Private Letter Ruling
201927002
Released July 5, 2019
Approved
Bankruptcy-split companies may reconsolidate before 61 months
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This page covers one taxpayer's ruling from 2019, which can't be cited as precedent. Ezel answers your situation under the current Code and IRS guidance, with citations.
Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.
About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.
View official IRS release (PDF)
Plain-English summary
A corporate group emerged from Chapter 11 through transactions that divided its assets and liabilities between two independent companies. The separation produced a large capital loss that had not been used, and both resulting groups later incurred net operating losses. The companies then proposed a stock-for-stock transaction that would bring the separated group members back into the original successor group's consolidated return before the normal 61-month waiting period expired. The IRS waived that waiting period because the transactions served stated business purposes and were not represented to create other federal tax savings. The waiver was conditioned on a closing agreement permanently preventing use of any portion of the capital loss on the acquiring parent's consolidated returns.
Ruling snapshot
- Question: Could corporations separated during a bankruptcy reorganization rejoin the successor parent's consolidated group before the section 1504(a)(3)(A) 61-month period ended?
- Outcome: Approved, conditioned on a closing agreement barring any consolidated-return benefit from the separation capital loss.
- Key authorities: IRC § 1504(a)(3); Treas. Reg. § 1.1502-75(d)(2)(i); Rev. Proc. 2002-32
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 201927002 Third Party Communication: None
Release Date: 7/5/2019 Date of Communication: Not Applicable
Index Number: 1504.00-00
Person To Contact:
-------------------- ---------------------------, ID No. ---------------
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--------------------------- Telephone Number:
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---------------------------- Refer Reply To:
CC:CORP:2
PLR-119557-18
Date:
October 02, 2018
Legend
Old Parent = ----------------------------------------------------------------
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New Parent = ----------------------------------------------------------------
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Target HoldCo = ----------------------------------------------------------------
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Loss Members = ----------------------------------------------------------------
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Bankruptcy Court = ----------------------------------------------------------------
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State A = ------------
Date 1 = --------------------
Date 2 = -----------------
Emergence Date = -----------------
Year 1 = ------
Year 2 = ------
Year 3 = ------
a = ------
PLR-119557-18 8
Corporate Business Purpose = ----------------------------------------------------------------
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Dear --------------:
This letter responds to your request, dated June 15, 2018, submitted on behalf of
New Parent, requesting a ruling under § 1504(a)(3)(B) of the Internal Revenue Code
waiving the application of § 1504(a)(3)(A) with respect to Target Parent and certain of
its affiliates. Additional information was received in a letter dated August 17, 2018. The
material information submitted is summarized below.
Summary of Facts
Old Parent was a public State A corporation and the common parent of an
affiliated group of corporations that joined in the filing of a consolidated federal income
tax return (the “Old Parent Consolidated Group”). On Date 1, Old Parent and its
affiliates filed a voluntary bankruptcy petition in the Bankruptcy Court. On Date 2, the
Bankruptcy Court issued the order confirming the plan of reorganization of these entities
(the “Plan”) and the Plan became effective on the Emergence Date.
On the Emergence Date, Old Parent and its affiliates emerged from Chapter 11
bankruptcy in a series of transactions pursuant to the Plan (the “Emergence
Transactions”). In general, the Emergence Transactions consisted of three parts: (i) the
internal restructuring of Old Parent’s subsidiaries (the “Internal Restructuring”); (ii) the
“Target Transfer,” consisting of the taxable transfer of specified assets (including the
stock of historic members of the Old Parent Consolidated Group, i.e., the Historic Group
Members) to, and the assumption of liabilities by, newly-formed Target Parent, in
exchange for Target Parent stock and other consideration, including stock of Target
HoldCo; and (iii) the recapitalization and reorganization of Old Parent into New Parent.
The Emergence Transactions were necessary for the business operations of Old
Parent to emerge from bankruptcy and more specifically, to divide the Old Parent
Consolidated Group’s assets and liabilities into two independent operating companies.
Old Parent retained valuable assets subject only to specified liabilities, and Target
Parent received the residual assets subject to all of the remaining liabilities, other than
those resolved pursuant to the Plan.
