PLR 200850015: a gain deferred since an old restructuring comes due on the third conversion, and is excluded from income
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This page covers one taxpayer's ruling, issued in 2008, which can't be cited as precedent. Ask about your situation and see what the current Code and IRS guidance say, with citations.
Plain-English summary
A six page private letter ruling, control number "PLR-127568-08", dated September 09, 2008 and released 12/12/2008. It is routed "CC:CORP:04" and signed by Marie C. Milnes-Vasquez, Acting Chief, Branch 4, Office of Associate Chief Counsel (Corporate). It answers a letter of June 17, 2008.
The header line reads "Index Numbers: 1502.13-00, 332.00-00", plural. That is the only plural in its release-day company. Five sibling rulings were checked before this entry was written, docs/2008/0850018.md, docs/2008/0850017.md, docs/2008/0850016.md, docs/2008/0850026.md and the letter numbered 200850014, and every one of them writes "Index Number:" singular and never the plural, even where, as in several of them, two numbers follow. Only this letter made the heading agree with its contents.
The legend runs to twenty defined terms, which is a lot for a six page letter, and two of them are the same company. Parent, Sub 1 through Sub 6, LLC 1 through LLC 4, Business A, the quantity a, Year 1, Date A through Date E, and State X. The trap sits in the middle of the history: "On Date C, Sub 5 changed its name to Sub 6." A reader counting corporations out of the legend will count one too many. The legend was built from the terms the letter uses, not from the entities that exist.
What the letter is about is a gain that has been sitting unrecognised for years and is now about to come due.
In Year 1 Parent bought Sub 1, which owned Sub 2, which owned Sub 3, and on Date A all three joined Parent's consolidated group. That same day Sub 2 distributed the Sub 3 stock up to Sub 1. Inside a consolidated group that distribution is still a taxable event on its own terms: "Sub 2 recognized gain on the distribution of the Sub 3 stock under § 311(b) of the Internal Revenue Code, and such gain was deferred under § 1.1502-13 of the Income Tax Regulations (the "Deferred Gain")." Deferred, not forgiven. The consolidated return rules park an intercompany gain and wait for the event that makes it real.
Then the group spent Date A through Date E moving the pieces around. Sub 1 passed Sub 3 up to Parent, recognising nothing. Parent dropped Sub 1 into Sub 4 in a section 351 exchange, and later dropped Sub 3 into Sub 5 in another. Sub 5 was renamed Sub 6. Sub 4 liquidated into Parent under section 332. Sub 6 converted into LLC 1, a disregarded entity, which the letter treats as one more section 332 liquidation into Parent. None of that is what triggers the gain.
The Proposed Transactions are three more conversions, each turning a corporation into a disregarded limited liability company and so each a complete liquidation for tax purposes. Sub 2 becomes LLC 2. Immediately after, Sub 1 becomes LLC 3. And then, "at least a days after the Sub 2 Conversion and the Sub 1 Conversion", Sub 3 becomes LLC 4. That gap is the only piece of deliberate timing in the plan, and the letter never says what it is for. The number of days is redacted. What can be said is that the first two conversions collapse the chain that held the Deferred Gain, and the third is held back until after they have settled.
The single ruling is one sentence, and it does two things at once. "Parent (as a successor to Sub 2 and to Sub 1 under § 1.1502-13(j)(2)(i)) will take into account the Deferred Gain on the Sub 3 Conversion (§ 1.1502-13(c)(2)(ii)), and such Deferred Gain will be determined to be excluded from gross income under § 1.1502-13T(c)(6)(ii)(C)."
Read it in order. First, the gain does come due, and it comes due on the third conversion, the one that was deliberately delayed. Sub 2, which earned the gain, no longer exists as a corporation, and neither does Sub 1; Parent inherits the position as their successor. Second, having landed the gain in Parent's hands, the ruling takes it straight back out again. The exclusion in the temporary regulation turns on the group never having got a tax benefit from the transaction that created the gain, and representation (m) is drafted to that test word for word: the group "has not and will not derive any Federal income tax benefit (within the meaning of § 1.1502-13T(c)(6)(ii)(C)) from the Completed Transactions that gave rise to intercompany gain or the redetermination of intercompany gain (including any adjustment to basis in member stock under § 1.1502-32)." Nothing was gained when the gain arose, so nothing is taxed when it matures.
