Deferred gain was excluded and downstream merger met continuity test

Plain-English summary

A consolidated corporate group completed a sale, internal distributions, an F reorganization, and a downstream merger into a disregarded entity owned by a partly public subsidiary. An earlier stock distribution had created a deferred intercompany gain, and the reorganized parent succeeded to that gain before the downstream merger. Based on the taxpayer's representations, the IRS ruled that the gain would be redetermined as excluded from gross income under the consolidated-return regulations. It also ruled that the downstream merger satisfied the continuity-of-business-enterprise requirement for an A reorganization. The letter superseded and withdrew an earlier private letter ruling involving the transaction.

Ruling snapshot

• Question: Could the deferred intercompany gain be excluded, and did the downstream merger meet the continuity-of-business-enterprise requirement?
• Outcome: approved
• Key authorities: IRC §§ 311, 332, and 368(a)(1)(A) and (F); Treas. Reg. §§ 1.1502-13(c)(6)(ii)(D), 1.1502-75(d)(2)(i), and 1.368-1(b) and (d)

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 202412009                                            Third Party Communication: None
Release Date: 3/22/2024                                      Date of Communication: Not Applicable
Index Number: 1502.93-00, 368.08-06
                                                             Person To Contact:
-----------------------                                      ----------------, ID No. -----------------
--------------------------                                   Telephone Number:
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--------------------------------                             Refer Reply To:
----------------------------                                 CC:CORP:BO3
                                                             PLR-118149-23
                                                             Date:
                                                             December 21, 2023


Parent Owner          = ----------------------------------------------------------------------------------------
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Parent                = ----------------------------------------------------------------------------------------
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Sub 1                 = ----------------------------------------------------------------------------------------
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Sub 2                 = ----------------------------------------------------------------------------------------
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Sub 3                 = ----------------------------------------------------------------------------------------
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DE 1                  = ----------------------------------------------------------------------------------------
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DE 2                  = ----------------------------------------------------------------------------------------
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DE 3                  = ----------------------------------------------------------------------------------------
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DE 4                  = ----------------------------------------------------------------------------------------
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DE 5                  = ----------------------------------------------------------------------------------------
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PLR-118149-23                                             2

 DE 6                    = ----------------------------------------------------------------------------------------
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 DE 7                    = ----------------------------------------------------------------------------------------
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 DE 8                    = ----------------------------------------------------------------------------------------
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 DE 9                    = ----------------------------------------------------------------------------------------
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 DE 10                   = ----------------------------------------------------------------------------------------
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 Date 1                  = -----------------

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

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

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

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

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

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

 d                       = --------------------------

 e                       = -----------------------

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


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

       This letter responds to your authorized representatives’ letter dated September 6,
2023, requesting rulings on certain federal income tax consequences of a series of
transactions (the “Completed Transaction”). The information provided in that letter and
in subsequent correspondence is summarized below.

PLR-118149-23                                  3

      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 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.
       This letter and one of the rulings contained herein are issued pursuant to section
6.03(2) of Rev. Proc. 2023-1, 2023-1 I.R.B. 1, regarding a significant issue under
section 368 of the Code. The rulings contained in this letter only address one or more
discrete legal issues involved in the Completed Transaction.
          This letter supersedes PLR-113230-20, and PLR-113230-20 is withdrawn.

                                     Summary of Facts
     The following is a description of the facts that existed immediately prior to the
Completed Transaction.

      Parent Owner is a domestic partnership that owned all of the outstanding stock of
Parent. Parent was the common parent of a consolidated group (the “Parent
Consolidated Group”). The Parent Consolidated Group was engaged in Business A,
conducted by DE 8 and its subsidiaries. Sub 1, a domestic corporation that was not a
member of the Parent Consolidated Group after Date 2, and its subsidiaries conducted
(and continue to conduct) Business B.

        Parent owned all the equity of DE 1, DE 2, and DE 3, each a domestic entity
disregarded as separate from its owner for federal income tax purposes (a “disregarded
entity”). Parent also owned a percent of the outstanding common stock of Sub 1.

