How commonly controlled partnerships count toward the section 7874 inversion ownership fraction

Plain-English summary

Section 7874 is the anti-inversion rule: when a foreign corporation
acquires a U.S. business, the tax law measures how much of the new
foreign parent the former U.S. owners hold (the "ownership fraction"). If
that fraction is high enough, the foreign parent is treated as a U.S.
corporation or otherwise loses inversion benefits. A special rule,
section 7874(c)(5), can treat commonly controlled partnerships as a
single domestic partnership, which could sweep more owners into the
fraction. Here, a group of individuals owned several foreign
partnerships and, indirectly, a U.S. LLC taxed as a partnership, all
under common control. As part of an integrated plan, they reorganized and
contributed interests to a new foreign holding company that elected to be
treated as a corporation, which counted as acquiring substantially all of
the U.S. partnership's business. The taxpayer asked whether section
7874(c)(5) forces all the foreign and domestic partnerships to be treated
as one domestic partnership when computing the ownership fraction. The
IRS ruled that it does not: only a proportionate slice of the new foreign
holding company's stock, the part traceable to the foreign partnership's
indirect interest in the U.S. business relative to all its assets, counts
as held "by reason of holding an interest in a domestic partnership." The
rest of the stock tied to the foreign partnerships does not count. This
matters because it limits how much of the deal counts toward the
inversion threshold, helping the parties avoid inversion treatment.

Ruling snapshot

• Question: Does section 7874(c)(5) cause several commonly controlled
  foreign partnerships and a domestic partnership to be treated as one
  domestic partnership when computing the section 7874 ownership fraction?
• Outcome: Approved (ruling issued; only a proportionate portion of
  the new foreign parent's stock counts as domestic-partnership stock)
• Key authorities: IRC § 7874(a)(2)(B), (c)(5); Treas. Reg.
  § 1.7874-2(f)

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 202237005                                             Third Party Communication: None
Release Date: 9/16/2022                                       Date of Communication: Not Applicable
Index Number: 7874.00-00, 7874.01-00
                                                              Person To Contact:
----------------                                              ---------------------, ID No. -----------------
-------------                                                 Telephone Number:
---------------------------------------------------------     --------------------
-----------------------------                                 Refer Reply To:
------------------------------                                CC:INTL:B04
                                                              PLR-119745-21
                                                              Date:
                                                              June 21, 2022

Legend

FP1                                    =     [redacted]
FP2                                    =     [redacted]
FP3                                    =     [redacted]
DP                                     =     [redacted]
US Blocker                             =     [redacted]
New Foreign Holdco                     =     [redacted]
Foreign Individual                     =     [redacted]
 Foreign Founders              =    [redacted]
 Partners                      =    [redacted]
 Investor                      =    [redacted]
 Country A                     =    ---------
 Country B                     =    ----
 State A                       =    ------------
 Date A                        =    ------------------
 Date B                        =    ------------------
 Date C                        =    ------------------
 Date D                        =    ----------------------
 a                             =    ----
 b                             =    -- ----

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


This letter responds to your authorized representative's letter dated August 19, 2021,
requesting rulings under section 7874, relating to expatriated entities and their foreign
parents. Specifically, for purposes of determining the ownership fraction under section
7874(a)(2)(B)(ii) on the facts described in the ruling request, a ruling is sought to
determine the application of section 7874(c)(5) with respect to certain foreign
partnerships and a domestic partnership that are under common control. The material
information submitted in that request and in subsequent correspondence is summarized
below.

The ruling contained in this letter is based on facts and representations submitted by
you and your representatives 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 of the request for a ruling. Verification of the information,
representations, and other data may be required as part of the audit process.

                                   Summary of Facts


The description below reflects the relevant organizational structure immediately before
the Proposed Transaction (defined below).

