IRS limits and reconsiders certain corporate transaction rulings
New ruling procedures may apply after IRS reconsideration
TAX ALERT |
The IRS recently issued a statement addressing requests for private letter rulings regarding four types of corporate transactions. Although the IRS has issued multiple favorable rulings in these areas, it is now reconsidering its views. After this reconsideration, the IRS may issue new guidance governing these types of rulings. The four types of corporate transactions are:
1. Worthless stock loss eligibility under section 165(g)(3)(B) of the Tax Code
Because it provides an ordinary deduction, rather than a capital loss, a worthless stock loss under section 165(g)(3) is beneficial. Our article providing a general summary is available here. To qualify for the ordinary loss, the gross receipts test of section 165(g)(3)(B) must be met. The IRS now 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 counter party to the intercompany transaction.
2. Delayed distributions in connection with a section 355 or section 361 distribution
Tax-free spin-off transactions are a beneficial exception to the general rule that corporations must recognize gain when they distribute appreciated assets. Substantially delaying distributions may render this benefit unavailable. Rather than considering solely the length of a delay, the IRS will additionally focus on the facts and circumstances of the transaction and the effects of a potential ruling on tax administration when ruling on whether a distribution in connection with a spin-off is substantially delayed.
3. “Drop-spin-liquidate” and similar transactions
Additional scrutiny will be applied to “drop-spin-liquidate” transactions. These transactions involve assets being contributed into a corporation, which is next spun off and then liquidated (or merged into a related corporation). The IRS will consider the facts and circumstances in these situations, in addition to any legal issues and effects of a potential ruling on tax administration.
4. Reorganizations resulting in a transfer of a portion of a subsidiary’s assets to its corporate shareholder
Additional scrutiny will also be applied reorganizations resulting in a transfer of a portion of a subsidiary’s assets to its corporate shareholder if the transfer is intended to be tax-free but does not qualify under section 332 or section 355. Some IRS rulings have permitted “upstream” reorganizations of this sort to effect non-taxable asset distributions. Our prior Alert discussing these transactions is available here. The IRS will consider facts and circumstances in these cases, as well as any legal issues and effects of a potential ruling on tax administration.
The IRS will study these issues and may issue further guidance addressing them in the future. Private letter rulings previously issued in these areas are not impacted. Companies considering transactions in one of the four areas identified by the IRS in this statement should consult with a tax advisor to assess the impact of the statement.