Representation (o) is the one that dates the file: "On its consolidated Federal income tax return that included July 12, 1995, Parent made an election for the Parent Group under § 1.1502-13(l)(3), which applies § 1.1502-13 (effective for taxable years beginning on or after July 12, 1995) to stock elimination transactions to which prior law would otherwise apply." July 12, 1995 appears twice in the letter, and both times it is the regulation's own effective date rather than anything about the taxpayer. It survives redaction because it belongs to the regulation. Its practical effect is that a 2008 ruling depends on a choice made on a return filed more than a decade earlier, and on that election still being findable.
One extraction defect, recorded rather than repaired, since the document came from a clean text layer. The Sub 6 Conversion is defined with an opening quotation mark that never closes: the text reads "(the "Sub 6 Conversion)" where every other defined term in the letter is closed properly. That is not a guess from one line. Counting the curly quotation marks across the whole document gives twelve opening marks against eleven closing ones, an imbalance of exactly one, and this is the one.
Two smaller points worth keeping for the release. The perjury sentence here is singular, "a penalty of perjury statement", and the plural form appears nowhere in the letter; docs/2008/0850018.md, two days later out of the same Associate Chief Counsel (Corporate), writes "penalties of perjury" instead. And the caveat contradicts the representations in a way that is ordinary but still worth naming. Representations (c) through (i) assert that every contribution qualifies under section 351 and every conversion and liquidation qualifies under section 332. The caveat then declines to confirm any of it, expressing no opinion "regarding whether any of the Conversions or Liquidations satisfies the requirements of § 332, or whether any contribution satisfies the requirements of § 351." The Service has ruled on what follows from those facts while declining to say the facts are right. The ruling is worth exactly as much as the representations underneath it.
That caveat sentence is also the one place where the extraction is worth watching. It is split across a page boundary, so the running header "PLR-127568-08" and the page number sit between the words "we express no" and "opinion regarding". The sentence is intact on the printed page. It is broken in the text layer, which is why the quotation above starts where it does.
The sections listed above are every provision cited by number anywhere in the letter.
The citation check this corpus normally runs could not be performed because the legal research tool is unavailable in this session. Every section listed above was verified against the released text itself, and nothing has been supplied or corrected from memory.
Ruling snapshot
- Question: When the last of three subsidiaries converts into a disregarded limited liability company, who takes into account an intercompany gain deferred since an earlier distribution of stock inside the group, and is it taxed?
- Outcome: Approved. Parent, as successor to Sub 2 and Sub 1 under regulations section 1.1502-13(j)(2)(i), will take the Deferred Gain into account on the Sub 3 Conversion under section 1.1502-13(c)(2)(ii), and the gain will be determined to be excluded from gross income under section 1.1502-13T(c)(6)(ii)(C). No opinion was expressed on whether any conversion or liquidation satisfies section 332 or whether any contribution satisfies section 351.
- Key authorities: Section 311(b) for the original gain, section 332 for the liquidations, section 351 for the contributions, regulations sections 1.1502-13, 1.1502-13(c)(2)(ii), 1.1502-13(j)(2)(i), 1.1502-13(l)(3) and 1.1502-13T(c)(6)(ii)(C), with section 1.1502-32 named in the no-benefit representation and section 301.7701-3 for disregarded entity status.
