Foreign-stock gain agreement terminates before partnership asset sale

Plain-English summary

A U.S. parent had entered into successive gain recognition agreements after transferring one foreign subsidiary to another, liquidating the transferred subsidiary, and later bringing the remaining foreign entity and historic assets back into the United States. The parent then contributed substantially all of those assets to a partnership that proposed selling them to an unrelated buyer. The IRS ruled that the latest agreement first prevented the inbound reorganization from triggering the prior agreement and then immediately terminated without further effect because the parent received the historic assets with carryover basis and any later gain would be subject to U.S. tax. The partnership's sale of substantially all of the assets therefore would not trigger the latest gain recognition agreement.

Ruling snapshot

• Question: Would a partnership's sale of historic foreign-subsidiary assets trigger the parent's latest gain recognition agreement?
• Outcome: Approved, the agreement had already terminated without further effect.
• Key authorities: IRC § 367(a); Treas. Reg. §§ 1.367(a)-8(k)(14), 1.367(a)-8(o)(5).

Full text (IRS public release)

Internal Revenue Service                                    Department of the Treasury
                                                            Washington, DC 20224

Number: 201639014                                           Third Party Communication: None
Release Date: 9/23/2016                                     Date of Communication: Not Applicable
Index Number: 367.00-00, 367.40-00,
              367.40-02                                     Person To Contact:
                                                            -----------------, ID No. -----------------
--------------------------------                            Telephone Number:
--------------------------                                  --------------------
----------------------------------------                    Refer Reply To:
----------------------------                                CC:INTL:B04
---------                                                   PLR-107901-16
---------------------------                                 Date:
                                                            June 23, 2016




                                                  Legend

Parent                            =        ----------------------------------------------------------------------
                                           ----------------------------------------------------------------------
                                           -----------------------

FSub 1                            =        ---------------------------------------
                                           -------------------------------
                                           -----------------------

FSub 2                            =        --------------------------
                                           --------------------------------------------------
                                           -----------------------

Partnership                       =        ------------------------------
                                           ----------------------------------------
                                           -----------------------

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

Country B                         =        ----------

Country C                         =        ----------------------

Business D                        =        --------------------------------------------

a                                 =        --------
PLR-107901-16                                  2

b                         =       --------

Year 1                    =       -------

Year 2                    =       -------

Year 3                    =       -------

Date 1                    =       ------------------------



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

       This letter responds to your March 4, 2016, request, submitted by your
authorized representative, for a ruling regarding certain federal income tax
consequences of a proposed transaction. The information submitted in that letter and in
later correspondence is summarized below.

      The rulings contained in this letter are based on facts and representations
submitted by the taxpayer and accompanied by a penalties of perjury statement
executed by the appropriate party. This office has not verified any of the materials
submitted in support of the request for rulings. Verification of the information,
representations, and other data may be required as part of the audit process.


                                   Summary of Facts

         Parent is a publicly traded State A corporation and is the common parent of an
affiliated group of corporations that files a consolidated return. Parent conducts
Business D through direct and indirect subsidiaries and joint ventures, including through
an a percent interest in Partnership, a State A partnership.

       Prior to the transactions described below, Parent directly or indirectly wholly
owned both FSub 1, a Country B corporation, and FSub 2, a Country C corporation. In
Year 1, pursuant to a series of transactions (the “Year 1 Transactions”), Parent was
treated for U.S. federal income tax purposes as transferring FSub 1 to FSub 2 (the
“FSub 1 Stock Transfer”). Parent treated the FSub 1 Stock Transfer as an exchange
described in section 351 and, on its Year 1 tax return, Parent entered into a gain
recognition agreement (the “Year 1 GRA”) with respect to the FSub 1 Stock Transfer
under Treas. Reg. § 1.367(a)-8.

      In Year 2, FSub 1 converted to a Country B unlimited liability company.
Following this conversion (the “FSub 1 Liquidation”), FSub 1 was disregarded as an
PLR-107901-16                                 3

entity separate from FSub 2 for U.S. federal income tax purposes. Parent treated the
FSub 1 Liquidation as being unrelated to the FSub 1 Stock Transfer, and qualifying as a
liquidation of FSub 1 under section 332. Parent determined that the FSub 1 Liquidation
was not a triggering event with respect to the Year 1 GRA pursuant to Treas. Reg.
§ 1.367(a)-8(k)(8). On its Year 2 tax return, Parent entered into a new gain recognition
agreement (the “Year 2 GRA”) with respect to the FSub 1 Liquidation. Under Treas.
Reg. § 1.367(a)-8(c)(5)(i), Parent treated the Year 2 GRA as replacing the Year 1 GRA
such that the Year 1 GRA terminated without further effect.

