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Procedures for private letter rulings, issues relating to divisive reorganizations

Issues relating to divisive reorganizations

The IRS today released an advance version of Rev. Proc. 2018-53 that provides procedures for taxpayers that request private letter rulings involving “divisive reorganizations”—that is, reorganizations under sections 368(a)(1)(D) and 355, in which debt of the distributing corporation (Distributing and such debt, Distributing Debt) is assumed by the controlled corporation (Controlled) or satisfied with consideration that Distributing receives from Controlled in the reorganization.

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Rev. Proc. 2018-53 [PDF 63 KB] includes guidance about taxpayer representations, information, and analysis to be included in the letter ruling requests.

Today’s revenue procedure applies to all ruling requests postmarked on (or if not mailed, received by the IRS) after October 3, 2018. For ruling requests pending on October 3, 2018, Rev. Proc. 2018-53 instructs taxpayers to consider a supplemental submission that complies with the requirement of Rev. Proc. 2018-53. 

Background

In a “divisive reorganization”—

  • A corporation (i.e., Distributing) transfers property to a corporation it controls (within the meaning of section 368(c)) immediately thereafter (i.e., Controlled), in exchange for consideration. 
  • The consideration received by Distributing (Section 361 Consideration) includes Controlled stock and also may include money, securities or other debt obligations of which Controlled is the obligor, and other property. Controlled may also assume liabilities of Distributing. 
  • To complete the Divisive Reorganization, Distributing distributes the Controlled stock, and possibly other Section 361 Consideration, to its shareholders and may also distribute Section 361 Consideration in satisfaction of its obligations to holders of its securities or to other creditors.

Change from prior “no-rule” position

Rev. Proc. 2013-3 modified the IRS’s prior practice and reflected a “no-rule” position—that is, the IRS would no longer rule on whether section 355 or 361 applied to Distributing’s distribution of Controlled stock or securities in exchange for, and in retirement of, putative Distributing debt if such Distributing debt was issued “in anticipation” of the distribution. The IRS removed the no-rule position in Rev. Proc. 2017-38.

In October 2017, the IRS released a statement to inform taxpayers and their advisers of changes relating to requests for private letter rulings on certain corporate transactions, providing in part:

If, in connection with a section 355 distribution, a distribution of stock, securities or other property to the distributing corporation’s shareholders or creditors is substantially delayed, IRS will continue to rule on whether the delayed distribution is tax-free under section 355 or section 361.

However, rulings on such issues will not be based solely on the length of the delay. Instead, IRS will rule on this issue only based on substantial scrutiny of the facts and circumstances (including the circumstances of the delay) and full consideration of the legal issues and the effects of a ruling on federal tax administration.

Rev. Proc. 2018-53

Today’s revenue procedure provides that the IRS and Treasury Department are continuing to study the issues relating to assumption and satisfaction of Distributing Debt in divisive reorganizations. The IRS has determined, however, that taxpayers requesting rulings that no gain or loss will be recognized to Distributing (1) upon the assumption of Distributing Debt, and (2) upon Distributing’s receipt of Section 361 Consideration and the distribution of the Section 361 Consideration to a creditor in satisfaction of the Distributing Debt (either as a significant issue ruling described in Rev. Proc. 2018-1, Section 6.03(2) or part of a full no gain or loss transactional ruling described in Rev. Proc. 2017-52) need to follow specified procedures and submit specified representations and related information and analysis.

Those procedures and representations, information, and analysis are set out in Rev. Proc. 2018-53 and include the submission of information and analysis to establish that the distribution of any Section 361 Consideration to Distributing’s creditors are in connection with the plan of reorganization, the description of any alternative transactions with respect to the assumption of Distributing Debt or satisfaction of such debt with Section 361 Consideration (and the business reasons for a plan not being fixed and determinative at the time of the first distribution of Controlled stock to Distributing shareholders), analysis to establish that under general principles of tax law the proposed transactions should not be recast or recharacterized or otherwise not qualify under the intended provisions of the Code, and the submission of various specific representations. 

The specific representations include representations regarding:

  • Distributing is the obligor in substance of the Distributing Debt
  • The holder of the Distributing Debt is not a person related to Distributing or Controlled
  • The holder of the Distributing Debt does not hold it for the benefit of Distributing, Controlled, or a related person
  • The Distributing Debt being historic debt of Distributing
  • The amount of Distributing Debt in comparison to the historic average of all of Distributing’s unrelated debt
  • Reasons for any delay in the satisfaction of the Distributing Debt
  • Distributing will not replace the Distributing Debt with previously committed borrowing (other than borrowing in ordinary course with respect to certain revolvers)

If a taxpayer cannot make a required representation or believes that a representation is inapplicable, it must explain why and include the rationale supporting issuance of each relevant requested ruling in the absence of the requested representation. If appropriate, a taxpayer may provide a modified representation addressing the same matter provided an explanation of the modification and why the relevant requested rulings are appropriate given such modification is also provided. 

The procedures described in the revenue procedure only apply to the extent the request involves an assumption by Controlled of Distributing Debt or satisfaction of Distributing Debt with Section 361 Consideration if:

  • Distributing is the obligor of the such debt, and 
  • The obligation is (x) evidenced by a debt instrument that is not a contingent debt instrument, and (y) by its terms is payable only in money.

Rev. Proc. 2018-53 does not apply to distributions of Section 361 Consideration to Distributing shareholders (e.g., exchanges of Controlled debt or Controlled stock for Distributing stock). 

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