Five-year regulated restructuring follows one reorganization plan

Plain-English summary

A multinational corporate group planned to move a regulated foreign business and its branches into another foreign affiliate. The steps included ownership contributions, establishing and authorizing new branches, transferring business operations jurisdiction by jurisdiction, closing old branches, and dissolving or changing the classification of the target. Court and regulatory approvals in several countries were expected to make the restructuring take about five years. The taxpayer represented that its board had authorized the plan, the listed steps were its constituent parts, and the group would proceed as quickly as legally and practically possible. The IRS ruled that each step would occur pursuant to a plan of reorganization despite the extended timeline. The ruling addressed only that significant Section 368 issue and did not decide whether the transactions otherwise qualified as a tax-free reorganization.

Ruling snapshot

• Question: Would the steps of a multinational restructuring expected to take about five years satisfy the plan-of-reorganization requirement?
• Outcome: Approved on the specific issue; each step was treated as occurring pursuant to a plan of reorganization.
• Key authorities: IRC § 368; Treas. Reg. § 1.368-1(c); Rev. Proc. 2020-1 § 6.03(2)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202128001 Third Party Communication: None
Release Date: 7/16/2021 Date of Communication: Not Applicable
Index Number: 368.09-00
Person To Contact:
------------------ ---------------------------, ID No. ---------------
-------------------------------------------------------- -----------------
--------------------- Telephone Number:
----------------------------------- --------------------
----------------------------------------- Refer Reply To:
CC:CORP:1
PLR-121210-20
Date:
April 19, 2021

Legend

Taxpayer = ----------------------------------------------------------------------------------------------
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DE1 = ----------------------------------------------------------------------------------------------
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DE2 = ----------------------------------------------------------------------------------------------
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Target = ----------------------------------------------------------------------------------------------
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FSub1 = ----------------------------------------------------------------------------------------------
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Acquiring = ----------------------------------------------------------------------------------------------
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Business X = --------------------------------

Business Y = -------------------------

PLR-121210-20 2

Business Z = ------------------------------

Country A = ---------------------

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

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

Country D = --------

Country E = --------------

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

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

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

Date 3 = -------------------------------------------------------------------

Date 4 = ----------------------

Year 1 = -------

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

This letter responds to your letter dated September 25, 2020, and supplemented by
additional letters dated January 22, 2021 and March 1, 2021, submitted on behalf of
Taxpayer and its affiliates (the “PLR Submission”), requesting a ruling on certain federal
income tax consequences of a series of transactions (the “Proposed Transactions,” as
defined below). The material information submitted in that request and subsequent
correspondence is summarized below.

This letter is issued pursuant to section 6.03(2) of Rev. Proc. 2020-1, 2020-1 I.R.B. 1,
regarding one or more significant issues under section 368 of the Internal Revenue
Code (the “Code”). The ruling in this letter only address one or more significant issues
involved in the transactions. This office expresses no opinion as to the overall tax
consequences of the transactions described in this letter or as to any issue not
specifically addressed by the ruling below.

The ruling contained in this letter is based on facts and representations submitted by the
taxpayer and accompanied by a penalties of perjury statement executed by an
appropriate party. This office has not verified any of the materials submitted in support

PLR-121210-20 3

of the request. Verification of the information, representations, and other data may be
required as part of the audit process.

                              Summary of Facts

Organizational Structure

Taxpayer, a State A corporation, is the common parent of a worldwide group of foreign
and domestic affiliates that include corporations and entities disregarded as separate
from their sole regarded owners for U.S. federal income tax purposes (each, a
“disregarded entity”). Immediately prior to the Proposed Transactions, Taxpayer owned
all of the membership interests in DE1, a State A entity treated as a disregarded entity.
DE1 owned: (i) all of the membership interests in DE2, a Country A entity treated as
disregarded entity; and (ii) all of the membership interests in FSub1, a Country B entity
treated as a corporation for U.S. federal income tax purposes.

DE2 owned all of the membership interests in Target, a Country A entity treated as a
corporation for U.S. federal income tax purposes.

FSub1 owned all of the membership interests in Acquiring, a Country B entity treated as
a disregarded entity.

Background

Taxpayer conducts three heavily regulated lines of business, Business X, Business Y,
and Business Z. In Year 1, Taxpayer indirectly acquired Target, a company engaged in
Business Z that conducted the majority of its business in Country A. In the years
following the acquisition, Business Z experienced significant global growth and Target
now has extensive operations in Countries C, D, and E, conducted through branches in
each country. Going forward, Business Z is expected to continue growing
internationally. Because Target is a Country A entity with significant non-Country A
operations, Target’s business activities are subject to a strict and complex Country A
regulatory regime in addition to each local regulatory regime for the branches in
Countries C, D, and E. This situation presents considerable cost and administrative
burden.

