In a new 18-month pilot program, the IRS is temporarily opening up a previous no-rule policy with respect to certain issues arising in a distribution by a corporation to its shareholders under Section 355.1 In addition, the IRS has provided a detailed list of documents, information and representations that must be submitted in a private letter ruling request under this pilot program.
In order to separate two businesses housed in one corporation or in a corporate group so that the businesses are held independently by the corporation’s shareholders, the detailed requirements of Section 355 must be satisfied. Meeting the Section 355 rules enables the corporation and its shareholders to avoid taxation on the division.
In a Section 355 transaction, one corporation (Distributing Co.) distributes to its shareholders the stock of another corporation it controls (Controlled Co.), effectively spinning out the business held by Controlled Co. (which may have been contributed to Controlled Co. by Distributing Co. before the distribution). If the distribution does not satisfy the requirements of Section 355, Distributing Co. would be treated as recognizing federal taxable gain equal to the difference between the fair market value of the Controlled Co. stock distributed and Distributing Co.’s tax basis in the stock, and the shareholders generally would be treated as receiving a taxable distribution upon their receipt of Controlled Co. stock.2
Many criteria must be met for a distribution to qualify under Section 355 and thus be tax-free. Because of these complexities and the double taxation that can be imposed if the distribution fails to qualify as tax-free, many taxpayers seek private letter rulings from the IRS before engaging in the transaction. For many years, the IRS issued these rulings with respect to the tax-free nature of Section 355 transactions. In 2003, the IRS provided guidance stating that its private letter rulings would not address the specific requirements of business purpose, non-device and whether a distribution was part of a plan.3 In Revenue Procedure 2013-32,4 the IRS further limited the scope of Section 355 private letter rulings to significant issues. As a result, the IRS stopped providing rulings indicating that the overall transaction qualified under Section 355.
Revenue Procedure 2017-52
Revenue Procedure 2017-52, issued on September 21, expands the scope of private letter rulings with respect to distributions under Section 355. During the 18-month period of the pilot program, taxpayers may seek rulings that the overall transaction qualifies as tax-free under Section 355. Taxpayers, however, are still subject to the limited scope of rulings as enumerated under Revenue Procedure 2003-48, which generally provides that the IRS will not rule on device, business purpose and whether the distribution is pursuant to a plan. Further, Revenue Procedure 2017-52 does not change the "no rulings" standard for international letter rulings. Revenue Procedure 2017-52 adds significant instructions as to the information, documentation and representations that taxpayers seeking rulings under the pilot program need to provide with the ruling request. Thus, private letter rulings under the pilot program may address the general tax consequences of distributions under Section 355 and transactions under certain other sections of the Internal Revenue Code.5
General Private Letter Ruling Procedures
Before filing a private letter ruling request with the IRS, taxpayers are encouraged to ask, in writing or by telephone, for a pre-submission conference. Pre-submission conferences are used to discuss substantive or procedural issues related to the proposed transaction for which the taxpayer intends to request a private letter ruling. When requesting a pre-submission conference, the taxpayer must identify itself and briefly explain the primary issue. The taxpayer should provide a pre-submission memorandum that summarizes the issues and relevant tax authority that may apply to those issues. Further, the taxpayer may request that the pre-submission conference be held in person or by telephone.
To request a private letter ruling under the pilot program, a taxpayer must follow the general procedures in Revenue Procedure 2017-1.6 Further, Section 3 of Revenue Procedure 2017-52 requires a taxpayer to submit all necessary documents, describe each transaction to be covered by the private letter ruling (including any transactions that are part of the same plan or a series of related transactions), describe and analyze all legal issues that may affect the requested private letter ruling, and make the representations required by Revenue Procedure 2017-52. In addition, Section 3.03 of Revenue Procedure 2017-52 asks that taxpayers submitting a request under the pilot program for a ruling on the general tax consequences of the transaction include "a statement describing the federal income tax consequences of all other material transactions related to the request." These new procedures generally will require more documentation and analysis than the current ruling requirements under the more limited "significant issue ruling" program with respect to Section 355 transactions.7
The pilot program will accept private letter ruling requests submitted to the IRS between September 21, 2017 and March 21, 2019. The IRS has also asked that comments concerning the pilot program be received by December 31, 2017.
The current fee to request a private letter ruling as of the date of this article is $28,300.8
As a result of the IRS’s desire to identify and rule on certain emerging issues under Section 355, Revenue Procedure 2017-52 grants taxpayers the opportunity to seek private letter rulings on certain distributions under Section 355. These distributions often involve complex tax analyses. A purported distribution under Section 355 that does not qualify as tax-free could result in significant tax liability to the distributing corporation and its shareholders. Thus, entities currently contemplating these transactions may want to consider requesting a private letter ruling from the IRS under the new 18-month pilot program.
1 A distribution under Section 355 includes the following, as defined in Revenue Procedure 2017-52, Appendix Section 2: (i) a spin-off, which is a pro rata distribution to the shareholders of the distributing corporation of the stock of the controlled corporation; (ii) a split-off, which is a distribution of the stock of the controlled corporation to some (but not all) of the shareholders of the distributing corporation in redemption of some or all of the shareholders’ stock of the distributing corporation; and (iii) a split-up, which is a liquidating distribution in which the distributing corporation distributes to its shareholders the stock of more than one controlled corporation, either pro rata or non-pro rata.
2 The treatment of a taxable corporate distribution by the receiving shareholders would generally be evaluated under Section 301 to determine if the distribution is a dividend, return of capital or capital gain transaction.
3 Rev. Proc. 2003-48, I.R.B. 29.
4 2013-28 I.R.B. 55.
5 Sections 312, 355, 357, 358, 361, 362(b), 362(e), 368(a)(1)(D), 368(b), 1032(a), 1223(1), and 1223(2), including relevant consolidated return Treasury regulations.
6 2017-1 I.R.B. 1.
7 The significant issue ruling guidelines are included in Section 2.02 of Revenue Procedure 2017-52.
8 Rev. Proc. 2017-1, Appendix A.
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