PLR 1323005: IRS allows specified intra-group stock-sale losses after a joint venture formation

Plain-English summary

The IRS considered a multinational consolidated group that transferred interests in several subsidiaries among related entities before forming a joint venture with an unrelated party. The group represented that the intra-group acquisitions were described in section 304(a)(1) and that there was a binding commitment to sell a joint venture interest. The IRS ruled that, when the joint venture was formed, specified losses from the related-party stock sales would be taken into account under section 267(f)(2)(B) and the related consolidated-return regulations. The ruling covered losses from sales involving three sellers and several redacted subsidiaries, and it did not express an opinion on other tax consequences.

Ruling snapshot

• Question: When will specified losses from intra-group stock sales be taken into account after the joint venture is formed?
• Outcome: Approved, five specified losses will be taken into account upon completion of the joint venture formation step.
• Key authorities: IRC §§ 267(f)(2)(B) and 304(a)(1); Treas. Reg. §§ 1.267(f)-1 and 1.1502-13

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201323005 Third Party Communication: None
Release Date: 6/7/2013 Date of Communication: Not Applicable
Index Number: 267.07-02
Person To Contact:
-------------------- ---------------------------, ID No. ---------------
--------------------------- -----------------
--------------------------------------------- Telephone Number:
---------------------------- ----------------------
--------------------------- Refer Reply To:
CC:CORP:B05
PLR-138559-12
Date:
March 08, 2013

              TY: -------

Legend

Parent = ----------------------------------------------
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Seller 1 = ---------------------------
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Seller 2 = ---------------------------------------------
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Seller 3 = ------------------------------------------------------
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Target 1 = --------------------------
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Target 2 = -------------
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Target 3 = ----------------
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PLR-138559-12 2

Target 4 = --------------------------------------------.
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Target 5 = -------------------------------
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Disregarded 1 = ---------------------------------------------
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Disregarded 2 = -----------------------------------------
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Disregarded 3 = ------------------------------------------
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Disregarded 4 = -------------------------------------------
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Buyer = ------------------------------------------------------
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Existing Sub = ------------------------------
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Holdco = ----------------------------------------------
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PLR-138559-12 3

Third Party = --------------------------------------
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Third Party Sub = -------------------

Third Party Business = --------------------------------------------------------------
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Joint Venture Business = --------------------------------------------------------
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Region = --------------------

Business Market = -------------------------------

Year = -------

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

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

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

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

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

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

c = ----

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

e = --------------

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

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

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

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

j = ---------------
PLR-138559-12 4

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

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

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

n = --------

o = --------

p = --------------

q = ------------

r = ----

s = ---------------

t = --------------

u = ----------------

v = ----------------

w = ------------------

x = --

y = ----------

z = --------------

aa = --------------

bb = ------------

cc = --------------

dd = ------------

ee = --------------

ff = ------
PLR-138559-12 5

gg = ----

hh = --------

ii = --

jj = -----

kk = ----

ll = --

mm = -----

nn = ----

oo = ----

pp = ----------------

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

This letter responds to your request, dated September 6, 2012, for rulings on certain
federal income tax consequences of the Completed Transactions (defined below). The
material information in the request and in subsequent correspondence 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 material 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

Parent is a domestic corporation that is the parent corporation of a multinational group
and the common parent of a consolidated group. Parent directly owns all of the stock of
Seller 1. Seller 1 directly owns Seller 2. Seller 1 owns -----% of the class A shares of
Target 1. Seller 1, Seller 2, and an unrelated shareholder own a%, b%, and c% of the
outstanding class B shares of Target 1, respectively.
PLR-138559-12 6

Parent indirectly owns all of the stock of Seller 3. Seller 3 owns all of the stock of
Disregarded 1, an entity disregarded as an entity separate from its owner for U.S.
income tax purposes. Disregarded 1 and Seller 1 own d% and e% of the outstanding
stock of Target 2, respectively. Disregarded 1, Target 2, and Seller 1 own f%, g%, and
h% of Target 3, respectively. Target 3, Seller 1, and Seller 2 own i%, j%, and k% of
Target 4, respectively. Target 3 and Seller 1 own l% and m% of Target 5, respectively.

