A transaction's amount realized included the present value of a guarantee

Plain-English summary

Two corporations proposed a transaction in which one would become the other's member and receive control rights, provide future services at arm's-length prices, and make a cost-savings guarantee. The parties would not exchange cash at closing, and the new member would receive no economic rights in the other corporation. The IRS concluded that the exchange was a disposition of property under section 1001. It ruled that the requesting corporation's amount realized would include the present value, if any, of the cost-savings guarantee. The IRS did not determine that present value or address section 482, other consideration, or whether the transaction had a valid business purpose.

Ruling snapshot

• Question: What amount would the requesting corporation realize from the exchange of membership and control rights, services, and a cost-savings guarantee?
• Outcome: approved
• Key authorities: IRC §§ 61(a)(3), 1001(a), 1001(b), and 1011; Treas. Reg. § 1.1001-1

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 202352010                                              Third Party Communication: None
Release Date: 12/29/2023                                       Date of Communication: Not Applicable
Index Number: 61.00-00, 1001.00-00
                                                               Person To Contact:
----------------                                               ----------------------, ID No. -----------------
------------------------------------                           Telephone Number:
-----------------------------------------------                ---------------------
------------------------------------------------------         Refer Reply To:
-----------------------------                                  CC:ITA:B05
                                                               PLR-108356-23
                                                               Date:
                                                               September 29, 2023



        TY: -------

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

This responds to a letter ruling request by the taxpayer, ------ ------------------------------------
-------------------------------------------------- (TIN: ----------------) (-----------), dated -----------------
-------, and as subsequently amended, regarding the application of sections 61 and 1001
of the Internal Revenue Code (Code) to the Proposed Transaction (described below). --
----------- requests a ruling that it will be treated as receiving an amount realized from the
Proposed Transaction measured by the present value, if any, of the ----------- Guarantee
(described below).

                                                    FACTS

----------- is a ----------------------------------- company incorporated under the laws of ---------
------------ and is treated as a corporation for federal income tax purposes. ---------- is a -
--------------------------------------- corporation incorporated under the laws of -----------. ------
---------- is treated as a corporation for federal income tax purposes. Both -----------and --
---------- are engaged in providing ------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------- ----
-----------------------------------------------. ----------- and ---------- each use the calendar year
as their respective annual accounting period and an accrual method of accounting for
maintaining books and filing federal income tax returns.

, ---------- is governed by a board of directors (the Board). Board vacancies are filled
based on the vote of existing Board members. In the event of dissolution, liquidation, or
change from its current form, the value of ------------ assets in excess of its obligations
and other liabilities would be distributed in an equitable manner determined by the
Board, subject to approval by the -----------------------.

For what are represented to be valid business purposes, ----------- and ---------- propose
to engage in the following transaction.

PLR-108356-23                                             2


   (1) ---------- will admit ----------- as its member. Such membership will not be
       transferable. ---------- will amend its corporate governance documents to reflect -
       ------------- membership in ----------. As the member of ----------, ----------- will have
       the right, among other things, to approve all directors of the Board of ----------
       (the Control Right).

   (2) ----------- will provide ----------, --------------------------------------------------------------------
       -----------------------------------------------------------------------------------------------------------
       ------------------------------------------- for an arms-length charge (the Future Service
       Transactions). The expected pricing on the Future Service Transactions is
       expected to yield cost savings to ---------- over their current pricing arrangements
       with current service providers. Similarly, ----------- is expected to be able to
       provide such cost savings to ---------- due to efficiencies of scale.

   (3) ----------- will agree to the ----------- Guarantee, defined below.

The elements described in (1) through (3) above are collectively referred to as the
Proposed Transaction. Neither ----------- nor ---------- will pay any cash consideration at
closing.

During the -------------- period following the closing of the Proposed Transaction, -----------
expects to realize at least $------------- in cost savings attributable to Future Service
Transactions. If ---------- does not realize at least $------------- in such cost savings, then
at the end of the -------------- period, ----------- will pay ---------- the excess, if any, of $--- --
--------- over the cost savings actually realized during the -------------- period (the -----------
--------------------------------------------------------------------------------------------------------------------
Guarantee).

---------- will pay for all future services provided by ----------- and its subsidiaries and
affiliates in accordance with the arm’s length standard, as monitored by applicable
regulators of -------------------------------------------------------------------.