          DE 1 owned b percent of the outstanding common stock of Sub 1.

          DE 3 owned all the equity of DE 4, a domestic disregarded entity.

          DE 4 owned all the equity of DE 5, DE 6, and DE 7, each a domestic disregarded
entity.

          DE 5 owned c percent of the outstanding common stock of Sub 1.

          DE 6 owned all the equity of DE 8, a domestic disregarded entity.

       DE 8 owned all the equity of DE 9, a domestic disregarded entity, and various
other corporate subsidiaries and disregarded entities, including Sub 3, a domestic
corporation.

          DE 9 owned all the equity of DE 10, a domestic disregarded entity.

PLR-118149-23                               4

       DE 10 owned all the equity of Sub 2, a domestic entity treated as a corporation
for federal income tax purposes. Sub 2 owned certain assets that are used in and
relevant to the operation of Business B by Sub 1.

      The remaining d percent of the outstanding common stock of Sub 1 was owned
by public investors.

                                  Prior Transactions

       Prior to Date 3, DE 3, DE 4, DE 6, DE 7, and DE 8 were corporations. During
Date 3, DE 3, DE 4, DE 6, DE 7, and DE 8 were converted to limited liability companies
treated as disregarded entities (the “Date 3 Conversions”).

        As a result of past transactions, a deferred intercompany gain under Treas. Reg.
§ 1.1502-13 (the “DIG”) existed with respect to a portion of Sub 1 stock (the “DIG
Stock”). Prior to Date 1, DE 8 owned all of Sub 1. The DIG resulted from DE 8’s
distribution on Date 1 of e percent of the common stock of Sub 1 to DE 6 in a
transaction to which section 311 of the Code applied (the “Date 1 Distribution”). DE 6
further distributed the DIG Stock to DE 4, which then contributed it to DE 7, which was
then a newly formed, wholly owned subsidiary.

       Subsequent to the Date 1 Distribution, ownership of the common stock of Sub 1
(other than the DIG Stock) was transferred within the Parent Consolidated Group in
various transactions. Parent determined that Sub 1 and its subsidiaries were no longer
members of the Parent Consolidated Group as of Date 2 as the combined result of
various transactions involving Sub 1 shares, including dispositions of Sub 1 shares (the
“Deconsolidation Event”).

                               Completed Transaction
       Parent engaged in the Completed Transaction for what are represented to be
valid business reasons. The relevant steps of the Completed Transaction, which
occurred on or before Date 4, are set forth below:
      Before Date 4:
   1) Parent distributed the equity of DE 2, a dormant or non-operational entity, to
      Parent Owner.

   2) DE 2 formed a new domestic corporation (“New Parent”).

   3) New Parent formed a new domestic disregarded entity (“DE 11”).

   4) The stock of Sub 2 was distributed from DE 10, through DE 9, DE 8, DE 6, DE 4,
      and DE 3, to Parent in a series of transactions intended to be disregarded for
      federal income tax purposes.

PLR-118149-23                              5

   5) DE 8 caused each of its domestic subsidiaries treated as corporations for federal
      income tax purposes, except for Sub 3, to be converted into limited liability
      companies treated as disregarded entities. Each conversion was intended to
      qualify as a liquidation under section 332 of the Code.

   6) DE 8 distributed the excess cash held by DE 8 and its subsidiaries to Parent in a
      series of transactions intended to be disregarded for federal income tax
      purposes.

   7) DE 5, through DE 4 and DE 3, and DE 1 distributed their respective shares of
      Sub 1 common stock to Parent in transactions intended to be disregarded for
      federal income tax purposes.

