Intragroup partnership sale terminates partnership and uses matching rules

Plain-English summary

Two disregarded entities in different chains of the same consolidated group owned a partnership, and one sold its entire interest to the other for cash. The IRS ruled that the partnership terminated under IRC § 708 because it then had a single owner. Under Revenue Ruling 99-6, the seller is treated as selling its partnership interest, while the buyer is treated as receiving a liquidating distribution and purchasing the seller's share of the underlying assets. Because the sale was an intercompany transaction, the seller's gain or loss and the buyer's corresponding asset items must be accounted for under the consolidated-return matching rules.

Ruling snapshot

• Question: How is a sale of the seller's entire partnership interest to an affiliated co-owner treated for partnership and consolidated-return purposes?
• Outcome: Approved. The partnership terminates, Revenue Ruling 99-6 applies, and the intercompany matching rules govern the resulting items.
• Key authorities: IRC §§ 708, 732, 741, 751, 1001, 1012; Treas. Reg. § 1.1502-13; Rev. Rul. 99-6

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201723008 Third Party Communication: None
Release Date: 6/9/2017 Date of Communication: Not Applicable
Index Number: 1502.13-00, 708.01-00
Person To Contact:
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---------------------------------------------- ID No. -----------------
---------------------- Telephone Number:
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-------------------------------------------- Refer Reply To:
CC:CORP:B02
PLR-128610-16
Date:
March 13, 2017

Legend

Parent = --------------------------------------------------------------------------------
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Sub 1 = --------------------------------------------------------------------------------
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Sub 2 = --------------------------------------------------------------------------------
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DE 1 = --------------------------------------------------------------------------------
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DE 2 = --------------------------------------------------------------------------------
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DE 3 = --------------------------------------------------------------------------------
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PS 1 = --------------------------------------------------------------------------------
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PLR-128610-16 2

Business = --------------------------------------------------------------------------------

Facilities = ----------------------------

LLC Agreement = --------------------------------------------------------------------------------
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Sales Agreement = -----------------------------------------------------------------------

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

a = --

b = ---

c = --

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

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

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

    This letter responds to your representative's letter dated September 14, 2016,

submitted on behalf of Parent, requesting rulings concerning the Federal income tax
consequences of the transaction described below. Additional information was submitted
in letters dated December 30, 2016, February 17, 2017, and March 8, 2017. The
material information submitted for consideration is summarized below.

                                            Facts

    Parent is a holding company and the common parent of an affiliated group of

corporations (the “Parent Group”) that join in the filing of a consolidated federal income
tax return. The Parent Group is engaged in Business, largely through two chains of
entities. Parent directly owns all of the membership interests in DE 1, a limited liability
company disregarded from Parent for federal income tax purposes, and all of the stock
of Sub 1. DE 1 owns all of the membership interests in DE 2, a limited liability company
disregarded from Parent for federal income tax purposes. Sub 1 owns all of the stock of
Sub 2, which owns all of the membership interests in DE 3, a limited liability company
disregarded from Sub 2 for federal income tax purposes.

   Prior to Date 1, DE 2 and DE 3 held all of the membership interests in PS 1, a

limited liability company treated as a partnership for federal income tax purposes. All of

PLR-128610-16 3

PS 1’s Class A membership interests were owned by DE 3, and all of PS 1’s Class B
membership interests were owned by DE 2. The assets of PS 1 consist of interests in a
Facilities, each of which is owned by a special purpose entity, wholly-owned by PS 1
and disregarded from PS 1 for federal income tax purposes. At all times relevant,
pursuant to the terms of the LLC Agreement, PS 1’s items of income, gain, loss,
deduction, and credit were allocated b% to DE 2 and c% to DE 3.

   On Date 1, pursuant to the Sales Agreement, DE 2 sold all of its Class B

membership interests in PS 1 to DE 3 (the “PS 1 Sale”) for cash of $d. Parent’s gain
from the PS 1 Sale was $e.

                                Representations

(a) At the time of the PS 1 Sale, PS 1’s assets consisted solely of the interests in the
special purpose entities, the assets of which consisted solely of the Facilities and
other trade or business assets related to the operation thereof. In addition, at the
time of the PS 1 Sale, PS 1 (and its special purpose entities) had no liabilities,
other than trade liabilities incurred in the ordinary course of its operation of the
Facilities.

