IRS says a foreign subsidiary liquidation will not trigger a branch-tax disposition

Plain-English summary

A foreign corporate group planned to liquidate a foreign subsidiary into its foreign parent under IRC § 332. The subsidiary indirectly held a U.S. holding company and a disregarded foreign entity, and earlier restructurings had carried forward effectively connected earnings and profits under the temporary branch-tax regulations. Those prior rulings required the foreign subsidiary to treat later dispositions of the relevant U.S. holding interests as dispositions for branch profits tax purposes. The IRS ruled that the proposed liquidation would not be treated as a disposition of the disregarded entity or U.S. holding company interests under Treas. Reg. § 1.884-2T(d)(5). It also ruled that the liquidating subsidiary would not recognize a dividend-equivalent amount under IRC § 884(a) because of the liquidation. The rulings depended on the submitted representations, including that the liquidation would qualify under IRC § 332 and that the foreign parent would file the required continuing statement.

Ruling snapshot

• Question: Would a foreign subsidiary's tax-free liquidation into its foreign parent count as a disposition under the temporary branch-tax regulations or create a dividend-equivalent amount?
• Outcome: approved (no disposition and no dividend-equivalent amount under the specified rules)
• Key authorities: IRC §§ 332, 337, 351, 355, 368, 884(a); Treas. Reg. § 1.884-2T(d)(4), (5)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202032003 Third Party Communication: None
Release Date: 8/7/2020 Date of Communication: Not Applicable
Index Number: 884.00-00
Person To Contact:
------------------------------- -----------------------, ID No. -----------------
--------------------------------------- Telephone Number:
---------------------------------- --------------------
----------------------------------------------- Refer Reply To:
---------------------------------- CC:INTL:B01
--------------------------------------------- PLR-128456-19
Date:
March 19, 2020

Legend

UPE = ------------------------------

FS 1 = ------------------------------------------------------------------
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FS 2 = ------------------------------------------------------------------
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FDE = ------------------------------------------------------------------
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----------------

Holdco US = ------------------------------------------------------------------
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Holdco US Group = ------------------------------------------

USS 1 = ------------------------------------------------------------------
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USS 2 = ------------------------------------------------------------------
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Entity Y = ------------------------------------------------------------------
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Country A = ----------

PLR-128456-19 2

Exchange = ---------------------------------

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

State B = ------------

a = ---

b = ----

Year 1 = -------

Year 2 = -------

Year 3 = -------

Year 4 = -------

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

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

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

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

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

Date 6 = ---------------------

                           =

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

This is in response to your letter dated November 26, 2019, requesting rulings with
respect to the federal income tax treatment of FS 2's proposed transaction, as
described below in part III (the "Proposed Transaction").

The rulings contained in this letter are predicated upon facts and representations
submitted by FS 2 and accompanied by a penalties of perjury statement executed by an
appropriate party. This office has not verified any of the material submitted in support of
the request for rulings. Verification of the factual information, representations, and other

PLR-128456-19 3

data may be required as part of the audit process. The information submitted for
consideration is substantially as set forth below.

  I.     PRE-TRANSACTION STRUCTURE

UPE is a Country A corporation that functions as a holding company. UPE's common
stock is traded on Exchange. UPE owns all of the outstanding stock of FS 1 and FS 2,
each a Country A corporation.

FS 2 owns all of the outstanding interests in FDE, an entity chartered under a
governmental subdivision of Country A that is disregarded as separate from FS 2 for
federal tax purposes. FDE owns all of the outstanding stock of Holdco US, a State A
limited liability company that is treated as a corporation for federal tax purposes.

Holdco US is the common parent of Holdco US Group, an affiliated group that files a
consolidated federal income tax return on a calendar year basis. Holdco US owns all of
the outstanding stock of USS 2, a State A corporation. USS 2 owns all of the
outstanding stock of USS 1, a State B corporation.

