United States

DowDuPont receives IRS approval on spin-off issue

IRS provides ruling based on overlap of shareholder ownership


The IRS released a private letter ruling (PLR 201740015) that appears to address the three spin-off transactions planned in the wake of the August 2017 DuPont-Dow Chemical business combination. The IRS approved the combined company’s reliance on overlap between the DuPont and Dow shareholder groups to allow the three subsequent spin-offs to meet a requirement for the desired tax-free treatment.

Spin-offs generally

In a spin-off, a corporation (Distributing) distributes stock of a subsidiary (Controlled) to its shareholders. To qualify as a spin-off for tax-free treatment, various requirements must be met. A number of requirements are designed to deny tax-free treatment in circumstances where the spin-off transaction resembles a sale transaction. One of these is section 355(e) of the tax code

Section 355(e)

Section 355(e) limits companies’ ability to negotiate or consummate change in control transactions in connection with a spin-off. Distributing will be taxed on the spin-off if, as part of a plan (or series of related transactions) including the spin-off (a Plan), one or more persons acquires a 50 percent or greater interest in either Distributing or Controlled.

Section 355(e) measures the size of an acquisition by reference to shareholder ownership. There is an overlap rule in section 355(e)(3)(A)(iv) that disregards acquisitions of a corporation’s stock to the extent they cause no net stock ownership decrease. Under this net decrease methodology, acquisition of shares by shareholders who have overlapping ownership in the two companies tested does not count toward the 50 percent threshold. Since the three DowDuPont spin-offs planned after the Dow-DuPont merger combination will be part of a Plan, DowDuPont would like to ensure that section 355(e)’s 50 percent ownership acquisition threshold is not reached.

IRS ruling

Applying the net decrease methodology to stock ownership can become complicated where the relevant corporation is publicly traded or has many layers of ownership. PLR 201740015 illustrates this complexity. The IRS approved DowDuPont’s use of certain overlap counting principles to apply the overlap rule. The IRS endorsed “looking through” certain entities to find ultimate indirect owners through either actual knowledge of overlapping shareholders or reliance upon publicly available information such as SEC filings. The IRS also ruled it was appropriate to measure shareholders’ net increases (or decreases) in stock ownership over the relevant time period.

The IRS previously issued similar PLRs regarding the appropriate method for analyzing section 355(e) (see, e.g., PLRs 200624001, 2014220004, 201505007, and 201603006).


PLR 201740015 illustrates that, despite the mechanical appearance of section 355(e), taxpayers should consider that acquisitions involving overlapping shareholders may require additional inquiry.


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