Private Letter Ruling
202048003
Released November 27, 2020
Approved
IRS disregards a multinational's circular cash-and-note steps, recharacterizing a foreign-branch restructuring as direct contributions down the corporate chain
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This page covers one taxpayer's ruling from 2020, which can't be cited as precedent. Ezel answers your situation under the current Code and IRS guidance, with citations.
Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.
About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.
View official IRS release (PDF)
Plain-English summary
A publicly traded parent that heads a consolidated group carried out a complex multi-step restructuring to move the assets and liabilities of several foreign branches into a lower-tier foreign partnership. To get there, cash and promissory notes were passed through a long chain of subsidiaries, disregarded entities, and partnerships, with the money and notes ultimately looping back to where they started. The parent asked the IRS to rule on the tax character of these steps. The IRS ruled that each set of steps was "circular," meaning the cash and note transfers cancel out, so they are disregarded for federal income tax purposes under long-standing circular-flow authorities (Rev. Ruls. 77-191, 57-311, and 83-142). Stripped of the circular movements, the restructuring is treated as what it economically accomplished: the top subsidiaries simply contributed the target branch assets successively down the chain (Sub 1 or Sub 2 to Sub 3, and Sub 3 into the foreign partnership), with each transferee treated as receiving the property it was deemed to receive. The IRS expressly did not opine on transfer pricing under § 482 or on the partnership rules of § 721 and Subchapter K. The practical value is certainty that the intermediate cash and note shuffling does not create separate taxable sales or exchanges; only the underlying asset contributions matter.
Ruling snapshot
- Question: How are a multinational group's circular cash and note transfer steps treated when restructuring foreign branch assets into a foreign partnership?
- Outcome: approved (the circular steps are disregarded and recharacterized as direct contributions of the branch assets down the corporate chain)
- Key authorities: IRC § 351; Rev. Ruls. 77-191, 57-311, 83-142; Rev. Proc. 2020-1 § 6.03
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 202048003 Third Party Communication: None
Release Date: 11/27/2020 Date of Communication: Not Applicable
Index Number: 351.00-00
Person To Contact:
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---------------------------------------- ID No. -----------------
------------------------- Telephone Number:
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------------------------------ Refer Reply To:
CC:CORP:B2
PLR-105485-20
Date:
August 28, 2020
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PLR-105485-20 5
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Dear --------------:
This letter responds to your authorized representatives' letter dated February 4, 2020,
requesting rulings on certain federal income tax consequences of a series of completed
transactions described below (the "Completed Transaction"). The information provided
in that request and in subsequent correspondence is summarized below.
The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalties 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.
This letter is issued pursuant to section 6.03 of Rev. Proc. 2020-1, 2020-1 I.R.B. 1,
regarding rulings on one or more significant issues under sections 332, 351, 355, 368,
or 1036 of the Internal Revenue Code. The rulings contained in this letter only address
one or more discrete legal issues involved in the Completed Transaction. This Office
expresses no opinion as to the overall tax consequences of the Completed Transaction
or as to any issue not specifically addressed by the rulings below.
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 for U.S. federal income tax
purposes. Parent owns all the stock of Sub 1 and Sub 4. Sub 1 owns all the stock of
Sub 2. Prior to Date A, Sub 2 owned more than e% of the stock of Sub 3, with the
remainder of the stock of Sub 3 owned by Sub 4. On Date A, Sub 4’s minority interest in
Sub 3 was eliminated, such that after Date A, Sub 2 owned all the stock of Sub 3.
Sub 2 also owns all the interests in LLC 6, a limited liability company that is treated as a
disregarded entity for U.S. federal income tax purposes (a “disregarded entity”). Sub 3
owns all the interests in LLC 1, a disregarded entity and (as a general partner) b% of
FPRS 1, a Country A entity that is treated as a partnership for U.S. federal income tax
purposes. Sub 2 and LLC 1 (as limited partners) respectively own the remaining c% and
d% of FPRS 1.
PLR-105485-20 6
FPRS 1 owns all of the interests in LLC 2, a disregarded entity. Together, FPRS 1 owns
approximately a a% interest and LLC 2 owns the remainder in FSub 1, a Country A
entity that is treated as a corporation for U.S. federal income tax purposes.
FSub 1 owns all of the interests in LLC 3, a disregarded entity. FSub 1 owns
approximately a a% interest and LLC 3 owns the remainder in FSub 2, a Country A
entity that is treated as a corporation for U.S. federal income tax purposes.