Entity Y is a State A limited liability company that has elected to be treated as a
corporation for federal tax purposes. Entity Y has two classes of shares outstanding:
Class A and Class B. Holdco US wholly owns the Class A shares. The Class A shares
represent approximately a percent (more than 80 percent) of the voting power and value
of Entity Y's outstanding shares. Senior management of Entity Y wholly owns the Class
B shares. The Class B shares represent the remaining, approximately b percent, voting
power and value of Entity Y's outstanding shares.

  II.    PREVIOUS TRANSACTIONS

  A. Incorporation of U.S. Assets

On Date 1, FS 1 transferred U.S. assets used in its U.S. trade or business to USS 1 in
exchange for stock, and FS 1 and USS 1 received a private letter ruling from the
Internal Revenue Service ("IRS") on Date 2, stating that the transfer qualified for
nonrecognition under section 351 of the Internal Revenue Code. With respect to the
Date 1 section 351 transaction and subsequent transfers, USS 1 elected under Treas.
Reg. § 1.884-2T(d)(4) to increase its earnings and profits ("E&P") by an allocable
portion of FS 1’s effectively connected E&P ("ECE&P") and non-previously taxed
accumulated ECE&P. In addition, FS 1 reduced its ECE&P and non-previously taxed
accumulated ECE&P in accordance with Treas. Reg. § 1.884-2T(d)(4)(iii).

Pursuant to Treas. Reg. § 1.884-2T(d)(5)(i), FS 1 agreed that, upon the disposition of
part or all of the stock or securities it owned in USS 1 (or a successor-in-interest), it
would treat as a dividend equivalent amount for the taxable year in which the disposition

PLR-128456-19 4

occurred an amount equal to the lesser of (1) the amount realized upon such
disposition, or (2) the total amount of ECE&P and non-previously taxed accumulated
ECE&P that was allocated to USS 1 pursuant to Treas. Reg. § 1.884-2T(d)(4)(ii).

  B. Formation of USS 2

In Year 1, FS 1 formed USS 2 and transferred to it all of the stock of USS 1 in exchange
for USS 2 stock. This transfer qualified for nonrecognition under section 351. As part of
the same transaction, FS 1 transferred all of the stock of USS 2 to FDE in exchange for
an ownership interest in FDE. In connection with the transfer, UPE and USS 1 received
a private letter ruling from the IRS on Date 3 stating, in part, the following:

  (1) Provided that the Actual Transaction qualifies as an
  exchange under § 351, and provided: (1) [USS 2] makes a
  valid election to increase its earnings and profits by an
  amount equal to the earnings and profits previously allocated
  to [USS 1] pursuant to the prior elections by [FS 1] under §
  1.884-2T(d)(4); (2) [FS 1] attaches a statement to its timely
  filed (including extensions) federal income tax return treating
  such earnings and profits as if they had been allocated from
  [FS 1] to [USS 2] pursuant to an election under § 1.884-
  2T(d)(4); and (3) [FS 1] attaches a statement to its timely
  filed (including extensions) federal income tax return
  agreeing that, upon the disposition of part or all of the stock
  or securities of either [USS 2] (or a successor-in-interest) or
  [FDE] (or a successor-in-interest), or upon a direct or
  indirect disposition of part or all of the stock or securities of
  [USS 1] (or a successor-in-interest), [FS 1] shall treat such
  disposition as a "disposition" for purposes of § 1.884-
  2T(d)(5)(i):

      a. [FS 1’s] transfer of [USS 1’s] stock to [USS 2] will not
         constitute a "disposition" of part or all of [USS 1’s]
         stock within the meaning of § 1.884-2T(d)(5)(i); and

      b. [USS 1’s] earnings and profits will be reduced by an
         amount equal to the earnings and profits allocated to
         [USS 2] pursuant to a valid election under § 1.884-
         2T(d)(4).

  (2) If [FS 1] disposes of part or all of the stock or securities
  of either [USS 2] (or a successor-in-interest) or [FDE] (or a
  successor-in-interest), or if [USS 2] disposes of part or all of
  the stock or securities of [USS 1] (or a successor-in-interest),

PLR-128456-19 5

  [FS 1] shall treat such disposition as a "disposition" for
  purposes of § 1.884-2T(d)(5)(i).