------------- status as the member of ---------- will not entitle ----------- to any economic
rights in ----------. Specifically, ----------- will not have the right to participate in the of ------
----------, nor will it have the right to share in the of ---------- in the event of ------------
liquidation. In addition, ---------- will not have access to the of ----------- as a result of the
Proposed Transaction.

Under the relevant terms of the -----------------------------------------------, ----------- will also
be responsible for maintaining the of ---------- following the Proposed Transaction (the ---
------------------------). It is not expected that ---------- will be at the time of closing of the
Proposed Transaction.

PLR-108356-23                                    3

Following the Proposed Transaction, ----------’s Board will consist of --- directors, ------of
whom will be appointed by -----------. The remaining -------- directors will consist of: (a) --
----------- residents; (b) ----------; and (c) the ---------- CEO, all ---------of whom will be
nominated by the Board and approved by ----------- in its capacity as the sole member of
----------. Accordingly, once ----------- becomes the member of ----------, ----------- will have
final authority to approve all members of the Board. Each director will be entitled to one
vote on all issues typically submitted for review and approved by boards of directors of -
------------------------------------------------------------------- corporations. However, certain
actions will also require the approval of ----------- as the member of ----------.

----------- represents that:

    1. The Proposed Transaction will not result in a ----------------; and

    2. The Proposed Transaction will not result in ---------- becoming an includible
     corporation (within the meaning of § 1504(b)) with respect to the affiliated group
     of which ----------- is the common parent.

                                   REQUESTED RULING

As a result of the Proposed Transaction, ----------- will be treated as receiving an amount
realized measured by the present value, if any, of the ----------- Guarantee.

                                   LAW AND ANALYSIS

Section 61(a) provides that, except as otherwise provided by subtitle A of the Code,
gross income means all income from whatever source derived. Specifically, gross
income includes, but is not limited to, gains from dealings in property. See
sec. 61(a)(3).

Section 1001(a) provides that the gain from the sale or other disposition of property is
the excess of the amount realized therefrom over the adjusted basis provided in § 1011
for determining gain and that the loss is the excess of the adjusted basis provided in
§ 1011 for determining loss over the amount realized.

Section 1001(b) provides that the amount realized from the sale or other disposition of
property is the sum of any money received plus the fair market value of property (other
than money) received.

In Cottage Sav. Ass’n. v. Commissioner, 499 U.S. 554, 559 (1991), the Supreme Court
described the language of § 1001(a) as providing a "straightforward test for realization:
to realize a gain or loss in the value of property, the taxpayer must engage in a "sale or
other disposition of [the] property." Upholding section 1.1001-1 of the Income Tax
Regulations as a reasonable interpretation of section 1001(a), the Court held that "an

PLR-108356-23                                 4

exchange of property for other property differing materially in kind or in extent"
constituted a disposition of property. See id. at 560-562.

The exchange under the Proposed Transaction between ----------- and ----------
constitutes a disposition of property for each party for purposes of section 1001(a). As
a result, ----------- will realize gain or loss from the Proposed Transaction.

In United States v. Davis, 370 U.S. 65 (1962), the Supreme Court held that the transfer
of appreciated stock by a former husband to his former wife in an arm’s length
transaction was a realization event under § 1001(a). The amount realized by the
husband was the fair market value of the property received (the former wife’s
relinquished marital rights), which were presumed to be equal in value to the property
given in exchange by the husband (the appreciated stock). The husband’s realized
(and recognized) gain was the difference between his amount realized and his adjusted
basis in the appreciated stock. Although the specific result in divorce cases has been
changed by enactment of § 1041, the Davis rationale continues to apply to arm’s length
transfers of property.

Accordingly, we conclude that ----------- will be treated as receiving an amount realized
under § 1001(a) from the Proposed Transaction measured by the present value, if any,
of the ----------- Guarantee.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter. Specifically, we express no opinion on the application of section 482 to the
Proposed Transaction or the consequences thereof; on the present value, fair market
value, or other value of the ----------- Guarantee or any other consideration provided in
the Proposed Transaction; or on whether there exists a valid business purpose for the
Proposed Transaction.

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, copies of this letter are
being sent to ------------- 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.

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

PLR-108356-23                                5

by an appropriate party. While this office has not verified any of the material submitted
in support of the request for a ruling, it is subject to verification on examination.

                                        Sincerely,



                                        Sue-Jean Kim
                                        Senior Technician Reviewer, Branch 5
                                        Office of Associate Chief Counsel
                                        (Income Tax & Accounting)

cc: -------------------
    --------------------