Deferred intercompany stock gains excluded after deemed liquidations

Plain-English summary

Members of a consolidated group had two deferred intercompany gains from pre-1995 stock distributions. After later mergers, contributions, parent changes, and a proposed sequence of subsidiary conversions into disregarded LLCs, the group asked how the deferred gains would be treated under the current intercompany transaction regulations. The IRS ruled that the surviving or parent entities would succeed to the respective deferred gains under Treasury Regulation section 1.1502-13(j)(2). When the relevant subsidiaries were deemed liquidated through their LLC conversions, both gains would be redetermined and excluded from gross income under section 1.1502-13(c)(6)(ii). The rulings depended on a valid election to apply the current regulations to the earlier stock-elimination transactions and on the taxpayer's representations about the surrounding restructuring.

Ruling snapshot

• Question: Who succeeds to two deferred intercompany stock gains, and are those gains excluded when the relevant subsidiaries convert to disregarded LLCs?
• Outcome: Approved; the identified successors inherit the gains, which are excluded from gross income upon the specified deemed liquidations.
• Key authorities: Treas. Reg. §§ 1.1502-13(c)(6)(ii), 1.1502-13(j)(2), and 1.1502-13(l)(3)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201605013                                              Third Party Communication: None
Release Date: 1/29/2016                                        Date of Communication: Not Applicable
Index Number: 1502.13-01
                                                               Person To Contact:
-------------------------------------------                    ------------------------, ID No. ------------------
---------------------------------------------------            ----------------------------------------------------
----------------------------                                   Telephone Number:
                                                               ----------------------
-------------------------------------                          Refer Reply To:
------------------------------------------                     CC:CORP:B03
                                                               PLR-115807-15
                                                               Date:
                                                               November 2, 2015




Legend

Parent                     =         --------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
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New Parent                 =         --------------------------------------------------
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Corp X                     =         ----------------------------------------------
------------------------------------------------------------

Sub 1                      =         -------------------------------------------
------------------------------------------------------------

Sub 2                      =         ---------------------------------------------------------
------------------------------------------------------------

Sub 3                      =         -----------------------------------------------------------------------
------------------------------------------------------------

Sub 4                      =         --------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
-----------------------------------------------------
------------------------------------------------------------

Sub 5                      =         ------------------------------
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PLR-115807-15                                             2

Sub 5 LLC                  =         -------------------------------
------------------------------------------------------------

Date A                     =        -------------------

Date B                     =        ----------------------------

Date C                     =        ---------------------------

Date D                     =        ------------------------

Date E                     =        ---------------

State A                    =        -----------

State B                    =        --------------

State C                    =        --------------

Y                          =        --

Dear -------------------:

        This letter is in response to your authorized representative’s letter dated May 4,
2015, requesting rulings concerning the federal income tax consequences of the
proposed transactions described below, under § 1.1502-13(c)(6)(ii) and 1.1502-13(j)(2)
of the Income Tax Regulations. The material information submitted in your letter and
subsequent correspondence dated July 1, 2015, and October 20, 2015, is summarized
below.

        Parent was the common parent of a consolidated group (“Parent Group”). Parent
owned all the stock of Sub 1. Sub 1 owned all the stock of Sub 2 and Sub 3. Sub 2
owned all the stock of Sub 4. On Date A, which was prior to the Parent Group’s first
taxable year beginning on or after July 12, 1995, Sub 2 distributed all the stock of Sub 4
to Sub 1 in a distribution to which §§ 301 and 311 applied (“Sub 4 Distribution”). Sub 2
recognized gain under § 311(b), all of which was deferred under the regulations
effective at that time (“DIG 1”). On the same date, Sub 1 contributed all the stock of
Sub 2 and Sub 4 to Sub 3 in a transaction qualifying under § 351 (“Contribution 1”).
Immediately following Contribution 1, and also on Date A, Sub 1 distributed all the stock
of Sub 3 to Parent in a distribution to which §§ 301 and 311 applied (“Sub 3
Distribution”). Sub 3 recognized gain under § 311(b), all of which was deferred under
the regulations effective at that time (“DIG 2”).
PLR-115807-15                               3

       On Date B, Sub 2 merged with and into Sub 4 in a transaction qualifying as a
reorganization under § 368(a) (“Merger”). On Date C, Parent contributed all the stock of
Sub 1 to Sub 5, a wholly owned subsidiary of Parent, in a transaction qualifying under §

351. On Date D, Sub 5 converted under State A law to Sub 5 LLC, as a result of which
Sub 5 LLC was disregarded as an entity separate from Parent for federal tax purposes.
Also on Date D, New Parent acquired all the stock of Parent in a transaction that
resulted in the termination of the Parent Group and with all the members of Parent
Group becoming members of a consolidated group of which New Parent was the
common parent (“New Parent Group”). On Date E, New Parent Group underwent a
restructuring that included a reorganization in which newly formed Corp X succeeded
New Parent as common parent of the New Parent Group (now called “Corp X Group”).

