In preparation for a tax-free spin-off, a parent corporation often contributes one or more of its businesses to a subsidiary in exchange for subsidiary stock and potentially debt and cash. When parent subsequently spins-off the subsidiary stock to its shareholders, it may also seek to exchange the subsidiary debt, stock and cash it received for a like amount of its own outstanding debt, allowing parent to retire its debt in a tax-efficient manner. Historically, the guideposts for structuring a tax-free spin-off with a debt exchange came primarily from private rulings that taxpayers had obtained approving specific transactions. The government’s release of Revenue Procedure 2018-53 on October 3, 2018 provides welcome insight for taxpayers into the government’s current view of this valuable transaction technique.
The revenue procedure requires that a taxpayer requesting a private ruling involving a spin-off debt exchange, where the parent debt is non-contingent and payable only in cash, make the following representations, including the following:
While the revenue procedure may be more limiting than the government’s prior ruling practice, the revenue procedure does not necessarily prevent the government from ruling on debt exchanges that cannot satisfy the requirements described above so long as the taxpayer provides additional representations or information required by the government. In addition, even where a taxpayer is not anticipated to request a private ruling from the government, taxpayers should carefully consider the guidelines provided by the revenue procedure as they will likely form the basis for planning any spin-off debt exchanges going forward.
Linda Z. Swartz
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linda.swartz@cwt.com
Adam Blakemore
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Jon Brose
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Andrew Carlon
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Mark P. Howe
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mark.howe@cwt.com
Catherine Richardson
Partner
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catherine.richardson@cwt.com
Gary T. Silverstein
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gary.silverstein@cwt.com