Affiliate's stock-offering profit is excluded from gross income

Plain-English summary

A publicly traded parent company sold two classes of preferred stock through an underwriting group that included a disregarded entity owned by a consolidated subsidiary. The parent paid underwriting fees to that affiliate, which incurred related expenses and earned a net underwriting profit. The parent represented that it would not claim a deduction or asset basis for the fees, and the parties had a closing agreement with the IRS covering the fees and expenses. Under the consolidated return intercompany transaction rules, the IRS may exclude an affiliate's intercompany item when exclusion is consistent with the regulation and the Code. The IRS ruled that the underwriting profit was excluded from the subsidiary's gross income under Treasury Regulation Section 1.1502-13(c)(6)(ii)(D).

Ruling snapshot

• Question: Could the consolidated subsidiary exclude its disregarded entity's net profit from underwriting the parent's preferred-stock offerings?
• Outcome: Approved. The net underwriting profit was excluded from the subsidiary's gross income.
• Key authorities: Treas. Reg. §§ 1.1502-13(b), 1.1502-13(c)(1), 1.1502-13(c)(6)(ii)(D); IRC § 6110(k)(3)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201828006 Third Party Communication: None
Release Date: 7/13/2018 Date of Communication: Not Applicable
Index Number: 1502.13-00, 263.00-00
Person To Contact:
----------------------------- ---------------------, ID No. ------------------
-------------------------------------------------------- Telephone Number:
---------------------------------- ----------------------
----------------------- Refer Reply To:
----------------------------- CC:CORP:2
------------------------------------- PLR-123322-17
Date:
April 16, 2018

              TY:-------

Legend

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

State X = --------------

State Y = --------------

Sub = ----------------------------------------------------------------------------------------
-------------------------------------------

DRE = ----------------------------------------------------------------------------------------
------------------------------------------------------------------

Date1 = ------------------------

Date2 = --------------------

Preferred Stock A = ----------------------------------------------------------------------------------

Preferred Stock B = ---------------------------------------------------------------------------------

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

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

$x = ----------------

$y = --------------

$z = ----------------

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

   This letter responds to your authorized representative’s letter dated July 26,

2016, requesting a ruling on certain Federal income tax consequences of a transaction.
The material information provided in that request 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. 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 Office expresses no opinion as to the overall tax consequences of
the transaction described in this letter or as to any issue not specifically addressed by
the rulings below.

   Parent, a State X corporation, is a publicly traded holding company and the

common parent of a consolidated group (the "Parent Group"). Parent Group files its
consolidated Federal income tax return on a calendar year basis. Parent owns all the
stock of Sub, a State X corporation and member of the Parent Group. Sub owns all the
equity of DRE, a State Y entity disregarded as separate from its owner for Federal
income tax purposes.

   On Date1 and Date2, Parent made public offerings of a shares of Preferred

Stock A and b shares of Preferred Stock B (the “Offerings”). The net proceeds from the
Offerings were used for general corporate purposes.

    The Offerings were underwritten by DRE and other unaffiliated underwriters.

Parent paid underwriting fees of $x to DRE with respect to the Offerings, and DRE
incurred related expenses of $y with respect to the Offerings for a net underwriting profit
for Sub (through DRE) of $z in the Offerings. Parent has represented that it has not and
will not claim a Federal income tax deduction or basis in any asset with respect to the
$x underwriting fees paid to DRE. Parent and the Commissioner of Internal Revenue
have entered into a closing agreement regarding the treatment of the $x underwriting
fees incurred by Parent and the $y related expenses incurred by DRE.

    Section 1.1502-13(b)(1) defines an intercompany transaction as a transaction

between corporations that are members of the same consolidated group immediately
after the transaction.

Section 1.1502-13(b)(2)(i) provides:

   S's income, gain, deduction, and loss from an intercompany transaction
   are its intercompany items. For example, S's gain from the sale of
   property to B is intercompany gain.

S is the member transferring property or providing services, and B is the member
receiving the property or services.

  Section 1.1502-13(b)(3)(i) provides that B's income, gain, deduction, and loss

from an intercompany transaction, or from property acquired in an intercompany
transaction, are its corresponding items.

   Section 1.1502-13(b)(6) provides that the attributes of an intercompany item or

corresponding item are all of the item's characteristics, except amount, location, and
timing, necessary to determine the item's effect on taxable income (and tax liability).
Attributes include treatment as excluded from gross income or as a noncapital,
nondeductible amount.

   Section 1.1502-13(c)(1)(i) provides that the separate entity attributes of S's

intercompany items and B's corresponding items are redetermined to the extent
necessary to produce the same effect on consolidated taxable income (and
consolidated tax liability) as if S and B were divisions of a single corporation, and the
intercompany transaction were a transaction between divisions.

   Section 1.1502-13(c)(6)(i) provides that under §1.1502-13(c)(1)(i), S's

intercompany item might be redetermined to be excluded from gross income or treated
as a noncapital, nondeductible amount.

  Section 1.1502-13(c)(6)(ii) provides that, notwithstanding the general rule in

§1.1502-13(c)(1)(i), S's intercompany income or gain is redetermined to be excluded
from gross income only to the extent one of the enumerated provisions apply.

   In addition, § 1.1502-13(c)(6)(ii)(D)(1) provides that the Commissioner may

determine that S's intercompany item may be excluded from gross income if such
exclusion is consistent with the purposes of §1.1502-13 and other provisions of the
Internal Revenue Code and regulations.

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

that DRE's net underwriting profit of $z is determined to be excluded from Sub's gross
income under § 1.1502-13(c)(6)(ii)(D).

  This ruling letter is directed only to the taxpayer requesting it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

   A copy of this letter ruling 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 on and
control number of the letter ruling.

    In accordance with the Power of Attorney on file with this office, a copy of this

letter ruling is being sent to your authorized representative.

                                       Sincerely,



                                       Ken Cohen
                                       Senior Technician Reviewer, Branch 3
                                       Office of Associate Chief Counsel (Corporate)