PLR 1021002: IRS disregarded a corporate restructuring and rescission for federal income tax purposes

Plain-English summary

A publicly traded corporation asked how the IRS would treat a completed internal restructuring, a later rescission, and a planned post-rescission restructuring involving foreign subsidiaries and intercompany debt. The IRS ruled that the earlier transfers and sale would be disregarded for federal income tax purposes. It also treated the relevant entities, debt, note, and cash pool according to the parties' pre-transaction status during the period covered by the ruling. The ruling was based on the submitted facts and representations, including that the rescission restored the material legal and financial arrangements that would have existed before the transactions.

Ruling snapshot

• Question: Could the completed transfers and sale, followed by a rescission, be disregarded for federal income tax purposes?
• Outcome: Approved
• Key authorities: IRC § 351; IRC § 6110(k)(3)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201021002 Third Party Communication: None
Release Date: 5/28/2010 Date of Communication: Not Applicable
Index Number: 351.00-00
Person To Contact:
----------------------- ------------------------, ID No. --- ---------
-------------------------- Telephone Number:
---------------- ---------------------
------------------------ Refer Reply To:
----------------------------------------- CC:CORP:B04
PLR-104029-10
Date:
February 19, 2010

Parent = ------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
------------------------------------

Holdco = -----------

Holdco = ------------------------------
Sub1
Holdco = ------------------------------
Sub 2
DE 1 = -------------------------------------

DE 2 = ----------------------------------------------------

DE 3 = -----------------------------

Merger = --------------------------------
DE

DE 4 = -------------------------

DE 5 = --------------------------------------

DE 6 = ----------------------------

DE 7 = -----------------------------------------------------

DE 8 = ---------------------------------------------------------------

DE 9 = -------------------------------------
PLR-104029-10 2

Sub 1 = ------------------------------------------------------------

Sub 2 = ----------------------------------------------------------------------------

Sub 3 = --------------------------------------------------------

Sub 4 = ---------------------------------------------

Country A = ----------------

Country B = ---------------------

Country C = -----------------

Country D = ---------

Country E = -----------

Country F = ------------

Country = -----------
G

Year 1 = -------

Year 2 = ---------------------------------------------

Month A ------------------

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

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

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

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

Note 1 = ----------------

aa = ------

a = ------
PLR-104029-10 3

b = ------

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

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

e = -------

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

g = ----------------------

h = ----------------------

i = ------------------------

j = ------------------------

k = ------------------------

l = ----------------------

m = ------------------------

n = ----------------------

o = ----------------------

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

  This letter responds to your letter dated January 26, 2010, in which you

requested rulings regarding certain Federal income tax consequences of a series of
completed transactions. The information submitted in that letter and later
correspondence is summarized below.

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

                                       Summary of Facts

PLR-104029-10 4

   Parent is a publicly traded domestic corporation that is the parent of a U.S.

consolidated group. Parent directly and indirectly owns various subsidiaries around the
world (collectively, the "Parent Group"). During Year 1, Parent caused its indirectly
wholly owned subsidiary, Holdco Sub 1, to acquire more than aa% of the outstanding
stock of Holdco Sub 2 through a cash tender offer. As a result of this acquisition, there
were numerous redundant and overlapping companies within the same line of business
and/or jurisdiction. Parent developed an integration plan with the purpose of realigning
these companies based on their business activities and jurisdiction of operation.
Another goal of the integration plan was to streamline the overall structure by reducing
the number of legal entities.

   The restructuring plan was designed in two phases. The key objective of Phase I

was to create a holding company for the non-U.S. entities and businesses. The holding
company structure would be aligned with the business needs for managing the
companies, would be tax efficient with respect to future operations, and would facilitate
the future movement, realignment, and elimination of foreign entities. Phase II would
involve realigning and eliminating foreign entities.

   Phase I of the holding company structuring was completed in Month A of Year 2

with a multi-tiered foreign holding company structure holding all of the non-North
American businesses. Immediately prior to the beginning of Phase II of the
restructuring, the relevant legal structure was as follows.

