IRS issues guidance on disguised corporate sales.

• Jurisdiction: United States
• Author: Kautter, David J.
• Date: 01 January 2002

In Chief Counsel Notice CC-2002-003, the Service advised Chief Counsel attorneys that when a parent disposes of a subsidiary in a merger and receives control of cash or liquid assets equal to the subsidiary's value, the transaction is a sale.

The typical transaction involves a parent that wants to dispose of a target subsidiary. The acquiring corporation forms a new subsidiary by contributing cash or liquid assets. The acquiring subsidiary forms a single-member limited liability company (SMLLC) by contributing cash or liquid assets equal to the target's value. The acquiring subsidiary uses a merger subsidiary to acquire the target's stock in a triangular merger. Following the merger, the acquiring subsidiary receives high-vote/low-value preferred stock in the target, giving it voting control over the target (but little of its value). The actual acquirer receives high-value/low-vote common stock in the target...