Daily Tax Report ®

Spinoff Deals Get Boost From New IRS Guidance

Oct. 4, 2018, 12:16 AM

Corporations doing debt-for-debt exchanges in tax-free spinoffs are getting more certainty from IRS guidance that standardizes the way they can ask for private rulings on the deals.

The Oct. 3 guidance (Revenue Procedure 2018-53) marks an agency shift toward spinoff-friendly policy, tax professionals said. Such a stance should help fuel what has already been a surge in spinoffs on the international and domestic fronts, with 205 of those deals pending or completed so far this year, compared with 156 pending or completed for the same period last year, according to Bloomberg Terminal data.

The new revenue procedure follows a Sept. 25 agency statement indicating it was looking into whether business units should still be required to generate revenue before a spinoff can be deemed tax-free.

The move appears to mark “the beginning of a trend back to the way it was” before the volume of IRS private letter rulings slowed to a trickle in recent years, said Robert Willens, a New York-based tax consultant.

The recent guidance, he added, indicates the administration is trying to “at least not discourage them by declining to rule on various issues that arise in connection with spinoffs.”

PLRs are IRS responses to taxpayer requests for guidance, binding only the agency and the requesting taxpayer. In debt-to-debt exchanges, a bank buys parent company debt from a third party, then transfers it to the parent in exchange for debt of the spun-off subsidiary.

Prior to the Oct. 3 guidance, Internal Revenue Service guidelines on seeking PLRs on debt-to-debt exchanges were inconsistent and confusing for businesses, and it “seemed like they were being made up as they were going along,” Willens said.

“The fact that the IRS is even giving PLRs on 355s these days is pretty amazing,” said Andrew Silverman, a Bloomberg Intelligence tax policy analyst, referring to the tax code section governing the tax treatment of spinoff transactions. “They refused to give them for a long time.”

Who Benefits

Madison Square Garden Co., which announced in June its plans to explore a possible spinoff of its sports businesses into a publicly traded company to include the New York Knicks and New York Rangers basketball and hockey franchises, is likely to benefit, according to Willens and Silverman.

In a statement to Bloomberg Tax regarding the new revenue procedure, Madison Square Garden said it “anticipated that the IRS was going to issue this guidance” and “will review and take into consideration” the standardized procedure, but declined to comment further.

The new guidance should also be a boon for investment banks in the business of underwriting debt and advising on transactions.

“To the extent banks can earn fees by facilitating the exchanges, it’s always good to have that certainty,” said Joshua Brady, a principal in Grant Thornton’s Washington National Tax Office.

He added that other beneficiaries will be corporations in debt-heavy industries—such as manufacturing, real estate, and telecommunications—that will typically engage in debt-to-debt exchanges.

The revenue procedure “is giving a far more clear road map to where the safer methods are,” said Stefan Gottschalk, senior director of RSM US LLP’s Washington National Tax Office. It did essentially move up a deadline for debt issuance by the parent company in a spinoff deal requesting a private letter ruling—but otherwise, the guidance is welcome and markedly pro-business.

The benefit of increased certainty should go a long way for any company looking to “refine its focus to one specific industry” by splitting into two businesses,” he added.

To contact the reporter on this story: Lydia O'Neal in Washington at loneal@bloombergtax.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bloombergtax.com

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