Partnership-interest distribution triggers partnership terminations and intercompany matching

Plain-English summary

A consolidated group proposed distributing a subsidiary's minority interest in one partnership to an affiliated holding company. The holding company would then become the partnership's sole owner. The IRS ruled that the first partnership would terminate and be treated as distributing its assets to its former partners, and that the deemed distribution of an interest in a second partnership would also terminate that partnership. The subsidiary's gain or loss would be an intercompany item accounted for under the consolidated return matching rules. Earlier intercompany gains would not be accelerated solely because of the proposed distribution.

Ruling snapshot

• Question: How will a distribution of a partnership interest within a consolidated group affect the two partnerships and the group's intercompany items?
• Outcome: Approved
• Key authorities: IRC §§ 301, 311, 708, 732, 741, 743, 751, 761; Treas. Reg. §§ 1.1502-13, 1.1502-32; Rev. Ruls. 87-115, 99-6

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201528007                                              Third Party Communication: None
Release Date: 7/10/2015                                        Date of Communication: Not Applicable
Index Number: 1502.13-00, 708.01-00
                                                               Person To Contact:
------------------------                                       ---------------------, ID No. ------------
------------------------------------------------------------   Telephone Number:
---------------------------                                    --------------------
--------------------------------------------                   Refer Reply To:
-------------------------                                      CC:CORP:B04
 --------------------------------------------                  PLR-123357-14
                                                               Date:
                                                               April 07, 2015




Legend

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

HoldCo             =      ------------------------------------------------------------------------------------------
                          ------------------------------------------------------------------------------------------
                          -------------------------------------------------------

HoldCo DE          =      ------------------------------------------------------------------------------------------
                          ------------------------------------------------------------------------------------------
                          -----------------------

Sub 1              =      ------------------------------------------------------------------------------------------
                          ------------------------------------------------------------------------------------------
                          ------------------------------------------------------------------------------------------
                          ------------------------------------------------------------------------------------------
Sub 2              =      ------------------------------------------------------------------------------------------
                          ------------------------------------------------------------------------------------------
                          -------------------------------------

PS 1               =      ------------------------------------------------------------------------------------------
                          ------------------------------------------------------------------------------------------
                          -------------------------

PS 2               =      ------------------------------------------------------------------------------------------
PLR-123357-14

                       ------------------------------------------------------------------------------------------
                       ----------------------------

a                =     ---

b                =     --

c                =     -------

d                =     -------

Year 1           =     ------

Year 2           =     ------


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

       This letter responds to your letter dated June 10, 2014, submitted by your
authorized representatives, requesting rulings on certain federal income tax
consequences of a proposed transaction (the “Proposed Transaction,” as described
below). The material information submitted in that letter and in 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. 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.

                                                   Facts

         Parent is the common parent of an affiliated group of corporations (the “Parent
Group”) that join in the filing of a consolidated federal income tax return. Parent owns
all of the stock of HoldCo. HoldCo, in turn, owns the sole membership interest in
HoldCo DE, a limited liability company disregarded from HoldCo for federal income tax
purposes, and an a% interest in PS 1, a limited liability company treated as a
partnership for federal income tax purposes. HoldCo DE owns all of the stock of Sub 1,
and Sub 1 owns the remaining b% interest in PS 1. HoldCo and Sub 1, among other
entities not relevant here, are members of the Parent Group.

       PS 1 holds cash (and cash equivalents), all of the stock of Sub 2, and a c%
(greater than 50%) interest in PS 2, a limited liability company treated as a partnership
for federal income tax purposes. The remaining d% interest in PS 2 is owned by an
unrelated party. PS 1 has no liabilities. PS 2, directly and indirectly, owns all of the
interests in multiple entities created under state law, each of which is an entity

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disregarded from PS 2 for federal income tax purposes. PS 2 has various liabilities
owed to affiliates and unrelated parties.

      With respect to each of PS 1 and PS 2 (but subject to section 704(c)), all items of
income, gain, loss, deduction and credit, all profits and losses, and all distributions are
shared in the same ratio as each partner’s respective ownership percentage in PS 1
and PS 2, as applicable. Elections under section 754 have always been in effect for
both PS 1 and PS 2 (including all successor partnerships resulting from partnership
terminations under section 708(b)(1)(B)).

