Deferred intercompany gains are excluded after subsidiary mergers

Plain-English summary

A consolidated group was carrying two deferred intercompany gains from earlier distributions of member stock under section 311(b). The group proposed a downstream merger followed by an upstream merger, and represented that the earlier distributions had produced no federal tax benefit beyond their effect on the distributed stock basis. Under the Commissioner's discretionary rule, the IRS allowed both intercompany gains to be redetermined as excluded from gross income in the merger years. The excluded amounts would not enter any member's earnings and profits and would not be treated as tax-exempt income. The IRS did not rule on whether either merger qualified under sections 332 or 368.

Ruling snapshot

• Question: Could two deferred intercompany gains be excluded under the Commissioner's discretionary rule when the relevant subsidiaries merge?
• Outcome: Approved on the stated representations.
• Key authorities: IRC §§ 311(b), 332, and 368(a)(1)(A); Treas. Reg. §§ 1.1502-13(c)(6)(ii)(D) and 1.1502-32(b)(2)(ii)

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201612006                                             Third Party Communication: None
Release Date: 3/18/2016                                       Date of Communication: Not Applicable
Index Number: 1502.13-00
                                                              Person To Contact:
-------------------------------                               -----------------------
--------------------------------------------------------      ID No. --------------
-----------------------------------                           Telephone Number:
----------------------------                                  ----------------------
------------------------------------                          Refer Reply To:
                                                              CC:CORP:B04
                                                              PLR-126078-15
                                                              Date:
                                                              December 16, 2015


Legend

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

Sub1                    =     --------------------------------------------------------------------------------------
                              --------------------------------------------------------------------------------------
                              -----------------------------------------

Sub2                    =     ------------------------------------------------------------------------------------------
                                                         ---------------------------------------------------------------
                                                         --------------

Sub3                    =     ------------------------------------------------------------------------------------------
                                                         ---------------------------------------------------------------
                                                         -------------------

Business A              =     ------------------------

Year 1                  =     -------

Year 2                  =     -------

Year 3                  =     -------

Percentage A            =     ------------------

PLR-126078-15                                     2

Percentage B          =    ------------------

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

        This letter responds to your representative’s letter dated July 31, 2015,
requesting rulings under the Commissioner’s Discretionary Rule of § 1.1502-
13(c)(6)(ii)(D) of the Income Tax Regulations. The material information submitted in
that letter and in subsequent 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 facts,
representations, and other information may be required as part of the audit process

                                                Facts

      Parent is the common parent of an affiliated group (the “Parent Group”) that files
a consolidated return for U.S. Federal income tax purposes. All members of the Parent
Group use the accrual method of accounting. Parent, through its subsidiaries, is
engaged in Business A. Sub2 is Parent’s principal operating subsidiary.

         Parent owns all of the stock of Sub1 and Percentage A of the stock of Sub2.
Sub1 owns the remaining Percentage B of Sub2 stock. Sub1 owns all of the
outstanding stock of Sub3. Prior to its acquisition by the Parent Group in Year 2, the
predecessor of Sub1 was the common parent of an affiliated group (the “Sub1 Group”)
that filed a consolidated return for U.S. Federal income tax purposes.
       As a result of past restructurings, Sub1, Sub2 and Sub3 are accounting for two
intercompany gains under the rules of Treas. Reg. § 1.1502-13. The first intercompany gain
was the result of a distribution of stock of a member of the Sub1 Group in Year 1 (the “Year 1
Distribution”) by Sub3 to the predecessor of Sub1 in a transaction to which section 311(b)
applied (the “First Intercompany Gain”).
       The second intercompany gain was the result of a distribution of stock of a member of
the Parent Group in Year 3 (the “Year 3 Distribution”) by a predecessor of Sub2 in a
transaction to which section 311(b) applied (the “Second Intercompany Gain” and, together
with the First Intercompany Gain, the “Intercompany Gains”).
       Sub1, as the successor to the common parent of the Sub1 Group, was the buying
member with respect to the First Intercompany Gain (B1). Sub1 was also the buying member
with respect to the Second Intercompany Gain (B2). Sub3 was the selling member with
respect to the First Intercompany Gain (S1), and Sub2 was the successor selling member with
respect to the Second Intercompany Gain (S2). Shares of Sub2 stock owned by Sub1 reflect
both Intercompany Gains.