As a result of the Emergence Transactions, New Parent became the § 381
successor to Old Parent and, pursuant to Treas. Reg. § 1.1502-75(d)(2)(i), the common
parent of the Old Parent Consolidated Group (hereafter referred to as the “New Parent
Consolidated Group”).
PLR-119557-18 9
The Target Transfer caused Old Parent to recognize a capital loss of
approximately $a million on the transfer of the stock of the Loss Members (the “Capital
Loss”). No amount of the Capital Loss has been used by the New Parent Consolidated
Group to reduce taxable income.
Target Parent, as the common parent of an affiliated group of corporations, has
filed a consolidated federal income tax return (the “Target Parent Consolidated Group”)
since the completion of the Emergence Transactions.
The Emergence Transactions created two self-sufficient companies. Since the
completion of the Emergence Transactions, both the New Parent Consolidated Group
and the Target Parent Consolidated Group have incurred net operating losses for the
Year 1 and Year 2 taxable years.
Subsequent to the Emergence Transactions, New Parent and Target Parent,
separately and independently, each undertook dispositions that were parts of the revival
of its respective businesses. After such dispositions, certain of the Historic Group
Members liquidated into Target Parent, and such liquidations were treated as tax-free
pursuant to § 332, thereby causing Target Parent to become a § 381 successor to
certain of the Historic Group Members.
In order to facilitate the Corporate Business Purpose, New Parent has agreed to
acquire Target Parent and Target HoldCo in exchange for New Parent common stock
(the “Transaction”). As a result of the Transaction, the New Parent Consolidated Group
will acquire the Historic Group Members. In order to acquire Target Parent and Target
HoldCo, New Parent intends to undertake the following steps in Year 3:
(i) New Parent will form Merger Sub 1, a State A corporation. Merger Sub 1
will form Merger Sub 2, a State A corporation.
(ii) Merger Sub 1 will merge with and into Target HoldCo, with Target HoldCo
surviving. Shareholders of Target HoldCo will receive solely common stock
in New Parent in exchange for their shares in Target HoldCo.
(iii) Immediately thereafter, Merger Sub 2 will merge with and into Target
Parent, with Target Parent surviving. Shareholders of Target Parent (other
than Target HoldCo) will receive solely common stock in New Parent in
exchange for their shares in Target Parent.
At the completion of the Transaction, the Target Parent Consolidated Group will
terminate. Target Parent, Target HoldCo, and certain of the Historic Group Members will
become members of New Parent’s affiliated group. Absent relief pursuant to
§ 1504(a)(3)(B), Target Parent and the remaining of the Historic Group Members will be
barred by § 1504(a)(3)(A) from joining in the filing of the New Parent Consolidated
Group's consolidated return for Year 3.
PLR-119557-18 10
Law
Section 1504(a)(3)(A) provides that, if a corporation is included in a consolidated
federal income tax return filed by an affiliated group of corporations, and such
corporation ceases to be a member of such group, such corporation (or any successor
of such corporation) may not be included in any consolidated return filed by the affiliated
group (or by another affiliated group with the same common parent or a successor of
such common parent) before the 61st month beginning after its first taxable year in
which it ceased to be a member of such affiliated group. Section 1504(a)(3)(A) therefore
prevents Target Parent and certain of the Historic Group Members from being included
in the consolidated return of the New Parent Consolidated Group before the 61st month
after the taxable year that included the Emergence Date. However, § 1504(a)(3)(B)
allows the Secretary to waive the application of § 1504(a)(3)(A) to any corporation for
any period subject to such conditions as the Secretary may prescribe. Section
1504(a)(3)(A) was enacted by § 60(a) of the Tax Reform Act of 1984. The Conference
Report states that the rule prohibiting consolidation after deconsolidation is an anti-
abuse rule. H.R. Conf. Rep. No. 98-861, at 833 (1984).
Rev. Proc. 2002-32 grants an automatic waiver of the general rule of
§ 1504(a)(3)(A) for taxpayers who meet its requirements. Section 5 of Rev. Proc. 2002-
32 specifies the information and representations to be included in a request for an
automatic waiver. Section 5.14 of Rev. Proc. 2002-32 provides that the request must
include a representation that the disaffiliation and subsequent consolidation has not
provided and will not provide a benefit of a reduction in income, increase in loss, or any
other deduction, credit, or allowance (a federal tax savings) that would not otherwise be
secured or have been secured had the disaffiliation and subsequent consolidation not
occurred, including, but not limited to, the use of a net operating loss or credit that would
otherwise have expired, or the use of a loss recognized on a disposition of stock of the
deconsolidated corporation or a predecessor of such corporation. Section 5.14 of Rev.
