Chief Counsel Advice: Application of SRLY provisions after reattribution election

Chief Counsel Advice: Application of SRLY provisions

The IRS today posted a redacted version of a field advice memorandum* concerning the application of the SRLY provisions after a reattribution election under Reg. section 1.1502-36(d)(6). 20150301F (release date January 16, 2015, and dated September 10, 2014)

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*Field advice memo documents are prepared by IRS field attorneys in the Office of Chief Counsel, are reviewed by an Associate Office, and are subsequently issued to IRS field or service center employees. The memo cannot be used or cited as precedent.

In the field advice memo [PDF 133 KB], all of the facts presented are redacted. The IRS memo provides these conclusions:

  • When liabilities are nonrecourse to the owner, upon discharge of those liabilities in bankruptcy, the owner is treated as selling assets of the disregarded entities in exchange for release of the liabilities of the disregarded entities.
  • Under Reg. sections 1.1502-36(d)(6)(iv)(A) and 1.1502-32(b)(2)(iii), the taxpayer’s basis in the stock of the subsidiary is reduced as a result of an election under Reg. section 1.1502-36(d)(6) to reattribute the subsidiary’s net operating losses (NOLs) because such reattribution is a noncapital, nondeductible expense.
  • While the entities that owned Company A were insolvent, the insolvency exception under Reg. section 1.1502-36(d)(6)(iv)(B) does not apply because these entities were disregarded entities and not “subsidiaries.”
  • Company B is a “successor” because Company B is treated as receiving the NOLs in a section 381 transaction. This treatment is in accordance with the “as the context may require” provision of Reg. section 1.1502-21(f)(1) because the treatment is consistent with the purpose of Reg. section 1.1502-36(d) (6)—provided that Company B includes only its post-separation taxable income in the SRLY register.
  • Since Company A is not in bankruptcy, its tax attributes are not property of the bankruptcy estate, and the automatic stay does not prevent Company B from making an election under Reg. section 1.1502-36(d)(6).

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