Check-the-box liquidation supports affiliated worthless-stock deduction

Plain-English summary

A corporate group planned a series of check-the-box elections that would liquidate several foreign subsidiaries up a holding-company chain. The lower-tier liquidations were represented to qualify under Section 332, with tax attributes carrying over under Section 381. The top holding company would be insolvent when its election occurred, making its stock worthless. The IRS ruled that the top company could use the historic gross receipts of the lower-tier companies for the Section 165(g)(3) 90-percent gross-receipts test, after eliminating intercompany distributions to prevent duplication. If the other statutory requirements were met, the taxpayer could claim an affiliated-corporation worthless-stock deduction.

Ruling snapshot

• Question: Could historic subsidiary receipts count toward the affiliated-corporation test, and could the taxpayer deduct the top holding company’s worthless stock when the final election occurred?
• Outcome: Yes, subject to the remaining requirements of Section 165(g)(3).
• Key authorities: IRC §§ 165(g)(3), 332, 381, 1504(a)(2); Treas. Reg. § 301.7701-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201829004 Third Party Communication: None
Release Date: 7/20/2018 Date of Communication: Not Applicable
Index Number: 165.00-00, 165.06-00,
165.06-02 Person To Contact:
-------------------
-------------------- ID No. ----------------
-------------------------------- Telephone Number:
------------------------------ ----------------------
Refer Reply To:
------------------------- CC:ITA:B01
----------------------------------------------------- PLR-133397-17
Date:
April 24, 2018

Re: -------------------------------------------------------------

                                                LEGEND

Taxpayer = -----------------------------------

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

Brand = ----------------------

Year 1 = -------

Year 2 = -------

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

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

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

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

Date 5 = ------------------------

Region 1 = ----------------

Region 2 = --------------------
PLR-133397-17 2

Franchisee = --------------------

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

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

Sub 3 = ----------------------------------------------------------------

Sub 4 = ------------------------------------------

HoldCo 1 = -------------------------------

HoldCo 2 = ---------------------

HoldCo 3 = -----------------------------------------

HoldCo 4 = --------------------------

HoldCo 5 = ----------------------------------------------

HoldCo 6 = ----------------------------------------------

HoldCo 7 = ----------------------------------

State A = --------------

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

This is in response to a letter dated October 31, 2017, submitted on behalf of Taxpayer,
requesting a letter ruling under § 165 of the Internal Revenue Code (the “Code”). The
information submitted for consideration is summarized below.

                                              FACTS

Taxpayer, a State A corporation, is an indirect wholly owned subsidiary of Parent.
Parent, a State A corporation, is the common parent of an affiliated group of
corporations that file a consolidated U.S. federal income tax return. Parent is also the
common parent of a worldwide group of entities. Parent and its related entities sell
Brand products. Unless otherwise noted, all of Taxpayer’s subsidiaries mentioned in this
ruling are foreign subsidiaries treated as corporations for U.S. federal income tax
purposes.
PLR-133397-17 3

In Year 1, one of Parent’s subsidiaries entered into a franchise agreement with
Franchisee and its subsidiaries to operate Brand stores in Region 1 and Region 2. Sub
1, a wholly-owned subsidiary of Franchisee, operated Brand stores in Region 1. Sub 2,
which became a wholly owned subsidiary of Sub 1, operated Brand stores in Region 2.

As part of a strategy to take more direct control of poorly performing Brand stores
operated by Franchisee, Taxpayer formed HoldCo 1 on Date 1. Subsequently, HoldCo
1 formed HoldCo 2, which formed HoldCo 3. On Date 2, HoldCo 3 acquired Sub 1.

In anticipation of a new Brand store in Region 2, Taxpayer caused HoldCo 3 to form
Sub 3. In Year 2, Taxpayer formed HoldCo 4, which formed HoldCo 5, which formed
HoldCo 6. On Date 3, HoldCo 3 sold Sub 3 to HoldCo 6. On Date 4, Sub 1 sold Sub 2 to
Holdco 6.

In anticipation of a new Brand store in Region 1, Taxpayer negotiated a lease
agreement allowing assignment of the future lease to an affiliate. Subsequently,
Taxpayer caused Sub 1 to enter a lease for the Region 1 store.