         With respect to PS 1, Sub 1’s tax basis in its interest in PS 1 is equal to its
allocable share of PS 1’s tax basis in its assets. By contrast, HoldCo’s tax basis in its
interest in PS 1 exceeds its allocable share of PS 1’s tax basis in its assets as a result
of the Prior Intercompany Distributions (described below). However, HoldCo’s tax basis
in its interest in PS 1 equals its allocable share of PS 1’s tax basis in its assets after
taking into account the consequences of PS 1’s section 754 election (and the resulting
section 743(b) adjustments). With respect to PS 2, PS 1’s tax basis in its interest in PS
2 is equal to its allocable share of PS 2’s tax basis in its assets. (For purposes of this
letter ruling, a partner’s allocable share of a partnership’s tax basis in its assets with
respect to the partner’s interest in the partnership is determined in accordance with the
principles set forth in §1.743-1(d).)

       In Year 1 and Year 2, as part of larger restructurings of the Parent Group,
interests in PS 1 (currently held by HoldCo) were distributed by members of the Parent
Group in intercompany transactions (the “Prior Intercompany Distributions”). Certain of
these members realized gains under section 311(b) (the “Prior Intercompany Gains”) as
a result of the Prior Intercompany Distributions. These Prior Intercompany Gains have
been, and continue to be, taken into account under the matching rule of §1.1502-13(c).

                                  Proposed Transaction

The Taxpayer proposes to undertake the following transactions:

       (i)    Sub 1 will distribute its b% interest in PS 1 to HoldCo DE with respect to
              its stock (the “Distribution”).

       (ii)   Immediately thereafter, HoldCo DE will distribute this b% interest in PS 1
              to HoldCo with respect to its membership interest. This transaction will be
              disregarded for federal income tax purposes.

                                     Representations

(a)    PS 1’s assets consist of cash (and cash equivalents), stock of Sub 2, and a c%
       interest in PS 2. PS 1 has no liabilities.




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PLR-123357-14

(b)   Sub 1 will not receive cash (or cash equivalents) in an amount that exceeds its
      tax basis in its b% interest in PS 1 in the deemed liquidating distribution from PS
      1.

(c)   The Prior Intercompany Gains that have not been previously taken into account
      under §1.1502-13 are fully reflected in the difference between HoldCo’s tax basis
      in its a% interest in PS 1 and the tax basis that this interest would have, had all
      members that were parties to the Prior Intercompany Distributions (including all
      successor persons) been divisions of a single corporation. In addition, as a
      result of elections under section 754, a portion of the Prior Intercompany Gains
      that have not been previously taken into account under §1.1502-13 are reflected
      in section 743(b) adjustments with respect to PS 1’s stock of Sub 2 and its
      interest in PS 2, and with respect to PS 2’s interest in its assets. See Rev. Rul.
      87-115, 1987-2 C.B. 163 and §1.743-1(h)(1).

(d)   All section 743(b) adjustments with respect to PS 1’s stock of Sub 2 and its
      interest in PS 2 and with respect to PS 2’s interest in its assets that resulted from
      the Prior Intercompany Distributions are reflected within the Parent Group,
      segregated and allocated solely to HoldCo with respect to its indirect ownership
      of such interests. See Rev. Rul. 87-115, 1987-2 C.B. 163 and §1.743-1(h)(1).

(e)   All section 743(b) adjustments with respect to PS 2’s interest in its assets that will
      result from the Distribution will remain within the Parent Group, segregated and
      allocated solely to HoldCo with respect to its indirect ownership of such interest.
      See Rev. Rul. 87-115, 1987-2 C.B. 163 and §1.743-1(h)(1).

(f)   The Parent Group, PS 1, and PS 2 will maintain appropriate records with respect
      to all assets that reflect the federal income tax consequences to the Parent
      Group of the Prior Intercompany Distributions and the Distribution in order to
      ensure that the Prior Intercompany Gains and any gain or loss resulting from the
      Distribution will be appropriately accounted for and taken into account under the
      intercompany transaction regulations.