Partners and Foreign Founders, all of whom are individuals, together own all of the
interests in FP1, a Country A entity treated as a partnership for federal income tax
purposes, and together own all of the interests in FP2, a Country B entity treated as a
partnership for federal income tax purposes. FP2, in turn, owns certain interests in FP3,
a Country B entity treated as a partnership for federal income tax purposes.

Partners and Foreign Founders also together indirectly own a percent of the interests in
DP, a State A limited liability company treated as a partnership for federal income tax
purposes, and FP1 owns the remaining b percent. None of FP1, FP2 or FP3 directly or
indirectly own interests in any domestic corporation or domestic partnership other than
US Blocker (described below) or DP, or directly or indirectly engage in the conduct a
trade or business within the United States, other than through DP. DP, FP1, FP2, and
FP3 are each under common control as that term is described in section 7874(c)(5).

                                Proposed Transaction

The following steps (collectively, the "Proposed Transaction") have been or will be
effectuated as part of a single, integrated plan:

      1. On Date A, Foreign Individual, who is also a Foreign Founder, formed New
         Foreign Holdco, a Country B entity which made an entity classification
         election to be disregarded as an entity separate from its owner for federal
         income tax purposes effective as of its date of formation.

      2. On Date C, FP1 formed US Blocker, a State A entity that made an entity
         classification election to be a corporation for federal income tax purposes
         effective as of its date of formation.

      3. On Date D, Partners and Foreign Founders indirectly transferred all of the
         properties of FP2 and FP3 to FP1.

      4. On Date D, FP1 contributed its interests in DP to US Blocker in exchange for
         stock of US Blocker.

      5. On Date D, Investor transferred cash to New Foreign Holdco solely in
         exchange for interests in New Foreign Holdco.

      6. On Date D, Foreign Founders and Partners transferred their interests in FP1
         to New Foreign Holdco, in exchange for interests in New Foreign Holdco and
         cash.

       7. New Foreign Holdco will make an entity classification election to be a
          corporation for federal income tax purposes effective as of Date B, resulting in
          an acquisition by New Foreign Holdco of substantially all of the properties
          constituting a trade or business of a domestic partnership for purposes of
          section 7874(a)(2)(B) with respect to the properties constituting a trade or
          business of DP. (Steps 6 and 7 together, the "Transfer.")

                               Applicable Law and Ruling

A ruling is sought to provide that the application of section 7874(c)(5) and the
regulations under section 7874 do not result in FP1, FP2, FP3 and DP being treated as
one domestic partnership for purposes of determining the ownership fraction under
section 7874(a)(2)(B) as a result of the Proposed Transaction.

Based solely on the information submitted, we rule as follows regarding the Transfer for
purposes of section 7874(a)(2)(B):

       The stock of New Foreign Holdco held by reason of holding an interest in a
       domestic partnership, taking into account section 7874(c)(5) and the regulations
       under 7874, including Treas. Reg. 1.7874-2(f), includes a proportion of the stock
       held by reason of holding an interest in FP1 determined based on FP1's
       indirectly held interest in DP relative to FP1's interests in all its properties
       (including such indirectly held interest in DP), and does not otherwise include
       stock held by reason of directly or indirectly holding an interest in FP1, FP2, or
       FP3.

                                         Caveats

No opinion is expressed regarding the tax treatment of the Proposed Transaction under
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 Transaction that are not
specifically covered by the above ruling. In particular, no opinion is expressed or
implied regarding the application of section 7874 to the Proposed Transaction other
than as described specifically herein. Further, no opinion is expressed regarding (i) the
federal income tax classification of any of the entities involved in the Proposed
Transaction and (ii) the validity of any entity classification election made with respect to
any of the entities. In addition, this ruling is based on the facts presented and the
applicable law in effect on the date of this letter.

                                 Procedural Statements

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.

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

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 of the
letter ruling.




                                                      Sincerely,



                                                      Robert B. Williams, Jr.
                                                      Senior Counsel, Branch 4 (International)


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