      On Date 4:

   8) An unrelated corporation (“Buyer”) acquired all the equity of DE 6 from DE 4
      through the merger of a disregarded entity wholly owned by Buyer with and into
      DE 6 with DE 6 surviving as a disregarded entity wholly owned by Buyer. The
      transaction was intended to be treated as a taxable sale for federal income tax
      purposes (the “Business A Disposition”). The consideration received by DE 4 in
      the transaction was distributed, through DE 3, to Parent in transactions intended
      to be disregarded for federal income tax purposes. A portion of the consideration
      will be used to satisfy liabilities and to redeem Parent shares held by employees
      of DE 8, with the remainder distributed to Parent Owner.

   9) Parent distributed the equity of DE 1 and DE 3 to Parent Owner (the “Interests”).
      The Interests represent ownership interests in dormant or non-operational
      entities. Parent Owner then contributed the equity of Parent, DE 1, DE 3, and a
      newly formed domestic disregarded entity to DE 2.

   10) Parent then merged with and into DE 11, with DE 11 surviving, in a transaction
      that, together with Steps 2 and 3, was intended to be a reorganization described
      in section 368(a)(1)(F) of the Code (the “Parent Reorganization”). As a result of
      the Parent Reorganization, New Parent succeeded to the DIG.

   11) DE 11 distributed its shares of Sub 1 common stock, cash, and the equity of
      Sub 2 to New Parent in transactions intended to be disregarded for federal
      income tax purposes.

   12) New Parent distributed the equity of DE 11 to DE 2.

   13) Sub 1 formed a new domestic disregarded entity (“DE 12”).

   14) New Parent merged with and into DE 12 with DE 12 surviving (the “Downstream
      Merger”) in a transaction intended to be a reorganization described in section
      368(a)(1)(A) of the Code.

PLR-118149-23                               6

                                   Representations


      Parent has made the following representations in connection with the Completed
Transaction:
   1) Each of the Date 3 Conversions qualified as a liquidation under section 332.
   2) The Parent Reorganization is a reorganization described in section 368(a)(1)(F)
      and resulted in a continuation of the Parent Consolidated Group pursuant to
      Treas. Reg. §1.1502-75(d)(2)(i).
   3) But for the issue of whether the Downstream Merger satisfies the continuity of
      business enterprise requirement under Treas. Reg. §§ 1.368-1(b) and (d), the
      Downstream Merger is a reorganization described in section 368(a)(1)(A).
   4) The Parent Consolidated Group did not terminate at any time before the effective
      date of the Downstream Merger.
   5) The Parent Consolidated Group held the DIG Stock until the effective date of the
      Downstream Merger.
   6) Transactions taken with respect to the stock of Sub 1, including any transactions
      that resulted in a Deconsolidation Event, were undertaken for valid business
      reasons.
   7) Other than the Date 1 Distribution, no transaction taken with respect to the stock
      of Sub 1 resulted in the creation of a deferred intercompany gain under
      Treas. Reg. § 1.1502-13.
   8) The effects of the Date 1 Distribution have not previously been, and no event
      would have resulted in the Date1 Distribution being, reflected, directly or
      indirectly, on the Parent Consolidated Group’s consolidated return.
   9) The Parent Consolidated Group has not derived, and no taxpayer will derive,
      any federal income tax benefit from the Date 1 Distribution that gave rise to the
      DIG.
                                        Rulings
      Based solely on the information submitted and the representations set forth
above, we rule as follows:
   1) The DIG is redetermined to be excluded from gross income under
      Treas. Reg. § 1.1502-13(c)(6)(ii)(D).
   2) The Downstream Merger satisfies the continuity of business enterprise
      requirement under Treas. Reg. §§ 1.368-1(b) and (d).
                                        Caveats
        Except as expressly provided herein, no opinion is expressed or implied
concerning the tax consequences of any aspect of the Completed Transaction or any
other transaction or item discussed or referenced in this letter.

PLR-118149-23                                           7


                                       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 (PLR-118149-23) of this letter ruling.

                                               Sincerely,


                                               Austin Diamond Jones
                                               Austin Diamond-Jones
                                               Branch Chief, Branch 3
                                               Office of Associate Chief Counsel (Corporate)

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