United States: Internal Revenue Service Announces It Will Recommence Issuing Private Letter Rulings On Certain Spin-Off Debt Exchanges

The Internal Revenue Service has announced1 that it will recommence issuing private letter rulings concerning whether a distributing corporation's transfer of stock or securities of a controlled corporation (or "Spinco") in exchange for debt of the distributing corporation would qualify for tax-free treatment in cases where such distributing corporation debt is issued in anticipation of a spin-off transaction intended to qualify under Sections 368(a)(1)(D) and 355. This action reverses a policy adopted by the IRS in early 2013 when the IRS announced that it would no longer issue private letter rulings on debt exchanges in any case where the distributing corporation debt was issued in anticipation of the spin-off.2 The IRS recently has also announced that it will recommence issuing private letter rulings concerning North-South transactions (defined below) and published a Revenue Ruling3 setting forth in general the IRS's position on such transactions.

If sections 355 and 361 apply to the issuance of Spinco shares and/or debt securities to the distributing corporation and the subsequent exchange of such Spinco shares or securities for debt of the distributing corporation, the distributing corporation recognizes no gain. This result is notwithstanding that the Spinco shares or securities may have little or no tax basis in the hands of the distributing corporation after such tax basis is reduced to account for any cash received from, or liabilities assumed by, Spinco in exchange for Spinco's assets. As a commercial and financial matter, debt exchanges allow a distributing corporation to reduce its leverage to take into account the disposition of Spinco assets in the spin-off (including a disproportionate deleveraging). A deleveraging debt exchange allows the distributing corporation to increase its equity value without incurring corporate income tax, which is commonly referred to as a "monetization strategy." The distributing corporation also may implement as an additional monetization strategy the receipt of cash from Spinco, which is tax-free to the extent of the tax basis in the Spinco assets and so long as the cash is used to promptly repay creditors or distributed in pursuance of the plan of reorganization.

In several cases, before and after the 2013 policy change, distributing corporations have facilitated or enhanced their debt exchanges by issuing, usually to investment banks, short-term debt with a term of ninety or fewer days. After the bank held the debt for a minimum amount of time (typically 5 days), the parties then entered into an exchange agreement under which the bank was required to swap the distributing corporation's debt for Spinco equity or debt securities, typically 14 days after the bank had acquired the distributing corporation debt, if the spin-off was consummated. Immediately after the exchange, the bank would then sell the Spinco equity or debt securities (through its underwriting desk). Entering into a debt exchange with an initial purchaser of its short-term debt allows the distributing corporation to complete the debt exchange without negotiating with its existing creditors, who may have no interest in holding Spinco equity or debt securities and who may be difficult to locate and aggregate, and without bearing what amounts to a substantial premium to compensate an intermediary that has tendered for existing debt of the distributing corporation in anticipation of acquiring Spinco equity or debt securities in the debt exchange. 

When this type of debt exchange was added to the no-ruling list, the IRS indicated that it was studying whether to issue guidance related to such transactions. Although the IRS now will, in certain circumstances, issue private letter rulings on debt exchanges where the retired distributing corporation debt was issued in anticipation of the spin-off, Revenue Procedure 2017-38 does not indicate the situations in which the IRS may rule or the representations the IRS may require and does not articulate the legal analysis the IRS will apply to requests for such rulings. The availability of tax-free treatment for this type of debt exchange under section 361 is clearly rooted in the statute itself, which requires only that the Spinco securities be transferred to "creditors" of the distributing corporation. Any representations required by the IRS in this context may be related to confirming that the exchanging debt holder is in substance a creditor holding the debt of the distributing corporation for its own account as principal rather than an agent or conduit.

The IRS also recently issued guidance, in Revenue Ruling 2017-9, clarifying the treatment of so-called "North-South transactions," in which property is transferred to the distributing corporation either by the Spinco (before the transfer of assets to the Spinco pursuant to the reorganization) or by the controlling shareholder of the distributing corporation (before or in connection with the spin-off distribution of Spinco stock to that shareholder). Concerns had been raised in North-South transactions whether the ostensibly separate transactions should be integrated. As part of this Ruling, the IRS also removed North-South transactions from the list of no-rule areas; North-South transactions had been added to the no-rule list in early 2013 along with the debt exchanges discussed above. 

The Ruling concludes, in Situation 1, that a transfer of assets by a controlling shareholder to a distributing corporation that otherwise qualifies as a non-recognition transaction (if analyzed without taking into account the spin-off), will not be treated as part of an exchange for the Spinco stock received by the shareholder, regardless of whether the purpose of the asset transfer was to allow the spin-off to qualify under Section 355 or whether the asset transfer would not have occurred in the absence of the spin-off. As a result, the distribution-of-control requirement for spin-offs, which generally requires a distribution of 80% of the Spinco stock, will not be violated by such transfer because the amount of Spinco stock treated as distributed in the spin-off will not be reduced by treating some or all of the Spinco stock as exchanged for the assets received from the shareholder. 

In contrast, the Ruling concludes, in Situation 2, that where the Spinco transfers cash and/or other nonqualifying property to the distributing corporation in pursuance of the plan of reorganization pursuant to which the parties complete a divisive reorganization under Sections 368(a)(1)(D) and 355, the parties cannot treat Spinco's transfer as a distribution under Section 301 (regardless of whether the transfer might have occurred in the absence of the reorganization). Instead, Spinco will be treated as transferring unqualified property ("boot") to which Section 361(b) applies, with the result that the boot must be distributed to shareholders or creditors in order for the receipt of the boot to be tax-free. The IRS now will consider providing letter rulings on North-South transactions that apply the holdings and reasoning of Revenue Ruling 2017-9


1. Rev. Proc. 2017 38, 2017 22 I.R.B. 1 (May 9, 2009). Unless otherwise noted, all section references herein are to the Internal Revenue Code of 1986, as amended (the "Code").

2. Rev. Proc. 2013-3, section 5.01(10), 2013-3 I.R.B. 113 (Dec. 31, 2013).

3. Rev. Rul. 2017-9, 2017-21 I.R.B. 1 (May 3, 2017).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.