New subsidiary-share basis can reduce excess loss account

Plain-English summary

A public company owned all of a subsidiary's high-vote stock and some of its publicly traded low-vote stock. The subsidiary's employee compensation awards could be settled with parent-company shares, after which the subsidiary reimbursed the parent by issuing additional low-vote subsidiary shares. The parent had an excess loss account in its previously held high-vote subsidiary stock. The IRS ruled that, when making the required consolidated-return investment adjustment, the parent could use its basis in the reimbursement shares to reduce or eliminate that excess loss account. The ruling addressed no other tax consequences.

Ruling snapshot

• Question: Could basis in newly received low-vote subsidiary shares reduce the parent's excess loss account in its high-vote subsidiary stock?
• Outcome: approved
• Key authorities: Treas. Reg. §§ 1.1502-19 and 1.1502-32

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 201749002                                            Third Party Communication: None
Release Date: 12/8/2017                                      Date of Communication: Not Applicable
Index Number: 1502.00-00, 1502.19-00
                                                             Person To Contact:
---------------------                                        -----------------------------,
--------------------------------------                       ID No. ------------------
-----------------------------------                          Telephone Number:
-------------------------                                    ----------------------
 ----------------------------------                          Refer Reply To:
                                                             CC:CORP
                                                             PLR-108435-17
                                                             Date:
                                                             September 08, 2017


Legend

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

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

Sub          = ---------------------------------------------------------------------------------------------------
               ---------------------------------------------------------------------------------------------------
               -------------------------

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

Date 2       = -----------------------

a            = ----------------

b            = ----------------

c            = ----------------

d            = ------------------



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

       This letter responds to your authorized representatives’ letter dated March 10,
2017, requesting a ruling as to the Federal income tax consequences of certain
PLR-108435-17                                2

transactions. The information provided in that request and subsequent correspondence
submitted for consideration is summarized below.

      The rulings contained in this letter are based upon information and
representations submitted by the taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. While this office has not verified any of the
material submitted in support of the request for rulings, it is subject to verification on
examination.

                                   Summary of Facts

         Parent is a publicly traded State A corporation and is the common parent of an
affiliated group of corporations which join in the filing of a consolidated Federal income
tax return (the “Parent Group”). Sub is a direct subsidiary of Parent, and a member of
the Parent Group. Sub has two classes of stock issued and outstanding: common stock
(“low-vote stock”) and Class B common stock (“high-vote stock”). Parent owns all of the
outstanding shares of Sub’s high-vote stock. Sub’s low-vote stock is publicly traded as
of Date 1.

      As of Date 2, Sub had a shares of low-vote stock outstanding, b of which were
owned by Parent and c of which were owned by the public and by Sub’s employees.
Also as of Date 2, Sub had d shares of high-vote stock outstanding, all of which were
owned by Parent.

        Sub’s low-vote stock and high-vote stock are identical with respect to liquidation
rights and dividend rights. With respect to voting rights, Sub’s low-vote stock is entitled
to one vote per share and Sub’s high-vote stock is entitled to ten votes per share with
respect to any matter submitted to a vote or to the consent of the shareholders. The
holders of Sub’s low-vote stock and high-vote stock vote together as one class on all
matters, including the election of directors. Each share of Sub high-vote stock is
convertible at any time at the option of the holder into a share of Sub low-vote stock on
a share-for-share basis. Shares of Sub low-vote stock are not convertible into shares of
Sub high-vote stock. In the event that Sub declares a stock dividend, or distributes
stock or securities in one of its subsidiaries to its shareholders, Sub has the ability to
distribute low-vote shares to holders of its low-vote stock and high-vote shares to
holders of its high-vote stock.

        Sub has a stock-based compensation plan under which its employees may be
granted stock options, restricted stock units, and performance-based restricted stock
units (“stock-based awards”). Pursuant to an Employee Matters Agreement (“EMA”)
between Parent and Sub, these stock-based awards are settled, at Parent’s election, in
shares of Parent’s common stock or in shares of Sub’s low-vote stock. To the extent
that shares of Parent’s common stock are issued in settlement of these awards, Sub
reimburses Parent for the cost of those shares by issuing shares of low-vote stock to
Parent.
PLR-108435-17                                  3


       At the time of the submission, Parent had an excess loss account within the
meaning of Treas. Reg. § 1.1502- 19(a)(2) (an “ELA”) in the high-vote stock of Sub that
it owned.

                                           Ruling

        Based solely on the information submitted and the representation set forth
above, we rule that: In connection with the investment adjustment required under Treas.
Reg. § 1.1502-32 for Parent’s Sub stock, Parent is permitted to utilize its basis in any
Sub shares it receives as reimbursement under the EMA to reduce or eliminate its ELA
in its previously held high-vote stock in Sub (Treas. Reg. § 1.1502-19(d)(1)).

                                          Caveats

       Except as expressly provided herein, no opinion is expressed or implied
concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

                                 Procedural Statements

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

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


                                       Sincerely,



                                       Mark J. Weiss
                                       Chief, Branch 2
                                       Office of Associate Chief Counsel (Corporate)



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