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IRS considers step transaction issues and revokes prior revenue ruling

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The IRS issued a revenue ruling (Rev. Rul. 2015-09) on May 5 that addressed certain corporate step transaction issues and revoked a prior revenue ruling with similar facts (Rev. Rul. 78-120). The IRS held that the contribution of the stock of a subsidiary to another subsidiary, followed by the contributed subsidiary transferring substantially all of its assets to a lower-tier subsidiary, would qualify as a Section 351 transaction followed by a reorganization under Section 368(a)(1)(D) (and not as a “triangular C reorganization” or some other type of transaction).  


In the facts of Rev. Rul. 2015-09, a domestic corporation (P) owned all the stock of a foreign corporation (S-1), which was an operating company, and all the stock of a foreign corporation (S-2), which was a holding company. S-2, in turn, owned all the stock of three foreign corporations (X, Y and Z), which were operating companies. In accordance with a merger plan, P, S-1 and S-2 entered into the following steps:
  • S-2 incorporated a foreign corporation (N), for purposes pf participating in the remaining steps.
  • P transferred all of the stock of S-1 to S-2 in exchange for additional shares of voting common stock of S-2 (the first contribution).
  • Immediately after the first contribution, X, Y, Z and S-1 each transferred substantially all of their respective assets to N in exchange for additional shares of common stock of N (the second contribution).
  • X, Y, Z and S-1 liquidated and distributed all of their N stock to S-2 (the liquidation).

A transfer of property may be treated as a Section 351 transaction even if it is followed by subsequent transfers of the property as part of a prearranged, integrated plan. (For example, see Rev. Rul. 77-449 and Rev. Rul. 83-34.) Under step transaction principles, however, a transfer of property that otherwise meets the definition of a Section 351 transaction won’t qualify under Section 351 if a different treatment is warranted to reflect the substance of the transaction as a whole. (For example, see Rev. Rul. 54-96 and Rev. Rul. 70-140.) In addition, the transfer of stock of a corporation followed by the liquidation of the transferred corporation may be recharacterized to reflect the substance, rather than the form, of the integrated steps. (For example, see Rev. Rul. 67-274.)  

The IRS stated in Rev. Rul. 2015-09 that an analysis of the transaction as a whole didn’t dictate that the first contribution should be treated other than in accordance with its form, to reflect the substance of the transaction. Thus, the IRS ruled that the first contribution was properly characterized as a Section 351 transaction. The IRS ruled that the second contribution and the liquidation, on the other hand, were more properly characterized as a reorganization under Section 368(a)(1)(D) rather than as a Section 351 transaction followed by a Section 332 liquidation.

Rev. Rul. 2015-09 revoked Rev. Rul. 78-130, which held in a similar fact pattern that:

  • The transfer by P for the stock of S-1 to S-2 wouldn’t constitute a Section 351 transaction, and instead N would be viewed as directly acquiring substantially all of the assets of S-1 in exchange for stock of S-2 (a recast transaction).
  • The recast transaction may be properly characterized as a reorganization under Section 368(a)(1)(C).
  • The direct transfer of assets of X, Y and Z to N followed by the liquidation of X, Y and Z would qualify as a reorganization under Section 368(a)(1)(D).   

Contacts
Andy Cordonnier
+1 202 521 1502
andy.cordonnier@us.gt.com

Bryan Keith
+1 202 861 4116
bryan.keith@us.gt.com

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