Full text (IRS public release)
```text
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 200850015 Third Party Communication: None
Release Date: 12/12/2008 Date of Communication: Not Applicable
Index Numbers: 1502.13-00, 332.00-00
Person To Contact:
------------------------ --------------------, ID No. -------------
-------------------------- Telephone Number:
---------------------------------------- ---------------------
---------------------------- Refer Reply To:
----------------------------- CC:CORP:04
PLR-127568-08
Date:
September 09, 2008
Legend
Parent = -----------------------------------------
Sub 1 = ------------------------------------
Sub 2 = --------------------------------
Sub 3 = -----------------------------------------------------------
Sub 4 = ------------------------------------------------
Sub 5 = -------------------------------------------------------------
Sub 6 = -------------------------------------
PLR-127568-08 2
LLC 1 = ---------------------------------------------------
-----------------------
LLC 2 = ----------------------------------------------------------------
LLC 3 = ----------------------------------------------------------------
LLC 4 = ----------------------------------------------------------------
Business A = --------------------------------------------------------------------------------
a = --
Year 1 = -------
Date A = ----------------
Date B = -------------------
Date C = ---------------------
Date D = ------------------
Date E = ----------------------
State X = -------------
Dear -----------------:
This letter responds to your letter dated June 17, 2008, requesting rulings
regarding certain Federal income tax consequences of the Proposed Transactions
(defined below). The information submitted in that letter is summarized below.
The rulings contained in this letter are based on facts and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. This office has not verified any of the materials 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
PLR-127568-08 3
Parent is the common parent of an affiliated group whose includible corporations
join in filing a consolidated Federal income tax return (the “Parent Group”). Parent’s
outstanding stock is publicly traded and widely held. Parent is engaged, through its
subsidiaries, in Business A.
Completed Transactions
In Year 1, Parent acquired the stock of Sub 1. Sub 1 owned all of the
outstanding stock of Sub 2, which owned all of the outstanding stock of Sub 3. On Date
A, Sub 1, Sub 2, and Sub 3 became members of the Parent Group.
From Date A through Date E, the following transactions occurred, involving the
distribution, contribution, and liquidation of member stock (the “Completed
Transactions”). On Date A, Sub 2 distributed the stock of Sub 3 to Sub 1 (the
“Distribution 1”). Sub 2 recognized gain on the distribution of the Sub 3 stock under
§ 311(b) of the Internal Revenue Code, and such gain was deferred under § 1.1502-13
of the Income Tax Regulations (the “Deferred Gain”). Immediately following Distribution
1, on Date A, Sub 1 distributed the stock of Sub 3 to Parent (the “Distribution 2”). Sub 1
did not recognize any gain under § 311(b).
Prior to Date A, Parent owned all of the outstanding stock of Sub 4. Immediately
following Distribution 2, Parent contributed the stock of Sub 1 to Sub 4 in a tax-free
§ 351 exchange.
Prior to Date B, Parent owned all of the outstanding stock of Sub 5. On Date B,
Parent contributed the stock of Sub 3 to Sub 5 in a tax-free § 351 exchange.
On Date C, Sub 5 changed its name to Sub 6.
On Date D, Sub 4 distributed to Parent all of its assets, and Parent assumed all
of Sub 4’s liabilities in a complete liquidation under § 332 (the “Sub 4 Liquidation”).
On Date E, Sub 6 converted under State X law into LLC 1, an entity disregarded
as separate from its owner for Federal income tax purposes under § 301.7701-3 of the
Procedure and Administrative Regulations (a “Disregarded Entity”) (the “Sub 6
Conversion). The Sub 6 Conversion will qualify as a complete liquidation under § 332
of Sub 6 into Parent.
Proposed Transactions
For what have been represented as valid business purposes, the following series
of related transactions has been proposed (collectively, the “Proposed Transactions”):
(i) Sub 2 will convert under applicable state law into LLC 2 (the “Sub 2
Conversion”), which will be a Disregarded Entity.
PLR-127568-08 4
(ii) Immediately following the Sub 2 Conversion, Sub 1 will convert under
applicable state law into LLC 3 (the “Sub 1 Conversion”). LLC 3 will be a
disregarded entity.
(iii) At least a days after the Sub 2 Conversion and the Sub 1 Conversion, Sub
3 will convert under applicable state law into LLC 4 (the “Sub 3
Conversion”). LLC 4 will be a disregarded entity.