PLR-126078-15                               3

      To date, the Intercompany Gains have not been taken into account under Treas. Reg.
§ 1.1502-13.
                                Proposed Transactions

      The following steps are proposed (collectively, the “Proposed Transactions”):

      (i)    Sub1 will merge into Sub2 in a transaction intended to qualify as a
             reorganization under section 368(a)(1)(A) (the “Downstream Merger”).

      (ii)   Immediately thereafter, Sub3 will merge into Sub2 in a transaction
             intended to qualify as a reorganization under section 368(a)(1)(A) (the
             “Upstream Merger”).

                                   Representations

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

      (a)    The Downstream Merger will qualify as a reorganization within the
             meaning of section 368(a)(1)(A).

      (b)    The Upstream Merger will qualify as a reorganization within the meaning
             of section 368(a)(1)(A), a liquidation under section 332, or both.

      (c)    The effects of the Year 1 Distribution have not previously been reflected
             on the Sub1 Group’s consolidated return or the Parent Group’s
             consolidated return.

      (d)    Neither the Sub1 Group nor the Parent Group has derived, and no
             taxpayer will derive, any Federal income tax benefit from the Year 1
             Distribution that gave rise to the First Intercompany Gain.

      (e)    The effects of the Year 3 Distribution have not previously been reflected
             on the Parent Group’s consolidated return.

      (f)    The Parent Group has not derived, and no taxpayer will derive, any
             Federal income tax benefit from the Year 3 Distribution that gave rise to
             the Second Intercompany Gain.

                                        Rulings

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

PLR-126078-15                                 4

       (1)    The Intercompany Gains from the first and second intercompany
              transactions will not be reflected in the basis of any asset of Sub1, Sub2
              or Sub3, other than the stock of the distributed members.

       (2)    The First Intercompany Gain will be redetermined to be excluded from
              gross income under the Commissioner’s Discretionary Rule of Treas. Reg.
              § 1.1502-13(c)(6)(ii)(D). Accordingly, the First Intercompany Gain will be
              excluded from Sub3’s gross income for the Parent Group’s consolidated
              income tax return year that includes the day of the Upstream Merger.

       (3)    The amount of the First Intercompany Gain that is redetermined to be
              excluded from gross income will not be taken into account as earnings
              and profits of any member and will not be treated as tax-exempt income
              under Treas. Reg. § 1.1502-32(b)(2)(ii).

       (4)    The Second Intercompany Gain will be redetermined to be excluded from
              gross income under the Commissioner’s Discretionary Rule of Treas. Reg.
              § 1.1502-13(c)(6)(ii)(D). Accordingly, the Second Intercompany Gain will
              be excluded from Sub2’s gross income for the Parent Group’s
              consolidated income tax return year that includes the day of the
              Downstream Merger.

       (5)    The amount of the Second Intercompany Gain that is redetermined to be
              excluded from gross income will not be taken into account as earnings
              and profits of any member and will not be treated as tax-exempt income
              under Treas. Reg. § 1.1502-32(b)(2)(ii).

                                          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 Transactions that are not specifically covered by the above
rulings. Specifically, we express no opinion about whether the Downstream Merger will
qualify as a reorganization under section 368(a)(1)(A), or whether the Upstream Merger
will qualify as a reorganization under 368(a)(1)(A), a liquidation under section 332, or
both.

                                  Procedural Statements

       This ruling is directed only to the taxpayer who requested 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

PLR-126078-15                                    5

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 representatives.


                                    Sincerely,


                                    __________________________________________
                                    Lawrence M. Axelrod
                                    Special Counsel to the Associate Chief Counsel
                                    (Corporate)

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