After intangible-owning entities are brought back into the U.S. consolidated group, the § 367(d) "deemed royalty" payments are redetermined as excluded from income

Plain-English summary

A U.S. parent company heads a consolidated group. In earlier restructurings, the group had moved certain intangible property (patents, trademarks, know-how, and similar assets) offshore in tax-free contributions under section 351. Because those were outbound transfers of intangibles, section 367(d) kicked in and treated the foreign recipients as making a stream of annual "deemed royalty" payments back to the U.S. group, which the group had to include in income each year. The taxpayer then did a series of steps (intended to qualify as a tax-free "F" reorganization) that brought the entities owning that intangible property back under a member of the same U.S. consolidated group. The taxpayer asked the IRS to confirm that, now that both sides of the deemed-royalty stream sit inside one consolidated group, those payments no longer have to be counted as income. The IRS agreed. It ruled that the deemed payments are redetermined to be excluded from gross income under the consolidated-return intercompany rules (Treas. Reg. § 1.1502-13(c)(6)(ii)(D)) for the remaining useful life of the intangibles, and it spelled out that the excluded payments create no earnings-and-profits item and no stock-basis adjustment. The ruling is conditioned on the taxpayer signing a closing agreement. It matters because it shows how the IRS keeps a purely internal, offsetting bookkeeping entry from generating phantom taxable income once a cross-border structure is unwound into a single group.

Ruling snapshot

• Question: Once the intangible-owning entities return to the U.S. consolidated group, may the section 367(d) deemed payments be redetermined as excluded from gross income, and may the newly acquired subsidiary join the consolidated return immediately?
• Outcome: approved (conditioned on a closing agreement)
• Key authorities: IRC § 367(d); Treas. Reg. § 1.1502-13(c)(6)(ii)(D); Treas. Reg. § 1.367(d)-1T(c)(2) and (g)(1); Treas. Reg. §§ 1.1502-32, 1.1502-33; IRC § 1504(a)(3); IRC § 368(a)(1)(F)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 202335001                                              Third Party Communication: None
Release Date: 9/1/2023                                         Date of Communication: Not Applicable
Index Number: 367.00-00, 367.30-00,
              951A.00-00, 1502.99-00,                          Person To Contact:
              1502.93-00                                       -------------------------------, ID No. -----------
                                                               -----------------
----------------------                                         Telephone Number:
------------------------------------------------------------   --------------------
---------                                                      Refer Reply To:
-------------                                                  CC:CORP:02
-----------------------------                                  PLR-100235-23
-----------------------------                                  Date:
                                                               May 26, 2023




Parent                          = -----------------------------------------------------------------------------
                                  ------------------------

Sub 1                           = -----------------------------------------------------------------------------
                                  --------------------------

Sub 2                           = -----------------------------------------------------------------------------
                                  --------------------------

LLC 1                           = -----------------------------------------------------------------------------
                                  --------------------------

LLC 2                           = --------------------

LLC 3                           = -----------------------------------------------------------------------------
                                  --------------------------

LLC 4                           = -----------------------------------------------------------------------------
                                  --------------------------

LLC 5                           = -----------------------------------------------------------------------------
                                  --------------------------

FSub                            = -----------------------------------------------------------------------------
                                  --------------------------
PLR-100235-23                                   2


 Foreign Partnership 1   = -----------------------------------------------------------------------------
                           --------------------------

 Foreign Partnership 2   = -----------------------------------------------------------------------------
                           ---------------------------

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

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

 Country A               = ----------

 Country B               = ----------------

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

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

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

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

 Intangible Property A   = -----------------------------------------------------------------------------
                           ---

 Intangible Property B   = ---------------------------------------------------------------------------

 a                       = ----------

 b                       = ----------

 c                       = ----------



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

This letter ruling responds to your authorized representative's letter dated October 19,
2022, requesting rulings under section 367(d) and Treas. Reg. § 1.1502-13. The material
information submitted in the request is summarized below.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
PLR-100235-23                                  3

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.

                                           FACTS

Parent, a State A corporation, is the parent of a worldwide group of corporations and the
common parent of a consolidated group (within the meaning of Treas. Reg. § 1.1502-
1(h)) (the "Parent Group"). Parent indirectly owns all the common stock of Sub 1, a State
B corporation that is a member of the Parent Group. Sub 1 owns LLC 1, a State B limited
liability company treated as a disregarded entity.

On Date 1, Sub 1 directly owned all the stock of Sub 2, a State B corporation that was a
member of the Parent Group. Sub 1 also owned a of FSub, a Country A limited
partnership treated as a corporation for U.S. federal income tax purposes. LLC 1 owned
the remaining interest in FSub and all of LLC 2, a State B limited liability company that
was treated as a disregarded entity. FSub owned LLC 3, a State B limited liability
company that was treated as a disregarded entity U.S. federal income tax purposes. FSub
also owned b of Foreign Partnership 1 and c of Foreign Partnership 2, both of which were
Country B limited partnerships treated as disregarded entities for U.S. federal income tax
purposes. LLC 3 owned the remaining interest in Foreign Partnership 1 and Foreign
Partnership 2. Foreign Partnership 1 owned LLC 4, a State B limited liability company
treated as a disregarded entity. Foreign Partnership 2 owned LLC 5, a State B limited
liability company treated as a disregarded entity for U.S. federal income tax purposes.

As a result of prior restructurings, all legal title and economic rights to use, exploit, and
develop patents, copyrights, trademarks, trade names, know-how, goodwill, and any
other intangible property described in Treas. Reg. § 1.482-4(b) associated with (i)
Intangible Property A and (ii) Intangible Property B (collectively, the “Section 367(d) IP”)
were transferred to the predecessors of LLC 4 and LLC 5, respectively, in outbound
contributions described in section 351 (the “Outbound Transfers”). Section 367(d) applied
to the Outbound Transfers and resulted in a stream of deemed annual payments to
Parent’s Group (the "Deemed Payments"). LLC 4 owned Intangible Property A and LLC
5 owned Intangible Property B.

