Rev. Rul. 2015-10: Transfer to subsidiary constitutes D reorganization

Transfer to subsidiary constitutes D reorganization

The IRS today released an advance version of Rev. Rul. 2015-10 concluding that the transfer by a corporation to its wholly owned subsidiary of all of the interests in an entity classified as a corporation for federal income tax purposes, followed by the entity’s planned election to be disregarded as separate from its owner for federal income tax purposes, is more properly characterized as a section 368(a)(1)(D) reorganization than as a section 351 transfer followed by a section 332 liquidation.

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Rev. Rul. 2015-10 [PDF 42 KB] concludes that a transaction is properly treated as two transfers of stock in exchanges governed by section 351 followed by a section 368(a)(1)(D) reorganization when:

  • A parent corporation transfers all of the interests in its limited liability company that is taxable as a corporation to the first subsidiary in exchange for additional stock;
  • The first subsidiary transfers all of the interests in the limited liability company to the second subsidiary in exchange for additional stock;
  • The second subsidiary transfers all of the interests in the limited liability company to the third subsidiary in exchange for additional stock; and
  • The limited liability company elects to be disregarded as an entity separate from its owner for federal income tax purposes effective after it is owned by the third subsidiary.

The IRS reasoned that section 351 governs the first two transfers of stock because an analysis of the transaction as a whole does not dictate that the transfers be treated other than in accord with their form in order to reflect their substance.

The IRS reasoned otherwise with respect to the third transfer of stock, followed by the election to disregard status. That transfer and election together were more properly characterized as a reorganization, consistent with Rev. Rul. 67-274 and Rev. Rul. 2004-83.

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