   Parent and members of the Parent Group directly and indirectly owned 100

percent of Holdco, a partnership organized under the laws of the Country A and treated
as a corporation for U.S. federal income tax purposes that serves as a foreign holding
company. Holdco indirectly owned, through a disregarded entity, 100 percent of the
shares of Holdco Sub 1, a company organized under the laws of the Country A and
treated as a corporation for U.S. federal income tax purposes. Holdco Sub 1 owned
nearly 100 percent of the shares of Holdco Sub 2, a company organized under the laws
of the Country A and treated as a corporation for U.S. federal income tax purposes.

   The relevant "legacy" Parent entities were owned by Holdco through a

disregarded entity. Specifically, Holdco indirectly owned 100 percent of the shares of
DE 1, a company organized under the laws of the Country B and treated as a
disregarded entity for U.S. federal income tax purposes. DE 1 owned 100 percent of
the shares of DE 3, a company organized under the laws of the Country B and treated
as a disregarded entity. DE 1 also owned approximately a% of the shares of DE 2, a
company organized under the laws of the Country B. The remaining approximately b%
of DE 2 was owned by Holdco. Prior to Phase II of the restructuring, DE 2 was treated
as a disregarded entity of Holdco for U.S. federal income tax purposes.
PLR-104029-10 5

Holdco also indirectly owned 100 percent of the shares of Merger DE, a company
organized under the laws of the Country A and treated as a disregarded entity for U.S.
federal income tax purposes. Merger DE owned the following relevant entities:

· 100 percent of the shares of DE 4, a company organized under the laws of
Country C and treated as a disregarded entity for U.S. federal income tax
purposes;

· 100 percent of the shares of DE 5, a company organized under the laws of
Country D and treated as a disregarded entity for U.S. federal income tax
purposes that owned several operating companies, each of which was organized
under the laws of Country D and treated as a disregarded entity for U.S. federal
income tax purposes. These Country D disregarded operating companies
included DE 6 and DE 7, a subsidiary of DE 6;

· 100 percent of DE 8, a company organized under the laws of Country E and
treated as a disregarded entity of Holdco for U.S. federal income tax purposes.
Holdco holds a nominee interest that represents no economic or beneficial
ownership in DE 8 for U.S. federal income tax purposes and was established to
satisfy local law requirements necessitating multiple owners;

· c% of the shares of DE 9 a company organized under the laws of Country F and
treated as a flow through entity for U.S. federal income tax purposes, the other
d% of which was owned by DE 8 (thus, DE 9 was treated as a disregarded entity
of Holdco); and

· 100 percent of the shares of several additional Parent European operating
companies, each treated as a disregarded entity for U.S. federal income tax
purposes, except for two Country G companies that were treated as
corporations.

The relevant "legacy" Holdco Sub 2 entities were owned directly or indirectly through

one or more disregarded entities by Holdco Sub 2. Specifically, Holdco Sub 2 indirectly
owned 100 percent of the shares of Sub 1, a company organized under the laws of
Country C and treated as a corporation for U.S. federal income tax purposes. Sub 1
directly owned 100 percent of the shares of Sub 2, a company organized under the laws
of Country E and treated as a disregarded entity for U.S. federal income tax purposes.
Holdco Sub 2 also indirectly owned 100 percent of the shares of Sub 3, a company
organized under the laws of the Country A and treated as a disregarded entity for U.S.
federal income tax purposes. Sub 3 owned 100 percent of the shares of Sub 4, a
company organized under the laws of the Country A and treated as a disregarded entity
for U.S. federal income tax purposes.
PLR-104029-10 6

Parent and each of its affiliates, including Holdco, Holdco Sub 1, Holdco Sub 2, and
Sub 1, has a 52-53 week tax year that ends on Date 1.

Phase II of the restructuring involved the realignment along business and

geographic lines of several "legacy" Parent entities that were disregarded entities of
Holdco. Immediately prior to Phase II, several of the disregarded entities were indebted
to Holdco (the "DEs"). For purposes of this ruling, all references to the DEs include a
reference to DE 1, DE 2, DE 3, DE 4, DE 5, DE 6, DE 7, DE 8, and DE 9. Due to the
disregarded status of the DEs, such loans were disregarded for U.S. federal income tax
purposes (the "DE Debt").

