Putting Humpty-Dumpty back together again
IRS permits early reconsolidation in recent PLR
TAX ALERT |
The taxpayer did not need all the king’s horses and all the king’s men; the IRS allowed a deconsolidated group to reconsolidate again. A deconsolidated group was granted a favorable letter ruling from the IRS in PLR 201927002, allowing a reconsolidation within the five-year period following deconsolidation.
The group had previously deconsolidated upon emergence from bankruptcy. Old Parent was the common parent of a consolidated group (i.e., an affiliated group of corporations that joined in the filing of a consolidated federal income tax return). Old Parent and its subsidiaries filed a voluntary bankruptcy petition in the Bankruptcy Court prior to the deconsolidation. As a result of the series of transactions entered into to effect the bankruptcy, the Old Parent consolidated group split into two separate consolidated groups with two independent operating businesses (parented by “New Parent” and “Target Parent”). The transactions undertaken in bankruptcy caused Old Parent to recognize a capital loss.
Subsequently, and for a valid corporate business purpose, New Parent agreed to acquire the consolidated group of which Target Parent was a member in the third year post-deconsolidation. As a result of the acquisition, Target Parent and its subsidiaries could become members of New Parent’s consolidated group if the IRS provided a favorable ruling.
Five year prohibition on reconsolidation
Section 1504(a)(3)(A) generally prohibits corporations that deconsolidate from a consolidated group from reconsolidating within 60 months of the deconsolidation. Reconsolidation may be permitted under Revenue Procedure 2002-32’s automatic waiver of this general rule. This automatic reconsolidation relief is not available, however, where the deconsolidation produced a tax benefit (as described in the Revenue Procedure). The taxpayer in the PLR 201927002 did not qualify for the automatic relief because of the capital loss recognized in the original disaffiliation transaction. As such, the taxpayer was forced to seek relief through the PLR.
In order to obtain relief in the ruling, New Parent entered into a closing agreement under section 7121 with the IRS to forgo the capital loss generated on the disaffiliation transaction. Accordingly, and conditioned on the execution of the closing agreement, the IRS allowed Target Parent and its subsidiaries to reconsolidate with the New Parent consolidated group earlier than the expiration of the 60-month waiting period prescribed in section 1504(a)(3)(A).
The issuance of PLR 201927002 indicates the IRS’ acceptance that early reconsolidations should be allowed if the taxpayer can show no tax benefits result from the deconsolidation and reconsolidation. Clients assessing the ability to reconsolidate corporations formerly in the same consolidated group should consult with their tax advisors, and should also consider the financial reporting implications of reconsolidation.