conducting separately Businesses A and B.
Facts: Distributing is a domestic public corporation that conducts Businesses A and B. For the usual “fit and focus” reasons it desires to separate the two businesses by spinning off the Business B group to the public shareholders. Preliminary steps include the following:
- Various intragroup distributions, contributions and sales carried out for the purpose of isolating all of Business B in Controlled.
- One of these preliminary steps was a contribution of stock to a group member that would have qualified for section 351 treatment except for the fact that the transferor took back preferred stock that it sold to insiders and others. This sale caused a decontrol of the transferee corporation and allowed the parties to make a section 338(h)(10) election that produced recognized losses. The property involved in this taxable contribution was not all of the Business B property; other property, including certain foreign subsidiaries, were not included in this part of the transaction, presumably for the purpose of maintaining built in losses in the foreign properties and subsidiaries.
- As mentioned above, Distributing licensed various intellectual property to Controlled to use in Business B, which licenses also allowed Controlled to use the licensed trade name in its corporate name. Presumably Distributing uses the same corporate name, which means that both Distributing and Controlled may continue to appear to the public as related?
Analysis:
- “Would have done it anyway”: A major focus of the ruling appears to be the loss recognition in the Distributing group. Taxpayer represented that it would have carried out the distribution whether or not it recognized the losses. This representation has come to be sort of a get out of jail free card that is particularly useful in obtaining section 355 rulings. It is extremely difficult for the IRS to overcome the taxpayer’s flat assertion of its intent; and if the taxpayer would have done it anyway, it is hard for the IRS to contend that obtaining the benefit of the tax loss was a principal purpose of the transaction, as opposed to the “fit and focus” that taxpayer represented to be its purpose.
- Loss recognition: The loss recognized in the section 338(h)(10) transaction would have been deferred under the consolidated return matching regulations and disallowed under section 267 but for the facts that Distributing distributed Controlled out of the consolidated group and the insiders and others who bought the preferred stock of Controlled did not cause the corporations to be in a controlled group under section 267(f). The ruling cited Rev. Rul. 79-70, 1979-1 C.B. 144, for the fact that a planned sale of the stock received in a putative section 351 exchange could cause decontrol and make section 351 inapplicable. Because there were foreign subs under Controlled, section 338(g) elections were made as to them, based on the qualified stock purchase and the section 338(h)(10) election for domestic purposes.
- Section 269: The taxpayer had to represent that the principal purpose of the formation of the new corporation was not tax avoidance.
- Timing: This ruling was issued within about six months of taxpayer’s initial submission. Perhaps that is slightly longer than some less complicated section 355 rulings have been issued in the past, but is still an astonishing feat for a government agency that had to coordinate at least two Divisions of Chief Counsel: Corporate and International. The facts and representations of the ruling were quite detailed.
