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Willingness by IRS to respect transaction sequencing

9 Apr 2015

A recent Private Letter Ruling (PLR) may evidence a willingness by the IRS to respect the description of steps set forth in transactional documents in the context of other transactions. Taxand USA explores the case.

Often, Subchapter K, the codification of partnership taxation, can involve deemed transactions that raise the specter of gain recognition under a number of anti-deferral provisions or simultaneous transactions where an ordering of steps is necessary to determine the tax consequences to the parties. Sequencing requires careful thought, planning and execution to ensure that the desired and intended tax outcomes are achieved. The recently released PLR 201505001 touches on this issue under the narrow fact pattern described in that ruling.

Prior to the enactment of section 732(f), the assets of subsidiary would have retained their high basis even though the basis of subsidiary stock was stepped down in connection with the distribution. X could then liquidate subsidiary in a tax-free liquidation, pursuant to section 332, taking the assets with a carryover basis (section 334). Essentially, the gain originally embedded in X’s partnership interest would be eliminated.

In a very simplified version of the facts of the PLR, Parent company owned two corporate subsidiaries, S1 and S2. Parent, S1 and S2 each owned an interest in an entity treated as a partnership for federal income tax purposes (the Partnership). Together Parent, S1 and S2 owned 100 percent of the interests in Partnership. Some property had been contributed to partnership by the partners with a fair market value that differed from its basis (i.e., partnership had section 704(c) property). Immediately prior to the deemed liquidation of partnership, its property was contributed to a new corporate subsidiary (Newco).

Discover more: Recent PLR evidences willingness by IRS to respect transaction sequencing

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Taxand's Take

While taxpayers may not rely on the PLR as precedential authority, the PLR evidences a willingness by the IRS to respect the description of steps set forth in transactional documents where taxpayers agree to report the transaction consistent with the description of those steps. This lends clarity to potentially uncertain tax consequences.

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