Parent indirectly owns ------percent of the shares of Buyer, a foreign entity treated as a
corporation for U.S. federal income tax purposes. Buyer owns n% of Existing Sub. An
unrelated shareholder owns the remaining o% of the stock of Existing Sub.

Third Party is unrelated to taxpayer and conducts Third Party Business.

Pursuant to an agreement dated Date 1, during Year, Parent, through its wholly-owned
subsidiaries, entered into a joint venture (the “Joint Venture”) with Third Party to conduct
Joint Venture Business in Region. Parent had previously done business in Region
through various companies owned in separate ownership chains in its multinational
group. Parent entered into the Joint Venture for business purposes including reducing
complexity and international exposure to Business Market, leveraging capabilities of
Third Party, and reducing exposure to geopolitical and economic volatility in Region.

Prior to entering the Joint Venture, Parent caused its interests in the entities that were to
be contributed to the Joint Venture (the “Joint Venture Entities”) to be consolidated in
Buyer and entities owned by Buyer in a series of transactions also occurring during
Year, as described below. Parent intended to accomplish a number of business
purposes by consolidating the Joint Venture Entities in Buyer’s ownership chain,
including:
 Creating a single owner in Parent’s group of the Joint Venture to minimize
management and reporting requirements, and limit liability risk;
 Facilitating execution of the Joint Venture transaction with Third Party by
entering into one master stock purchase agreement for the transfer of the
Joint Venture Entities;
 Transferring the Joint Venture Entities into the Joint Venture structure with
minimal local country income taxes;
 Providing for a Joint Venture vehicle that would allow for minimal local country
taxes on the sale and on future distributions to and from the Joint Venture;
and
 Allowing for the conversion of certain Joint Venture Entities into local law
companies that may elect to be disregarded for U.S. income tax purposes.

                                   Transactions

During the course of Year, the following transactions steps occurred (together, the
“Completed Transactions”):
PLR-138559-12 7

                                Preparatory Steps

(i) On Date 2, Buyer purchased the remaining c% of the class B shares of
Target 1 from an unrelated shareholder.

(ii) During Year, Buyer formed Disregarded 2, and elected to treat it as
disregarded as an entity separate from its owner for U.S. federal income tax
purposes. Disregarded 2 then formed Disregarded 3, and elected to treat it
as disregarded as an entity separate from its owner for U.S. federal income
tax purposes. Disregarded 3 then formed Disregarded 4, and elected to treat
it as disregarded as an entity separate from its owner for U.S. federal income
tax purposes. Buyer and Disregarded 2 then formed Holdco and elected to
treat it as a corporation for U.S. federal income tax purposes. Disregarded 2
then sold Disregarded 3 to Holdco.

                                 Intra-group Sales

On Date 3, through the following steps, Parent caused its affiliates in the Seller 1 and
Seller 3 ownership chains to sell interests in the Joint Venture entities to Buyer or
Disregarded 4:

(iii) Seller 1 sold to Buyer all of the class A shares and a% of the class B shares
of Target 1 for a note with a face value of $p. Seller 1 realized a gain on the
sale of the class A and class B shares of Target 1 in the amount of $q.

(iv) Disregarded 1 sold to Buyer r% of the shares of Target 2 and s% of the
shares of Target 3 in exchange for notes with a face value of $t and $u,
respectively. Seller 3, through Disregarded 1, realized losses on the sale of
the Target 2 and Target 3 shares in the amounts of $v and $w, respectively.

(v) Seller 1 sold to Disregarded 4 j% of the shares of Target 4 for nominal
consideration of $x. Seller 1 realized a loss on the sale of Target 4 shares in
the amount of $y.

(vi) Disregarded 1 sold to Disregarded 4 z% of the shares of Target 2 and aa% of
the shares of Target 3 in exchange for $bb and $cc, respectively. Seller 3,
through Disregarded 1, realized losses on the sale of the Target 2 and Target
3 shares in the amounts of $dd and $ee, respectively.

