PLR 200537026: IRS rules on contributed debt in corporate restructuring

Number

200537026

Outcome

Approved

Document type

Private Letter Ruling

IRS subject

Indebtedness Contributed to Capital; Debt Satisfied by Corporation's Stock

Topics

Income and deductions

Code sections

§ 108, § 6110

Ruling dated

June 17, 2005

Publicly released

September 16, 2005

Source

View Official PDF

Apply this to your situation

This page covers one taxpayer's ruling, issued in 2005, which can't be cited as precedent. Ask about your situation and see what the current Code and IRS guidance say, with citations.

Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.

About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.

View official IRS release (PDF)

Plain-English summary

As part of a court approved bankruptcy plan, two foreign corporate shareholders contributed loans owed by a U.S. subsidiary during a restructuring of its ownership. The IRS ruled that one loan was a capital contribution and was deemed satisfied for the creditor's adjusted basis in the debt under section 108(e)(6). It also ruled that the subsidiary would not recognize income from cancellation of accrued interest on that loan to the extent payment would have produced a deduction. For the other loan, the subsidiary was treated as satisfying the debt for the fair market value of stock issued to the creditor under section 108(e)(8). The rulings rested on the submitted facts and representations and did not resolve other tax consequences of the restructuring.

Ruling snapshot

Question: How would two shareholder loans be treated when contributed or exchanged for stock in the subsidiary's restructuring?
Outcome: Approved; the IRS provided the requested debt satisfaction and accrued interest rulings.
Key authorities: IRC §§ 108(e)(2), 108(e)(6), 108(e)(8).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200537026
Third Party Communication: None
Release Date: 9/16/2005
Date of Communication: Not Applicable
Index Number: 108.04-03, 108.04-05
Person To Contact:
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---------------------, ID No. -------------
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Telephone Number:
---------------------------------------------- ---------------------
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Refer Reply To:
CC:CORP:BO1
PLR-165780-04
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Date:
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June 17, 2005

New Foreign Parent = --------------------------
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Old Foreign Parent = --------------------
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Business A = ----------------------------------------------------------------------
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Foreign Sub 1 = -------------------------------------
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Foreign Sub 2 = ----------------------------------------------------------------------
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Foreign Sub 3 = -------------------------------------
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Foreign Sub 4 = --------------------------------------
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Sub 1 = -------------------------------------------------
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Sub 2 = --------------------------
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---------------------------------------------------------------------
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PLR-165780-04
2

Loan 2 = ----------------------------------------------------------------------
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Worldwide Group = ----------------------------------------------------------------------
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Country X = ---------------------
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Country Y = ----- ----------------
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State X = -------------

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

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

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

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

Date 5 = ---------------------------

a = ----

b = --

c = ------------------------------------

d = ------------------------------------

e = -----------------------------------

f = ----------------------------------

Dear -----------------------

This letter responds to your December 23, 2004 request for rulings on certain federal income tax consequences of the restructuring of certain indebtedness of Sub 1 held by Sub 1’s former corporate shareholders (the “Sub 1 Debt Restructuring,” as

PLR-165780-04
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defined below). Additional information was submitted in letters dated March 10, 2005 and May 27, 2005. The information provided is summarized below.

The rulings contained in this letter are based upon 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 material submitted in support of the request for rulings. Verification of the information, representations, and other data may be required as part of the audit process.

Summary of Facts

New Foreign Parent, a Country X corporation, has been the common parent of Worldwide Group since Date 1, when New Foreign Parent acquired all of the stock of Old Foreign Parent, formerly the common parent of Worldwide Group, in a holding company formation. Worldwide Group conducts Business A.

Before the Sub 1 Debt Restructuring, Old Foreign Parent owned all the stock of Foreign Sub 1, a Country X corporation. Old Foreign Parent and Foreign Sub 1 owned all the stock of Foreign Sub 2, a Country X corporation. Foreign Sub 2 owned all of the stock of Foreign Sub 3, a Country Y corporation. Foreign Sub 3 owned all of the stock of Foreign Sub 4, a Country X corporation.

Foreign Sub 3 owned a percent and Foreign Sub 4 owned b percent of the stock of Sub 1, a State X corporation. Sub 1 has historically operated the Worldwide Group’s business in the United States.

Sub 1, Foreign Sub 3, and Old Foreign Parent each filed a separate Chapter 11 bankruptcy petition on Date 2. Sub 1 owed $c to Foreign Sub 3, consisting of $d of principal and $e of accrued interest (Loan 1). Sub 1 owed Foreign Sub 4 $f, consisting entirely of principal, pursuant to a debtor-in-possession financing arrangement (Loan 2).

Pursuant to the Plan of Reorganization approved by the bankruptcy court, the following transactions were consummated on Date 3 (collectively, the Sub 1 Debt Restructuring):

(i) Loan 1 and Loan 2 were contributed to the capital of Sub 1.

(ii) Foreign Sub 3 then transferred its a percent interest in Sub 1 to Foreign Sub 4.

(iii) All of the outstanding stock of Sub 1 was then cancelled.

(iv) Sub 1 then issued new shares to Foreign Sub 4 in exchange for the contribution of Loan 2.

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Immediately after the foregoing steps, Foreign Sub 4 owned all of the stock of Sub 1.

On Date 4, Sub 1 was transferred to New Foreign Parent. On Date 5, Sub 1 was transferred to a newly formed U.S. subsidiary of New Foreign Parent, Sub 2, in a transaction that Sub 2 represents was a reverse acquisition within the meaning of Treas. Reg. § 1.1502-75(d)(3).

Representations

Sub 2 makes the following representations in connection with the Sub 1 Debt Restructuring:

(a) Loan 1 qualified as debt for federal income tax purposes and was treated by Foreign Sub 3 and Sub 1 as debt of Sub 1 for all U.S. federal income tax purposes.

(b) Loan 2 qualified as debt for federal income tax purposes and was treated by Foreign Sub 4 and Sub 1 as debt of Sub 1 for all U.S. federal income tax purposes.

(d) Loan 1 and Loan 2 each had a positive fair market value at the time they were contributed to the capital of Sub 1.

Rulings

Based solely on the information submitted and the representations set forth above, we rule as follows:

(1) Foreign Sub 3’s contribution of Loan 1 to Sub 1 will be treated as a contribution to the capital of Sub 1, and Sub 1 will be deemed to satisfy Loan 1 for an amount equal to Foreign Sub 3’s adjusted basis in the debt (§108(e)(6)).

(2) Sub 1 will not recognize income from the discharge of its obligation to pay accrued interest on Loan 1 to Foreign Sub 3 to the extent that payment of such interest would have given rise to a deduction (§ 108(e)(2)).

(3) Sub 1 will be treated as having satisfied Loan 2 with an amount of money equal to the fair market value of the Sub 1 stock issued to Foreign Sub 4 in exchange for the contribution of Loan 2 (§ 108(e)(8)).

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Caveats

We express no opinion about the tax treatment of any transaction described above under other provisions of the Code and regulations or the tax treatment of any condition existing at the time of, or effect resulting from, any of these transactions that is not specifically covered by the above rulings.

Procedural Matters

This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) provides that it may not be used or cited as precedent.

A copy of this ruling letter must be attached to the federal income tax return of each party involved in the Sub 1 Debt Restructuring for the taxable year in which the Sub 1 Debt Restructuring was completed.

Under a power of attorney on file in this office, a copy of this letter has been sent to your authorized representative.

Sincerely yours,

_______
Michael J. Wilder
Senior Technician Reviewer, Branch 1
Office of Associate Chief Counsel
(Corporate)

cc:

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