IRS rules a deferred intercompany gain is excluded and a downstream merger meets continuity of business enterprise despite deconsolidation

Plain-English summary

A corporate group that files a consolidated tax return planned a multi-step restructuring: a chain of subsidiary liquidations, an "F" reorganization of the parent holding company, and a downstream merger, the effect of which is to separate a majority-owned subsidiary (Sub 8, which runs one of the group's two businesses) from the group. Two technical issues arose. First, an earlier internal distribution of Sub 8 stock had created a deferred intercompany gain (DIG) that had not yet been taxed; the group wanted confirmation that the DIG would be excluded from income rather than triggered when Sub 8 leaves the group. Second, the group needed confirmation that the downstream merger would meet the continuity-of-business-enterprise requirement so it still qualifies as a tax-free reorganization. The IRS ruled that, provided Sub 8 requests relief under Revenue Procedure 2002-32 in the event it deconsolidates, the DIG is redetermined to be excluded from gross income under the consolidated-return regulations, and that the downstream merger satisfies the continuity-of-business-enterprise requirement notwithstanding the deconsolidation. This was a limited-scope ruling addressing only those discrete issues.

Ruling snapshot

• Question: Is the group's deferred intercompany gain excluded from income (rather than triggered) on deconsolidation, and does the downstream merger satisfy the continuity-of-business-enterprise requirement?
• Outcome: Approved (both rulings granted; the DIG ruling is conditioned on Sub 8 requesting Rev. Proc. 2002-32 relief)
• Key authorities: Treas. Reg. § 1.1502-13(c)(6)(ii)(D); Treas. Reg. § 1.368-1(b), (d); IRC § 368(a)(1)(A), (F); IRC § 332; IRC § 311(b); Rev. Proc. 2002-32; Treas. Reg. § 1.1502-75(d)(3)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202145025 Third Party Communication: None
Release Date: 11/12/2021 Date of Communication: Not Applicable
Index Number: 368.08-06, 1502.93-00
Person To Contact:
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------------------------------------------------------------ Telephone Number:
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--------------------------- Refer Reply To:
--------------------------- CC:CORP:01
PLR-113230-20
Date:
November 17, 2020

Parent Owner = -----------------------------------------------------------------------------------------
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Sub 8 = -----------------------------------------------------------------------------------------
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DE = -----------------------------------------------------------------------------------------
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Business A = -----------------------------------------------------------------------------------------
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Business B = --------------------------------------

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

Year 1 = -------

a = ------

b = ------

c = ------

d = ----

e = ------

Dear ----------------:
This letter responds to your authorized representatives’ letter dated May 11,
2020, requesting rulings on certain federal income tax consequences of a series of
proposed transaction (the “Proposed Transaction”). The information provided in that
letter 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 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.
This letter and one of the rulings contained therein are issued pursuant to section
6.03(2)(a) of Rev. Proc. 2020-1, 2020-1 I.R.B. 1, regarding a significant issue under
section 368. The rulings contained in this letter only address one or more discrete legal
issues involved in the Proposed Transaction.
Summary of Facts
Parent Owner is a domestic partnership that owns all of the stock of Parent.
Parent is the common parent of a consolidated group (the “Parent Group”). Each of Sub
1, Sub 2, Sub 3, Sub 4, Sub 5, Sub 6, and Sub 7 is, and Sub 8 is or was (prior to any
Deconsolidation Event, as defined infra) a member of the Parent Group. The Parent
Group is engaged in Business A, conducted by Sub 5 and its subsidiaries, and
Business B, conducted by Sub 8 and its subsidiaries.

    Prior to the Proposed Transaction and any Deconsolidation Event, Parent owned

all of Sub 1. Sub 1 owned all of Sub 2. Sub 2 owned all of Sub 3 and Sub 4. Sub 3
owned approximately a percent of Sub 8’s outstanding common stock. Sub 4 owned all
of Sub 5. Sub 5 owned all of Sub 6, Sub 7, and certain other subsidiaries. Sub 6 owned
approximately b percent of Sub 8’s outstanding common stock. Sub 7 owned
approximately c percent of Sub 8’s outstanding common stock and all of the equity of
DE, an entity disregarded from its sole owner for federal income tax purposes (a
“disregarded entity”). Through DE, Sub 7 owned an additional approximately d percent
of Sub 8’s outstanding common stock. The remaining approximately e percent of Sub
8’s outstanding common stock is publicly traded. Collectively, members of the Parent
Group owned more than 80% of Sub 8’s outstanding common stock.
As a result of past restructurings, Sub 5 has deferred intercompany gain under
Treas. Reg. § 1.1502-13 (the “DIG”). Prior to Date 1, Sub 5 owned all of Sub 8. The DIG
resulted from Sub 5’s distribution of a portion to the stock of Sub 8 (the “DIG Stock”) to
Sub 4 in a transaction to which section 311(b) of the Code applied (the “Year 1
Distribution”). The DIG Stock will, until the Downstream Merger (defined in Step 12,
infra), be owned within the Parent Group. The DIG has not been taken into account
under Treas. Reg. § 1.1502-13.
Prior to the Proposed Transaction, certain transactions with respect to the stock
of Sub 8 may cause Sub 8 to no longer be a member of the Parent Group (a
“Deconsolidation Event”).
Proposed Transaction
Parent intends to engage in the Proposed Transaction for what are represented
to be valid business reasons. Step 1 through Step 6 of the Proposed Transaction may
occur in a different order than presented. The relevant steps of the Proposed
Transaction are set forth below:
1) Sub 6 and Sub 7 will each liquidate into its respective owner (the “Sub 6
Liquidation” and the “Sub 7 Liquidation,” respectively). Each liquidation will be
effected by either a state-law merger of the subsidiary into its sole owner or by
converting the subsidiary into a limited liability company (“LLC”) that is treated as
a disregarded entity (such a transaction, a “Liquidating Transaction”).
2) Sub 5 and certain of its subsidiaries (other than Sub 8 and, potentially, certain
other subsidiaries) will each liquidate into its respective owner in a Liquidating
Transaction (the “Sub 5 Liquidations”). If the liquidation of Sub 5 is effected by
converting Sub 5 into an LLC, then the resulting LLC will distribute all of its stock
of Sub 8 and its interest in DE, and may distribute the stock of one or more
corporate subsidiaries (the “Distributed Subsidiaries”), to Parent, through any
disregarded entities as necessary, in a transaction or transactions intended to be
disregarded for federal income tax purposes. This distribution will occur after the
completion of Step 3 through Step 7.
3) Sub 4 will liquidate into its owner in a Liquidating Transaction (the “Sub 4
Liquidation”).