Representations
The following representations have been made regarding the Proposed
Transactions:
(a) Parent will remain the common parent of the current Parent Group until
after the date on which the Proposed Transactions are completed.
(b) Each share of the stock of each member which reflects intercompany gain
from any of the Completed Transactions has been held by members of the Parent
Group continuously since such gain arose and will be held by members of the Parent
Group continuously until the completion of the Proposed Transactions.
(c) The contribution of Sub 1 stock by Parent to Sub 4 will qualify as a tax-
free exchange within the meaning of § 351.
(d) The contribution of Sub 3 stock by Parent to Sub 5 will qualify as a tax-
free exchange within the meaning of § 351.
(e) The Sub 4 Liquidation will qualify as a complete liquidation of Sub 4 into
Parent within the meaning of § 332.
(f) The Sub 6 Conversion will qualify as a complete liquidation of Sub 6 into
Parent within the meaning of § 332.
(g) The Sub 2 Conversion will qualify as a complete liquidation of Sub 2 into
Sub 1 within the meaning of § 332.
(h) The Sub 1 Conversion will qualify as a complete liquidation of Sub 1 into
Parent within the meaning of § 332.
(i) The Sub 3 Conversion will qualify as a complete liquidation of Sub 3 into
Parent within the meaning of § 332.
PLR-127568-08 5
(j) The effects of the Completed and Proposed Transactions have not been
taken into account by any member of the Parent Group in any taxable or nontaxable
transaction other than as described herein.
(k) Immediately before the Deferred Gain is taken into account pursuant to
the Proposed Transactions, Parent will be treated for Federal income tax purposes as
the owner of the Sub 3 stock.
(l) As a result of the Sub 3 Conversion, Parent’s basis in the Sub 3 stock that
reflects the Deferred Gain that is taken into account will be eliminated without the
recognition of gain or loss (and such eliminated basis will not be reflected in the basis of
any successor asset).
(m) The Parent Group has not and will not derive any Federal income tax
benefit (within the meaning of § 1.1502-13T(c)(6)(ii)(C)) from the Completed
Transactions that gave rise to intercompany gain or the redetermination of
intercompany gain (including any adjustment to basis in member stock under § 1.1502-
32).
(n) The effects of the Completed Transactions have not previously been
reflected, directly or indirectly, on the Parent Group’s consolidated return.
(o) On its consolidated Federal income tax return that included July 12, 1995,
Parent made an election for the Parent Group under § 1.1502-13(l)(3), which applies
§ 1.1502-13 (effective for taxable years beginning on or after July 12, 1995) to stock
elimination transactions to which prior law would otherwise apply.
Rulings
Based solely on the information submitted and the representations set forth
above, we rule as follows:
Parent (as a successor to Sub 2 and to Sub 1 under § 1.1502-13(j)(2)(i)) will take
into account the Deferred Gain on the Sub 3 Conversion (§ 1.1502-13(c)(2)(ii)), and
such Deferred Gain will be determined to be excluded from gross income under
§ 1.1502-13T(c)(6)(ii)(C).
Caveats
We express no opinion about the tax treatment of the Proposed Transactions
under other provisions of the Code and regulations or the tax treatment of any
conditions existing at the time of, or effects resulting from, the Proposed Transactions
that are not specifically covered by the above ruling. In particular, we express no
PLR-127568-08 6
opinion regarding whether any of the Conversions or Liquidations satisfies the
requirements of § 332, or whether any contribution satisfies the requirements of § 351.
Procedural Statements
This ruling letter is directed only to the taxpayer who requested it. Section
6110(k)(3) of the Internal Revenue Code provides that it may not be used or cited as
precedent.
A copy of this ruling letter should be attached to the Federal income tax return of
each taxpayer involved for the taxable year in which the transactions covered by this
ruling letter are completed. 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 ruling letter.
Under the power of attorney on file in this office, a copy of this letter is being sent
to your authorized representatives.
Sincerely,
______________________________
Marie C. Milnes-Vasquez
Acting Chief, Branch 4
Office of Associate Chief Counsel
(Corporate)
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