department of the treasury int ernal revenue service washington d c o f f i c e o f c h i e f c o u n s e l number release date cc intl postf-163926-01 uilc internal_revenue_service national_office legal advice date date memorandum for joseph maselli area_counsel area cc lm hmt from elizabeth g beck chief cc intl subject fsc marginal_costing - overall profit percentage this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent legend uscorp uscorp-fsc industry products taxable year1 taxable year2 amounta amountb issue with respect to the fsc marginal_costing rules whether the numerator and denominator of the overall profit percentage defined in temp sec_1 b -1t c i computed for sales of a product or product line include licensing royalties received in connection with such sales postf-163926-01 conclusion no neither the numerator nor denominator of the overall profit percentage defined in temp sec_1 b -1t c i computed for sales of a product or product line include licensing royalties received in connection with such sales facts i the taxpayer uscorp is a domestic_corporation in the business of industry uscorp manufactures - and licenses the manufacture of - products uscorp wholly-owns uscorp-fsc a foreign_corporation that had an election in effect under sec_922 and sec_927 to be treated as a foreign_sales_corporation fsc during taxable_year sec_1 through we assume solely for purposes of analyzing the question presented that uscorp-fsc satisfied the foreign_management and economic process requirements under sec_924 that uscorp’s products constitute export_property within the meaning of sec_927 and that all other requirements for qualification under the fsc provisions in sec_921 through were met with respect to products at issue here uscorp paid commissions to uscorp-fsc when it sold products to its controlled_foreign_corporations cfcs as defined in sec_957 pursuant to temp sec_1 b -1t a uscorp elected on behalf of uscorp-fsc to use the marginal_costing combined taxable_income method for determining some or all of these fsc commissions ii the transactions during taxable_year sec_1 through uscorp engaged in transactions with its cfcs using two different trading patterns both trading patterns involve uscorp and a series of cfcs wholly-owned either directly or indirectly by uscorp a trading pattern - sale of products accompanied by license of manufacturing know-how under trading pattern uscorp manufactured products which it sold to manufacturing cfc1 after performing further manufacturing on products manufacturing cfc1 sold the resulting products to manufacturing cfc2 for still further manufacturing and packaging manufacturing cfc2 then sold the final in the case of one foreign_subsidiary uscorp owned only a majority interest in the company postf-163926-01 products to a marketing cfc for distribution to the general_public in trading pattern manufacturing cfc1 paid uscorp both a purchase_price for the products and royalties for the license of manufacturing know-how necessary for the further manufacture of products performed by manufacturing cfc sec_1 and uscorp paid a commission to uscorp-fsc with respect to the sale of products but not with respect to the royalties b trading pattern - license of know-how only under trading pattern uscorp did not sell products rather uscorp licensed to manufacturing cfc3 all of the know-how necessary to manufacture products manufacturing cfc3 performed all of the manufacturing activities performed by both uscorp and manufacturing cfc1 in trading pattern manufacturing cfc3 then sold the product to manufacturing cfc4 which after still further manufacturing and packaging sold the final product to a marketing cfc for distribution to the general_public in trading pattern manufacturing cfc3 paid uscorp royalties for the license of manufacturing know-how necessary for the further manufacture of the products by manufacturing cfc sec_3 and uscorp paid no commissions to uscorp-fsc the royalties earned by uscorp under both trading patterns accounted for approximately amounta to amountb of taxpayer’s total gross_receipts from all sales of the products’ product line as computed under taxpayer’s interpretation of the overall profit percentage under temp sec_1 b -1t c i for purposes of applying the marginal_costing combined taxable_income method to its sales of products to manufacturing cfc1 taxpayer computed the overall profit percentage by including the royalties described above in the numerator and denominator of the percentage law and analysis i fscs generally a fsc receives certain tax benefits under sec_921 through of the code these benefits are determined with respect to foreign_trading_gross_receipts ftgr sec_923 and sec_925 generally the more ftgr a fsc earns the greater its fsc benefits will be sec_924 provides that ftgr means the gross_receipts of any fsc which are- from the sale exchange or other_disposition of export_property from the lease or rental of export_property for use by the lessee outside the united_states for services which are related and subsidiary to and above postf-163926-01 other services not relevant here emphasis added ftgr is similarly defined where a fsc acts as a commission agent with respect to such sale lease or service temp sec_1 a -1t b through f for purposes of applying the fsc provisions a license of export_property