Related-party debt forgiveness generally avoids recognition
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This page covers one taxpayer's ruling from 2021, which can't be cited as precedent. Ezel answers your situation under the current Code and IRS guidance, with citations.
Plain-English summary
A foreign financing subsidiary proposed forgiving part of debt owed by an insolvent U.S. consolidated group. The IRS ruled that the U.S. parent and two subsidiaries would recognize no income, gain, or loss from the forgiveness, with one exception. Under Section 108(e)(6), the parent must recognize discharge-of-indebtedness income to the extent the forgiven debt's adjusted issue price exceeds the foreign subsidiary's adjusted basis in that debt. The ruling relies on the taxpayer's representations that the notes have always been treated as debt and that the group was solvent when they were issued.
Ruling snapshot
- Question: What federal income tax consequences result when a related foreign financing subsidiary gratuitously forgives part of the U.S. group's debt?
- Outcome: Approved. No income, gain, or loss is recognized except for any discharge-of-indebtedness income required by Section 108(e)(6).
- Key authorities: IRC § 108(e)(6)
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 202112003 Third Party Communication: None
Release Date: 3/26/2021 Date of Communication: Not Applicable
Index Number: 108.00-00, 108.04-03
Person To Contact:
--------------------- ----------------------------,
------------------------------------ ID No. -----------------
------------------ Telephone Number:
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----------------------------- Refer Reply To:
CC:CORP:B2
PLR-128158-20
Date:
December 29, 2020
Legend
Foreign = ------------------------------------------------------------------------------------------
Parent ------------------------------------------------------------------------------------------
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FSub 1 = ------------------------------------------------------------------------------------------
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FDRE1 = ------------------------------------------------------------------------------------------
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FDRE2 = ------------------------------------------------------------------------------------------
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Parent = ------------------------------------------------------------------------------------------
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Sub 1 = ------------------------------------------------------------------------------------------
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PLR-128158-20 2
Sub 2 = ------------------------------------------------------------------------------------------
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DRE 1 = ------------------------------------------------------------------------------------------
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State X = -------------
Country Y = ---------
Country Z = -----------------
Business A = --------------------------------------------------
x = -------------
y = -------------
Notes = --------------------------------------------------------------------------------------
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PLR-128158-20 3
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Dear --------------:
This letter responds to your authorized representatives’ letter dated July 10, 2020,
requesting a ruling on certain U.S. federal income tax consequences of a proposed
transaction described below (the “Proposed Transaction”). The 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 penalties 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.
Simplified Facts
Foreign Parent is a publicly traded Country Y entity that is treated as a corporation for
U.S. federal income tax purposes. Foreign Parent is the parent of a worldwide group of
entities that is engaged in Business A. Foreign Parent indirectly owns all of the
outstanding stock of FSub 1, a Country Z entity that is treated as a corporation for U.S.
federal income tax purposes. FSub 1 provides financing to Foreign Parent’s worldwide
group of entities.
FSub 1 directly owns all of the interests in FDRE 1, which in turn directly owns all of the
interests in FDRE2. Each of FDRE1 and FDRE2 is a Country Y entity that is disregarded
as an entity separate from its owner for U.S. federal income tax purposes (a “disregarded
entity”). FDRE2 directly owns all of the outstanding stock of Parent.
Parent is a State X corporation that is the common parent of an affiliated group of
corporations that joins in filing a consolidated return (the “Parent Group”). The Parent
Group is engaged in domestic operations of Business A. Parent owns, directly or
indirectly, all of the outstanding stock of Sub 1 and Sub 2. Each of Sub 1 and Sub 2 is a
State X corporation and member of the Parent Group. Sub 2 directly owns all of the
interests in DRE 1, a State X limited liability company that is treated as a disregarded
entity.
FSub 1 holds Notes issued by Parent. Under the terms of the Notes, Parent, Sub 1, and
DRE 1 are co-obligors. The amount outstanding under the Notes is approximately $x (the
“Debt”). Since the issuance of the Notes, Parent’s business has experienced a significant
deterioration. Parent, and the Parent Group, are likely insolvent as a result of the Debt.
Proposed Transaction
FSub 1 intends to undertake the Proposed Transaction to improve the financial position
of Parent. The Proposed Transaction is described as follows:
PLR-128158-20 4
FSub 1 will gratuitously forgive a portion of the Debt (the “Debt Forgiveness”).
The amount to be forgiven is expected to be approximately $y (the “Applicable
Debt”).
FSub 1 intends that the Parent Group will be solvent following the Debt Forgiveness.
Representations
Parent makes the following representations with respect to the Proposed Transaction:
(a) The Notes have been properly characterized as debt for U.S. federal income tax
purposes at all times prior to the Debt Forgiveness and have been treated by FSub
1, Parent, and the Parent Group as debt for all U.S. federal income tax purposes.
(b) Parent and the Parent Group were solvent when the Notes were issued.
(c) Except for the Notes, no member of the Parent Group has any material
indebtedness for borrowed money owed to any person outside the Parent Group,
provided that members of the Parent Group may guarantee obligations of Foreign
Parent or its subsidiaries.
(d) Except for Parent, all of the stock of each member of the Parent Group is wholly
owned by other members of the Parent Group, directly or through disregarded
entities of members of the Parent Group.
Ruling
Based solely on the information provided and the representations set forth above, we rule as
follows:
None of Parent, Sub 1, or Sub 2 will recognize income, gain, or loss as a result of
the Debt Forgiveness, except that Parent will recognize discharge of indebtedness
income to the extent, if any, that the adjusted issue price of the Applicable Debt
exceeds FSub 1’s adjusted basis in the Applicable Debt. Section 108(e)(6).
Caveats
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.
Procedural Statements
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.
PLR-128158-20 5
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,
_Gerald B. Fleming____
Gerald B. Fleming
Senior Technician Reviewer, Branch 2
Office of Associate Chief Counsel (Corporate)
cc:
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