FSub 2 owns all of the interests in LLC 4 and LLC 5, both of which are disregarded
entities; an e% interest in FSub 3, a Country A entity that is treated as a corporation for
U.S. federal income tax purposes; and an e% interest in FSub 4, a Country A entity that
is treated as a corporation for U.S. federal income tax purposes. LLC 4 owns the
remaining interests in FSub 3 and FSub 4,
FSub 2, along with FSub1, FSub3, and LLC 3, owns FSub 5, a Country A entity that is
treated as a corporation for U.S. federal income tax purposes. FSub 2 owns a f%
interest in FSub 5, FSub 1 owns g%, FSub 3 owns h%, and LLC 3 owns the remainder.
FSub 2, along with FSub 3, FSub 4, FSub 5, Sub 3, and LLC 5, owns FPRS 2, a
Country A entity that is treated as a partnership for U.S. income tax purposes. FSub 2
owns a i% interest, FSub 3 owns j%, FSub 4 owns k%, FSub5 owns l%, Sub 3 owns
m%, and LLC 5 owns the remainder in FPRS 2.
FPRS 2 owns all of the interests in DRE 1, a Country A disregarded entity. DRE 1 owns
all of the interests in DRE 2 and DRE 3, each of which is a Country A disregarded
entity.
DRE 3 owns all of the interests in DRE 4 and DRE 7, each of which is a Country A
disregarded entity . DRE 4 owns all of the interests in DRE 5, a Country B disregarded
entity. DRE 5 owns all of the interests in DRE 6, a Country B disregarded entity.
DRE 7 owns all of the interests in DRE 8, a Country A disregarded entity. DRE 8 owns
all of the interests in DRE 9, a newly formed Country D disregarded entity.
DRE 1 owns a p%, DRE 3 owns a q%, and DRE 7 owns a r% interest in DRE 10, a
newly formed Country C disregarded entity.
Sub 2 owns a n% interest, and LLC 6 owns the remaining o% interest in DRE 11, a
Country B disregarded entity.
Parent also operates branches through Sub 1 and Sub 2. Sub 1 operates branches in
certain countries including Country C, and Country D. Sub 2 operates branches in
certain countries including Country E.
Completed Transaction
Parent undertook the Completed Transaction in order to transfer certain of the assets
and liabilities of certain foreign branches of Sub 1 and Sub 2 and DRE 11 (the "Target
Assets") to FPRS 2.
PLR-105485-20 7
The Completed Transaction has been completed as of the date of this ruling, but either
the tax return has not yet been filled for the year in which the transaction was completed
or the tax return was filed for the year in which the transaction was completed, but this
ruling request was filed prior to the filing of the tax return.
The steps of the Completed Transaction are set forth below:
Sub 1 Restructuring
Sub 1 Country C Branch Restructuring
(i) On or before Date B, Sub 1 contributed cash (the "Targeted Cash") equal
to the fair market value of the Target Assets of its Country C Branch (the
"Sub 1 Country C Branch") to Sub 2 as contribution to capital.
(ii) Sub 2 contributed the Targeted Cash to Sub 3 as a contribution to capital.
(iii) Sub 3 contributed the Targeted Cash to FPRS 2 in exchange for an
additional partnership interest in FPRS 2.
(iv) FPRS 2 contributed the Targeted Cash to DRE 1.
(v) DRE 1 contributed the Targeted Cash to DRE 3.
(vi) DRE 3 contributed the Targeted Cash to DRE 7.
(vii) DRE 7 contributed the Targeted Cash to DRE 10.
(viii) Sub 1 sold the Target Assets of the Sub 1 Country C Branch to DRE 10 in
exchange for the Targeted Cash.
Sub 1 Country D Branch Restructuring
(ix) On Date C, Sub 1 sold the Target Assets of its Country D Branch (the
"Sub 1 Country D Branch") to DRE 9 in exchange for a note equal to the
fair market value of the Target Assets of the Sub 1 Country D Branch
("Note 1").
(x) Sub 1 contributed Note 1 to Sub 2 as a contribution to capital.
(xi) Sub 2 contributed Note 1 to Sub 3 in exchange for shares and cash (in
lieu of the issuance of fractional shares).
(xii) Sub 3 contributed Note 1 to FPRS 2 in exchange for an additional
partnership interest in FPRS 2.
PLR-105485-20 8
(xiii) FPRS 2 sold Note 1 to DRE 8 in exchange for non-interest bearing note.
(xiv) DRE 8 contributed Note 1 to DRE 9.
Sub 2 Restructuring
DRE 11 Restructuring
(xv) On Date D, DRE 11 sold a portion of its Target Assets (the "DRE 11
Target Assets") to DRE 6 in exchange for a note equal to the fair market
value of the portion of the Target Assets of DRE 11 transferred ("Note 2").
(xvi) DRE 11 distributed Note 2 pro rata to Sub 2 and LLC 6, thereby
bifurcating Note 2 into Note 3 (distributed to Sub 2) and Note 4 (distributed
to LLC 6). LLC 6 distributed Note 4 to Sub 2.
