2015-05-11
Last week the IRS released Rev. Rul. 2015-09 and Rev. Rul. 2015-10.
In Rev. Rul. 2015-09, (1) a domestic corporation transferred all of the stock of its foreign operating subsidiary to its foreign holding company subsidiary in exchange for additional stock, (2) the foreign operating subsidiary and three foreign subsidiaries of the foreign holding company transferred substantially all of their assets to a newly-formed foreign subsidiary of the foreign holding company in exchange for stock of the new subsidiary, and (3) the subsidiaries that transferred their assets were liquidated. The IRS held that the transactions are properly treated for federal income tax purposes as a transfer of the foreign operating subsidiary’s stock in an exchange governed by Code §351 followed by reorganizations under Code §368(a)(1)(D).
Rev. Rul. 2015-09 revokes Rev. Rul. 78-130, where the same transaction was recast in part as a triangular C reorganization. When Rev. Rul. 78-130 was issued, Code §367(a) generally triggered gain on an outbound transfer of property to a foreign corporation, unless the taxpayer received a ruling from the IRS that the transaction was not undertaken for tax avoidance reasons. Recasting the transaction as a triangular C reorganization removed the U.S. person transferring property to a foreign corporation from the transaction (as well as the applicability of Code §367(a)). Later, in 1984, Code §367 was amended to allow for gain recognition agreements. With more relaxed taxation of outbound transfers of property, part of the impetus of Rev. Rul. 78-130 was removed. Rev. Rul. 2015-09 now respects the form of similar transactions.
In Rev. Rul. 2015-10, the IRS addressed a "triple drop and check" transaction. The steps included: (1) a parent corporation transferred all of the interests in its limited liability company that is taxable as a corporation to the first subsidiary in exchange for additional stock, (2) the first subsidiary transferred all of the interests in the limited liability company to the second subsidiary in exchange for additional stock, (3) the second subsidiary transferred all of the interests in the limited liability company to the third subsidiary in exchange for additional stock, and (4) the limited liability company elected 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 held that the transaction was properly treated for federal income tax purposes as two transfers of stock in exchanges governed by Code §351, followed by a reorganization under Code §368(a)(1)(D).
We have created situational charts that illustrate the new rulings. Images of the charts are shown below and links to PDFs of the charts are also available:
