Successor keeps acquired target's pre-2017 inversion date

Plain-English summary

A domestic corporate group proposed to acquire a foreign target that had become a surrogate foreign corporation before November 9, 2017. The buyer would acquire the target for cash, make section 338(g) elections for target corporations, move substantial foreign assets within the group, and complete an intended section 368(a)(1)(F) reorganization into a new domestic subsidiary. The taxpayer represented that the target was not treated as a domestic corporation and that the transaction would not create a new surrogate foreign corporation except through successor status. The IRS ruled that any person treated as the target's successor under section 7874 would not be treated as first becoming a surrogate foreign corporation after November 9, 2017. That timing matters because the special base-erosion rule in section 59A(d)(4) applies only when the relevant surrogate foreign corporation first acquired that status after that date. The IRS expressed no opinion on other tax consequences of the proposed transactions.

Ruling snapshot

• Question: Would a successor created by the proposed acquisition and restructuring be treated as first becoming a surrogate foreign corporation after November 9, 2017?
• Outcome: No, the successor retains the target's earlier timing for this purpose
• Key authorities: IRC §§ 59A(d)(4), 965(l), and 7874; Treas. Reg. § 1.7874-12(a)(10)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 202343028                                              Third Party Communication: None
Release Date: 10/27/2023                                       Date of Communication: Not Applicable
Index Number: 7874.00-00
                                                               Person To Contact:
----------------                                               ---------------------, ID No. -----------------
--------------------------                                     Telephone Number:
---------------                                                --------------------
----------------------------------                             Refer Reply To:
-------------------------------------------------              CC:INTL:B04
                                                               PLR-108840-23
                                                               Date:
                                                               July 27, 2023

Legend

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

Parent US Sub                       =        -------------------------------------
                                            -------------------------------
                                            -----------------------

Parent Foreign Sub                  =        ---------------------------------------------
                                            ------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
                                            ------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
                                            ------------------------------------------------

Purchaser                           =        ----------------------
                                            ------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
                                            ------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
                                            ----------------------------
                                            ------------------------------------------

Target                              =        ---------------------------------
                                            -----------------------------------------
                                            -----------------------

Target Foreign Sub                  =        ----------------------------------------------------

PLR-108840-23                                             2

                                            ------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
                                            ------------------------------------------------
                                            -----------------------

Target US Sub                       =        ------------------------------------------
                                            -------------------------------
                                            -----------------------

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

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


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

This letter responds to your authorized representative’s letter dated April 6, 2023, and
additional correspondence dated July 24, 2023, requesting a ruling under section 7874
of the Code with respect to the proposed transactions described below (the “Proposed
Transactions”). The information submitted in that request is summarized below. All
Code and section references are to the Internal Revenue Code of 1986, as amended.

The ruling contained in this letter is based on facts and representations submitted by
you and your representatives and accompanied by a penalty of perjury statement
executed by an appropriate party. While this office has not verified any of the materials
submitted in support of the request for rulings, it is subject to verification on
examination.

                                            Summary of Facts

Parent, a domestic corporation and parent of a multinational corporate group, directly
owns all of the stock of Parent US Sub, which is also a domestic corporation. Parent
US Sub directly owns all of the interests in Purchaser, a Country A entity that is
disregarded for federal income tax purposes. Parent indirectly owns all of the stock of
Parent Foreign Sub, a Country B entity that is treated as a corporation for federal
income tax purposes.

Target, a Country A entity that is treated as a corporation for federal income tax
purposes, directly owns all the stock of Target Foreign Sub, a Country A entity that is
treated as a corporation for federal income tax purposes. Target Foreign Sub indirectly
owns all the stock of Target US Sub, a domestic corporation. Before November 9,
2017, Target indirectly acquired all the stock of Target US Sub in a transaction that
satisfied the conditions of section 7874(a)(2)(B)(i), (ii) and (iii). Thus, before November
9, 2017, Target became a surrogate foreign corporation within the meaning of section

PLR-108840-23                                 3

7874(a)(2)(B), and Target US Sub became an expatriated entity within the meaning of
section 7874(a)(2)(A).

                               Proposed Transactions

The following transactions will occur after December 22, 2017.

            Step 1: Parent US Sub, through Purchaser, will acquire 100% of the stock
     of Target in exchange for cash.

            Step 2: Parent, on behalf of Parent US Sub, will make an election under
     section 338(g) with respect to Target, Target Foreign Sub, and some or all of the
     other foreign corporations owned, directly or indirectly, by Target.

