Ezel / IRS Rulings / 200908001

PLR 200908001: Liquidating corporations received a limited loss-disallowance ruling

Number
200908001
Outcome
Approved
Document type
Private Letter Ruling
IRS subject
Disqualified Property
Topics
Corporate transactions and reorganizations
Code sections
§ 331, § 336, § 351, § 721, § 732, § 6110
Ruling dated
November 13, 2008
Publicly released
February 20, 2009
Source
View Official PDF

Apply this to your situation

This page covers one taxpayer's ruling, issued in 2009, which can't be cited as precedent. Ask about your situation and see what the current Code and IRS guidance say, with citations.

Currency note: this determination was released in 2009
Statutory amendments, regulation changes, court decisions, or later IRS guidance may have changed the analysis since then. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, threshold, or position mentioned here.
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

Four S corporations planned to liquidate and distribute partnership interests and stock to their trust shareholders. The corporations had previously contributed the stock to the partnership, which added capital to the stock's issuer and later distributed the stock back to them. The IRS ruled that § 336(d)(1)(A)(ii) would disallow losses on the liquidating distributions of the partnership interests only if, and only to the stated extent, the corporations' realized but disallowed losses on the distributed stock were less than the stock's earlier basis. The ruling did not decide the amount of any liquidation loss or the operation of other partnership or S corporation rules.

Ruling snapshot

  • Question: To what extent would § 336(d)(1)(A)(ii) disallow losses on partnership interests distributed in the proposed S corporation liquidations?
  • Outcome: Approved: the IRS limited disallowance to the condition and extent stated in the ruling.
  • Key authorities: IRC §§ 331 and 336(d)(1)(A)(ii).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 200908001
Third Party Communication: None
Release Date: 2/20/2009
Date of Communication: Not Applicable
Index Number: 336.03-02
Person To Contact:
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------------------------, ID No. ------------
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Telephone Number:
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Refer Reply To:
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CC:CORP:BO1
PLR-118143-08
----------------------------------------------------------- Date:
November 13, 2008

Corp A = ---------------------------------------------------
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Corp B = -------------------------
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Corp C = -------------------------------
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Corp D = ------------------------------------------------------
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Corp E = ----------------------------------------------------------------
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LLC 1 = ----------------------------------
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LLC 2 = ------------------------------------------------
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Individual G = -------------------
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PLR-118143-08
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Individual H = -------------------
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Individual I = -----------------------------
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Trust 1 = --------------------------------------------------------------------------------
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Trust 2 = --------------------------------------------------------------------------------
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Trust 3 = --------------------------------------------------------
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Trust 4 = --------------------------------------------------------------------------------
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Trust 5 = --------------------------------------------------------------------------------
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Trust 6 = -----------------------------------------------
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Trust 7 = -----------------------------------------------
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Trust 8 = -------------------------------------------------------
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Date 1 = --------------------------

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

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

PLR-118143-08
3

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

a = ----------------

b = -------------

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

State X = -------------

State Y = ------------

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

This letter replies to your letter dated April 10, 2008 requesting rulings concerning certain federal income tax consequences of a proposed transaction. The following information is provided in that letter and a letter dated November 6, 2008.

Corp A, Corp B, Corp C, and Corp D are each State X corporations that have each elected to be taxed as S corporations (together, the “S Corporations”). Their stock is owned by eight trusts (Trusts 1, 2, 3, 4, 5, 6, 7, and 8), which collectively benefit Individual 1, Individual 2, and Individual 3. Corp E’s stock was also collectively owned by the trusts before the transactions described below.

LLC 1 is a State Y limited liability company that is treated as a partnership for federal income tax purposes. From Date 1 until Date 2, all the interests of LLC 1 were held by the S Corporations. On Date 2, LLC 2, another State Y limited liability company, became a fifth member of LLC 1.

On Date 3 (a date within the past 5 years), the shareholders of the S Corporations contributed the stock of Corp E to the S Corporations. The taxpayers state that these contributions qualified for nonrecognition of gain or loss under § 351 of the Internal Revenue Code. Immediately after the above contributions, the S Corporations contributed the stock of Corp E to LLC 1. The taxpayers state that these contributions qualified for nonrecognition of gain or loss under § 721. As of Date 3, the basis of Corp E stock was approximately $a.

Between Date 3 and Date 4, LLC 1 contributed approximately $b in cash capital contributions to Corp E to finance operating deficits of Corp E.

On Date 4, LLC 1 distributed the Corp E stock to the S Corporations. As of Date 4, the total basis of Corp E stock was $c. Each of the S Corporations represent that it

PLR-118143-08
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had sufficient basis in its membership interest in LLC 1 so that the basis limitation contained in § 732(a)(2) was not applicable to the distribution of Corp E stock to each S Corporation.

Proposed Transactions

The taxpayers now propose to liquidate the S Corporations in liquidations within the meaning of § 331 and § 336. Each of the S Corporations will distribute their assets (including the LLC 1 interests and the Corp E stock) to their trust shareholders and dissolve.

Ruling

Based solely on the information submitted, we hold that the losses (if any) to the S Corporations on their liquidating distributions of the interests in LLC 1 will be disallowed under § 336(d)(1)(A)(ii) only if, and to the extent that, the total losses (if any) to the S Corporations on the liquidating distributions of the Corp E stock that was realized but disallowed under § 336(d)(1)(A)(ii) was less than a, the basis of the Corp E stock on Date 3.

Caveats

We express no opinion concerning the federal tax consequences of the proposed transactions under any other provision of the Code or regulations, or concerning 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 opinion on the amount of the loss (if any) recognized by any of the S Corporations on their liquidations. We also express no opinion on the operation of any partnership or S corporation provisions of the Code.

Procedural Statements

This letter 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.

Each taxpayer involved in the transaction should attach a copy of this ruling letter to the taxpayer's federal income tax return for the taxable year in which the transaction covered by this letter is 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 this ruling letter.

PLR-118143-08
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Pursuant to a power of attorney on file with this office, a copy of this letter will be sent to two of your authorized representatives.

Sincerely yours,

________
Mark Weiss
Assistant to the Chief, Branch 1
Office of Associate Chief Counsel
(Corporate)

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