The Internal Revenue Service (IRS) recently announced a policy change regarding requests for private letter rulings on certain corporate transactions. According to the IRS, it “is reconsidering its views regarding certain issues as to which it has provided favorable rulings in the past.”
The IRS indicated that once it completes its study, it may issue new guidance. In the meantime, the IRS Statement sets forth the following guidelines for the processing of private letter ruling requests while the agency studies the issues:
- Worthless stock loss eligibility under section 165(g)(3)(B) of the Tax Code: In connection with a worthless stock loss under Section 165(g)(3)(B), IRS will no longer rule on whether the character of gross receipts received by a consolidated group member in an intercompany transaction may be redetermined by reference to the character of the source funds possessed by the counterparty to the intercompany transaction.
- Delayed distributions in connection with a section 355 or section 361 distribution: If, in connection with a Section 355 distribution, a distribution of stock, securities or other property to the distributing corporation’s shareholders or creditors is substantially delayed, IRS will continue to rule on whether the delayed distribution is tax-free under Section 355 or Section 361. However, rulings on such issues will not be based solely on the length of the delay. Instead, IRS will rule on this issue only based on substantial scrutiny of the facts and circumstances (including the circumstances of the delay) and full consideration of the legal issues and the effects of a ruling on federal tax administration. However, in determining whether a retention of stock or securities is in pursuance of a plan having as one of its principal purposes the avoidance of federal income tax, within the meaning of Section 355(a)(1)(D)(ii), IRS will continue to follow the guidelines in Appendix B of Rev. Proc. 96-30, even though Rev. Proc. 2017-52 has superseded Rev. Proc. 96-30. Thus, IRS will continue to rule in accordance with prior practice as to the application of Section 355 to the distribution of the stock, or stock and securities, that are not retained.
- Drop-spin-liquidate” and similar transactions: The IRS will increase its scrutiny and analysis of “drop-spin-liquidate” and similar transactions. As an example, a corporation may distribute the stock of a subsidiary in a transaction potentially subject to Section 355, and as part of the same plan the distributing corporation or the subsidiary may liquidate into a corporate parent or may merge into or otherwise be acquired by its corporate parent or another related corporation. In connection with such a transaction, IRS will rule that the distribution is subject to Section 355 only based on substantial scrutiny of the facts and circumstances and full consideration of the legal issues and the effects of a ruling on federal tax administration. However, IRS will continue to rule in accordance with prior practice on such transactions (including “Morris Trust” and “reverse Morris Trust” transactions) if the distributing corporation or the controlled corporation, as the case may be, and its successor are not related before the acquisition.
- Reorganizations resulting in a transfer of a portion of a subsidiary’s assets to its corporate shareholder: The IRS will increase its scrutiny and analysis of potential reorganizations that result in transfers of a portion of a subsidiary’s assets to its corporate shareholder, if the transfer does not qualify under Section 332 or Section 355 but is intended to be tax-free. For example, a corporate subsidiary may convert into a non-corporate entity (for example, a limited liability company) that is treated as a disregarded entity owned by its parent. As part of the same plan, the disregarded entity distributes a portion of its assets to the parent and then either elects to be taxed as a corporation or converts back into a corporation (either in the same state as the state of incorporation of the original subsidiary or a different state). IRS will rule on issues relating to such a transaction only based on substantial scrutiny of the facts and circumstances and full consideration of the legal issues and the effects of a ruling on federal tax administration.
The IRS Statement advises that private letter rulings previously issued on these issues are not impacted. Corporations that are contemplating any of the above transactions in the future should consult with experienced corporate tax professionals regarding how the IRS statement may impact your tax obligations.
If you have any questions or if you would like to discuss the matter further, please contact me, James McDonough, at 201-806-3364.