4) Sub 3 will liquidate into its owner in a Liquidating Transaction (the “Sub 3
Liquidation”). If the liquidation of Sub 3 is effected by converting Sub 3 into an
LLC, then the resulting LLC will distribute all of its stock of Sub 8 to Parent,
through any disregarded entities as necessary, in a transaction or transactions
intended to be disregarded for federal income tax purposes. This distribution will
occur after the completion of Step 3 through Step 6.
5) Sub 2 will liquidate into its owner in a Liquidating Transaction (the “Sub 2
Liquidation”).
6) Sub 1 will liquidate into its owner in a Liquidating Transaction (the “Sub 1
Liquidation”)
7) One or more disregarded entities owned by Sub 5 may elect to be classified as a
corporation for federal income tax purposes.
8) Parent Owner will form New Parent, a domestic corporation. Parent Owner will
then contribute all of the stock of Parent to New Parent in exchange for all of the
stock of New Parent.
9) New Parent will form Parent LLC, an LLC treated as a disregarded entity. Parent
will then merge with and into Parent LLC, with Parent LLC surviving (together
with Step 8, the “Parent Reorganization”).
10) Parent LLC will distribute all of its stock of Sub 8 and its interests in DE 1, and
may distribute the stock of one or more Distributed Subsidiaries, to New Parent
in a transaction intended to be disregarded for federal income tax purposes.
11) New Parent will sell or otherwise dispose of all of the equity of Parent LLC.
12) Sub 8 will form Merger LLC, an LLC treated as a disregarded entity. New Parent
will then merge with and into Merger LLC, with Merger LLC surviving (the
“Downstream Merger”).
Representations
Parent has made the following representations in connection with the Proposed
Transaction:
1) Each of the Sub 1 Liquidation, Sub 2 Liquidation, Sub 3 Liquidation, Sub 4
Liquidation, Sub 5 Liquidations, Sub 6 Liquidation, and Sub 7 Liquidation will
qualify as a liquidation under section 332.
2) The Parent Reorganization is a reorganization described in section 368(a)(1)(F)
and will qualify as a reverse acquisition within the meaning of Treas. Reg.
§1.1502-75(d)(3).
3) But for the issue of whether the Downstream Merger will satisfy the continuity of
business enterprise requirement under Treas. Reg. §§ 1.368-1(b) and (d), the
Downstream Merger is a reorganization described in section 368(a)(1)(A) and will
qualify as a reverse acquisition within the meaning of Treas. Reg. § 1.1502-
75(d)(3).

4) Sub 8 will qualify for an automatic waiver pursuant to Rev. Proc. 2002-32, 2002-
20 I.R.B. 959, and intends to request such relief in the event of a Deconsolidation
Event.
5) The Parent Group will not terminate at any time before the effective date of the
Downstream Merger.
6) The Parent Group holds, and will continue to hold, the DIG Stock until the
effective date of the Downstream Merger.
7) Transactions taken with respect to the stock by Sub 8, including any transactions
resulting in a Deconsolidation Event, will be undertaken for valid business
reasons.
8) The effects of the Year 1 Distribution have not previously been, and no event
would have resulted in the Year 1 Distribution being, reflected, directly or
indirectly, on the Parent Group’s consolidated return.
9) The Parent Group has not derived, and no taxpayer will derive, any federal
income tax benefit from the Year 1 Distribution that gave rise to the DIG.
Rulings
Based solely on the information submitted and the representations set forth
above, we rule as follows:
1) Provided that Sub 8 requests relief pursuant to Rev. Proc. 2002-32, 2002-20
I.R.B. 959, in the event of a Deconsolidation Event, the DIG is redetermined to
be excluded from gross income under Treas. Reg. § 1.1502-13(c)(6)(ii)(D).
2) The Downstream Merger will satisfy the continuity of business enterprise
requirement under Treas. Reg. §§ 1.368-1(b) and (d), notwithstanding any
Deconsolidation Event.
Caveats
Except as expressly provided herein, no opinion is expressed or implied
concerning the tax consequences of any aspect of the Proposed Transaction or any
completed 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) of the
Code provides that it may not be used 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 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 (PLR-113230-20) of this letter ruling.
Sincerely,

                                 Austin Diamond-Jones
                                 Senior Technician Reviewer, Branch 1
                                 Office of Associate Chief Counsel (Corporate)

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