The IRS Recently Announced a Policy Change Regarding Requests For Private Letter Rulings On Certain Corporate Transactions
The Internal Revenue Service (IRS) recently announced a policy change regarding requests for private letter rulings on certain corporate transactions. According to the IRS, it “is reconsidering its views regarding certain issues as to which it has provided favorable rulings in the past.”
The IRS indicated that once it completes its study, it may issue new guidance. In the meantime, the IRS Statement sets forth the following guidelines for the processing of private letter ruling requests while the agency studies the issues:
Worthless stock loss eligibility under section 165(g)(3)(B) of the Tax Code: In connection with a worthless stock loss under Section 165(g)(3)(B), IRS will no longer rule on whether the character of gross receipts received by a consolidated group member in an intercompany transaction may be redetermined by reference to the character of the source funds possessed by the counterparty to the intercompany transaction.
Delayed distributions in connection with a section 355 or section 361 distribution: If, in connection with a Section 355 distribution, a distribution of stock, securities or other property to the distributing corporation’s shareholders or creditors is substantially delayed, IRS will continue to rule on whether the delayed distribution is tax-free under Section 355 or Section 361. However, rulings on such issues will not be based solely on the length of the delay. Instead, IRS will rule on this issue only based on substantial scrutiny of the facts and circumstances (including the circumstances of the delay) and full consideration of the legal issues and the effects of a ruling on federal tax administration. However, in determining whether a retention of stock or securities is in pursuance of a plan having as one of its principal purposes the avoidance of federal income tax, within the meaning of Section 355(a)(1)(D)(ii), IRS will continue to follow the guidelines in Appendix B of Rev. Proc. 96-30, even though Rev. Proc. 2017-52 has superseded Rev. Proc. 96-30. Thus, IRS will continue to rule in accordance with prior practice as to the application of Section 355 to the distribution of the stock, or stock and securities, that are not retained.
Drop-spin-liquidate” and similar transactions: The IRS will increase its scrutiny and analysis of “drop-spin-liquidate” and similar transactions. As an example, a corporation may distribute the stock of a subsidiary in a transaction potentially subject to Section 355, and as part of the same plan the distributing corporation or the subsidiary may liquidate into a corporate parent or may merge into or otherwise be acquired by its corporate parent or another related corporation. In connection with such a transaction, IRS will rule that the distribution is subject to Section 355 only based on substantial scrutiny of the facts and circumstances and full consideration of the legal issues and the effects of a ruling on federal tax administration. However, IRS will continue to rule in accordance with prior practice on such transactions (including “Morris Trust” and “reverse Morris Trust” transactions) if the distributing corporation or the controlled corporation, as the case may be, and its successor are not related before the acquisition.
Reorganizations resulting in a transfer of a portion of a subsidiary’s assets to its corporate shareholder: The IRS will increase its scrutiny and analysis of potential reorganizations that result in transfers of a portion of a subsidiary’s assets to its corporate shareholder, if the transfer does not qualify under Section 332 or Section 355 but is intended to be tax-free. For example, a corporate subsidiary may convert into a non-corporate entity (for example, a limited liability company) that is treated as a disregarded entity owned by its parent. As part of the same plan, the disregarded entity distributes a portion of its assets to the parent and then either elects to be taxed as a corporation or converts back into a corporation (either in the same state as the state of incorporation of the original subsidiary or a different state). IRS will rule on issues relating to such a transaction only based on substantial scrutiny of the facts and circumstances and full consideration of the legal issues and the effects of a ruling on federal tax administration.
The IRS Statement advises that private letter rulings previously issued on these issues are not impacted. Corporations that are contemplating any of the above transactions in the future should consult with experienced corporate tax professionals regarding how the IRS statement may impact your tax obligations.
If you have any questions or if you would like to discuss the matter further, please contact me, James McDonough, at 201-806-3364.
Does Your Homeowners Insurance Provide Adequate Coverage?
