Holding company may count subsidiary's historic receipts for worthless-stock test

Plain-English summary

A U.S. subsidiary organized foreign companies to develop and commercialize a product, then contributed them to a foreign holding company. The product failed, monetizing its intellectual property proved impossible, the operating subsidiary disposed of nearly all assets and became insolvent, and an appraiser found the relevant equity interests worthless. The operating subsidiary and later the holding company elected disregarded-entity status as the structure was wound down. For an affiliated corporation's worthless stock to receive the special treatment in Section 165(g)(3), the corporation must satisfy a gross-receipts test. The IRS ruled that the holding company would count the operating subsidiary's historic gross receipts when applying that test. The ruling did not verify solvency, insolvency, valuation, transfer pricing, or other consequences of the restructuring.

Ruling snapshot

• Question: May the foreign holding company count its operating subsidiary's historic gross receipts for Section 165(g)(3)(B)'s more-than-90-percent test?
• Outcome: Approved
• Key authorities: IRC § 165(g)(3)(B); IRC § 332; Treas. Reg. § 301.7701-3

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 202140002                                             Third Party Communication: None
Release Date: 10/8/2021                                       Date of Communication: Not Applicable
Index Number: 165.06-00
                                                              Person To Contact:
--------------------------------------                        -------------------------------, ID No. -----------
--------------------------------------                        Telephone Number:
-----------------------------                                 ---------------------
                                                              Refer Reply To:
----------------------                                        CC:ITA:B01
------------------------------------------                    PLR-100233-21
In Re: ---------------------------------------                Date:
------------------------                                      July 02, 2021




                                                  LEGEND

Taxpayer             =   ----------------------------------------------------------------
State A              =   -------------
State B              =   -------------
US Sub               =   ---------------------------------------------
Foreign Sub 1        =   ---------------------------------
Country A            =   ------------
Foreign Sub 2        =   ---------------------------------------
Country B            =   ---------------
Holding Co.          =   ----------------------------------------------------
Year 1               =   -------
Year 2               =   -------
Year 3               =   -------
Year 4               =   -------
Date 1               =   --------------------------
Date 2               =   -----------------------
Date 3               =   ---------------------
Date 4               =   --------------------------
Date 5               =   -------------------
Date 6               =   ------------------
Date 7               =   ------------------
Date 8               =   ---------------------
Date 9               =   --------------------------
Product              =   ----------------------------------------------------------------
PLR-100233-21                                2



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

This letter responds to correspondence dated December 21, 2020, and supplemental
submissions dated April 6, 2021, and May 7, 2021, submitted on behalf of Taxpayer,
requesting a ruling under section 165 of the Internal Revenue Code (the “Code”). This
letter ruling is being issued electronically in accordance with Rev. Proc. 2020-29, 2020-
21 I.R.B. 859. A paper copy will not be mailed to Taxpayer. The information submitted
for consideration is summarized below.

                                         FACTS

Taxpayer, a State A corporation, is the common parent of an affiliated group of
corporations that files a consolidated U.S. federal income tax return. Taxpayer wholly
and directly owns US Sub, a State B corporation. In Year 1, US Sub formed Foreign
Sub 1, a corporation organized under the laws of Country A, to focus on developing
Product. In Year 2, US Sub formed Foreign Sub 2, a corporation organized under the
laws of Country B, as its European operating corporation meant to facilitate the
development and ultimate exploitation of Product. In Year 3, US Sub formed Holding
Co., a corporation organized under the laws of Country B, pursuant to a business
strategy to centralize all foreign operations in Country B.

On Date 1 and Date 2, US Sub contributed all of the shares of Foreign Sub 1 and
Foreign Sub 2 to Holding Co., respectively, in exchange for additional voting stock of
Holding Co. Taxpayer treated both contributions as transactions under sections 351(a)
and 368(a)(1)(B). US Sub owns directly 100 percent of the total voting power of the
stock of Holding Co. and 100 percent of the total value of the stock of Holding Co. within
the meaning of section 1504(a)(2).

On Date 3, US Sub concluded that Product was not effective as intended but continued
to explore the possibility of monetizing the intellectual property associated with Product
in other ways. In the first half of Year 4, it became clear that such monetization was
impossible. As a result, US Sub began to wind down its operations related to Product,
along with the foreign entities established solely for the development and
commercialization of Product. As part of the wind down, the management of US Sub
eliminated Foreign Sub 2’s workforce and disposed of substantially all of Foreign Sub
2’s assets. Foreign Sub 2 was insolvent by Date 5.

A third-party appraiser determined that, as of Date 7, US Sub’s equity interests in
Holding Co. were worthless and that Holding Co.’s equity interests in Foreign Sub 1 and
Foreign Sub 2 were worthless.
PLR-100233-21                                 3

On Date 6, Holding Co. filed an election pursuant to section 301.7701-3(a) of the
Income Tax Regulations to treat Foreign Sub 2 as a disregarded entity for U.S. federal
income tax purposes, effective as of Date 4.
On Date 9, US Sub filed an election pursuant to section 301.7701-3(a) to treat Holding
Co. as a disregarded entity for U.S. federal income tax purposes, effective as of Date 8.
Holding Co. remained insolvent as of the time of making the election, Date 9, and as of
its effective date, Date 8. As of the date of the ruling request, Holding Co. has had no
gross receipts since its incorporation in Year 3.

                                  REPRESENTATIONS

1. Foreign Sub 2 was solvent on Date 4. The Foreign Sub 2 election pursuant to
section 301.7701-3(a) will qualify as a liquidation under section 332 for U.S. federal
income tax purposes.

2. Foreign Sub 1 has had no gross receipts since its incorporation in Year 1.

3. Holding Co. has no other subsidiaries other than Foreign Sub 1 and Foreign Sub 2.

4. Foreign Sub 1 and Foreign Sub 2 do not own any subsidiaries.

                                         RULING

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

For purposes of computing the “more than 90 percent gross receipts” test under section
165(g)(3)(B), Holding Co. will take into account the historic gross receipts of Foreign
Sub 2.

                                        CAVEATS

The rulings contained in this letter are based on facts and representations submitted by
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. In particular, the office has not verified
any of the information, representations and other data submitted regarding the solvency
of Foreign Sub 2 on Date 4 or the insolvency of Holding Co. on Date 8.

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 under any provision of the Code and regulations including, but not limited to,
the arm’s length price required for, or the amount of any income or loss resulting from,
PLR-100233-21                                  4

any transfers of property, including stock, in any controlled transaction within the
meaning of section 482 and the regulations issued thereunder.

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 Taxpayer’s authorized representatives.

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,



                                                   Norma C. Rotunno
                                                   Branch Chief, Branch 1
                                                   (Income Tax & Accounting)




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