Double and triple drops with liquidations clarified in pair of revenue rulings.

• Author: Gottlieb, Andrew

For years, practitioners have struggled with the Subchapter C characterization of certain multistep transactions, especially in situations in which the stock of a target corporation is transferred and the target corporation subsequently liquidates. Fortunately, the IRS has provided clarity in two of these situations: one involving a double drop and liquidation (Rev. Rul. 2015-9) and the other dealing with a triple drop and liquidation (Rev. Rul. 2015-10). This item discusses these rulings along with the technical aspects surrounding their issuance and addresses whether the IRS reached the right results.

Double Drop and Liquidation

Rev. Rul. 2015-9 revokes Rev. Rul. 78-130, characterizing a double drop and liquidation as a Sec. 351 transfer followed by a reorganization under Sec. 368(a)(1)(D) (D reorganization).

In Rev. Rul. 78-130, the IRS applied step-transaction principles to integrate the transfer of a target corporation to an indirectly owned second-tier subsidiary, followed by a liquidation of the target corporation into the second-tier subsidiary (double drop and liquidation). The facts of the 1978 ruling were as follows: P owned all the stock of S1 and S2. S2 owned all the stock of X, Y, and Z. Pursuant to a prearranged plan, S2 formed a new corporation, N, and P transferred the stock of S1 to S2 in exchange for S2 stock Immediately thereafter, S1, X, Y, and Z transferred all their assets and liabilities to N in exchange for N stock, followed by the distribution by S1, X, Y, and Z of their remaining assets (i.e., N stock) to S2 in complete liquidation. The IRS ruled that the direct transfers of the assets of X, Y, and Z to TV were treated as D reorganizations. In viewing the transaction as a whole, the IRS ruled that the transaction should be recharacterized as a triangular Sec. 368(a)(1)(C) reorganization (triangular C reorganization) with respect to S1.

On identical facts, Rev. Rul. 2015-9 revoked Rev. Rul. 78-130 and treated the contribution of S1 as a Sec. 351 exchange followed by a D reorganization of S1. Rev. Rul. 2015-9 relies on Rev. Rul. 77-449, holding that successive transfers of property from a domestic corporation to its wholly owned subsidiary and from that subsidiary to another wholly owned subsidiary pursuant to the same plan are each analyzed separately for purposes of Sec. 351. In addition, in Rev. Rul. 2015-9, the IRS stated that "an analysis of the transaction as a whole does not dictate that P's transfer be...