LTR 201731004 is a significant ruling that approves several techniques that taxpayers have frequently used in spinoffs.
First, it approved a dual voting class structure for stock of SpinCo. Evidently the public parent will distribute the high-vote stock to the public and will retain the low-vote stock. The group will use the low-vote stock to redeem debt. An investment banker will acquire the debt for the parent.
The spin also involved a delayed exchange of assets into SpinCo. And it involved an overlap of directors between SpinCo and the public parent. Finally, it involved possible post-spin payments under a Tax Matters Agreement.
Each of these four features causes concerns for the spinning corporation. Taxpayers would like to have published guidance establishing guidelines for approved solutions, but there are none. This ruling provided this taxpayer these guidelines:
- Dual class stock
It permitted the dual classes so long as the structure of stock was maintained for at least 24 months after the spin, with one exception. The exception was a huge one. Many spincos expect to be acquired. Reg. Section 1.355-7 provides many safe harbors from the Section 355(e) gain recognition rule. In effect, the ruling picks one of those exceptions as a way to eliminate the dual voting structure within 24 months after the spin: merge with another corporation for which there were not negotiations within 12 months before or after the spin, and less than 20% overlap of stock ownership with an acquirer.
The investment bank that will buy up the parent’s debt must hold the debt for at least five days before entering into an agreement to exchange the debt for the retained low-vote stock and must not complete the exchange until at least 14 days after the bank acquired the debt. The stock for debt exchanges must occur within 12 months after the spin.
Two officers or directors of the public company will be minority members of the board of SpinCo. They will stand for reelection. Their overlap will not be inconsistent with the business purpose of the spin.
- Delayed transfers
The post-spin transfers between SpinCo and the parent that were delayed for regulatory or similar reasons will be treated as if they occurred before the spin.
These and similar issues come up all the time in spins. Taxpayers must either try to obtain a ruling on a significant spin issue or become comfortable with a pattern of rulings for others.
For more information, please contact Jack Cummings at 919.862.2302.