Proc. 2002-32 further provides that in determining whether the disaffiliation and
subsequent consolidation provided or will provide a federal tax savings, the net tax
consequences to all parties, taking into account the time value of money, are
considered.
Section 7 of Rev. Proc. 2002-32 provides that if a deconsolidated corporation
cannot qualify for an automatic waiver, a waiver under § 1504(a)(3)(B) may only be
obtained through a letter ruling request. Section 7 of Rev. Proc. 2002-32 further
provides that the ruling request should include the information set forth in § 5 of Rev.
Proc. 2002-32.
Representations
New Parent on behalf of itself and its affiliates has made the following
representations in connection with the Transaction:
PLR-119557-18 11
(1) No party to the Transaction (i.e., New Parent, Target Parent, and Target
HoldCo) is or has been an S corporation (within the meaning of § 1361(a)),
a real estate investment trust (a “REIT”), or a regulated investment
company (a “RIC”), an insurance company, a bank, a savings and loan
association, a controlled foreign corporation (a “CFC”), or other corporation
with a special U.S. federal tax status at any time during the period of
disaffiliation, and no party to the Transaction (i.e., New Parent, Target
Parent, and Target HoldCo) plans to become or will become eligible to be
such an entity.
(2) Except for obtaining a tax benefit in the form of the Capital Loss, the
deconsolidation and reconsolidation of certain of the Historic Group
Members has not provided and will not provide a benefit of a reduction in
income, increase in loss, or any other deduction, credit, or allowance that
would not otherwise be secured or have been secured had the disaffiliation
and subsequent consolidation not occurred, including, but not limited to, the
use of a net operating loss or credit that would have otherwise expired, or
the use of a loss recognized on the disposition of stock of the
deconsolidated corporation or a predecessor of such corporation. In
determining whether the disaffiliation and subsequent consolidation
provided or will provide a U.S. federal income tax savings, the net
consequences to all parties, taking into account the time value of money,
were considered.
(3) The Transaction will be carried out to facilitate the Corporate Business
Purpose. Each step of the Transaction will be (i) motivated in whole or
substantial part by bona fide business purposes unrelated to U.S. taxes and
(ii) economically meaningful apart from any anticipated U.S. tax benefit.
Ruling
Based solely on the information and representations submitted, and conditioned
upon the execution of the closing agreement attached hereto, we rule that pursuant to
§ 1504(a)(3)(B), the application of § 1504(a)(3)(A) is waived with respect to Target
Parent and the Historic Group Members. Provided that Target HoldCo, Target Parent,
and each of the Historic Group Members are otherwise includible in the consolidated
return to be filed by the New Parent Consolidated Group, then Target HoldCo, Target
Parent, and the Historic Group Members may be included in the New Parent
Consolidated Group’s consolidated return for the portion of the Year 3 tax year following
the Transaction and subsequent tax years.
Closing Agreement
We have, accordingly, approved entering into a closing agreement in connection
with the issuance of this letter ruling. The necessary closing agreement for New Parent
has been prepared in triplicate and is enclosed. In pursuance of our practice with
PLR-119557-18 12
respect to such agreements, the agreement contains a stipulation to the effect that any
change or modification of applicable statutes enacted subsequent to the date of this
agreement and made applicable to the taxable period involved will render the
agreement ineffective to the extent that it is dependent upon such statutes.
The closing agreement to be entered into between the Internal Revenue Service
and New Parent, on behalf of itself and the New Parent Consolidated Group, provides
that no reduction in income or other federal tax savings is allowable on a consolidated
return filed by the New Parent Consolidated Group or any consolidated group of which
New Parent (or its successor) becomes a member (as defined in § 1.1502-1(b)) with
respect to any portion of the Capital Loss.
Procedural Statements
The rulings contained in this letter are based on facts 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.
Except as 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.
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, copies of this
letter are being sent to your authorized representatives.
Sincerely,
_________________________________
Robert H. Wellen
Associate Chief Counsel
Office of Associate Chief Counsel (Corporate)
cc:
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