is treated as a lease of export_property temp sec_1 a -1t a sec_927 defines export_property property that otherwise satisfies the definition of export_property under sec_927 generally does not constitute export_property if such property is among other things patents inventions models designs formulas or processes whether or not patented or other like property sec_927 temp sec_1_927_a_-1t in other words the intangible_property described in sec_927 generally may not generate ftgr ii full costing combined taxable_income method sec_925 provides three alternative methods for determining transfer prices on sales of export_property to a fsc sec_925 describes the full costing combined taxable_income method in the case of a sale of export_property to a fsc by a person described in sec_482 the taxable_income of such fsc and such person shall be based upon a transfer price which would allow such fsc to derive taxable_income attributable to such sale regardless of the sales_price actually charged in an amount which does not exceed percent of the combined taxable_income of such fsc and such person which is attributable to the foreign_trading_gross_receipts derived from the sale of such property by such fsc if a fsc is the principal on a sale rather than a commission fsc the full costing combined taxable_income of the fsc and its related supplier2 from a sale of export_property is the excess of the foreign_trading_gross_receipts of the fsc from the sale over the total costs of the fsc and related_supplier including the related supplier’s cost_of_goods_sold and its and the fsc’s noninventoriable costs see sec_1_471-11 which relate to the foreign_trading_gross_receipts see temp sec_1_927_d_-2t for the definition of related_supplier postf-163926-01 temp sec_1 a -1t c i the full costing combined taxable_income method for determining fsc transfer prices in sec_925 applies similarly to the determination of the fsc commissions except that the fsc commissions paid or payable are excluded from total costs on sales and leases of export_property as well as related_and_subsidiary_services sec_925 and temp sec_1 a -1t d iii for transfer_pricing purposes sale transactions may not be grouped on a product or product line basis with lease transactions temp sec_1 a -1t d iii marginal_costing combined taxable_income method a generally sec_925 authorizes the secretary_of_the_treasury to prescribe rules for the allocation of expenditures in computing combined taxable_income under subsection a in those cases where a fsc is seeking to establish or maintain a market for export_property accordingly temp sec_1 b -1t a provides that taxpayers may apply the combined taxable_income method under sec_925 on a marginal rather than full costing basis where a fsc is seeking to establish or maintain a market for export_property temp sec_1 b -1t c states a fsc shall be treated for its taxable_year as seeking to establish or maintain a foreign market with respect to sales of an item product or product line of export_property from which foreign_trading_gross_receipts are derived if the combined taxable_income computed under the marginal_costing combined taxable_income method is greater than the full costing combined taxable_income computed under the full costing combined taxable_income method of sec_1 a - 1t c and temp sec_1 b -1t a provides that the marginal_costing method may be applied at the related supplier’s election with respect to a taxable_year in addition t he marginal_costing rules do not apply to leases of property or to the performances of any services even if they are related_and_subsidiary_services as defined in sec_1 a -1t d and sec_1 a -1t b iii c temp sec_1 b -1t a under the marginal_costing method only direct production_costs of producing a particular item product or product line are taken into account for purposes of computing the combined taxable_income of the fsc and its postf-163926-01 related_supplier under sec_925 the costs to be taken into account are the related supplier’s direct material and labor costs as defined in sec_1_471-11 temp sec_1 b -1t b the amount of combined taxable_income determined under the marginal_costing method may not exceed the overall profit percentage determined under paragraph c of this section multiplied by the fsc’s foreign_trading_gross_receipts if the fsc is the principal on the sale or the related supplier’s gross_receipts if the fsc is a commission agent from the sale of export_property temp sec_1 b -1t b this limitation on the amount of combined taxable_income computed under the marginal_costing combined taxable_income method is known as the overall profit percentage limitation oppl in a case involving sec_1_994-2 - the direct predecessor of the fsc marginal_costing regulations - the united_states tax_court described the function of the oppl as follows the oppl essentially limits the ‘profitability’ of export sales for purposes of computing taxable_income under marginal_costing to the ‘profitability’ of worldwide sales or ‘overall’ profitability of the product or product line determined under a full costing method emphasis added 94_tc_919 aff’d 955_f2d_1037 6th cir cert_denied 506_us_827 the tax_court also observed that the fsc marginal_costing regulations are virtually identical to sec_1_994-2 id pincite see also 984_f2d_416 fed cir observing that the oppl