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US Inbound: IRS private ruling 201328003

Jim Fuller and David Forst, Fenwick & West

IRS private ruling 201328003 describes the restructuring of a US consolidated group owned by a foreign parent involving a number of dual resident entities. The presence of the dual resident entities made the restructuring more complicated than an equivalent transaction with entities organised solely in the US. Nevertheless, the Service looked to the end result, which was a simple reorganisation under section 368(a)(1)(F).

Foreign parent is the parent corporation of a number of subsidiaries, including target, an entity incorporated in country X (target X). This entity had filed certificates of domestication and incorporation in state Y pursuant to a state Y domestication statute (target). Target was the common parent of a US consolidated group of corporations.

Target owned all of the stock of sub 1, which was incorporated in country X (sub 1X) and had also filed certificates of domestication and incorporation in state Y pursuant to a state Y domestication statute (sub 1). The only asset held by target and sub 1 was equity in sub 2, a state Y entity, which was presumably a partnership, that had elected to be treated as a corporation for US federal income tax purposes and is treated as a partnership for country X tax purposes.

Sub 2 owned equity in other subsidiaries, all of which were part of the target consolidated group.

In a restructuring transaction, target and sub 1 liquidated. Given the dual residency of these entities, the liquidations were more complicated that usual. Both target and sub 1 were dissolved under state Y law, and in addition, under Treasury regulation section 301.7701-3(c)(1)(i), target X and sub 1X filed protective elections to be classified as disregarded for federal income tax purposes. Foreign parent apparently considered the check-the-box elections to be prudent because of the dual incorporation of target and sub1X. Check-the-box elections would not have been a consideration had the entities solely been organised in the US.

Sub 2 also liquidated for US tax purposes, and to do so simply made a check-the-box election, reversing its previous election to be treated as a corporation. (Sub 2's check-the-box election occurred after sub 1's liquidation.) As a non-corporate entity, a state law liquidation was not necessary. Further, it was represented that sub 2 was not subject to the 60-month limitation of section 301.7701-3(c)(1)(iv).

The end result of the transactions was that a newly formed state Y LLC that elected to be treated as a corporation for US tax purposes held all of the assets formerly held by target. As a result, the restructuring was treated as a reorganisation under section 368(a)(1)(F). It would appear that none of the transactions had any effect on the entities' foreign characterisation. In addition, it can be presumed that neither target nor sub 1 had losses or else foreign parent likely also would have requested rulings under the dual consolidated loss rules.

Jim Fuller (
Tel: +1 650 335 7205
David Forst (
Tel: +1 650 335 7274
Fenwick & West

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