  C. Spin-Off of FS 2

In Year 2 and Year 3, pursuant to a reorganization described in section 368(a)(1)(D), FS
1 transferred all of its interests in FDE (which owned all the stock of USS 2) and cash to
FS 2, a newly formed corporation, in exchange solely for stock of FS 2. FS 1 then
distributed all the stock of FS 2 to UPE in a transaction to which section 355 applied. In
connection with this transaction, UPE and USS 1 received a private letter ruling from the
IRS on Date 4 stating, in part, the following:

  (10) Provided that [FS 2] attaches a statement to its timely
  filed (including extensions) federal income tax return
  agreeing that [FS 2] will treat a disposition of part or all of the
  stock or securities of either [USS 2] (or a successor-in-
  interest) or [FDE] (or a successor-in-interest), as a
  "disposition" for purposes of § 1.884-2T(d)(5)(i), then [FS 1’s]
  transfer of the [USS 2] stock to [FS 2] will not be treated as a
  "disposition" of stock under § 1.884-2T(d)(5)(i). If in the
  future [USS 2] is liquidated into [FS 2] in a liquidation under
  § 332, such liquidation of [USS 2] will be treated as a
  "disposition" for purposes of § 1.884-2T(d)(5)(i),
  notwithstanding § 1.884-2T(d)(5)(ii).

  D. Acquisition of Entity Y Assets

In Year 4, FS 2 (through FDE) acquired all the assets of Entity Y. Pursuant to a
restructuring involving the assets acquired from Entity Y, FS 2 (through FDE) formed
Holdco US and transferred to Holdco the assets acquired from Entity Y and all of the
stock of USS 2, in exchange solely for stock of Holdco (the "Entity Y Acquisition"). As a
result of the Entity Y Acquisition, Holdco US became the new common parent of the
Holdco US Group. In connection with the Entity Y Acquisition, on Date 6 the IRS issued
a private letter ruling stating, in part, the following:

  3. Pursuant to Treas. Reg. § 1.884-2T(d)(5)(ii), the transfer
  by [FDE] of the stock of [USS 2] to [Holdco US] pursuant to
  the [Entity Y Acquisition] will not be treated as a "disposition"
  of the Financial stock under Treas. Reg. § 1.884-2T(d)(5)(i).

  4. [USS 2’s] earnings and profits will be reduced by an
  amount equal to the earnings and profits allocated to [Holdco
  US] in accordance with [representations made in] this ruling
  letter.

PLR-128456-19 6

   5. The statement filed pursuant to [the representations made
   in] this ruling letter is in lieu of and replaces the statement
   filed pursuant to ruling 10 of the [ruling addressing the spin-
   off of FS 2] for dispositions occurring after the date of the
   [Entity Y Acquisition].

   III.      PROPOSED TRANSACTION

In order to simplify the structure of the UPE corporate group, UPE now proposes to
liquidate FS 2 in a transaction that would constitute a tax-free liquidation of FS 2 under
section 332(a) (the "Liquidation"). FS 2’s liquidating distribution will include the stock of
FDE and the stock of Holdco US that FS 2 owns through FDE. Following the
Liquidation, UPE will own all of the stock of FDE, which will remain disregarded as
separate from its owner for federal income tax purposes, and all of the stock of Holdco
US through FDE.

   IV.       REPRESENTATIONS

FS 2 has made the following representations in connection with the Liquidation:

   1. As required by Priv. Ltr. Rul. 200925030:

          a. [FS 2] filed a Year 4 federal income tax return within 30 days of
             the date of that letter ruling and attached a statement to that
             return agreeing that it will treat a disposition of part or all of the
             shares or securities of [Holdco US] (or a successor-in-interest),
             or part or all of the interests in [FDE] (or a successor-in-interest),
             as a "disposition" for purposes of Temp. Treas. Reg. § 1.884-
             2T(d)(5)(i); and

          b. [Holdco US] filed an amended Year 4 federal income tax return
             within 30 days of the date of that letter ruling and attached to
             that return a statement described in Temp. Treas. Reg. § 1.884-
             2T(d)(4)(i) agreeing to increase its earnings and profits by an
             amount equal to the earnings and profits previously allocated to
             [USS 2] pursuant to prior elections made with respect to [USS 2]
             under Temp. Treas. Reg. § 1.884-2T(d)(4) as if they had been
             allocated from [FS 2] to [Holdco] pursuant to an election under
             Temp. Treas. Reg. § 1.884-2T(d)(4).