It was intended that as part of Phase II, Holdco, through a disregarded entity, would

simultaneously transfer 100 percent of its interests in the DEs and the DE Debt to
Holdco Sub 1. As outlined in the Phase II transaction steps below, beginning on Date 2,
Holdco, through a disregarded entity, contributed the DEs to Holdco Sub 1 (except as
described below), and Holdco Sub 1 subsequently contributed such interests in the DEs
to Holdco Sub 2. However, through inadvertence, Holdco did not transfer the DE Debt
nor did it transfer its approximate b% interest in DE 2. As a result, for U.S. federal
income tax purposes, the DE Debt held by Holdco became regarded as debt owing from
Holdco Sub 2 to Holdco, and DE 2 became a regarded partnership with Holdco and
Holdco Sub 2 as its partners. While the debt has only existed for a couple of months
thus far, Holdco could be viewed for U.S. federal income tax purposes as receiving the
DE Debt (i.e., boot) in exchange for a portion of its interest in the DEs, thus causing the
transaction to be taxable. In addition, Parent never intended for DE 2 to become
regarded as a partnership for U.S. federal income tax purposes. Immediately upon
realization of the inadvertence, corrective remedies were sought.

                               Transaction Steps

   Specifically, as part of Phase II of the restructuring, Parent effectuated the

following relevant transaction steps (the "Transaction"):

Step 1: On Date 2, a disregarded entity of Holdco contributed all of its shares in
Merger DE and DE 1 to Holdco Sub 1 in exchange for no consideration
("Transfer I").

Step 2: On Date 2, Holdco Sub 1 contributed all of its shares in Merger DE and DE 1
to Holdco Sub 2 in exchange for no consideration ("Transfer II").

Step 3: On Date 2, Holdco Sub 2 contributed all of its shares in DE 1 to a
disregarded entity in a disregarded transaction.

Step 4: On Date 2, Holdco Sub 2 contributed all of its shares in Merger DE through a
disregarded entity to Sub 3 in a disregarded transaction.
PLR-104029-10 7

Step 5: Effective Date 3, Merger DE merged with and into Sub 4 in a disregarded
transaction. Immediately thereafter, Sub 4 directly owned 100 percent of DE
4, 100 percent of DE 5, 100 percent of DE 8, and c% of DE 9. DE 5
continued to own, directly or indirectly, 100 percent of DE 6 and DE 7, while
DE 8 continued to own the remaining d% of DE 9.

Step 6: On Date 3, Sub 4 sold all of its shares in DE 5 to Holdco Sub 1 in exchange
for a note with a face amount equal to the fair market value of DE 5 (“Note
1”) (the "Sale").

Step 7: On Date 3, Sub 4 sold all of its shares in DE 4, DE 8, and DE 9 (among other
entities) to disregarded entities of Holdco Sub 2 in exchange for disregarded
notes in disregarded transactions.

    Prior to the restructuring, as part of Parent's global treasury function, DE 4, a

disregarded entity of Holdco, operated a cash pool (the "Cash Pool"). The Cash Pool
centralized the management of and facilitated the efficient deployment of Parent's
foreign cash for the "legacy" Parent entities. As part of this operation, Parent’s foreign
entities (collectively, the "Depositors") would loan cash to DE 4, and DE 4 would record
a corresponding liability to the appropriate Depositor. DE 4 would also loan money to
related parties as needed and record a corresponding receivable, although this
occurred less frequently. DE 4 would transfer its net cash to an interest-bearing
account with a third party bank. In connection with operating the Cash Pool, DE 4
generally would earn interest on the spread between the interest rate it received from
the third party bank and the lower interest rate it paid to the Depositors. The interest
income was treated as earned by Holdco for U.S. federal income tax purposes.

    Holdco Sub 2 operated its "legacy" cash pool in a disregarded entity of Sub 1,

Sub 2. Parent determined that only one entity would succeed as manager of the cash
pool. Parent’s Treasury Department determined that it was operationally more efficient
to have the cash pool administered out of Sub 2 because Sub 2 had a better Treasury
infrastructure (people, systems, etc.) in place to support one large cash pool than DE 4.
As a result, on Date 4, to consolidate the “legacy” cash pools, DE 4, which was a DE of
Holdco Sub 2 at the time, transferred its Cash Pool to Sub 2, a disregarded entity of
Sub 1 in a transaction unrelated to Transfer I, Transfer II, and the Sale ("Transfer III").
The Cash Pool was transferred from Holdco Sub 2 to Sub 1, for U.S. federal income tax
purposes, by Sub 2's assuming the obligations and receivables of DE 4 and by DE 4's
transferring the net cash from its bank account to Sub 2's bank account.

  Transfer I, Transfer II, and Transfer III are collectively referred to herein as the

"Transfers." All references to the "Transferors" include a reference to Holdco, Holdco
Sub 1, and Holdco Sub 2. In addition, all references to the "Transferees" include a
PLR-104029-10 8

reference to Holdco Sub 1, Holdco Sub 2, and Sub 1. All references to "Buyer" are to
Holdco Sub 1 and all references to "Seller" are to Holdco Sub 2.

                             Debt Relationships

The DE Debt owed to Holdco that became regarded for U.S. federal income tax
purposes as a result of Transfer I included the following obligations:

· An obligation from DE 1 payable to Holdco in the amount of f;

· Obligations from DE 2 and from DE 3 payable to Holdco in the aggregate amount
of g;

· An obligation from DE 9 payable to Holdco in the amount of h; and

· An obligation from DE 4 payable to Holdco in the amount of i.

In addition to the DE Debt, four additional notes became regarded as a result of the
Sale. These included the following obligations (collectively, the "Country D DE Debt"):

· An obligation from DE 5 payable to DE 4 in the amount of j; and

· An obligation from DE 6 payable to DE 4 in the amount of k;

   The DE 5 and DE 6 obligations payable to DE 4 are collectively referred to herein
   as the "Country D-DE 4 Debt."

· An obligation from DE 6 payable to a disregarded entity of Holdco Sub 2 in the
amount of l; and

· An obligation from DE 7 payable to a disregarded entity of Holdco Sub 2 in the
amount of m;

The DE 6 and DE 7 obligations payable to disregarded entities of Holdco Sub 2 are

collectively referred to herein as the "Country D-Holdco Sub 2 Debt." The Country D-
Holdco Sub 2 Debt was regarded debt for U.S. federal income tax purposes prior to the
Transaction, with DE 6 and DE 7, disregarded entities of Holdco, as the issuers and
disregarded entities of Holdco Sub 2 as the holders. In Transfer II, when DE 5, which
directly owned DE 6 and indirectly owned DE 7, was transferred to Holdco Sub 2, the
Country D-Holdco Sub 2 Debt was extinguished for U.S. federal income tax purposes.
However, as a result of the Sale, in which DE 5 (and thus DE 6 and DE 7) was sold to
Holdco Sub 1, the Country D-Holdco Sub 2 Debt was reconstituted for U.S. federal
income tax purposes with Holdco Sub 1 as the issuer and Holdco Sub 2 as the holder
for U.S. federal income tax purposes.
PLR-104029-10 9

Finally, certain DEs listed below owed disregarded debt to DE 4 (the "Country B DE

Debt"). If DE 4 and these DEs had not been contributed simultaneously in the
Transfers, the Country B DE Debt would have become regarded for U.S. federal income
tax purposes in the Transaction. The Country B DE Debt included the following
obligations:

· An obligation from DE 1 payable to DE 4 in the amount of n; and

· An obligation from DE 3 payable to DE 4 in the amount of o.

Consistent with general business practices between related corporations, certain

foreign subsidiaries in the Parent Group provide services to other foreign members of
the Parent Group. For example, DE 6 provides management services, and DE 8
provides product sourcing services to the Parent Group. In connection with providing
these services in the ordinary course of business, DE 6 and DE 8 charge an arm's
length fee based on the level of services provided and based on a percentage of
products sourced, respectively. In addition, Holdco owns the intellectual property ("IP")
that is used by the foreign members of the Parent Group. Holdco charges an arm's
length royalty for the use of its IP that is based on the level of use by each member.
The business relationships described herein were put in place prior to the Transaction
and continue through the date of this ruling.

