Would Utah follow federal IRC section 332 and allow tax-free liquidation of two wholly owned subsidiaries into their parent corporation?

Plain-English summary

Utah Private Letter Ruling 92-044 addressed a parent corporation proposing to liquidate two wholly owned Utah subsidiaries into the parent.

The transaction was represented to qualify for federal nonrecognition under IRC section 332.

Utah had not expressly adopted section 332, but the Commission allowed the tax-free treatment to avoid creating a Utah asset basis different from the federal basis.

Proposed transaction

The parent and its subsidiaries designed, manufactured, and marketed electronic components.

The two subsidiaries operated Utah manufacturing facilities and had previously operated as divisions of the parent.

The parent wanted to liquidate both wholly owned subsidiaries back into itself and again operate them as divisions.

Utah liquidation provisions

The response said Utah had not adopted IRC section 332 and that Utah law was silent on this type of corporate liquidation.

Utah Code section 59-7-117(2) generally treated a complete-liquidation distribution as full payment in exchange for stock.

Together with sections 59-7-114 through 59-7-116, that provision standing alone could recognize gain or loss based on the difference between asset basis and fair market value, because section 59-7-115 contained no stated exclusion for the complete liquidation.

Basis-conformity conflict

Utah Code section 59-7-108(9) provided that depreciation, cost recovery, and similar amounts were the same as those used to determine federal tax liabilities.

The Commission read that provision as showing legislative intent to keep Utah asset basis the same as federal asset basis.

Recognizing gain or loss under section 59-7-117(2) would create a Utah basis different from the federal basis in an IRC section 332 liquidation.

The Commission treated that result as conflicting with section 59-7-108(9).

Holding

The Commission resolved the potential conflict by following IRC section 332's tax-free treatment.

It expressly allowed the described subsidiaries' liquidation into their parent without recognition.

What this means for you

Corporate groups

Confirm that a proposed subsidiary liquidation satisfies all federal section 332 requirements and then separately analyze current Utah conformity law.

Corporate tax departments

Basis consequences were central to this ruling. Maintain schedules reconciling federal and state basis before and after an internal restructuring.

Accountants and tax professionals

This 1992 opinion resolved a conflict among then-existing Utah provisions. Do not treat it as a substitute for reviewing today's conformity statutes.

Common questions

Q: Had Utah expressly adopted IRC section 332?

A: No, according to the ruling.

Q: Would Utah nevertheless allow the proposed tax-free liquidations?

A: Yes.

Q: Why did the Commission follow the federal result?

A: Recognizing gain or loss would create a Utah asset basis different from the federal basis, contrary to the basis-conformity intent it found in section 59-7-108(9).

Q: Did the opinion cover subsidiaries that were not wholly owned?

A: No. It addressed two wholly owned subsidiaries represented to qualify under IRC section 332.

Key source language

• Utah adoption: “Utah has not adopted IRC 332.”
• Standalone liquidation rule: “would create a taxable event in a complete liquidation of a subsidiary into its parent.”
• Basis intent: “the legislative intent was to keep the Utah basis of assets the same as it is for federal purposes.”
• Holding: “Utah will follow the tax-free provisions of IRC 332.”

Citations and references

• I.R.C. § 332
• Utah Code Ann. § 59-7-108(9)
• Utah Code Ann. § 59-7-114
• Utah Code Ann. § 59-7-115
• Utah Code Ann. § 59-7-116
• Utah Code Ann. § 59-7-117(2)

Source

• Landing page: Utah Private Letter Rulings
• Official ruling: Utah PLR 92-044
• Scope note: the requester represented that both complete liquidations would qualify for federal treatment under IRC section 332.
• Fetch note: the exact official URL returned HTTP 404 to a direct request and was then retrieved through Sofya.

Original ruling text

Response
December 18, 1992

December
18, 1992

XXXXX,

Dear
XXXXX:

Your
request for an advisory opinion regarding whether Utah will follow the federal provisions of IRC 332 relating to the tax-free liquidation of two wholly owned subsidiaries was referred to the Tax Commission's Auditing Division for their analysis and recommendation. You indicated that you are representing XXXXX which is considering the merger of two of its subsidiaries, XXXXX and XXXXX into XXXXX under IRC 332.

The
division staff recommendation is as follows:

Utah
has not adopted IRC 332 and the Utah statute is silent as to Utah's treatment of this type of corporate liquidation. Therefore, U.C.A. 59-7-117(2) is the controlling statute relating to this matter. It states:

"Amounts
distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, ...The gain or loss to the distributee resulting from such exchange shall be determined under Section 59-7-114 but shall be recognized only to the extent provided in Section 59-7-115..."

