A supplemental ruling confirms no foreign use of a dual consolidated loss and lets a shareholder count its section 961(a) basis increase before reducing CFC stock basis on a previously-taxed-earnings distribution

Plain-English summary

This is a supplemental letter updating an earlier private ruling (from January 2021) about a multinational group's series of transactions. The only factual change is that several steps happened on later dates than originally planned, and the parent now intends to have a foreign subsidiary (Entity 2) distribute cash up to its owner (Entity 1). The IRS ruled on two technical international-tax points. First, under the dual consolidated loss (DCL) rules, no "foreign use" of a Country B loss is treated as occurring merely because of deductions tied to certain timing-difference liabilities, so the loss is not disqualified. Second, and more central, when the foreign subsidiary distributes cash out of previously taxed earnings and profits (PTEP), the shareholder must first credit the basis increase it gets under section 961(a) (from including subpart F and GILTI income) before applying the basis reduction under section 961(b)(1). That ordering matters because it can prevent or reduce the gain the shareholder would otherwise recognize under section 961(b)(2) when a distribution would push stock basis below zero. Multinationals managing PTEP distributions and CFC stock basis care because the sequencing determines whether a tax-free return of already-taxed earnings triggers gain.

Ruling snapshot

• Question: In a supplement to a prior ruling, does the DCL "foreign use" rule bar the loss, and may the shareholder take its section 961(a) basis increase into account before reducing CFC stock basis under section 961(b)(1) on a PTEP distribution?
• Outcome: approved (both rulings favorable to the taxpayer)
• Key authorities: IRC §§ 961(a), 961(b)(1), 961(b)(2), 959(a), 951(a), 951A; Treas. Reg. §§ 1.1503(d)-3(c)(7), 1.951A-5; Notice 2019-01

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202304008 Third Party Communication: None
Release Date: 1/27/2023 Date of Communication: Not Applicable
Index Number: 961.00-00, 1503.04-00
Person To Contact:
-------------- -----------, ID No. -----------------
------------------------ Telephone Number:
--------------------- --------------------
------------------------------------ Refer Reply To:
CC:INTL:B04
PLR-116484-22
Date:
November 03, 2022
TY:

Legend

Parent = ------------------------
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Entity 1 = -----------------------------------------------
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Entity 2 = ---------------------------------------------------------
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Date 2 = ---------------------
Date 3 = ---------------------
Date 4 = -----------------
Date 5 = -------------------
Date 6 = ---------------------
Date 7 = -----------------
Year 1 = The calendar year that includes Date 4
Year 2 = The calendar year that includes Date 7

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

This letter responds to your letter dated August 12, 2022, and additional
correspondence dated November 3, 2022, requesting a supplemental private letter
ruling to the private letter ruling dated January 29, 2021 (PLR-120013-20) (the "Prior
Letter Ruling") on certain federal income tax consequences of a series of transactions
described therein. The material information submitted in that request and subsequent
correspondence is summarized below. Capitalized terms not defined in this letter have
the meanings assigned to them in the Prior Letter Ruling.

The rulings contained in this letter are based upon information and representations
submitted by Parent and accompanied by a penalty 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. All Code
and section references are to the Internal Revenue Code of 1986, as amended.

                               Supplemental Facts

The facts as described in the Prior Letter Ruling are unchanged, except that
Steps 2, 3, and 4 did not occur on Dates 2, 3, and 4, respectively. Instead, Steps 2, 3,
and 4 occurred on Dates 5, 6, and 7, respectively.

In addition, Parent intends to cause Entity 2 to distribute cash (including cash received
in Step 4) to Entity 1 before the last day of Year 2 (the “Distribution”).

At all relevant times, each of Parent, Entity 1, and Entity 2 uses the calendar year for its
taxable year.

Entity 2 has one class of stock outstanding, all of which is owned directly by Entity 1.

                                 Representations

Parent reaffirms all of the material information submitted in connection with, and all the
representations contained in, the Prior Letter Ruling, as modified and supplemented by
the representations and information herein. Each representation contained in the Prior
Letter Ruling that references Date 2, Date 3, Date 4 or Year 1 is modified by replacing
Date 2 with Date 5, Date 3 with Date 6, Date 4 with Date 7, and Year 1 with Year 2.

Parent has made the following additional representations:

   1. Parent and Entity 1 will compute and report its Year 2 consolidated taxable
   income in accordance with all applicable rules, including keeping, maintaining
   and making adjustments to its and its affiliates’ previously taxed earnings and
   profits (“PTEP”) accounts in accordance with Notice 2019-01, 2019-2 IRB 275.

   2. Entity 1 will, under section 951(a)(1)(A), include in its gross income for Year 2
   its pro rata share of Entity 2’s subpart F income (within the meaning of section
   952(a)) for Year 2. Entity 1 will, under section 951A(a), include in its gross
   income for Year 2 its GILTI inclusion amount (within the meaning of Treas. Reg.
   §§ 1.951A-1(c)(1) and 1.1502-51). Any amount so included by Entity 1 under
   section 951(a)(1)(A), or under section 951A(a) and allocated to Entity 2 under
   section 951A(f)(2) and Treas. Reg. § 1.951A-5(b)(2), will, under section 959, give
   rise to an increase (in Entity 2’s functional currency) to Entity 1’s PTEP accounts
   with respect to Entity 2, and will under section 961(a) give rise to an increase (in

   U.S. dollars) to Entity 1’s adjusted basis in its stock of Entity 2 (such increase,
   the “Section 961(a) Basis Increase”).

   3. All or a portion of the Distribution will be excluded from Entity 1’s gross income
   under section 959(a).

   4. Other than the Distribution, Entity 2 will not have made any actual or deemed
   distributions in Year 2 on or before the date on which the Distribution occurs.

   5. For one or more shares of stock of Entity 2, the adjusted basis of the share at
   the time of the Distribution and without regard to the Section 961(a) Basis
   Increase will be less than the amount by which the adjusted basis of the share
   would be reduced under section 961(b)(1) (determined as if the adjusted basis
   were permitted to be reduced below zero) as a result of the Distribution.

                                       Ruling

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

   1. No foreign use is considered to occur with respect to a Country B DCL solely
   as a result of an item of deduction or loss attributable to the Timing Difference
   Liabilities. Treas. Reg. § 1.1503(d)-3(c)(7).

   2. For each share of Entity 2 stock, Entity 1 will take into account the appropriate
   portion of the Section 961(a) Basis Increase with respect to the share when
   determining the extent to which Entity 1 is required to reduce the share’s
   adjusted basis under section 961(b)(1) and recognize gain with respect to the
   share under section 961(b)(2) as a result of the Distribution.

                                      Caveats

No opinion is expressed regarding the tax treatment of (i) Steps 1 through 4 or the
Distribution under other provisions of the Code and regulations, or (ii) any conditions
existing at the time of, or effects resulting from, Steps 1 through 4 or the Distribution that
are not specifically covered by this ruling.

                             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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

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,

                                   Andrew Logan Wigmore
                                   Senior Counsel, Branch 4
                                   (International)

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