The Proposed Transactions are intended to reduce these costs by ensuring Target’s
non-Country A operations are not subject to Country A’s regulatory regime, to
consolidate a greater percentage of Business Z’s assets under one entity (i.e.,
Acquiring), and to increase business efficiency. Because Target has global operations
and Business Z is a heavily regulated line of business, the completion of the Proposed
Transactions may take a significant period of time (discussed below).

PLR-121210-20 4

                             Proposed Transactions

For the reasons discussed above, Taxpayer proposes to undertake the following
Proposed Transactions in the order listed below.

Step 1: On Date 1, DE1 contributed all of the membership interests in DE2 to FSub1.

Step 2: Acquiring will begin establishing new branches in Countries A, C, D, and E. This
step will be completed on a rolling basis based on the requirements for establishing
branches in each jurisdiction.

Step 3: On Date 2, FSub1 will contribute all of the membership interests in DE2 to
Acquiring.

Step 4: Acquiring, directly and through its newly established branches, will begin
engaging in Business Z as soon as practically possible. As a result of engaging in
Business Z, Acquiring will convert to a corporation for U.S. federal income tax purposes.
Treas. Reg. § 301.7701-2(b).

Step 5: Through regulatory and other processes, the business of Target and its
branches will be transferred to Acquiring and the foreign branches of Acquiring (the
“Liquidating Transfers”).

Step 6: Following the Liquidating Transfers, the foreign branches of Target will be
deauthorized and closed.

Step 7: Target will legally dissolve or file an entity classification election to be treated as
a disregarded entity (collectively, with steps 2-6, the “Target Reorganization”).

Due to the global nature of Business Z, one or more regulatory authorities in each
jurisdiction must approve various aspects of the Proposed Transactions. Acquiring will
be required to obtain authorization to establish a branch in each jurisdiction that will
receive assets from Target in the Liquidating Transfers. The Liquidating Transfers
cannot occur in any of the jurisdictions until authorization in that jurisdiction is obtained.
Taxpayer expects that all branches will be established and authorized in each
jurisdiction by Date 3.

Once the relevant branches are established, authorized, and operational, the transfer of
Target’s business in each jurisdiction to the relevant branch of Acquiring is anticipated
to take a significant amount of time. Among other requirements, Target will be subject to
lengthy, multi-step court approval and regulatory processes in Countries A and D, in
order to effectuate the Liquidating Transfers to the new branches Acquiring formed in
those countries. The approval process in Country A will culminate in a court order
approving the Proposed Transactions. The court order will be final and binding on the
parties involved, including affected third parties. This court order is expected to be

PLR-121210-20 5

issued by Date 4. In Countries C and E, Target will transfer its operations to the
branches formed by Acquiring on a contract-by-contract basis, and this process is also
expected to take a significant period of time and may implicate regulatory processes in
each jurisdiction.

Based on the above, Taxpayer estimates that the Proposed Transactions will take
approximately 5 years to effectuate. Taxpayer is committed to complete the Proposed
Transactions as quickly and reasonably possible for substantial economic reasons,
including avoiding duplicative costs, administrative burdens, inefficient operations,
potential reputational damage, and other economic and practical consequences.

                             Representations

Taxpayer has made the following representations with respect to the Target
Reorganization:

1. Taxpayer estimates it will take approximately 5 years to complete the Target
   Reorganization.

2. The Board of Directors of the parties to the Proposed Transactions has given
   authorization for Taxpayer to move forward with the restructuring of Business Z. The
   executive team at Taxpayer, with the assistance of their advisors, has designed the step
   plan as set forth in the PLR Submission to accomplish the business purposes of
   reorganizing Business Z. The steps set forth in the PLR Submission, and described
   above, represent the constituent parts of the plan of reorganization of Target.

3. Taxpayer will execute the Proposed Transactions as soon as legally and practicably
   possible. Taxpayer will not prolong the Proposed Transactions under the plan of
   reorganization and will proceed with the Proposed Transactions in a commercially
   reasonable manner in accordance with the direction of regulators.

4. Other than the issue of whether the plan of reorganization requirement under Treas.
   Reg. § 1.368-1(c) is satisfied with respect to the Target Reorganization, the Target
   Reorganization will meet all requirements of a tax-free reorganization under section
   368(a).

                                  Ruling
   

Based solely on the information submitted and representations made, we rule that the
steps of the Target Reorganization each will be treated as occurring in pursuance of a
plan of reorganization as required by Treas. Reg. § 1.368-1(c).

PLR-121210-20 6

                                     Caveats

No opinion is expressed or implied about the tax treatment of the Proposed
Transactions under any other provisions of the Code or 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 ruling.

                             Procedural Statements

The ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be sued or cited as precedent.

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

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 on and
control number (PLR-121210-20) of the letter ruling.

                                      Sincerely,


                                      ____________________________________
                                      Brian R. Loss
                                      Office of Associate Chief Counsel (Corporate)
                                      Senior Technician Reviewer, Branch 4

cc: