PLR 201109017: The IRS withdrew three prior rulings on borrowed shares and constructive sales

Plain-English summary

The IRS withdrew three rulings in private letter ruling 200440005 concerning the delivery of borrowed shares to close out two financial contracts. The withdrawn rulings had concluded that the delivery would not cause the subsidiary to recognize gain on the contracts, would not create constructive sales under IRC § 1259(c)(1)(D), and would cause gain recognition under IRC § 1259(c)(1)(A) for the excess of the existing shares' fair market value over the subsidiary's basis. The IRS applied the revocation without retroactive effect to the particular transactions described in the prior ruling. The withdrawal was made under § 11.06 of Rev. Proc. 2010-1.

Ruling snapshot

• Question: Should three prior rulings concerning borrowed shares and financial contracts remain in effect?
• Outcome: Revocation.
• Key authorities: IRC § 1259(c)(1)(A) and (D); Rev. Proc. 2010-1, §§ 11.06 and 11.07.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201109017
Third Party Communication: None
Release Date: 3/4/2011
Date of Communication: Not Applicable
Index Number: 1233.00-00, 9300.99-11
Person To Contact:
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Refer Reply To:
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CC:FIP:B06
PLR-146608-10
Date:
November 23, 2010

Legend

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

Subsidiary = ---------------------------------------------------------------------------- Year 1 = ------- Date 1 = ----------------------- Date 2 = ----------------
Bank = -----------------------------

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

This letter regards the private letter ruling 200440005 that was issued on June 10, 2004 to Parent by Associate Chief Counsel (Financial Institutions & Products), Branch 1. The ruling addressed the effect of the delivery of borrowed shares to close out two transactions, described as Financial Contracts, entered into by Parent in Year 1 and governed by a single master stock purchase agreement dated Date 1 between Parent and Bank. Certain terms relevant to each transaction were established in two separate transaction confirmations signed by Parent and Bank on Date 1 and Date 2.

Private letter ruling 200440005 provided three rulings: (1) the delivery of borrowed shares in satisfaction of the Financial Contracts will not cause Subsidiary to recognize gain on the Financial Contracts; (2) the delivery of borrowed shares did not give rise to constructive sales of the Financial Contracts under section 1259(c)(1)(D) of the Internal Revenue Code; and (3) the delivery of borrowed shares and the retention of the Existing Shares resulted in gain recognition under section 1259(c)(1)(A) equal to the excess of the fair market value of the Existing Shares over Subsidiary’s basis on the Existing Shares.

PLR-146608-10
2

Please be advised that these rulings in private letter ruling 200440005, i.e., as described above are hereby withdrawn in accordance with § 11.06 of Rev. Proc. 2010- 1, 2010 I.R.B. 1. The revocation of these three rulings is applied without retroactive effect with respect to the particular transactions described therein. See § 11.07 of Rev. Proc. 2010-1.

Sincerely,

Patrick E. White
Senior Counsel, Branch 6
(Financial Institutions & Products-)