prevented taxable_income after deducting only direct labor and material from exceeding the normal overall profitability of the product in other words the oppl reduces a taxpayer’s combined taxable_income under the marginal_costing method to the amount that would result if the taxpayer’s profit percentage on sales of export_property were equal to its worldwide profit percentage on all sales of the same product or product line thus the marginal_costing method may not yield a higher profit percentage for sales of export_property than the taxpayer would otherwise realize on its aggregate worldwide sales of the same product or product line postf-163926-01 b the overall profit percentage temp sec_1 b -1t c i provides that the overall profit percentage opp for a taxable_year of the fsc for a product or product line is the percentage which- a the combined taxable_income of the fsc and its related_supplier from the sale of export_property plus all taxable_income of its related_supplier from all sales domestic and foreign of such product or product line during the fsc’s taxable_year computed under the full costing method is of b the total gross_receipts determined under sec_1_927_b_-1t of the fsc and related_supplier from all sales of the product or product line emphasis added the preamble to t d which contains temp sec_1 b - 1t c i describes the opp fraction as follows the numerator is the fsc’s and related supplier’s combined taxable_income on all sales foreign and domestic of the export product or product line determined under the full costing method and the denominator is the total gross_receipts from those sales 1987_1_cb_184 emphasis added temp sec_1_927_b_-1t defines gross_receipts for fsc purposes as follows business income the total_amounts received or accrued by the person from the sale or lease of property_held_primarily_for_sale or lease in the ordinary course of a trade_or_business and other income gross_income recognized from whatever source derived such as for example from- i the furnishing of services whether or not related to the sale or lease of property described in subdivision of this paragraph ii dividends and interest including tax exempt_interest iii the sale at a gain of any property not described in paragraph of this paragraph and postf-163926-01 iv commission transactions to the extent described in paragraph e of this section thus as applied to the present case the opp may be stated as the following fraction worldwide taxable_income from sales of the products’ product line worldwide gross_receipts from sales of the products’ product line iv taxpayer’s argument the dispute in this case centers on the meaning of the phrase from all sales which appears in both the numerator and the denominator of the opp fraction taxpayer argues that although the marginal_costing rules do not apply to licensing royalties the opp that is applied to limit taxpayer’s marginal_costing combined taxable_income from sales of products reflects royalty payments earned by taxpayer on licenses of manufacturing know-how connected with sales of products citing webster’s new collegiate dictionary webster’s taxpayer defines from as it is used in the opp context as follows used as a function word to indicate the source cause agent or basis taxpayer has also described the nexus necessary for non-sale income to be included in the opp fraction as a sufficient connection taxpayer argues that its taxable_income and gross_receipts from all sales of the products’ product line include taxable_income and gross_receipts attributable to its licensing royalties because sales of the products’ product line were the source cause agent or basis for the royalty receipts taxpayer’s interpretation thus taxpayer argues that taxable_income or gross_receipts from all sales referenced in the opp fraction are not strictly sales income or sales receipts rather taxable_income and gross_receipts from all sales include all income that ultimately results from sales of the product or product line to which the marginal_costing method is applied in taxpayer’s view where licensing income results from a sale that licensing income must be said to be from all sales thus taxpayer temp sec_1_927_b_-1t provides that a commission fsc’s gross_receipts for purposes of computing its profit under the administrative pricing methods of sec_925 and shall be the gross_receipts other than gross_receipts which would not be foreign_trading_gross_receipts had they been received by the fsc derived by the related_supplier from the sale or lease of the property or from the furnishing of services with respect to which the commissions are derived postf-163926-01 rewrites the opp fraction applicable to products as the following ratio worldwide taxable_income ultimately resulting from sales of the products’ product line worldwide gross_receipts ultimately resulting from sales of the products’ product line taxpayer’s interpretation enables taxpayer to include in the opp non-sales income for the purpose of increasing its profit percentage on sales income v summary of conclusions we believe that taxpayer’s interpretation of the opp fraction is wrong it disregards the plain language of the marginal_costing rules and the purpose of those rules as confirmed by the only two courts that have discussed the oppl provisions within the context of the