       Corp X Group proposes the following transactions. Sub 1 will convert under
State B law to an LLC disregarded as an entity separate from Parent for federal tax
purposes (“Sub 1 Conversion”). Sub 3 will convert under State C law into an LLC
disregarded as an entity separate from Parent for federal tax purposes (“Sub 3
Conversion”). Sub 4 will convert under State A law into an LLC disregarded as an entity
separate from Parent for federal tax purposes (“Sub 4 Conversion”). Sub 1
Conversion, Sub 3 Conversion, and Sub 4 conversion will take place in that order over a
Y day period.

      We have received the following representations from appropriate parties:

      a. Other than the transactions described in this letter, no corporate restructuring
         or similar transaction under § 368, 351, 355 or similar provision took place
         within the Parent Group, or took place or will take place on or before the date
         of the Sub 4 Conversion within the Corp X Group (including the time period
         during which New Parent was the parent of the consolidated group) in which
         the basis of the stock of any corporation (or a successor thereto) whose stock
         was the subject of DIG 1 or DIG 2 would have been impacted.

      b. Other than the Sub 1 Conversion, the Sub 3 Conversion, and the Sub 4
         Conversion, there will be no other transaction involving the stock of any of
         Sub 1, Sub 3, or Sub 4.

      c. Beginning with the Sub 1 Conversion and continuing through the time of the
         Sub 4 Conversion, no business activities outside the ordinary course will be
         conducted by Sub 1, Sub 3, or Sub 4, except for the deemed extinguishment
         of intercompany notes between Sub 4 (including entities disregarded as
         separate from Sub 4) and Parent (including entities disregarded as separate
         from Parent) in connection with the Sub 4 Conversion.

      Based on the facts and information submitted and the representations made, and
provided that a valid election has been made under § 1.1502-13(l)(3) of the regulations
PLR-115807-15                                 4

for the taxpayers to elect to apply the intercompany transaction regulations under
§ 1.1502-13 to stock elimination transactions (described in § 1.1502-13(l)(3)(ii)) to which
prior law would otherwise apply, we rule as follows:

    1. As a result of the deemed liquidation arising from the Sub 1 Conversion, Parent
      will become a successor person, within the meaning of § 1.1502-13(j)(2), to
      Sub 1 and will succeed to DIG 2.

    2. Upon the deemed liquidation of Sub 3 resulting from the Sub 3 Conversion,
      DIG 2 will be redetermined to be excluded from gross income under
      § 1.1502-13(c)(6)(ii)(C).

    3. As a result of the Merger, Sub 4 became a successor person, within the meaning
      of § 1.1502-13(j)(2), to Sub 2 and succeeded to DIG 1.

    4. Upon the deemed liquidation of Sub 4 resulting from the Sub 4 Conversion,
      DIG 1 will be redetermined to be excluded from gross income under
      § 1.1502-13(c)(6)(ii)(D).

        No opinion is expressed or implied about the federal income tax consequences
of any other aspect of any transaction or item discussed or referenced in this letter, or
the federal income tax treatment of any conditions existing at the time of, or effects
resulting from, the Transaction that are not specifically covered by the above rulings.

      This ruling letter is directed only to the taxpayer requesting it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.

       A copy of this letter ruling must be attached to any income tax return to which it is
relevant. Alternatively, taxpayers filing their returns electronically may satisfy this
requirement by attaching a statement to their return that provides the date and control
number of the letter ruling.

        In accordance with the Power of Attorney on file with this office, a copy of this
letter ruling is being sent to your authorized representative.

                                       Sincerely,


                                       ___________________
                                       Ken Cohen
                                       Senior Technician Reviewer, Branch 3
                                       Office of Associate Chief Counsel (Corporate)