(xvii) Sub 2 contributed Note 3 and 4 to Sub 3 in exchange for shares and cash
(in lieu of the issuance of fractional shares).
(xviii) Sub 3 contributed Note 3 and 4 to FPRS 2 in exchange for an additional
partnership interest in FPRS 2.
(xix) FPRS 2 sold Note 3 and 4 to DRE 4 in exchange for a non-interest
bearing note.
(xx) DRE 4 sold Note 3 and 4 to DRE 5 in exchange for a new note (“New
Note”).
(xxi) DRE 5 issued new shares and cash (in lieu of the issuance of fractional
shares) to DRE 4 in exchange for New Note.
(xxii) DRE 6 issued new shares and cash (in lieu of the issuance of fractional
shares) to DRE 5 in exchange for Note 3 and 4.
Sub 2 Country E Branch Restructuring
(xxiii) On Date E, the principal in the commercial agency relationship of Sub 2’s
Country E Branch (the "Sub 2 Country E Branch") changed from Sub 2 to
DRE 2. In consideration for the transfer, DRE 2 issued a note equal to the
fair market value of the Target Assets of the Sub 2 Country E Branch
("Note 5").
(xxiv) Sub 2 contributed Note 5 to Sub 3 in exchange for shares and cash (in
lieu of the issuance of fractional shares).
PLR-105485-20 9
(xxv) Sub 3 contributed Note 5 to FPRS 2 in exchange for an additional
partnership interest in FPRS 2.
(xxvi) FPRS 2 sold Note 5 to DRE 2 in exchange for a non-interesting bearing
note.
Representations
The taxpayer makes the following representations with respect to the Completed
Transaction:
Sub 1 Country C Branch Restructuring
a) The Targeted Cash that originated in Sub 1 and ultimately transferred to
DRE 10 was equal to the fair market value of the Sub 1 Country C Branch
Target Assets.
b) The additional paid in capital in Sub 2 received by Sub 1 in exchange for
the Targeted Cash was equal to the fair market value of the Sub 1 Country
C Branch Target Assets transferred to DRE 10.
c) The additional paid in capital in Sub 3 received by Sub 2 in exchange for
the Targeted Cash was equal to the fair market value of the Sub 1 Country
C Branch Target Assets transferred to DRE 10.
d) The fair market value of the partnership interest issued by FPRS 2 to Sub
3 in exchange for the Targeted Cash was equal to the fair market value of
the Sub 1 Country C Branch Target Assets transferred to DRE 10.
e) Neither Sub 1 nor Sub 2 were issued, or became the owner of, an interest
in FPRS 2.
f) Steps (i) through (viii) occurred pursuant to a binding commitment to
undertake such steps.
g) Each transaction step was documented and implemented in a manner that
complies with all applicable U.S. federal and state law and foreign law
requirements.
Sub 1 Country D Branch Restructuring
h) Note 1 did not constitute stock or securities for U.S. federal income tax
purposes.
PLR-105485-20 10
i) The value of Note 1 issued by and ultimately transferred to DRE 9 was
equal to the fair market value of the Sub 1 Country D Branch Target
Assets.
j) Steps (ix) through (xiv) occurred pursuant to a binding commitment to
undertake such steps.
k) The additional paid in capital in Sub 2 received by Sub 1 in exchange for
Note 1 was equal to the fair market value of the Sub 1 Country D Branch
Target Assets transferred to DRE 9.
l) The fair market value of the Sub 3 shares and cash issued by Sub 3 to
Sub 2 in exchange for Note 1 was equal to the fair market value of the
Sub 1 Country D Branch Target Assets transferred to DRE 9.
m) The fair market value of the partnership interest issued by FPRS 2 to Sub
3 in exchange for Note 1 was equal to the fair market value of the Sub 1
Country D Branch Target Assets transferred to DRE 9.
n) Neither Sub 1 nor Sub 2 were issued, or became the owner of, an interest
in FPRS 2.
o) Each transaction step was documented and implemented in a manner that
complies with all applicable U.S. federal and state law and foreign law
requirements.
Sub 2 DRE 11 Restructuring
p) Notes 2, 3, and 4 did not constitute stock or securities for U.S. federal
income tax purposes.
q) The value of Note 2 (and the combined values of Notes 3 and 4) that was
issued by and ultimately transferred to DRE 6 was equal to the fair market
value of the portion of the DRE 11 Target Assets transferred to DRE 6.
r) Steps (xv) through (xxii) occurred pursuant to a binding commitment to
undertake such steps.
s) The fair market value of the Sub 3 shares and cash issued by Sub 3 to
Sub 2 in exchange for Notes 3 and 4 was equal to the fair market value of
the portion of the DRE 11 Target Assets transferred to DRE 6.
t) The fair market value of the partnership interest issued by FPRS 2 to Sub
3 in exchange for Notes 3 and 4 was equal to the fair market value of the
portion of the DRE 11 Target Assets transferred to DRE 6.
