United States

Circular flows disregarded for tax characterization of transaction

IRS ruling treats sale of assets as liquidating distribution


Corporate transactions sometimes are structured with circular flows to satisfy local (state/foreign) law requirements or other nontax imperatives. Federal tax law may disregard these circular flows, as illustrated by two recently released private letter rulings (PLRs) 201622012 and 201614017.

Each of the PLRs discussed below cited multiple IRS revenue rulings, including Rev. Rul. 83-142, as authority for disregarding the circular flows. They apply a version of the step transaction doctrine whereby the circular cash flows are disregarded. Taxpayers may rely on the principles of those revenue rulings even if they do not request a ruling from the IRS addressing their particular transaction.

PLR 201622012: Post-acquisition liquidation

PLR 201622012 addressed a taxable business acquisition that was followed by a liquidation of the target company. The circular flow noted in this ruling was apparently designed to allow the target company to transfer all of its operating assets to the acquiring company immediately before it liquidated and distributed cash (not business assets) to its minority shareholders.  

After the acquiring company purchased target stock that carried at least 80 percent ownership of target (by vote and value), target sold all of its business assets to the acquiring company in exchange for a note. Target then liquidated. In the liquidation, the note received by target from the acquiring company was extinguished, and target’s minority shareholders received cash. The parties agreed in advance to undertake all of these steps. The IRS ruled that the asset sale would be disregarded for federal income tax purposes. Target would be treated as if it distributed its business assets to the acquiring company and cash to its minority shareholders in the liquidation.

PLR 201614017: Pre-spin-off restructuring

PLR 201614017, released earlier this year, addressed restructuring of a corporate group prior to a spin-off. This PLR involved a sale of stock for a note. The note was then transferred back to the buyer and extinguished (via a series of distributions and contributions). The parties made a binding commitment in advance to take these steps. The sale for a transitory note may have been utilized to facilitate the stock transfer under applicable foreign law, given that a sale of a subsidiary’s shares may be easier to accomplish in some jurisdictions than a distribution of those shares.   

The creation and extinguishment of the note were circular and disregarded for federal income tax purposes. The IRS held that the pre-spin-off restructuring would be treated as a series of contributions and distributions involving no asset sales—a favorable ruling for the taxpayer’s planned spin-off.


When circular flows of cash, notes or other property occur in corporate transactions, companies should consider whether the circular flows should be disregarded for tax purposes. If disregarding the circular flow is desired, the IRS may be willing to provide a favorable ruling, especially where the circular flows’ purpose is related to nontax aspects of the transaction such complying with applicable nontax law.  


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