In Year 2, Taxpayer formed HoldCo 7, which formed Sub 4. Sub 1 assigned the lease of
the Region 1 store to Sub 4 on Date 5. Sub 1 has closed three of its Brand stores in
Region 1, and will soon close a fourth. Taxpayer represents that it intends to cause Sub
1 to sell its remaining two Region 1 Brand stores to Sub 4.

In summary, Taxpayer is currently the common parent of three relevant holding
company chains. The initial holding company chain now contains HoldCo 1, HoldCo 2,
HoldCo 3, and Sub 1. The Region 1 holding company chain contains HoldCo 7 and Sub

4. The Region 2 holding company chain contains HoldCo 4, HoldCo 5, HoldCo 6, Sub 2,
   and Sub 3.

Taxpayer now proposes the following transaction:

1. Sub 1 will file an election under Treas. Reg. § 301.7701-3 to be classified as a
   disregarded entity for U.S. federal income tax purposes, resulting in a deemed
   distribution of all of Sub 1’s assets and liabilities to Holdco3 (the “Sub 1 CTB
   Election”).

2. Holdco 3 will file an election under Treas. Reg. § 301.7701-3 to be classified as a
   disregarded entity for U.S. federal income tax purposes, resulting in a deemed
   distribution of all of HoldCo 3’s assets and liabilities to Holdco 2 (the “HoldCo 3
   CTB Election”).

3. HoldCo 2 will file an election under Treas. Reg. § 301.7701-3 to be classified as
   a disregarded entity for U.S. federal income tax purposes, resulting in a deemed
   PLR-133397-17 4

   distribution of all of HoldCo 2’s assets and liabilities to HoldCo 1 (the “HoldCo 2
   CTB Election”).

4. Holdco 1 will file an election under Treas. Reg. § 301.7701-3 to be classified as a
   disregarded entity for U.S. federal income tax purposes, resulting in a deemed
   distribution of all of HoldCo 1’s assets and liabilities to Taxpayer (the “HoldCo 1
   CTB Election”).

                            REPRESENTATIONS
   

5. The Sub 1 CTB Election will qualify as a liquidation under Section 332 for U.S.
   federal income tax purposes; and, pursuant to Section 381, the attributes will
   carry over to HoldCo 3.

6. The HoldCo 3 CTB Election will qualify as a liquidation under Section 332 for
   U.S. federal income tax purposes; and, pursuant to Section 381, the attributes
   will carry over to HoldCo 2.

7. The HoldCo 2 CTB Election will qualify as a liquidation under Section 332 for
   U.S. federal income tax purposes; and, pursuant to Section 381, the attributes
   will carry over to HoldCo 1.

8. Taxpayer owns directly more than 80 percent of the total voting power and 80
   percent of the total value of HoldCo 1 within the meaning of Section 1504(a)(2).

9. The HoldCo 1 CTB Election will occur at a time when HoldCo 1 will be insolvent
   (as described in Rev. Rul. 2003-125, 2003-2 C.B. 1243) and its stock will be
   worthless, within the meaning of section 165(g)(1).

10. HoldCo 1 has not made any distributions that caused it to become insolvent.

                                   RULINGS
    

    Based upon the information submitted and representations made by Taxpayer, we rule
    as follows:

11. For purposes of computing the “more than 90 percent gross receipts” test under
    section 165(g)(3)(B), HoldCo 1 will take into account the historic gross receipts of
    HoldCo 2, HoldCo 3, and Sub 1 provided, however, that prior distributions
    received by HoldCo 3, HoldCo 2 and HoldCo 1 from Sub 1, HoldCo 3 and
    HoldCo 2, respectively, will be eliminated so as to prevent duplication.

12. Assuming the requirements for claiming a worthless stock deduction under
    § 165(g)(3) are otherwise satisfied, Taxpayer may claim a worthless stock
    deduction for the HoldCo 1 stock upon the occurrence of the HoldCo 1 CTB
    Election.
    PLR-133397-17 5

                                     CAVEATS
    

    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 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.

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.

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,



                                   Ronald J. Goldstein
                                   Assistant to the Branch Chief, Branch 1
                                   (Income Tax & Accounting)

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