marginal_costing regulations taxpayer’s interpretation is premised on a definition of the word from that we believe is contrary to the plain language of the opp fraction would yield clearly incorrect results if applied in other areas of the fsc provisions and ignores the crucial sales-only scope of the marginal_costing rules taxpayer’s interpretation is also internally contradictory by its own terms licensing royalties could not logically be included in the opp for products because sales of the products’ product line were not the source cause agent or basis of the licenses of manufacturing know-how we conclude that licensing royalties are not included in the opp fraction because they are not sales receipts vi analysis we start our analysis by identifying areas of common agreement we agree with taxpayer that the term gross_receipts that appears in the denominator of the opp fraction considered alone may include licensing royalties temp sec_1_927_b_-1t which expands on the sec_927 definition of gross_receipts provides that gross_receipts are g ross income recognized from whatever source derived we also agree with taxpayer that licensing royalties constitute gross_income from whatever source derived we note however that the term gross_receipts referenced in the opp fraction is modified by the phrase from all sales the discussion below will illustrate that whereas taxpayer considers from all sales to refer to gross_receipts merely resulting from sale transactions we consider from all sales to refer strictly to sales receipts therefore although we agree with taxpayer that the general definition of gross_receipts includes licensing royalties of the related_supplier we do not agree with postf-163926-01 further we agree with taxpayer that the word from - as used in the opp context - indicates a source cause agent or basis and may in certain contexts convey a more attenuated causal connection than that supported by the service in this case we also agree with taxpayer that the numerator of the opp fraction encompasses the same class of gross_receipts as the denominator of the opp fraction reduced by the total costs of the fsc and related_supplier as defined in temp sec_1 a -1t c iii c and d finally taxpayer is correct that inclusion in the opp of transactions involving property other than export_property is not in itself inappropriate because the opp fraction by its own terms requires the inclusion of income from all sales regardless of whether the sales involved export_property from these areas of common agreement we make the following analysis sec_924 and temp sec_1 a -1t specify that for purposes of the fsc provisions transactions are generally separated into three separate and distinct categories sales leases licenses and services the combined taxable_income method under sec_925 determines fsc transfer prices and commissions for such sales leases licenses and services on a full costing basis temp sec_1 a -1t c i sales and leasing licensing income cannot be combined temp sec_1 a - 1t d where a taxpayer’s marginal_costing profit percentage on sales of export_property is lower than its full costing profit percentage on sales of the same product or product line worldwide the taxpayer may apply the combined taxable_income method on a marginal_costing basis temp sec_1 b -1t a and c thus the marginal_costing rules allow a taxpayer to determine greater combined taxable_income than would otherwise be permissible under sec_925 sec_925 taxpayer that licensing royalties are gross_receipts from all sales in short gross_receipts include licensing royalties but gross_receipts from all sales do not the discussion below illustrates our view that the opp fraction does not reflect licensing transactions regardless of whether the licenses involved export_property throughout this advice we use the term sale to refer to the sales exchanges and other dispositions enumerated in sec_927 we use the term lease license to refer to the leases subleases licenses sublicenses and rentals enumerated in sec_927 and temp sec_1 a -1t a and we use the term services to refer to the furnishing of services enumerated in sec_927 postf-163926-01 the marginal_costing combined taxable_income method is similar to the full costing combined taxable_income method with two notable exceptions first the marginal_costing method takes into account only direct costs of production whereas the full costing method takes into account all costs and expenses both direct and direct temp sec_1 a -1t c and b -1t b second the marginal_costing method applies only to sale transactions whereas the full costing method applies to all three categories of transactions - sales leases licenses and services temp sec_1 a -1t b iii and b -1t a taxpayer’s reading of from all sales as meaning from licenses from all sales renders meaningless the important distinction in the fsc provisions between sale transactions and licensing transactions and thus circumvents the restriction against combining sale and licensing income the notion that the marginal_costing rules apply only to sales is not restricted to temp sec_1 b -1t a the sales-centered nature of the marginal_costing rules is reflected in the basic operation of the marginal_costing method because marginal_costing requires the reduction of gross_income by direct costs of production only rather than by all