                               Rescission Steps

   The following steps were undertaken pursuant to a rescission agreement (the

"Rescission Agreement") to rescind a portion of the Phase II transaction steps
previously completed (the "Rescission"). The rescission steps were effected prior to the
end of Year 2 in which the Transaction occurred.

Step 1: Through a series of transactions, the Cash Pool was reconstituted back into
DE 4. Thus, the current net cash balance was reestablished with DE 4 along
with the corresponding obligations and receivables (reversing Transfer III).

Step 2: In disregarded transactions, the disregarded entities of Holdco Sub 2
transferred their ownership interests in DE 4, DE 8, and DE 9 back to Sub 4
in partial cancellation of the portion of the disregarded notes issued in the
original transactions representing the fair market value of their ownership
interests in DE 4, DE 8, and DE 9 (reversing Step 7 of the Transaction).

Step 3: Holdco Sub 1 transferred its ownership interest in DE 5 to Sub 4 in
cancellation of Note 1 (reversing Step 6 of the Transaction).
PLR-104029-10 10

Step 4: In a disregarded transaction, Sub 4 transferred its ownership interest in DE
4, DE 5, DE 8, and DE 9 through a series of disregarded entities to Holdco
Sub 2 (reversing Step 4 of the Transaction with respect to the DEs listed in
this Step 4).

Step 5: In a disregarded transaction, a disregarded entity of Holdco Sub 2
transferred its ownership interest in DE 1 to Holdco Sub 2 (reversing Step 3
of the Transaction).

Step 6: Holdco Sub 2 transferred its ownership interest in DE 4, DE 5, DE 8, DE 9,
and DE 1 to Holdco Sub 1 (reversing Step 2 of the Transaction with respect
to the DEs listed in this Step 6).

Step 7: Holdco Sub 1 transferred its ownership interest in DE 4, DE 5, DE 8, DE 9,
and DE 1 to a disregarded entity of Holdco (reversing Step 1 of the
Transaction with respect to the DEs listed in this Step 7).

   In connection with the Transaction, other disregarded entities of Holdco, in

addition to the DEs, were transferred to Holdco Sub 1 and to Holdco Sub 2. However,
these disregarded entities were not parties to the DE Debt or Country D DE Debt that
became regarded for U.S. federal income tax purposes. Therefore, Parent did not
rescind the transfer of these other entities. Certain of these entities were Depositors
who had cash on deposit with the Cash Pool, which was transferred from Holdco Sub 2
to Sub 1 for U.S. federal income tax purposes in Transfer III. As a result of the
Rescission of the transfer of the Cash Pool in Transfer III and the Rescission of the
transfer of DE 4 to Holdco Sub 1 and Holdco Sub 2 in Transfers I and II, respectively,
certain immaterial obligations between the Cash Pool operated by DE 4 and Depositors
became regarded for U.S. federal income tax purposes.

    As discussed above, Parent had intended to transfer the DEs and the DE Debt

simultaneously. Parent intends to transfer several of the DEs and the DE Debt (the
"Post-Rescission Transaction") to implement Phase II of the restructuring after the
effective date of the Rescission in order to achieve the objective set forth above. The
Rescission, in which the DEs were distributed by Holdco Sub 2 to Holdco Sub 1 and
thereafter by Holdco Sub 1 to Holdco, did not generate any material foreign tax benefit,
including any foreign tax credit benefit.

                               Representations

  Parent makes the following representations:

    1. The Transfers and Sale occurred and the Rescission was effective during the
  same taxable year for each of the Transferors, Transferees, Seller, and Buyer
  (Year 2).

PLR-104029-10 11

2. The intent and effect of the Rescission Agreement is, and has been, to restore in
 all material respects the legal and financial arrangements between the
 Transferors, Transferees, Seller, Buyer, and the DEs that would have existed
 had the Transfers and Sale not occurred.

