PLR 200843001: Rescinded stock sale did not change disregarded entity status

Plain-English summary

A foreign entity intended to be classified as disregarded from its formation date under a separately granted late-election ruling. Its sole shareholder later sold part of the entity’s stock to another corporation, then rescinded the sale within the same tax year. The parties returned to the positions they would have occupied if the sale had never occurred. Applying the rescission principles in Revenue Ruling 80-58, the IRS disregarded the stock sale for federal income tax purposes. If the entity’s classification election was valid and had not otherwise changed, it continued as a disregarded entity throughout the sale and rescission period, and the rescission was not treated as liquidating a partnership.

Ruling snapshot

• Question: Did a same-year sale and rescission of part of the entity’s stock interrupt its disregarded status or cause a partnership liquidation?
• Outcome: Approved. The entity remained disregarded, and the rescission was not a partnership liquidation, subject to a valid classification election.
• Key authorities: IRC §§ 61, 1001; Rev. Rul. 80-58

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

Number: 200843001                                             Third Party Communication: None
Release Date: 10/24/2008                                       Date of Communication: Not Applicable
                                                                Person To Contact:
Index Number: 61.00-00, 1001.00-00                              -------------------, ID No. -------------
                                                                Telephone Number:
                                                                ---------------------
 ----------------------------------------                       Refer Reply To:
--------------------------------------------------------------- CC:PSI:02
------------                                                    PLR-100808-08
--------------------------------------------------------        Date:
---------------------------------                               July 02, 2008
 ------------------------




 X        =         --------------------------------------------------------------------------------
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 A        =         ----------------------------------------------------
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 B        =         --------------------------------------------
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 Country 1         =        ------------
 Country 2         =        -----------
 State             =        -------------
 Date 1            =        -------------------
 Date 2            =        ---------------------
 Date 3            =        --------------------------
 a                 =        --

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

       This responds to a letter dated December 20, 2007, submitted on behalf of X,
 requesting a ruling on the status of X as a disregarded entity.

          The information submitted states that X was formed under the laws of Country 1
 on Date 1. X has been granted, in a separate private letter ruling, an extension of time
 to file Form 8832, Entity Classification Election, to be treated as a disregarded entity
 effective Date 1. X’s original sole shareholder was A, a State corporation.
 Subsequently, on Date 2, A sold approximately a% of the Class A common stock of X to
 B, a Country 2 corporation. This sale of stock to B was rescinded on Date 3. Both Date
 2 and Date 3 occurred during the same taxable year.
PLR-100808-08                                 2

        The Service recognizes that a rescission may be given full effect in abrogating a
transaction under certain conditions. When these conditions are met, the transaction is
disregarded for federal income tax purposes. In this connection, Rev. Rul. 80-58, 1980-
1 C.B. 181, states the general legal principles pertaining to the doctrine of rescission in
the following terms:

       The legal concept of rescission refers to the abrogation, canceling, or
       voiding of a contract that has the effect of releasing the contracting parties
       from further obligations to each other and restoring the parties to the
       relative positions that they would have occupied had no contract been
       made. A rescission may be effected by mutual agreement of the
       parties, by one of the parties declaring a rescission of the contract without
       the consent of the other if sufficient grounds exist, or by applying to the
       court for a decree of rescission.

        The revenue ruling states that there are at least two conditions that must be
satisfied for the remedy of rescission to apply to disregard a transaction for federal
income tax purposes. First, the parties to the transaction must return to the status quo
ante; that is, they must be restored to "the relative positions they would have occupied
had no contract been made." Second, this restoration must be achieved within the
taxable year of the transaction.

        X, A, and B were restored to the relative positions they would have occupied had
X’s stock never been sold to B. In addition this restoration occurred within the same
taxable year as the original transaction. Therefore, the legal doctrine of rescission
applies to (1) disregard the sale of X stock to B and (2) prevent any change in the entity
classification of X arising from the sale of X’s stock to B.

        Based solely on the facts submitted and representations made, we rule that,
provided that X makes a valid entity classification election, pursuant to the above-
mentioned private letter ruling, to be treated as a disregarded entity effective Date 1,
and provided that this election was not otherwise changed since this effective date, X
will be treated as continuing to be a disregarded entity during the period from Date 2 to
Date 3, and thereafter. We further rule that the rescission of the stock sale will not be
treated as the liquidation of a partnership on Date 3.

       Except as expressly provided herein, we express or imply no opinion concerning
the federal tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

      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.
PLR-100808-08                                 3


       In accordance with a power of attorney on file with this office, a copy of this letter
is being sent to X’s authorized representative.

                                                  Sincerely,


                                                  J. Thomas Hines
                                                  Chief, Branch 2
                                                  Office of Associate Chief Counsel
                                                  (Passthroughs and Special Industries)

Enclosures (2):
      Copy of this letter
      Copy for § 6110 purposes




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