No gain or loss on a taxable corporation's liquidation into a tax-exempt tribal corporation, which will itself be exempt from federal income tax

Plain-English summary

When a taxable corporation moves its assets into a tax-exempt entity, the tax
rules normally treat that like a taxable sale so the built-in gain does not
escape tax forever. Here, a state-law corporation owned (through a holding
company) by an Indian tribe had a troubled tax history: it elected S
corporation status, was later found on audit not to qualify, and converted to
a C corporation under a closing agreement. New counsel then advised that the
business could instead be run through a corporation chartered under Section 3
of the Oklahoma Indian Welfare Act (OIWA), which is treated as an integral
part of the tribe and therefore not subject to federal income tax. The tribe
proposed a series of steps ending with the taxpayer liquidating into a new
Section 3 corporation. The taxpayer asked whether the liquidation triggers
tax and whether the new corporation will be tax-exempt. The IRS ruled that no
gain or loss is recognized on the liquidation under Treas. Reg. § 1.337(d)-4
(the regulation that governs asset transfers to tax-exempt entities), and that
the new Section 3 corporation will be exempt from federal income tax on income
it earns after the transaction. The rulings depend on the Department of the
Interior actually granting the OIWA corporate charter.

Ruling snapshot

• Question: Does a taxable corporation recognize gain or loss when it
  liquidates into a newly formed tax-exempt tribal (OIWA Section 3)
  corporation, and will that corporation be exempt from federal income tax?
• Outcome: Approved (both rulings granted).
• Key authorities: Treas. Reg. § 1.337(d)-4; Rev. Rul. 94-65; Treas. Reg.
  § 301.7701-1(a)(3); Section 3 of the Oklahoma Indian Welfare Act.

Full text (IRS public release)

Internal Revenue Service                        Department of the Treasury
                                                Washington, DC 20224

Number: 202613001                   Third Party Communication: None
Release Date: 3/27/2026             Date of Communication: Not Applicable
Index Number: 337.14-00
                                    Person To Contact:
                                    --------, ID No. --------
                                    Telephone Number:
                                    --------
                                    Refer Reply To:
                                    CC:CORP:B01
                                    PLR-101163-25
                                    Date:
                                    December 23, 2025


Legend

Taxpayer        =   --------
Holdco          =   --------
Tribe           =   --------
State A         =   --------
Business        =   --------
Date 1          =   --------
Date 2          =   --------
Date 3          =   --------
Date 4          =   --------
Year A          =   --------
Year B          =   --------
Date 5          =   --------
Date 6          =   --------


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

This letter is in response to a letter dated December 23, 2024, and supplemented by
additional letters requesting rulings on certain federal income tax consequences of a
proposed transaction described below. The information submitted in the request and
subsequent correspondence 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
by appropriate parties. 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.

                                       Facts

Taxpayer, a State A corporation, is engaged in Business. On Date 1, Taxpayer was
acquired by Tribe. Currently, Taxpayer is wholly owned by Holdco, a State A corporation
that is wholly owned by Tribe.

On Date 2, Taxpayer filed an election to be treated as an S Corporation (the "Election").
The IRS initially rejected the Election, but after reconsideration, accepted the Election on
Date 3. On Date 4, Taxpayer received a notice of examination for tax years Year A
through Year B. As part of this examination, the IRS determined that the Taxpayer did
not qualify as an S corporation. On advice of counsel, Taxpayer entered into a closing
agreement with the IRS on Date 5 to resolve the examination and, consistent with its
understanding of the IRS' expectations under the closing agreement, Taxpayer converted
to a C corporation.

                             The Proposed Transaction

In Date 6, newly obtained counsel advised taxpayer that the Business could be operated
through corporations formed under section 3 of the Oklahoma Indian Welfare Act
("OIWA"). Accordingly, Taxpayer intends to transfer its business operations to a newly
formed corporation organized under section 3 of OIWA. The relevant steps of the
Proposed Transaction are set forth below.

   1. Holdco will merge into Taxpayer and Tribe will exchange 100% of the stock of
      Holdco for 100% of the stock of Taxpayer.
   2. Tribe will form a corporation under section 3 of the OIWA (the "Operating Section
      3 Corporation"). Tribe will own all of the issued and outstanding stock of the
      Operating Section 3 Corporation.
   3. Tribe will transfer 100% of the outstanding stock of Taxpayer to the Operating
      Section 3 Corporation in exchange for 100% of the stock of the Operating Section
      3 Corporation.
   4. Immediately thereafter, Taxpayer will liquidate and the Operating Section 3
      Corporation will acquire all of the assets and liabilities of Taxpayer; and
   5. Tribe will form a second corporation under section 3 of the OIWA (the "Section 3
      Holding Corporation") and will exchange 100% of the Operating Section 3
      Corporation to the Section 3 Holding Corporation in exchange for all stock in the
      Section 3 Holding Corporation, which will own all of the stock of the Operating
      Section 3 Corporation.


                                       Rulings

Based upon the facts and information submitted, including representations made, we rule
as follows:

   1. No gain or loss will be recognized by Taxpayer upon its liquidation into Operating
      Section 3 Corporation under Reg. § 1.337(d)-4. See Rev. Rul. 94-65, 1994-42
      I.R.B. 10; See also Certain Asset Transfers to a Tax-Exempt Entity, 62 Fed. Reg.
      2064, 2066 (proposed January 15, 1997).
   2. Following the Proposed Transaction, Operating Section 3 Corporation, will be
      exempt from federal income tax on income it earns following the Proposed
      Transaction. See Treas. Reg. 301.7701-1(a)(3).

                                       Caveats

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in this
letter.

   1. The conclusions reached in this letter ruling are dependent upon the Department
      of Interior's grant of a corporate charter pursuant to Section 3 of the OIWA. No
      opinion is expressed regarding whether such a grant is appropriate or required.
   2. This letter ruling express no opinion concerning whether the proposed
      reorganization, or the subsequent organizational structure, complies with the
      requirements of the OIWA.

                                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, a taxpayer filing its return electronically may satisfy this requirement by
attaching a statement to its return that provides the date and control number of the letter
ruling.

In accordance with the power of attorney on file with this office, copies of this letter are
being sent to the authorized representatives.

                                     Sincerely,



                                     Gregory J. Galvin
                                     Branch Chief, Branch 1
                                     (Corporate)


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