United States

Where one transaction ends and the next begins


When planning a business restructuring that involves more than one transaction step, companies should carefully consider the tax consequences. Whether one transaction step affects the tax treatment of the next step often is an important tax issue. This was the case for the multinational group that received PLR 201731008. The taxpayer sought this Private Letter Ruling (PLR) because it was concerned that its restructuring tax results might be affected by prior and subsequent transaction steps.

Multi-step restructuring presents significant tax issues

From a tax point of view, where one transaction ends and the next begins is not always clear, as illustrated by this PLR. The IRS would not have issued this PLR if the resolution was entirely clear.[1] This PLR therefore indicates that the taxpayer and the IRS agreed that the restructuring presented significant tax issues.

The PLR addresses a complex series of restructuring transactions. The proposed restructuring was intended to simplify the corporate structure and achieve non-tax regulatory compliance. The taxpayer’s U.S. parent corporation (directly or indirectly) owned a group of domestic corporate subsidiaries and various foreign subsidiaries. These subsidiaries were treated as corporations for Federal income tax purposes. In order to effectuate its goal of structural simplification, the taxpayer would engage in more than 17 steps to reorganize or eliminate certain entities. In doing so, the taxpayer asked the IRS to evaluate the tax consequences of 10 of the steps after taking into consideration the entire plan.

Under the proposed restructuring plan, the taxpayer would convert many of the corporations in the group to entities disregarded for Federal income tax purposes as entities apart from their owners (disregarded entities). These disregarded entities would be treated as if they had liquidated. The taxpayer intended tax-free liquidation treatment (under sections 332 and 337 of the Tax Code) for these deemed liquidations, and wanted to make sure that the prior and subsequent restructuring steps would not jeopardize this tax-free liquidation treatment. The IRS agreed that the intended tax-free liquidation treatment would apply. The PLR provided favorable rulings requested by the taxpayer, including:

1.    A subsidiary’s contribution to the capital of a corporation would qualify as a tax-free contribution (under section 351), and the control test of section 351 would be satisfied, even though the corporation receiving the contribution would liquidate in a subsequent transaction step;

2.    The transfer of a subsidiary’s assets would qualify as a tax-free corporate reorganization (under section 368) even though the various subsidiaries in the group underwent liquidations before or after the reorganization in a planned sequence; and

3.    Where a subsidiary was deemed liquidated as a result of a “check-the-box” entity classification election changing its tax status from corporation to disregarded entity, it would not be treated as adopting a plan of liquidation prior to the time its immediate parent company was liquidated.

In many situations existing tax authorities step transactions together and test for tax-free treatment following the series of steps, so this ruling was significant to the taxpayer and provided assurance that its restructuring steps would attain their intended tax-free qualification. One interesting aspect to the third ruling is that it addresses the timing of a transaction step that only occurs for tax purposes – a step that is a tax fiction. Where an entity changes its classification from corporation to disregarded entity, it is deemed to liquidate. There is no actual liquidation. The deemed liquidation’s tax consequences may depend on what transaction steps are undertaken pursuant to the applicable plan of liquidation. Like the deemed liquidation itself, the plan of liquidation is essentially a tax fiction – deemed to exist for tax purposes. The PLR’s ruling on this point helped the taxpayer limit the scope of this deemed plan of liquidation.


When planning multi-step restructuring transactions, taxpayers and tax practitioners should carefully review the treatment of each step. The review often raises the question of when, for tax purposes, one transaction ends and the next begins. PLR 201731008 demonstrates that resolving this question often presents significant tax issues. Companies planning multi-step restructuring transactions should consult with tax professionals experienced in addressing restructuring transactions’ tax consequences.

[1] If the transaction’s tax results were clear, the PLR would be considered a “comfort” ruling,” and the IRS would not issue it  The IRS will only issue a PLR of this sort if the transaction presents one or more significant tax issues.  See Rev. Proc. 2016-1.


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