PLR-105485-20 11
u) Sub 2 was neither issued, nor became the owner of, an interest in FPRS
2.
v) Each transaction step was documented and implemented in a manner that
complies with all applicable U.S. federal and state law and foreign law
requirements.
Sub 2 Country E Branch Restructuring
w) Note 5 did not constitute stock or securities for U.S. federal income tax
purposes.
x) The value of Note 5 that was issued by and ultimately transferred to DRE
2 was equal to the fair market value of the Sub 2 Country E Branch Target
Assets.
y) Steps (xxiii) through (xxvi) occurred pursuant to a binding commitment to
undertake such steps.
z) The fair market value of the Sub 3 shares and cash issued by Sub 3 to
Sub 2 in exchange for Note 5 was equal to the fair market value of the
Sub 2 Country E Branch Target Assets transferred to DRE 2.
aa) The fair market value of the partnership interest issued by FPRS 2 to Sub
3 in exchange for Note 5 was equal to the fair market value of the Sub 2
Country E Branch Target Assets transferred to DRE 2.
bb) Sub 2 was neither issued, nor became the owner of, an interest in FPRS
2.
cc) Each transaction step was documented and implemented in a manner that
complies with all applicable U.S. federal and state law and foreign law
requirements.
Rulings
Based solely on the information provided and the representations set forth above, the
transactions described in Steps (i) through (viii); (ix) through (xiv); (xv) through (xxii);
and (xxiii) through (xxvi) are each circular and therefore disregarded for U.S. federal
income tax purposes. See Rev. Rul. 77-191, 1977-1 C.B. 94; Rev. Rul. 57-311, 1957-2
C.B. 243; and Rev. Rul. 83-142, 1983-2 C.B. 68. Accordingly:
Sub 1 Country C Branch Restructuring
PLR-105485-20 12
The transfer of the Target Assets of the Sub 1 Country C Branch pursuant to steps (i)
through (viii) will be treated as if:
(1) Sub 1 contributed the Target Assets of the Sub 1 Country C Branch to
Sub 2;
(2) Sub 2 contributed the Target Assets of the Sub 1 Country C Branch to
Sub 3;
(3) Sub 3 transferred the Target Assets of the Sub 1 Country C Branch to
FPRS 2.
Sub 1 Country D Branch Restructuring
The transfer of the Target Assets of the Sub 1 Country D Branch pursuant to steps (ix)
through (xiv) will be treated as if:
(4) Sub 1 contributed the Target Assets of the Sub 1 Country D Branch to
Sub 2;
(5) Sub 2 contributed the Target Assets of the Sub 1 Country D Branch to
Sub 3;
(6) Sub 3 transferred the Target Assets of the Sub 1 Country D Branch to
FPRS 2.
Sub 2 DRE 11 Restructuring
The transfer of a portion of the Target Assets of DRE 11 pursuant to steps (xv) through
(xxii) will be treated as if:
(7) Sub 2 contributed a portion of the Target Assets of DRE 11 to Sub 3;
(8) Sub 3 transferred a portion of the Target Assets of DRE 11 to FPRS 2.
Sub 2 Country E Branch Restructuring
The transfer of the Target Assets of the Sub 2 Country E Branch pursuant to steps
(xxiii) through (xxvi) will be treated as if:
(9) Sub 2 contributed the Target Assets of the Sub 2 Country E Branch to Sub
3;
PLR-105485-20 13
(10) Sub 3 transferred the Target Assets of the Sub 2 Country E Branch to
FPRS 2.
In each transfer described in Rulings (1) through (10), each transferee will be treated as
receiving the property it was deemed to receive.
Caveats
Except as expressly provided herein, no opinion is expressed or implied concerning the
Federal tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. In particular, no opinion is expressed on whether transfers of
the Target Assets or any other Completed Transaction meet the requirements of section
482, or the regulations promulgated thereunder. Also, no opinion is expressed on
whether transfers of the Target Assets or any other Completed Transaction will meet
any of the requirements of section 721, or the regulations promulgated thereunder, or
on the application of any other provision under Subchapter K.
Procedural Statements
This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) provides
that it may not be used or cited as precedent.
A copy of this ruling letter must be attached to the federal income tax return of each
taxpayer involved for the taxable year in which the transactions described herein are
completed. Alternatively, a taxpayer filing its return electronically may satisfy this
requirement by attaching a statement to its federal income tax return that sets forth the
date and control number of this ruling letter.
Under a power of attorney on file with this Office, a copy of this letter is being sent to
your authorized representatives.
Sincerely,
Mark J. Weiss
Chief, Branch 2
Office of Associate Chief Counsel (Corporate)
cc:
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