Your home is likely your greatest asset, which is why it is so important to adequately protect it. Homeowners insurance protects you from the financial costs of unforeseen losses, such as theft, fire, and natural disasters, by helping you rebuild and replace possessions that were lost While the definition of “adequate” coverage depends upon a […]
Understanding the Importance of a Non-Contingent Offer
Making a non-contingent offer can dramatically increase your chances of securing a real estate transaction, particularly in competitive markets like New York City. However, buyers should understand that waiving contingencies, including those related to financing, or appraisals, also comes with significant risks. Determining your best strategy requires careful analysis of the property, the market, and […]
Fred D. Zemel Appointed Chair of Strategic Planning at Scarinci & Hollenbeck, LLC
Business Transactional Attorney Zemel to Spearhead Strategic Initiatives for Continued Growth and Innovation Little Falls, NJ – February 21, 2025 – Scarinci & Hollenbeck, LLC is pleased to announce that Partner Fred D. Zemel has been named Chair of the firm’s Strategic Planning Committee. In this role, Mr. Zemel will lead the committee in identifying, […]
Novation Agreement Process: Step-by-Step Guide for Businesses
Big changes sometimes occur during the life cycle of a contract. Cancelling a contract outright can be bad for your reputation and your bottom line. Businesses need to know how to best address a change in circumstances, while also protecting their legal rights. One option is to transfer the “benefits and the burdens” of a […]
What Is a Trade Secret? Key Elements and Legal Protections Explained
What is a trade secret and why you you protect them? Technology has made trade secret theft even easier and more prevalent. In fact, businesses lose billions of dollars every year due to trade secret theft committed by employees, competitors, and even foreign governments. But what is a trade secret? And how do you protect […]
What Is Title Insurance? Safeguarding Against Title Defects
If you are considering the purchase of a property, you may wonder — what is title insurance, do I need it, and why do I need it? Even seasoned property owners may question if the added expense and extra paperwork is really necessary, especially considering that people and entities insured by title insurance make fewer […]
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
IRS Announces It May Reverse Position on Certain Corporate Transactions
Author: James F. McDonough
The IRS Recently Announced a Policy Change Regarding Requests For Private Letter Rulings On Certain Corporate Transactions
The Internal Revenue Service (IRS) recently announced a policy change regarding requests for private letter rulings on certain corporate transactions. According to the IRS, it “is reconsidering its views regarding certain issues as to which it has provided favorable rulings in the past.”
The IRS indicated that once it completes its study, it may issue new guidance. In the meantime, the IRS Statement sets forth the following guidelines for the processing of private letter ruling requests while the agency studies the issues:
Worthless stock loss eligibility under section 165(g)(3)(B) of the Tax Code: In connection with a worthless stock loss under Section 165(g)(3)(B), IRS will no longer rule on whether the character of gross receipts received by a consolidated group member in an intercompany transaction may be redetermined by reference to the character of the source funds possessed by the counterparty to the intercompany transaction.
Delayed distributions in connection with a section 355 or section 361 distribution: If, in connection with a Section 355 distribution, a distribution of stock, securities or other property to the distributing corporation’s shareholders or creditors is substantially delayed, IRS will continue to rule on whether the delayed distribution is tax-free under Section 355 or Section 361. However, rulings on such issues will not be based solely on the length of the delay. Instead, IRS will rule on this issue only based on substantial scrutiny of the facts and circumstances (including the circumstances of the delay) and full consideration of the legal issues and the effects of a ruling on federal tax administration. However, in determining whether a retention of stock or securities is in pursuance of a plan having as one of its principal purposes the avoidance of federal income tax, within the meaning of Section 355(a)(1)(D)(ii), IRS will continue to follow the guidelines in Appendix B of Rev. Proc. 96-30, even though Rev. Proc. 2017-52 has superseded Rev. Proc. 96-30. Thus, IRS will continue to rule in accordance with prior practice as to the application of Section 355 to the distribution of the stock, or stock and securities, that are not retained.
Drop-spin-liquidate” and similar transactions: The IRS will increase its scrutiny and analysis of “drop-spin-liquidate” and similar transactions. As an example, a corporation may distribute the stock of a subsidiary in a transaction potentially subject to Section 355, and as part of the same plan the distributing corporation or the subsidiary may liquidate into a corporate parent or may merge into or otherwise be acquired by its corporate parent or another related corporation. In connection with such a transaction, IRS will rule that the distribution is subject to Section 355 only based on substantial scrutiny of the facts and circumstances and full consideration of the legal issues and the effects of a ruling on federal tax administration. However, IRS will continue to rule in accordance with prior practice on such transactions (including “Morris Trust” and “reverse Morris Trust” transactions) if the distributing corporation or the controlled corporation, as the case may be, and its successor are not related before the acquisition.
Reorganizations resulting in a transfer of a portion of a subsidiary’s assets to its corporate shareholder: The IRS will increase its scrutiny and analysis of potential reorganizations that result in transfers of a portion of a subsidiary’s assets to its corporate shareholder, if the transfer does not qualify under Section 332 or Section 355 but is intended to be tax-free. For example, a corporate subsidiary may convert into a non-corporate entity (for example, a limited liability company) that is treated as a disregarded entity owned by its parent. As part of the same plan, the disregarded entity distributes a portion of its assets to the parent and then either elects to be taxed as a corporation or converts back into a corporation (either in the same state as the state of incorporation of the original subsidiary or a different state). IRS will rule on issues relating to such a transaction only based on substantial scrutiny of the facts and circumstances and full consideration of the legal issues and the effects of a ruling on federal tax administration.
The IRS Statement advises that private letter rulings previously issued on these issues are not impacted. Corporations that are contemplating any of the above transactions in the future should consult with experienced corporate tax professionals regarding how the IRS statement may impact your tax obligations.
If you have any questions or if you would like to discuss the matter further, please contact me, James McDonough, at 201-806-3364.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!