                                         Rulings

Based solely on the information submitted and the representations made, we rule as
follows:

(1)   PS 1 will terminate as a result of the Distribution because PS 1 will have a single
      owner, HoldCo. Section 708(b)(1)(A). Under the principles of Rev. Rul. 99-6,
      1999-1 C.B. 432, Sub 1 will treat the Distribution as a distribution of its
      partnership interest in PS 1 to HoldCo and will determine its income, gain, and/or
      loss under section 311(b) (and its principles pursuant to §1.1502-13(f)(2)(iii)),
      section 741, and section 751.




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(2)   Under the principles of Rev. Rul. 99-6, 1999-1 C.B. 432, PS 1 will be deemed to
      make a liquidating distribution of all of its assets (the cash and cash equivalents,
      the stock of Sub 2, and the interest in PS 2) to HoldCo and Sub 1. Following this
      distribution, HoldCo will be treated as acquiring, in a distribution from Sub 1, the
      assets deemed to be distributed by PS 1 to Sub 1 (Sub 1’s distributive share of
      the cash and cash equivalents, the stock of Sub 2, and the interest in PS 2) in
      liquidation of Sub 1’s interest in PS 1. HoldCo’s basis in the assets deemed
      acquired from Sub 1 will be their fair market value under section 301(d).

(3)   HoldCo will not include in its gross income the amount of the distribution it is
      treated as receiving from Sub 1 (as described in Ruling (2) above) to the extent
      there is a corresponding negative adjustment under §1.1502-32 in HoldCo’s
      basis in the stock of Sub 1. Section 1.1502-13(f)(2)(ii).

(4)   PS 1’s deemed distribution of its interest in PS 2 to HoldCo and Sub 1 (as
      described in Ruling (2) above) will cause PS 2 to terminate. Sections
      708(b)(1)(B) and 761(e).

(5)   The Distribution will be an intercompany transaction as described in §1.1502-
      13(b)(1).

(6)   Sub 1’s income, gain, and/or loss from the Distribution will be its intercompany
      item (or items). Section 1.1502-13(b)(2). The amount of Sub 1’s gain or loss will
      be the difference between the fair market value of Sub 1’s interest in PS 1 and
      Sub 1’s adjusted basis in its interest in PS 1 as determined under section 311(b)
      (and its principles pursuant to §1.1502-13(f)(2)(iii)) and section 741, and such
      amount will be considered as gain or loss from the sale of a capital asset, except
      as provided in section 751.

(7)   Sub 1’s income, gain, and/or loss from the Distribution (the intercompany item or
      items) will be accounted for under the matching rule of §1.1502-13(c). Holdco’s
      corresponding items from the Distribution or from property acquired in the
      Distribution will be: (i) its items with respect to the assets that HoldCo is treated
      as acquiring from Sub 1 in the manner described in Ruling (2) above; and (ii)
      its items from PS 2 that reflect any section 743(b) adjustments to the assets of
      PS 2 resulting from the deemed distributions of the interests in PS 2 (as
      described in Ruling (2) above) to the extent the section 743(b) adjustments are
      attributable to HoldCo’s acquisition from Sub 1 of the interest in PS 2 (the interest
      acquired by Sub 1 in the deemed liquidation of PS 1).

(8)   Holdco’s recomputed corresponding items will be based upon the respective
      bases that Sub 1 would have had in the assets that HoldCo is treated as
      acquiring from Sub 1 in the manner described in Ruling (2) above, had these
      assets been received in a liquidating distribution to which section 732(b) applied.




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(9)    The Prior Intercompany Gains will not be taken into account as income or gain
       under the acceleration rule of §1.1502-13(d) as a result of the Distribution.

                                          Caveats

        No opinion is expressed or implied about the federal income tax consequences
of any other aspect of any transaction or item discussed or referenced in this letter, or
the federal income tax treatment of any conditions existing at the time of, or effects
resulting from, the Proposed Transaction that are not specifically covered by the above
rulings. Specifically, we express no opinion about the federal income tax treatment of
the Prior Intercompany Distributions, the existence or amount of any Prior Intercompany
Gains, or whether the Prior Intercompany Gains should have been taken into account
previously.

                                  Procedural Statements

       The rulings 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.

       This ruling is directed only to the taxpayer requesting 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 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 is being sent to your authorized representative.


                                           Sincerely,


                                           __________________________
                                           Frances L. Kelly
                                           Senior Counsel, Branch 2
                                           Office of Associate Chief Counsel
                                           (Corporate)



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