3. The Transferors, Transferees, Buyer, and Seller have examined their activities,
 and the activities of all other regarded entities controlled directly or indirectly by
 the Transferors, Transferees, Buyer, and Seller between the time of Transfer I
 and the Rescission (the "Interim Period") and have (i) determined that no activity
 of any such entity occurred that is materially inconsistent with the Rescission,
 and (ii) agreed that no activity of any such entity will occur that is materially
 inconsistent with the Rescission.

4. During the Interim Period, the Transfers and Sale had no legal or material
 economic consequences to the Transferors or Transferees or to the Buyer or
 Seller, respectively, or to any other regarded entities controlled directly or
 indirectly by the Transferors, Transferees, Buyer, or Seller during the Interim
 Period.

5. The Rescission placed the Transferors and Transferees as well as the Buyer and
 Seller in the status quo ante with respect to the Transfers and Sale, respectively.

6. The Rescission did not involve any party that was not involved in the Transfers or
 the Sale.

7. The Transferors, Transferees, Buyer, and Seller executed the Rescission
 Agreement and implemented the Rescission in accordance with the terms of the
 executed Rescission Agreement.

8. Provided the Rescission is effective to disregard the Transfers and the Sale for
 U.S. federal income tax purposes, the Transferors and Transferees as well as
 the Buyer and Seller will file their U.S. federal income tax and information returns
 for Year 2 as if the Transferors had not transferred the DEs to the Transferees in
 Transfers I and II, as if the Cash Pool had not been transferred in Transfer III,
 and as if the Seller had not sold DE 5 to the Buyer in the Sale. In particular, the
 return of Holdco for Year 2 will reflect that Holdco owned the DEs prior to any
 Post-Rescission Transaction steps, and all of the Transferors', Transferees',
 Buyer's, and Seller's material items of income, deduction, gain, and loss will be
 reflected on each of their respective U.S. federal income tax returns as if the
 Transfers and the Sale had not occurred.

9. The Transferees made no interest payments with respect to the DE Debt during
 the Interim Period. Also, the Buyer made no interest payments with respect to

PLR-104029-10 12

     the Country D DE Debt from the time of the Sale through the effective date of the
     Rescission.

        10. The proposed Post-Rescission Transaction will be comprised of a series of
      transfers that qualify under section 351 or that will occur between disregarded
      entities for U.S. federal income tax purposes.

        11. DE 4 was restored to the same economic position in all material respects that it
      would have been in had the Transfers never occurred, except for fluctuations in
      the Cash Pool balances that occurred in the normal course of business.

        12. The e% interest in DE 8 owned by Holdco is a nominee interest that represents
      no economic or beneficial ownership in DE 8 for U.S. federal income tax
      purposes and was established to satisfy local law requirements necessitating
      multiple owners.

                                      Rulings

   Based solely on the facts submitted and the representations made, we rule that

for federal income tax purposes:

(1) The Transfers and Sale will be disregarded.

(2) The DEs will be treated as owned by Holdco at all times from the effective date of
Transfer I through the effective date of the Rescission.

(3) The DE Debt and Country D-DE 4 Debt will be treated as disregarded at all times
from the effective date of Transfer I through the effective date of the Rescission.

(4) The Country D-Holdco Sub 2 Debt will be treated as regarded at all times from the
effective date of Transfer I through the effective date of the Rescission.

(5) Note 1 will be disregarded.

(6) The Cash Pool will be treated as owned by DE 4 at all times from the effective date
of Transfer III through the effective date of the Rescission.

(7) DE 2 will be treated as a disregarded entity at all times from the effective date of
Transfer I through the effective date of the Rescission.

                                      Caveat

PLR-104029-10 13

   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.

                             Procedural Statements

  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. 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.

    In accordance with the Power of Attorney on file with this office, a copy of this

letter will be sent to your authorized representative.

                                   Sincerely,


                                   _________________________
                                   Lewis K Brickates
                                   Branch Chief, Branch 4
                                   Associate Chief Counsel (Corporate)