Deferred intercompany stock-distribution gain is excluded after subsidiary merger

Plain-English summary

A consolidated group acquired a subsidiary and its lower-tier subsidiary in a taxable stock purchase without a section 338 election. The acquired parent later distributed the lower-tier subsidiary’s stock to the group parent, creating gain that was deferred under the consolidated intercompany transaction rules. After the lower-tier company merged back into the acquired parent, the group parent sold the surviving company at a loss. The IRS ruled that the surviving company’s stock was not a successor asset to the distributed stock, so the deferred gain was taken into account after the merger. It then exercised the discretionary rule to redetermine that gain as excluded from gross income because the transaction produced no tax benefit. The excluded amount would not enter any member’s earnings and profits or count as tax-exempt income.

Ruling snapshot

• Question: How should deferred intercompany gain from a subsidiary-stock distribution be treated after the distributed subsidiary merged into the distributing member?
• Outcome: approved, the gain is taken into account and redetermined as excluded from gross income
• Key authorities: Treas. Reg. §§ 1.1502-13, 1.1502-32, and 1.1502-36; IRC §§ 332 and 368

Full text (IRS public release)

Internal Revenue Service                                        Department of the Treasury
                                                                Washington, DC 20224

Number: 202248009                                               Third Party Communication: None
Release Date: 12/2/2022                                         Date of Communication: Not Applicable
Index Number: 1502.00-00, 1502.13-00,
              1502.13-01                                        Person To Contact:
                                                                -------------------------,
----------------------------------------------                  ID No. -----------------
------------------------------------------------------------    Telephone Number:
-------------                                                   --------------------
------------------------                                        Refer Reply To:
--------------------------                                      CC:CORP:BO2
                                                                PLR-111834-22
                                                                Date:
                                                                September 08, 2022




Legend

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

Sub 1                             =        -----------------------------
                                           ----------------------------------
                                           -----------------------

Sub 2                             =        -------------------------------
                                           ------------------------------
                                           ------------------------

Sub 3                             =         --------------------
                                           ------------------------------
                                           -----------------------

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

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

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

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

a                                 =        -------------
PLR-111834-22                                  2


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

This letter responds to your representative’s letter dated June 13, 2022, requesting
rulings under § 1.1502-13 of the Income Tax Regulations. The material information
submitted 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.

                                            Facts

Parent is the common parent of an affiliated group of corporations that files a
consolidated return for U.S. federal income tax purposes (the “Parent Group”).

On Date 1, Parent acquired all of the stock of Sub 1 in a fully taxable transaction. No
section 338 election was made with respect to the acquisition. Following the acquisition,
Sub 1 and its wholly owned subsidiary, Sub 2, became members of the Parent Group.

On Date 2, the following transactions occurred:

    (i)     Sub 1 distributed all of its Sub 2 stock to Parent (“Sub 2 Distribution”); and

    (ii)    Sub 3 (a wholly owned subsidiary of Parent) merged with and into Sub 1 with
            Sub 1 surviving (“Sub 3 Merger”). No stock was issued in the merger.

Sub 1 recognized approximately $a of gain on the Sub 2 Distribution, and the gain
(“DIG”) was deferred under Treas. Reg. § 1.1502-13.

                                 Completed Transactions

On Date 3, Sub 2 merged with and into Sub 1 with Sub 1 surviving (“Sub 2 Merger”). No
stock was issued in the merger.

On Date 4, Parent sold all of its Sub 1 stock to an unrelated buyer at a loss (“Sub 1
Sale”).

                                      Representations

    (a)     The Sub 2 Merger and Sub 3 Merger each qualified as a reorganization under
            section 368(a)(1)(A).
PLR-111834-22                             3

  (b)   Following the Sub 2 Merger, Parent’s aggregate basis in Sub 1 is the same
        as it would have been if, instead of the Sub 2 Distribution on Date 2 and the
        Sub 2 Merger on Date 3, Sub 2 had liquidated directly into Sub 1 in a
        transaction qualifying under section 332.

  (c)   The existence of separate basis blocks in Sub 1 stock has never affected the
        taxable income or tax liability of any taxpayer.

  (d)   Provided the DIG is redetermined to be excluded from gross income, Parent’s
        loss from the Sub 1 Sale was the same as it would have been if Sub 2 had
        liquidated directly into Sub 1 in a transaction qualifying under section 332
        (taking into account the application of Treas. Reg. § 1.1502-36 in each of the
        two scenarios).

  (e)   The effects of the Sub 2 Distribution have not previously been reflected,
        directly or indirectly, on the Parent Group’s consolidated return.

  (f)   The Parent Group has not derived, and no taxpayer will derive, any federal
        income tax benefit from the Sub 2 Distribution that gave rise to the DIG or
        from the redetermination of the DIG (including any adjustment to basis in
        member stock under Treas. Reg. § 1.1502-32).

  (g)   At the time of the Sub 1 Sale, the value of the outstanding Sub 1 stock
        exceeded Sub 1’s net inside attribute amount (as defined in Treas. Reg.
        § 1.1502-36(d)(3)(iii)(B)).

                                      Rulings

    1.    The context does not require treating Sub 1 stock as a successor asset to
        Sub 2 stock within the meaning of Treas. Reg. § 1.1502-13(j)(1), and Parent
        takes the DIG into account following the Sub 2 Merger.

    2.    The DIG is redetermined to be excluded from gross income under the
        Commissioner’s Discretionary Rule of Treas. Reg. § 1.1502-13(c)(6)(ii)(D).
        Accordingly, the DIG is excluded from the gross income of the Parent Group
        for the group’s consolidated return year that includes the day of the Sub 2
        Merger.

    3.    The amount of the DIG that is redetermined to be excluded from gross
        income will not be taken into account as earnings and profits of any member
        of the Parent Group and will not be treated as tax-exempt income of any
        member of the Parent Group under Treas. Reg. § 1.1502-32(b)(2)(ii).


                                      Caveats
PLR-111834-22                                  4


Except as expressly provided herein, no opinion is expressed or implied concerning the
tax treatment of the above completed transactions under any provision of the Code and
regulations or the tax treatment of any condition existing at the time of, or effects
resulting from, the completed transactions that is not specifically covered by the above
rulings.

                                 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. 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.

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

                                       Sincerely,


                                       _____________________
                                       Julie T. Wang
                                       Senior Counsel, Branch 2
                                       Office of the Associate Chief Counsel (Corporate)




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