                             COMPLETED TRANSACTIONS

Effective Date 2 through Date 3, the following transactions occurred, which were intended
to be treated as a reorganization under section 368(a)(1)(F) (the “Inbounding
Transactions”):

       (i) Sub 1 contributed all of its interests in FSub to Sub 2;
       (ii) LLC 1 contributed all of its interests in FSub to LLC 2;
       (iii) Sub 1 contributed all of its shares in Sub 2 to LLC 1;
PLR-100235-23                                4

      (iv) LLC 1 contributed all of its interests in LLC 2 to Sub 2; and
      (v) LLC 2 liquidated through a legal dissolution and distributed its FSub interests
to Sub 2.

As a result of the Inbounding Transactions, FSub ceased to exist by operation of Country
A law. Consequently, LLC 4 and LLC 5, which are the disregarded entities that own the
Section 367(d) IP, became owned by a member of the Parent Group.

On Date 4, Foreign Partnership 1 and Foreign Partnership 2 directly, and indirectly
through LLC 3, transferred their respective interests in LLC 4 and LLC 5 to Sub 2.

                                 STATEMENT OF LAW

Treas. Reg. § 1.367(d)-1T(c)(2) provides that when the recipient of a deemed payment
under section 367(d) includes the deemed payment into income, the payor reduces its
earnings and profits by the amount of the deemed payment. However, the payor is
allowed no other adjustments to its earnings and profits, basis, or gross income.

Treas. Reg. § 1.1502-13(c)(6) provides that under Treas. Reg. § 1.1502-13(c)(1)(i), S's
intercompany item might be redetermined to be excluded from gross income or treated
as a noncapital, nondeductible amount. However, S's intercompany income or gain is
redetermined to be excluded from gross income only to the extent Treas. Reg. §§ 1.1502-
13(c)(6)(ii)(A), (B), (C), or (D) applies.

Treas. Reg. § 1.1502-13(c)(6)(ii)(D) provides that, under certain circumstances, the
Commissioner may determine that treating S's intercompany item as excluded from gross
income is consistent with the purposes of § 1.1502-13 and other applicable provisions of
the Internal Revenue Code, regulations, and published guidance. One such circumstance
may occur if the corresponding item relevant to that intercompany item of income is
permanently disallowed.

                                 REPRESENTATIONS

The taxpayer has made the following representations with respect to this letter ruling:

    1. Following the Inbounding Transactions, all Section 367(d) IP is owned by a
      member of Parent Group’s consolidated group.

    2. The Inbounding Transactions are intended to qualify as a reorganization under
      section 368(a)(1)(F).

    3. Taxpayer will report the Inbounding Transactions as a reorganization under section
      368(a)(1)(F) on the relevant U.S. federal income tax returns.
PLR-100235-23                               5

                                       RULINGS

Based solely on the information and representations made, and conditioned upon the
execution of a closing agreement, we rule as follows:

    1. Following the Inbounding Transactions, the Deemed Payments are redetermined
      to be excluded from gross income under Treas. Reg. § 1.1502-13(c)(6)(ii)(D).
      Accordingly, the Deemed Payments are redetermined to be excluded from gross
      income for each of the Parent Group's consolidated return years for the remaining
      useful life of the Intangible Property.

    2. For purposes of determining the effect of the Deemed Payments on the Parent
      Group’s consolidated return, under Treas. Reg. § 1.1502-13(c)(1):

             a. The intercompany item from the deemed receipt of the Deemed
                Payments will not be taken into account for purposes of earnings and
                profits under Treas. Reg. § 1.1502-33;

             b. No stock basis adjustment under Treas. Reg. § 1.1502-32(b)(2) will arise
                as a result of the deemed payment of the Deemed Payments because
                the corresponding item will not be (i) taxable income, (ii) tax exempt
                income, (iii) a non-capital, non-deductible amount, or (iv) a distribution
                with respect to stock, within the meaning of such regulations; and

             c. The Deemed Payments will not be subject to Treas. Reg. § 1.367(d)-
                1T(g)(1).

    3. Section 1504(a)(3) will not prevent Sub 2 from being eligible to be included in the
      Parent Group's consolidated U.S. federal income tax return immediately on
      completion of the Inbounding Transactions.

                               CLOSING AGREEMENT

We will, accordingly, approve a closing agreement with the taxpayer with respect to those
issues affecting its tax liability on the basis set forth above. The necessary closing
agreement has been prepared in triplicate and is enclosed. In pursuance of our practice
with respect to such agreements, the agreement contains a stipulation to the effect that
any change or modification of applicable statutes enacted subsequent to the date of this
agreement and made applicable to the taxable period involved will render the agreement
ineffective to the extent that it is dependent upon such statutes.
PLR-100235-23                                    6

                                         CAVEATS

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax treatment of the Inbounding Transactions under any provision of the Code and
regulations or the tax treatment of any condition existing at the time of, or effects resulting
from, the Inbounding Transactions that is not specifically covered by the above rulings.
Specifically, we express no opinion on whether the Inbounding Transactions qualify under
section 368(a)(1)(F). In addition, we express no opinion with respect to the application of
Treas. Reg. § 1.1502-13(c)(6)(ii)(D) to items subject to any other provision of the Code
and regulations.

                              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.

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 representative.




                                    Sincerely,


                                    Lisa A. Fuller
                                    Lisa A. Fuller
                                    Acting Associate Chief Counsel (Corporate)
                                    Office of Associate Chief Counsel (Corporate)




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