        In Year 3, Parent directly or indirectly owned a b percent interest in Partnership.
In Year 3, as part of a series of transactions (the “Year 3 Transactions”), FSub 2 made
an election to be disregarded as an entity separate from its owner, Parent, for U.S.
federal income tax purposes under Treas. Reg. § 301.7701-3 (the “Inbound
Reorganization”). Subsequent to the Inbound Reorganization, pursuant to further steps
in the Year 3 Transactions, Parent was treated as transferring substantially all of the
historic assets of FSub 1 to Partnership (the “Partnership Contribution”). Parent
determined that the Inbound Reorganization resulted in a deemed liquidation of FSub 2
and a reorganization under section 368(a)(1)(C).

       Parent entered into a new gain recognition agreement (the “Year 3 GRA”) on its
Year 3 tax return. The Year 3 GRA described the Inbound Reorganization and the
Partnership Contribution and cited the triggering event exceptions in Treas. Reg.
§§ 1.367(a)-8(k)(6), 1.367(a)-8(k)(14), and 1.367(a)-8(k)(8). Under Treas. Reg.
§ 1.367(a)-8(c)(5)(i), Parent treated the Year 3 GRA as replacing the Year 2 GRA such
that the Year 2 GRA terminated without further effect.



                                 Proposed Transaction

      In the proposed transaction, Partnership will sell substantially all of the assets of
FSub 1 (the “FSub 1 Assets”) to an unrelated buyer.

                                    Representations

       Parent has made the following representations:

          a. The FSub 1 Stock Transfer qualified as an exchange described in section
             351.

          b. The FSub 1 Liquidation qualified as a liquidation under section 332.

          c. FSub 2 was eligible to elect to be treated for U.S. federal income tax
             purposes as a disregarded entity under Treas. Reg. § 301.7701-3 and
PLR-107901-16                                  4

               filed a valid election to be treated as a disregarded entity effective on Date
               1.

          d. The Inbound Reorganization qualified as a reorganization described in
             section 368(a)(1)(C), and Parent complied with the requirements under
             Treas. Reg. §1.367(b)-3 resulting from such reorganization.

          e. The Partnership Contribution was a section 721 transfer.

          f. Parent entered into the Year 3 GRA due to uncertainty over whether the
             Year 2 GRA was terminated in the Inbound Reorganization.

          g. There were no transactions that resulted in an increase in the basis of the
             FSub 1 Assets between the FSub 1 Stock Transfer and the Inbound
             Reorganization.

          h. Substantially all of the FSub 1 Assets will be sold by Partnership in the
             Proposed Transaction.

          i.   The FSub 1 Liquidation was not a triggering event with respect to the Year
               1 GRA.

          j.   FSub 2 did not hold any United States real property interests, as defined
               in section 897(c)(1), immediately before or after the FSub 1 Stock Transfer
               or the FSub 1 Liquidation, or immediately before the Inbound
               Reorganization.

          k. FSub 1 did not hold any United States real property interests, as defined
             in section 897(c)(1), immediately before or after the FSub 1 Stock
             Transfer, or immediately before the FSub 1 Liquidation.


                                     Law and Analysis

        Section 367(a) and the regulations promulgated thereunder provide rules
governing the circumstances under which the nonrecognition rules of sections 351, 354,
356, and 361 apply to transfers of property to foreign corporations. Section 367(a)(1)
provides the general rule that gain is recognized on such outbound transfers. This
general rule, however, is subject to several exceptions. In particular, section 367(a)(2)
provides that the nonrecognition rules apply to outbound transfers of stock or securities
of a foreign corporation, except as provided in regulations.

       Treas. Reg. § 1.367(a)-3(b)(1) provides that a transfer of stock or securities of a
foreign corporation by a U.S. transferor (who owns more than five percent of the stock
PLR-107901-16                                 5

of the transferred foreign corporation) to a foreign corporation qualifies for
nonrecognition treatment if the U.S. transferor enters into a gain recognition agreement
with respect to such transfer.

       Treas. Reg. § 1.367(a)-8 describes the conditions for entering into a gain
recognition agreement, including that the U.S. transferor agrees to recognize gain on
the outbound stock transfer if a “triggering event” occurs before the close of the fifth
taxable year following the close of the taxable year of the initial transfer.

       Treas. Reg. § 1.367(a)-8(j) lists the triggering events. Specifically, Treas. Reg.
§ 1.367(a)-8(j)(1) provides that a triggering event includes a complete or partial
disposition of the transferred stock or securities. Treas. Reg. § 1.367(a)-8(j)(2)(i)
provides that a triggering event includes a disposition in one or more related
transactions of substantially all of the assets of the transferred corporation.

