The IRS today released an advance version of Rev. Rul. 2015-09 which provides that the following transaction is properly treated for federal income tax purposes as a transfer of the foreign operating subsidiary’s stock in an exchange governed by section 351 followed by reorganizations under section 368(a)(1)(D):
With today’s revenue ruling, the IRS has revoked Rev. Rul. 78-130.
Rev. Rul. 2015-09 [PDF 41 KB] states that the IRS will apply this guidance prospectively, and will not apply it to challenge a position taken by a taxpayer that reasonably relied on the conclusions in Rev. Rul. 78-130 prior to May 5, 2015, with respect to a transaction that occurred on or before May 5, 2015, or a transaction that is effected pursuant to a written agreement that is binding on May 5, 2015, and later until the date when the transaction is completed (provided that all parties treat the transaction consistently for federal income tax purposes).
The facts presented in Rev. Rul. 2015-09 are as follows:
P, a domestic corporation, owns all of the stock of S-1 and S-2, both of which are incorporated in foreign country R. S-1 is an operating company. S-2 is a holding company that owns all of the stock of X, Y, and Z, which are operating companies incorporated in foreign country R.
All of the operating companies in country R are to be combined into a new subsidiary of S-2 to be formed in country R in accordance with the following plan:
Following the transaction, N will continue to conduct the businesses formerly conducted by S-1, X,Y, and Z.
To avoid recognizing gain under section 367(a)(1) and Reg. section 1.367(a)-3(a) on the transfer of the S-1 stock to S-2, P will properly enter into a gain recognition agreement pursuant to Reg. section 1.367(a)-8 with respect to that transfer and will satisfy the applicable exceptions to triggering events resulting from the other exchanges that occur in the transaction.
P will also take into account the application of Reg. section 1.367(b)-4, which may require shareholders that exchange stock of a foreign corporation in certain nonrecognition exchanges (including sections 351 and 354) to include in income as a deemed dividend the section 1248 amount attributable to the exchanged stock.
The question presented is whether a transaction when:
is a transaction properly treated for federal income tax purposes as a transfer of the foreign operating subsidiary’s stock in an exchange governed by section 351 followed by reorganizations under section 368(a)(1)(D)?
Noting that a transfer of property may be respected as a section 351 exchange even if it is followed by subsequent transfers of the property as part of a prearranged, integrated plan, Rev. Rul. 2015-09 explains that a transfer of property in an exchange otherwise described in section 351 will not qualify as a section 351 exchange if, for example, a different treatment is warranted to reflect the substance of the transaction as a whole.
The IRS continued by explaining that under the facts of this revenue ruling, P’s transfer satisfies the formal requirements of section 351, including the requirement that P control S-2 within the meaning of section 368(c) immediately after the exchange.
Moreover, even though P’s transfer and S-1’s transfer and liquidation are steps in a prearranged, integrated plan that has as its objective the consolidation of S-1 and the other operating companies in N, an analysis of the transaction as a whole does not dictate that P’s transfer be treated other than in accordance with its form in order to reflect the substance of the transaction.The IRS therefore concluded that:
The IRS therefore concluded that:
The facts of the ruling are identical to those of Rev. Rul. 78-130, which treats P’s transfer of the stock of S-1 to S-2, followed by S-1’s transfer of substantially all its assets to N as a reorganization under section 368(a)(1)(C). The IRS reasoned that such a recast of form was proper because the two planned steps are not to be viewed independently. In revoking Rev. Rul. 78-130, the IRS viewed the form of the transaction as a whole, as no longer dictating a recast to reflect substance.
As noted above, the IRS stated that it will not apply Rev. Rul. 2015-09 to challenge a position taken by a taxpayer that reasonably relied on the conclusions of Rev. Rul. 78-130 prior to May 5, 2015, with respect to a transaction that occurs on or before today, May 5, or to a transaction that is effected pursuant to a written agreement that is binding on May 5, 2015, provided none of the affected corporate parties treats the transaction inconsistently for federal income tax purposes.
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