(b) If the PS 1 assets which Sub 2 is treated as purchasing from Parent in the PS 1
Sale, had been distributed to Parent in a liquidating distribution to which section
732(b) applied, Parent would not have recognized gain or loss on the distribution;
the amount of cash (or cash equivalents) distributed would not have exceeded
Parent’s tax basis in its interest in PS 1.

(c) The amount realized by Parent in the PS 1 Sale will be fully reflected in the
bases of the assets that Sub 1 will be treated as purchasing from Parent in
connection with the PS 1 Sale.

(d) The Parent Group, Parent, and Sub 2 have maintained, and will continue to
maintain, appropriate records with respect to all amounts of income, gain, and/or
loss from the PS 1 Sale and with respect to all assets that reflect the federal
income tax consequences to the Parent Group of the PS 1 Sale, in order to
ensure that all items of income, gain, deduction and/or loss resulting from the PS
1 Sale 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 terminated as a partnership as a result of the PS 1 Sale because PS 1 has
a single owner, Sub 2. Section 708(b)(1)(A).

PLR-128610-16 4

(2) Under Rev. Rul. 99-6, 1999-1 C.B. 432, Parent will treat the PS 1 Sale as a sale
of its partnership interest in PS 1 to Sub 2 and will determine its income, gain,
and/or loss under sections 741 and 751(a). The amount of Parent’s gain or loss
will be the difference between the amount realized by Parent with respect to its
interest in PS 1 and Parent’s adjusted basis in the interest in PS 1. Section
1001.

(3) Under Rev. Rul. 99-6, 1999-1 C.B. 432, PS 1 will be deemed to have made a
liquidating distribution of all of its assets to Parent and Sub 2. Following this
distribution, Sub 2 will be treated as purchasing the assets deemed to be
distributed by PS 1 to Parent in liquidation of Parent’s interest in PS 1. Sub 2’s
basis in the assets deemed purchased from Parent will be the purchase price
paid for Parent’s interest in PS 1. Section 1012.

(4) The PS 1 Sale is an intercompany transaction as described in Treas. Reg.
§ 1.1502-13(b)(1).

(5) Parent’s income, gain, and/or loss from the PS 1 Sale are its intercompany items.
Treas. Reg. § 1.1502-13(b)(2). The amount of Parent’s income, gain, and/or loss
from the PS 1 Sale (the intercompany items) will be accounted for under the
matching rule of Treas. Reg. § 1.1502-13(c).

(6) Sub 2’s corresponding items from the PS 1 Sale will be its items with respect to
the assets that Sub 2 is treated as purchasing from Parent (in the manner
described in Ruling (3) above).

(7) Sub 2’s recomputed corresponding items will be determined based upon the
respective bases that Parent would have had in the assets that Sub 2 is treated
as purchasing from Parent (in the manner described in Ruling (3) above), had
these assets been received in a liquidating distribution to which section 732(b)
applied.

(8) The separate entity attributes of Parent’s intercompany items will be
redetermined under Treas. Reg. § 1.1502-13(c)(1)(i) and (c)(4) by treating a
proportionate amount of each of the items as allocable to the assets that Sub 2 is
treated as purchasing from Parent (in the manner described in Ruling (3) above),
based upon the difference between Sub 2’s recomputed corresponding items
and its corresponding items with respect to each of such assets, in order to
produce the same effect on the Parent Group’s consolidated taxable income (and
consolidated tax liability) as if Parent and Sub 2 were divisions of a single
corporation and the PS 1 Sale were between divisions of a single corporation.

PLR-128610-16 5

                                      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 PS 1 Sale that is not specifically covered by the above rulings. In
particular, we express no opinion about the amount of Parent’s gain with respect to the
PS 1 Sale.

                          PROCEDURAL STATEMENTS

  The rulings contained in this letter are based upon information and

representations submitted by the taxpayer and accompanied by a penalties 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.

  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 is being sent to your authorized representatives.

                                Sincerely,


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

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