In a recently issued private letter ruling (PLR 201731008
), the IRS ruled that a corporate taxpayer had not adopted a plan of liquidation until after certain steps were completed in an internal restructuring that resulted in the to-be-liquidated corporation being wholly owned by the distributee parent.
Section 332 provides for non-recognition of gain or loss by the distributee corporation upon the receipt of property in complete liquidation of a subsidiary that is at least 80% owned (by vote and by value) by such distributee parent. The requisite 80% ownership must be present “on the date of the adoption of the plan of liquidation.” However, neither the Internal Revenue Code nor Treasury regulations define the date of adoption. If a subsidiary’s parent had decided to liquidate the subsidiary and subsequently acquired more shares solely to meet the 80% ownership threshold, it may be held that the plan of liquidation was adopted informally before the additional shares were acquired, thus rendering the liquidation taxable.
In the PLR, the taxpayer had a complicated ownership structure involving both foreign and domestic subsidiaries and laid out a series of steps involving liquidations, mergers and contributions to ultimately simplify the entire structure. At the start, one of the foreign subsidiaries (a liquidating subsidiary) was owned partially by two different subsidiaries. However, after a series of steps, the interests held by the two distributee subsidiaries in the liquidated subsidiary ultimately ended up in the hands of another subsidiary in the group (an acquiring subsidiary) such that liquidated subsidiary was 100% owned by the acquiring subsidiary. Thereafter, the liquidating subsidiary was liquidated.
The IRS ruled that there was no formal plan of liquidation before the liquidating subsidiary became wholly owned by the acquiring subsidiary. The IRS cited George L. Riggs, Inc. v. Comm’r, 64 TC 474 (1975) to come to the proposition.
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