(vii) Seller 2 sold to Disregarded 4 k% of the shares of Target 4 and b% of the B
shares in Target 1 in exchange for nominal consideration of $ff and $gg,
respectively. Seller 2 realized a loss on the sale of Target 4 shares in the
amount of $hh and realized a gain on the sale of Target 1 shares in the
amount of $ii.
PLR-138559-12 8

(viii) Seller 1 sold to Disregarded 4 e% of the stock of Target 2, h% of the shares
of Target 3, and m% of the shares of Target 5 in exchange for total
consideration of $jj. Seller 1 realized a loss on the sale of Target 3 shares in
the amount of $kk and realized gains on the sale of Target 2 and Target 5 in
the amounts of $ll and $mm, respectively

                               Buyer Contribution

(ix) On Date 3, Buyer contributed all of its newly acquired shares in Target 1,
Target 2, and Target 3, along with n% of the shares of Existing Sub
previously owned by Buyer, to Holdco for no consideration.

                               Holdco Contribution

(x) On Date 3, Holdco contributed all of its shares in Target 1, Target 2, Target 3,
and Existing Sub to Disregarded 3 in exchange for an additional interest in
Disregarded 3.

                             Joint Venture Formation

(xi) On Date 4, Third Party acquired a nn% interest in Disregarded 3 in exchange
for a oo% interest in Third Party Sub, a wholly owned subsidiary of Third
Party, and $pp.

The transaction documents with Third Party require Parent and Third Party to use their
best efforts to undertake the actions necessary to treat Target 1, Target 2, and Target 3
each disregarded as an entity separate from its owner for U.S. federal income tax
purposes. This requires conversion into different corporate forms under local law, and
the required actions are ongoing

                                 Representations

Parent has made the following representations in connection with the Completed
Transactions:

(a) The acquisitions by Buyer of the class A and class B shares of Target 1, the
shares of Target 2, and the shares of Target 3, all as described in Completed
Transaction steps (iii) and (iv), are acquisitions described in section 304(a)(1).

(b) The acquisitions by Holdco, through its wholly owned disregarded subsidiary
Disregarded 4, of the shares of Target 2, Target 3, Target 4, and Target 5, and
of the class B shares of Target 1, all as described in Completed Transaction
steps (v) through (viii), are acquisitions described in section 304(a)(1).
PLR-138559-12 9

(c) At the time of the acquisitions by Buyer and the acquisitions by Disregarded 4 in
Completed Transaction steps (iii) through (vii), there was a binding commitment
to sell to Third Party a nn% interest in the transferred subsidiaries.

(d) There is no plan or intent of Parent, Buyer, or Holdco to dispose of the Joint
Venture partnership interests, to reacquire Joint Venture partnership interests
held by Third Party, or to liquidate the Joint Venture partnership.

                                    Rulings

Based solely on the information submitted and the representations set forth above, we
hold as follows:

(1) On the completion of step (xi) of the Completed Transaction Seller 3 will take into
account losses realized on the sale by Disregarded 1of Target 2 and Target 3
shares described in Completed Transaction step (iv). Section 267(f)(2)(B),
Treas. Reg. §§ 1.267(f)-1(c) and 1.1502-13(c), (d).

(2) On the completion of step (xi) of the Completed Transaction Seller 1 will take into
account losses it realized on the sale of Target 4 shares described in Completed
Transaction step (v). Section 267(f)(2)(B), Treas. Reg. §§ 1.267(f)-1(c) and
1.1502-13(c), (d).

(3) On the completion of step (xi) of the Completed Transaction Seller 3 will take into
account losses it realized on the sale by Disregarded 1 of Target 2 and Target 3
shares described in Completed Transaction step (vi). Section 267(f)(2)(B),
Treas. Reg. §§ 1.267(f)-1(c) and 1.1502-13(c), (d).

(4) On the completion of step (xi) of the Completed Transaction Seller 2 will take into
account losses it realized on the sale of Target 4 shares described in Completed
Transaction step (vii). Section 267(f)(2)(B), Treas. Reg. §§ 1.267(f)-1(c) and
1.1502-13(c), (d).

(5) On the completion of step (xi) of the Completed Transaction Seller 1 will take into
account losses it realized on the sale of Target 3 shares described in Completed
Transaction step (viii). Section 267(f)(2)(B), Treas. Reg. §§ 1.267(f)-1(c) and
1.1502-13(c), (d).

                                    Caveats

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

PLR-138559-12 10

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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

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.

                                   Sincerely,


                                   ________________________
                                   Lawrence M. Axelrod
                                   Special Counsel
                                   Office of Associate Chief Counsel (Corporate)