             Step 3: Following Step 2, Target will directly, or indirectly through
     intermediate entities, transfer a substantial portion of its properties held directly
     or indirectly, other than the stock or properties of Target US Sub, to Parent
     Foreign Sub in exchange for stock of Parent Foreign Sub.

            Step 4: Following Step 3, Target will engage in a series of transactions
     pursuant to a plan that will cause it to be treated as transferring its properties to
     Sub 1, a domestic corporation newly formed by Parent US Sub, and liquidating
     and that are intended to qualify as a reorganization under section 368(a)(1)(F).

                                   Representations

Parent has made the following representations:

    1. Target is a surrogate foreign corporation that first became a surrogate foreign
     corporation before November 9, 2017.

    2. Target is not treated as a domestic corporation under section 7874(b).

    3. No foreign corporation will be treated as a surrogate foreign corporation (other
     than as a successor to another surrogate foreign corporation) as a result of
     Parent undertaking the Proposed Transactions.

    4. Step 4 of the Proposed Transactions will qualify as a reorganization described in
     section 368(a)(1)(F).

                                          Law

Section 7874 provides rules for expatriated entities and their surrogate foreign
corporations. A foreign corporation that completes an acquisition described in section
7874(a)(2)(B)(i) (“foreign acquiring corporation”) constitutes a surrogate foreign

PLR-108840-23                                  4

corporation, and an inversion transaction will have occurred, if the three conditions set
forth in section 7874(a)(2)(B) are satisfied. A foreign acquiring corporation also includes
a successor to a foreign acquiring corporation, including a corporation that succeeds to
and takes into account amounts with respect to the foreign acquiring corporation
pursuant to section 381. Treas. Reg. §1.7874-12(a)(10). It follows that, in the case of a
foreign acquiring corporation that is treated as a surrogate foreign corporation, a
successor to that corporation also will be treated as a surrogate foreign corporation.

An expatriated entity is a domestic corporation (or domestic partnership) with respect to
which a foreign corporation is a surrogate foreign corporation, and any United States
person that is or becomes related to such domestic corporation (or domestic
partnership) (within the meaning of sections 267(b) or 707(b)(1)). Section
7874(a)(2)(A); Treas. Reg. §1.7874-12(a)(8). Thus, for example, a United States
person will obtain expatriated entity status by becoming related to a person that is an
expatriated entity as a result of a previous inversion transaction.

In general, section 59A subjects certain corporations to a minimum tax that is calculated
by reference to the corporation’s base erosion payments. Under section 59A(d)(4),
certain payments that would not otherwise constitute base erosion payments are base
erosion payments if such payments are paid or accrued by a taxpayer with respect to a
surrogate foreign corporation which is a related party of the taxpayer or a foreign person
which is a member of the same expanded affiliated group (within the meaning of section
7874(c)(1)) as the surrogate foreign corporation. This rule applies only in the case
where the applicable surrogate foreign corporation “first became a surrogate foreign
corporation after November 9, 2017.” Section 59A(d)(4)(B)(i).

Section 965(c) allowed a United States shareholder a deduction for a portion of the
amount included in income under section 951(a) by reason of section 965. Under
section 965(l), a United States shareholder that was allowed such deduction is subject
to additional tax if such shareholder “first becomes an expatriated entity at any time
during the 10-year period beginning on the date of the enactment of the Tax Cuts and
Jobs Act (with respect to a surrogate foreign corporation which first becomes a
surrogate foreign corporation during such period).” The Tax Cuts and Jobs Act was
enacted on December 22, 2017. Pub. L. No. 115-97.

In describing changes from a prior draft of section 965(l), the Conference Report states:
“the conference agreement clarifies that U.S. shareholders acquired by a surrogate
[foreign] corporation are within the scope of [section 965(l)] only if the surrogate [foreign]
corporation inverted post-enactment.” H.R. Rep. No. 115-466 at 621 (Conf. Rep. 2017).

                                          Ruling

Based solely on the information submitted and representations made, we rule as follows
with respect to the Proposed Transactions:

PLR-108840-23                                  5

      If any person is treated as a successor to a surrogate foreign corporation (within
      the meaning of section 7874 and Treas. Reg. §1.7874-12(a)(10)) as a result of
      the Proposed Transactions, such successor will not be treated as having first
      become a surrogate foreign corporation in a period after November 9, 2017.

                                         Caveats

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax treatment of the Proposed Transactions under any other provision of the Code or
regulations, or the tax treatment of any condition existing at the time of, or effects
resulting from, the Proposed Transactions that is not specifically addressed by the
above 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,

                                                  /s/ Andrew Wigmore

                                                  Andrew Logan Wigmore
                                                  Senior Counsel, Branch 4
                                                  (International)




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