   2. The Liquidation will qualify as a tax-free liquidation of FS 2 under section
      332(a); as a consequence, UPE will not recognize gain or loss on the
      Liquidation under section 332(a) and FS 2 will not recognize gain or loss on
      the Liquidation under section 337(a).

PLR-128456-19 7

   3. UPE will file a statement in accordance with the provisions of Treas. Reg. §
      1.884-2T(d)(5)(i), providing that it will treat a disposition of part or all of the
      interests in FDE (or a successor-in-interest), or part or all of the shares or
      securities of Holdco US (or a successor-in-interest), as a "disposition" for
      purposes of Treas. Reg. § 1.884-2T(d)(5)(i).

   V.     RULINGS

Pursuant to Treas. Reg. § 1.884-2T(d)(5)(ii), a “disposition” does not include a transfer,
by a foreign corporation that was engaged (or deemed engaged) in the conduct of a
U.S. trade or business and that transferred its U.S. assets to a domestic corporation in a
section 351 transaction (section 351 transferee), of stock or securities of the section 351
transferee pursuant to a complete liquidation described in section 332(b) or a
reorganization described in section 368(a)(1)(F). Treas. Reg. § 1.884-2T(d)(5)(ii)
further provides that any other transfer of the shares of the section 351 transferee that
qualifies for nonrecognition of gain or loss shall be treated as a disposition for purposes
of paragraph (d)(5)(i), unless the Commissioner has determined otherwise “by
published guidance or by prior ruling issued to the taxpayer upon its request.” FS 2 has
therefore requested a ruling on the Proposed Transaction pursuant to Treas. Reg. §
1.884-2T(d)(5)(ii).

As required by prior ruling, FS 2 filed a statement under Treas. Reg. § 1.884-2T(d)(5)(i)
agreeing to treat a disposition of part or all of the shares or securities of Holdco US (or a
successor-in-interest), or part or all of the interests in FDE (or a successor-in-interest),
as a “disposition” for purposes of Treas. Reg. § 1.884-2T(d)(5)(i).

Based solely on the information submitted and on the representations set forth above,
we rule as follows:

   1. Pursuant to Treas. Reg. § 1.884-2T(d)(5)(ii), the Liquidation will not be treated
      as a "disposition" of the shares of FDE or Holdco US by FS 2 for purposes of
      Treas. Reg. § 1.884-2T(d)(5)(i).

   2. FS 2 will not be required to treat as a dividend equivalent amount for
      purposes of section 884(a) any portion of the amount realized on account of
      the Liquidation.

No opinion is expressed about the tax treatment of any of the transactions described
herein under other provisions of the Code and regulations, or about the tax treatment of
any conditions existing at the time of, or effects resulting from, the transactions not
specifically covered by the above rulings.

This ruling letter is directed only to the taxpayer who requested it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.

PLR-128456-19 8

Each affected taxpayer must attach a copy of this letter to the taxpayer's federal income
tax return for the tax year in which the transaction covered by this ruling letter is
consummated.

In accordance with the power of attorney on file with this office, a copy of this ruling
letter is being sent to your authorized representative. A copy of this ruling should be
attached to any federal income tax return to which it is relevant.

                                                      Sincerely,


                                                      ___________________________
                                                      Frank W. Dunham III
                                                      Senior Technical Reviewer, Branch 1
                                                      Associate Chief Counsel (International)

Enclosure:
Copy for 6110 Purposes

cc: