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IRS: Liquidation possible despite subsequent assets transfer

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Tax Hot Topics newsletterThe IRS ruled in a private letter ruling (PLR 201923003) that a series of proposed transactions could qualify as Section 332 liquidations notwithstanding that a portion of the liquidating corporation’s assets was transferred to another corporation.

In the PLR, a publicly traded corporation, “Foreign Parent,” owned all of the stock of another corporation, “Foreign Holdco 2,” and Foreign Holdco 2 owned all of the stock of another corporation, “Foreign Holdco 1.” Foreign Holdco 1 owned all of the stock of a corporation that was the common parent of a consolidated group, “U.S. Parent.” U.S. Parent owned all of the stock of a corporation, “U.S. Distributing.” U.S. Distributing owned all of the stock of a corporation, “Sub 1,” Sub 1 owned all of the stock of a corporation, “Sub 2,” Sub 2 owned all of the stock of a corporation, “Sub3,” and Sub 3 owned all of the stock of a corporation, “Sub 4.”

Among the steps in the proposed transaction in the PLR, U.S. Distributing formed a new corporation, “U.S. Controlled,” which formed LLCs that were disregarded entities (DREs). The steps of the proposed transactions in the PLR provided that: (i) Sub 1 merged with and into one of the DREs; (ii) Sub 2 merged with and into one of the DREs; (iii) Sub 3 merged with and into one of the DREs; and then (iv) Sub 4 merged with and into one of the DREs. After the mergers, U.S. Distributing transferred some of the assets of Sub 2, Sub 3, and Sub 4 to U.S. Controlled.

As a significant issue, the IRS ruled that the contributions of assets did not preclude the mergers from qualifying as complete liquidations within the meaning of Section 332. It is noteworthy that Foreign Parent made a representation that the gross fair market value of all assets transferred in the contributions was less than 30% of the gross fair market value of the consolidated assets of Sub 1, Sub 2, Sub 3, and Sub 4, respectively, immediately prior to the mergers.

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Jeff Borghino
Partner
Washington National Tax Office
T +1 202 521 1532

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