Flexibility for intragroup restructuring and asset transfers.

AuthorGruidl, Nick

Letter Ruling 201127004 reinforces the flexibility granted to taxpayers wishing to move assets around a qualified group without triggering gains or meeting the stringent qualifications of Sec. 355. The ruling addressed an intragroup restructuring using the conversion of a corporate subsidiary into a single-member limited liability company (SMLLC) that existed only momentarily as a disregarded entity prior to conversion back to corporate status. Similar in fact and result to Letter Ruling 200952032, the ruling also dealt with conversions into and out of disregarded entity status. In addition, while both of these rulings addressed domestic entities, international restructuring opportunities abound when using this transaction alternative.

The rulings' facts

Letter Ruling 201127004: Parent (P) was the common parent of an affiliated group of corporations filing a consolidated U.S. federal income tax return that owned a first-tier subsidiary (Sub). Sub conducted business A and business B operations through its direct and indirect subsidiaries. Sub's business A operations were conducted through a limited liability company {LLC1) classified as a partnership for U.S. federal income tax purposes. The ruling involved the following steps:

  1. Sub converted into an SMLLC dis regarded as a separate entity for U.S. federal income tax purposes;

  2. The SMLLC assigned the LLC1 interests to P;

  3. The SMLLC converted into a corporation (NewSuh) under applicable state law.

    The IRS ruled that the steps represented an upstream Sec. 368(a)(1)(C) reorganization followed by a Sec. 368(a) (2)(C) drop by P of Sub's assets, other than the LLC1 interests, into the newly incorporated entity under Sec. 351. The ruling did not disclose what percentage LLCl represented of Sub's total assets prior to the transaction.

    Letter Ruling 200952032: Under the fact pattern of this letter, somewhat simplified, Parent (P) wholly owns Subsidiary (Q) and Subsidiary 1 (Ql) and is the parent in the P-Q-Ql group. Q operates business A, while Q and Ql jointly operate business B. P apparently wanted Ql to operate business B on its own. To accomplish the transfer by Q of business B's assets to Q2, the following steps occurred:

  4. Q merged with and into LLC, an entity wholly owned by P and disregarded from P for federal tax purposes;

  5. LLC distributed business B's assets to p;

  6. P transferred business B's assets to Ql; and

  7. LLC elected to be treated as an entity taxable as a corporation. The ruling...

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