This content is from: United States

US inbound: Outbound liquidation

Jim Fuller
David Forst
LTR 201348011 describes a Country A foreign parent company (FP) that owns a US subsidiary (USCo) and affiliates in its home country. USCo constitutes a real property interest under the Foreign Investment in Real Property Tax Act (FIRPTA) rules. USCo owns two operating subsidiaries. The USCo group has lower levels of debt relative to its assets and earnings than those of FP's Country A affiliates.

For what was represented to constitute valid accounting and financial purposes, FP will cause USCo to liquidate under Section 332 and then operate in the US through a branch. To affect the restructuring and liquidation, USCo will transfer the assets and liabilities of its operating subsidiaries to a new State Y limited partnership. USCo also will form a new disregarded entity. In the liquidation, USCo will distribute its interest in the limited partnership and the branch to FP. Following the liquidation, deductions for interest of FP will be determined pursuant to the rules in Treasury Regulation Section 1.882-5.

The transaction would seem to involve a straightforward liquidation under the rules of Treasury Regulation Section 1.367(e)-2(b)(2)(i). To qualify for this exception from Section 367(e)(2)'s general rule of gain recognition, the foreign distributee, immediately after the distribution and for 10 years thereafter, must use the distributed property in the conduct of a trade or business within the US In addition, certain filing requirements must be satisfied. The taxpayer also represented that it would comply with FIRPTA filing and other requirements under the Section 897 rules.

This special non-recognition exception is subject to a general anti-abuse rule, as the ruling notes. Under this rule, the IRS can require the domestic liquidating corporation to recognise gain on the distribution (or treat the liquidating corporation as if it had recognised a loss on a distribution) if a principal purpose of the liquidation is the avoidance of US tax. A liquidation may have a principal purpose of tax avoidance even though the tax avoidance purpose is outweighed by other purposes when taken together.

The Service ruled that USCo would not recognise gain on the distribution of its assets in liquidation to FP except with respect to intangibles described in Section 936(h)(3)(B), as provided in the Section 367(e)(2) regulation. Implicit in the ruling is that the liquidation was not undertaken with a principal purpose of US tax avoidance.

Jim Fuller (
Tel: +1 650 335 7205

David Forst (
Tel: +1 650 335 7274
Fenwick & West

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