Quarterly tax-payment distributions by an S corporation are not partial-liquidation distributions

Plain-English summary

An S corporation adopted a plan of partial liquidation and distributed most of
one business line's assets to its shareholders. Separately, the company has a
standing obligation to make quarterly cash distributions so its shareholders can
pay the income taxes they owe on their share of the company's passthrough
income. The company asked the IRS to confirm that those routine tax-payment
distributions are not treated as distributions "in partial liquidation" under
Section 302. The IRS agreed: the quarterly tax distributions are not partial
liquidation distributions, relying on two older revenue rulings. The distinction
matters because partial-liquidation treatment can change how a distribution is
taxed to shareholders. The IRS expressed no opinion on whether the underlying
transaction itself qualified as a partial liquidation.

Ruling snapshot

• Question: Are the S corporation's quarterly distributions to let
  shareholders pay taxes on their allocable share of income treated as
  distributions in partial liquidation?
• Outcome: Approved (ruled they are not partial-liquidation distributions)
• Key authorities: IRC § 302; Rev. Rul. 77-375; Rev. Rul. 77-166

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 202210005                                             Third Party Communication: None
Release Date: 3/11/2022                                       Date of Communication: Not Applicable
Index Number: 302.04-03
                                                              Person To Contact:
-------------------------------                               --------------------, ID No. --------------------
--------------------------------------                        Telephone Number:
----------------------------------------                      --------------------
---------------------------------                             Refer Reply To:
------------------------------------                          CC:CORP:B03
                                                              PLR-113076-21
                                                              Date:
                                                              December 10, 2021


Legend

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

DE1                                   = --------------------------------------------------------------------------
                                        ------------------------------------------------

DE2                                   = ------------------------
                                        ------------------------------------------------

DE3                                   = ---------------
                                        ------------------------------------------------

Business A                            = -------------------------------------------------

Business B                            = ----------------------------

Private Equity                        = ------------------------------------

Partnership                           = ---------------------------------------
                                        ----------------------------------------------------------
                                        ----------------------------
                                        -----------------------

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

Date 2                                = --------------------------
PLR-113076-21                                 2


 Year                          = -------


 c                             = --------


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

This letter responds to the letter dated August 21, 2021, submitted on behalf of
Taxpayer and its shareholders requesting rulings on certain federal income tax
consequences of distributions to shareholders.as discussed below. The material
information submitted in that request and subsequent correspondence is summarized
below.

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

                                    Summary of Facts

Taxpayer, an S corporation, has operated Business A since Year. Business A has also
been operated by DE2, a disregarded entity owned by DE1, which is owned by
Taxpayer. Other disregarded entities owned by DE2 also operate Business A. Taxpayer
has also operated Business B through DE3, a disregarded entity wholly owned by DE1.
Other disregarded entities held by DE1, directly or indirectly, also operate Business B.

On Date 1, DE1, DE2, and Partnership executed a contribution agreement pursuant to
which an affiliate of Private Equity, an unrelated private equity firm, and others
contributed cash to Partnership for an equity interest in Partnership. Pursuant to the
same agreement, DE1 contributed all the issued and outstanding membership interests
in DE2 to Partnership in exchange for an equity interest in Partnership and the cash
contributed to Partnership by Private Equity (with the exchange constituting the
"Disposition"). The cash received by DE1 was and continues to be invested primarily in
U.S. treasury bonds.

On Date 2 (2019), Taxpayer adopted a plan of partial liquidation. About c percent of the
assets of Business A were distributed to shareholders by the end of 2020.

Pursuant to an agreement among Taxpayer and its shareholders, Taxpayer is obligated
to make cash distributions each quarter to its shareholders in order to allow each
shareholder to pay federal, state, and local income taxes (including estimated taxes) on
such owner's allocable share of Taxpayer's taxable income.
PLR-113076-21                                 3

                                           Ruling

Distributions by Taxpayer to its shareholders to pay federal, state, and local income
taxes (including estimated taxes) on such owner's allocable share of Taxpayer's taxable
income are not considered to be distributions in partial liquidation. (Rev. Rul. 77-375,
1977-2 C.B.106, and Rev. Rul. 77-166, 1971-1 C.B. 90.)

                                          Caveats

No opinion is expressed as to whether the Disposition qualifies as a partial liquidation.
Also, no opinion is expressed about the tax treatment of the Disposition or events
following the Disposition under other provisions of the Code or regulations or the tax
treatment of any conditions existing at the time of, or effects resulting from, the
Disposition that are not specifically covered by the above ruling.

                                 Procedural Statements

The ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be sued 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 returns that provides the date and control number (PLR-
113076-21) of this ruling letter.

Pursuant to the Power of Attorney on file with this office, copies of this letter are being
sent to your authorized representatives.

                                           Sincerely,



                                           Gerald B. Fleming
                                           Senior Technician Reviewer Branch 2
                                           Office of Associate Chief Counsel (Corporate)



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