        Treas. Reg. § 1.367(a)-8(k)(8) provides that a liquidation of the transferred
corporation into the transferee foreign corporation to which sections 332 and 337 apply
will not constitute a triggering event provided that the U.S. transferor enters into a new
GRA.

         Treas. Reg. § 1.367(a)-8(k)(14) provides, in relevant part, that a disposition or
other event that would constitute a triggering event shall not constitute a triggering event
if (i) the disposition qualifies as a nonrecognition transaction, (ii) immediately after the
disposition or other event, a U.S. transferor retains a direct or indirect interest in the
transferred stock or securities or, as applicable, in substantially all of the assets of the
transferred corporation, and (iii) a new gain recognition agreement is entered into by the
U.S. transferor that includes (A) an explanation of why paragraph (k)(14) applies to the
disposition or other event; and (B) a description of each subsequent disposition or other
event that would constitute a triggering event, other than those described in paragraph
(j) of this section, with respect to the new gain recognition agreement based on the
principles of paragraphs (j) and (k) of this section.

       Treas. Reg. § 1.367(a)-8(o)(5) generally provides, notwithstanding Treas. Reg.
§ 1.367(a)-8(j), that a gain recognition agreement will terminate without further effect
when the transferred stock is distributed or transferred to the U.S. transferor pursuant to
certain transactions and certain requirements are satisfied, including that the basis in
the distributed stock is not greater than the basis of such stock at the time of the initial
transfer. Treas. Reg. § 1.367(a)-8(k) (introductory language) cross references the rules
of Treas. Reg. § 1.367(a)-8(o).

       The Inbound Reorganization is described in Treas. Reg. § 1.367(a)-8(k)(14)
because the disposition of the FSub 2 stock and the disposition of substantially all of the
FSub 1 Assets, qualified as nonrecognition transactions; immediately after Parent
retained a direct or indirect interest in substantially all the FSub 1 Assets; and Parent
entered into the Year 3 GRA that met the requirements of Treas. Reg. § 1.367(a)-
PLR-107901-16                                 6

8(k)(14)(iii). Accordingly, the Inbound Reorganization did not trigger the Year 2 GRA
and, under Treas. Reg. § 1.367(a)-8(c)(5)(i), the Year 2 GRA terminated without further
effect.

       Under Treas. Reg. § 1.367(a)-8(k)(14), the principles of paragraphs (j) and (k)
must be applied to identify any transactions that would constitute triggering events but
that are not specifically listed in paragraph (j). Because Treas. Reg. § 1.367(a)-8(o)
applies to transactions to which Treas. Reg. § 1.367(a)-8(j) applies, in the case of a gain
recognition agreement filed pursuant to Treas. Reg. § 1.367(a)-8(k)(14), the principles
of paragraph (o) also apply to determine whether the transaction constitutes a triggering
event or a termination event. Because Parent received substantially all of the historic
assets of FSub 1 with a carryover basis, and any gain on a subsequent disposition of
such assets by Parent would be subject to U.S. tax in the hands of Parent, under the
principles of Treas. Reg. § 1.367(a)-8(o)(5), any gain by Parent on the sale of the FSub
1 assets previously held by FSub 2 represents the gain on stock of FSub1 described in
the Year 1 GRA. Thus, on the Inbound Reorganization, the Year 3 GRA immediately
terminated upon its filing.

                                          Ruling

       Based solely on the information submitted and the representations set forth
above, the Year 3 GRA first prevented the Inbound Reorganization from triggering the
Year 2 GRA, and then immediately terminated without further effect upon its filing.
Therefore, the sale of substantially all of the FSub 1 Assets by Partnership will not
constitute a triggering event with respect to the Year 3 GRA.

                                         Caveats

       We express no opinion about the tax treatment of the Proposed Transaction
under other provisions of the Code and regulations or the tax treatment of any
conditions existing at the time of, or effects resulting from, the Proposed Transactions
that are not specifically covered by the above rulings.

       In particular, we express no opinion regarding:

         i.   The federal tax classification under Treas. Reg. §§ 301.7701, et seq., of
              any of the entities involved in the Year 1 Transactions, the FSub 1
              Liquidation, the Year 3 Transactions, or the Proposed Transaction, or the
              validity of any entity classification election made with respect to any of the
              entities.

        ii.   The federal income tax treatment or consequences of the Year 1
              Transactions, the FSub 1 Liquidation, the Year 3 Transactions, or the
              Proposed Transaction, other than as expressly provided above.
PLR-107901-16                                  7

                                    Procedural Matters

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

       Under a power of attorney on file in this office, a copy of this letter is being sent
to your authorized representative.




                                           Sincerely,



                                           Jason Smyczek
                                           Senior Technical Reviewer, Branch 4
                                           (International)