U.C.A.
59-7-114(1) states that "... the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in Section 59-7-116, and the loss shall be the excess of such basis over the amount realized." U.C.A. 59-7-114(3) defines "amount realized" as "...the sum of any money received plus the fair market value of the property (other than money) received."

Therefore,
U.C.A. 59-7-117(2) standing alone, provides that a gain or loss would be recognizable in a corporate liquidation (unless expressly not recognizable under U.C.A. 59-7-115) for the difference between the basis of the assets and their fair market value. Since, there is no provision in U.C.A. 59-7-115 which would exclude a complete liquidation from the provisions of 59-7-114, 59-7-117(2) standing alone, would create a taxable event in a complete liquidation of a subsidiary into its parent.

However,
U.C.A. 59-7-108(9) provides that amounts claimed as depreciation, cost recovery, etc. are the same as used in determining tax liabilities under the IRC. This section clearly indicates that the legislative intent was to keep the Utah basis of assets the same as it is for federal purposes.

U.C.A.
59-7-117(2) and 59-7-108(9) potentially create conflicting provisions in the case of an IRC 332 liquidation. Since, the recognition of gain or loss under U.C.A. 59-7-117(2) would create a different basis of assets for Utah purposes than the basis would be under federal law, which is contrary to the provisions of U.C.A. 59-7-108(9), Utah will follow the tax-free provisions of IRC 332.

If
you do not agree with this determination, you may appeal to the Tax Commission for a formal hearing. The results of that hearing would constitute a declaratory judgement and be appealable to the Utah State Supreme Court.

A
Notice of Appeal Rights and a copy of the Utah Taxpayer Bill of Rights are attached. In contacting the Tax Commission, if special accommodations are needed in accordance with the Americans with Disabilities Act, please call (801) 530-6290, (801) 530-6077 or TDD (801) 530-6269 allowing three working days notice.

For
the Commission

Joe
B. Pacheco

Mr.
H. R. Hansen, Chairman

Utah
State Tax Commission

Heber
M. Wells Building

160
East Third South

Salt
Lake City, Utah 84134-0300

Dear
Chairman Hansen:

We
are writing on behalf of our client, XXXXX (XXXXX), to request an advisory opinion regarding the proposed liquidation of two wholly-owned subsidiaries into their parent company. This matter has been discussed with XXXXX in advance of our submitting this request. We have included below a discussion of the background of the entities involved and a complete description of the proposed transaction. The company wishes to finalize this transaction before the close of the current calendar year and we therefore respectfully request a response to our inquiry by December 20, 1992, if possible.

BACKGROUND

XXXXX,
a California corporation domiciled in California, is the parent of a group of subsidiaries doing business in a number of states and foreign countries. XXXXX and its subsidiaries design, manufacture, and market various electronic components. The company is privately held and headquartered in XXXXX, California.

XXXXX
(XXXXX), a California corporation domiciled in Utah, is a wholly-owned XXXXX subsidiary which designs and manufactures electronic sensing and control devices. The company occupies a manufacturing facility in XXXXX, Utah.

XXXXX(XXXXX),
a California corporation domiciled in Utah, is a wholly-owned XXXXX subsidiary which designs and manufactures resistive networks. The company occupies a manufacturing facility in XXXXX, Utah.

Prior
to 1989, both XXXXX and XXXXX were operated in Utah for a number of years as divisions of XXXXX. Due to unfavorable business and economic conditions, these operations were spun-off as wholly-owned subsidiaries in December 1988. Recently, substantially improved business and economic conditions both internally and externally have made the merger of these two subsidiaries back into the parent a favorable option. XXXXX has determined that numerous financial and operating efficiencies could be achieved by once again operating XXXXX and XXXXX as divisions of XXXXX. It is anticipated that manufacturing operations in these two divisions would continue in Utah for the foreseeable future.

PROPOSED
TRANSACTION

XXXXX
is considering a complete liquidation of two wholly-owned subsidiaries, XXXXX and XXXXX, into XXXXX. It has been determined that this transaction will qualify for nontaxable treatment for federal income tax purposes under Internal Revenue Code Section (IRC �) 332. Utah law appears to follow the federal provisions for tax-free reorganizations, however, the Utah statutes are silent as to whether or not Utah will follow the federal provisions under IRC �332. Therefore, we are requesting an advisory opinion on the State of Utah's position with regard to tax-free liquidations of wholly-owned subsidiaries which qualify under IRC �332.

If
you have any questions or need additional information regarding this proposed transaction please do not hesitate to contact me directly. Again, due to the timing of this liquidation, we would like to thank you in advance for your prompt attention to this matter.

Very
truly yours,

XXXXX

XXXXX,
Partner

The
Utah State Tax Commission will allow this tax-free liquidation as provided under IRC �332 for the indicated subsidiaries.

UTAH
STATE TAX COMMISSION