costs and expenses both direct and direct marginal_costing is relevant only in the product sales context where production_costs are a factor marginal_costing is inapplicable and irrelevant in the context of other sorts of transactions such as leases licenses and services the sales-only scope of the marginal_costing rules is further reflected by the plain language of the opp fraction the numerator consists only of taxable_income amounts from all sales and the denominator consists only of gross_receipts from all sales temp sec_1 b -1t c i the sole reference to leases services or any other non-sale transactions in the marginal_costing rules and the examples therein is the statement in temp sec_1 b -1t a which expressly prevents the marginal_costing rules from applying to leases and services in sum the marginal_costing rules set forth a sales-centered pricing method that boosts combined taxable_income while limiting fsc-sales profitability to worldwide- sales profitability taxpayer’s interpretation is inconsistent with the clearly limited scope of the marginal_costing rules taxpayer’s argument that non-sale receipts factor into the opp fraction also runs contrary to the purpose of the oppl as a limitation on a taxpayer’s profit on sales of export_property under the marginal_costing rules in upholding the validity of the oppl both the tax_court and the federal_circuit observed that the oppl limits the profit on sales of export_property to the average profit that the taxpayer realizes on its worldwide sales of the same product or product line brown-forman t c pincite dow corning f 2d pincite however according to taxpayer’s interpretation profit earned on sales of export_property is limited not by worldwide profit on sales but by worldwide profit on transactions of any kind such as sales leases licenses services agency fees etc so long as the transactions ultimately postf-163926-01 result from qualifying_sale transactions accordingly taxpayer’s interpretation of the opp fraction contradicts the plain language and purpose of the marginal_costing regulations as confirmed by the brown-forman and dow corning courts it disregards the sales-only premise of the marginal_costing rules and thereby bases the oppl on transactions that share no apparent economic or accounting nexus with sales of export_property in our view gross_profits earned on licenses of intangible_property do not constitute a reasonable measuring stick for a limitation on the sales profit under marginal_costing and were not intended by the drafters of the marginal_costing regulations the drafters to figure in the oppl our view of the sales-only nature of the marginal_costing rules is further buttressed by an analysis of the logical implications of taxpayer’s interpretation for other fsc provisions in particular the use of the phrase from all sales in the opp fraction mirrors the use of the phrase from the sale in the definition of ftgr under sec_924 sec_924 defines ftgr to include gross_receipts from the sale of export_property applying taxpayer’s interpretation sec_924 means that ftgr include all gross_receipts that have a sale as their beginning source cause or basis taxpayer’s interpretation would improperly enlarge the universe of gross_receipts that may qualify as ftgr to include gross_receipts from transactions that are not explicitly described in sec_924 for example under taxpayer’s interpretation a service fee earned by an unrelated third party not pursuant to a contract with the fsc that transports export_property in connection with a sale of the property would qualify as ftgr even though sec_924 does not list such fees as ftgr see also temp sec_1 a -1t d we are unaware of any decision or other accepted authority supporting the view that such transportation fees or any other gross_receipts not explicitly described in sec_924 and temp sec_1 a -1t b through f may qualify as ftgr in addition taxpayer’s interpretation logically would allow taxpayer to treat the licensing royalties for manufacturing know-how described above as ftgr because such royalties are according to taxpayer’s interpretation gross_receipts that emanate from the sale of products such treatment directly contradicts the sec_927 prohibition against fsc benefits for such intangible_property h_r rep no 92d congress 1st sess in other words the additional word all in the opp fraction is necessitated by the fact that the opp fraction reflects worldwide sales both the sec_924 phrase and the opp phrase mean in essence from sales and differ only in the number of sales to which they refer in addition we note that the construction from the sale of export_property in sec_924 mirrors the phrase from the sale of export_property in the opp numerator and that from the sale of export_property is a construction that parallels the phrase from all sales elsewhere in the opp numerator postf-163926-01 applying taxpayer’s interpretation would render the sec_927 carve-out for intangible_property meaningless and would greatly expand the definition of ftgr beyond the widely-accepted current definition we note that inconsistent with its position on marginal_costing taxpayer did not apply its interpretation of from sales to sec_924 in this case and thus did not seek fsc exemptions for its royalties from licenses of manufacturing know-how related to its sales of products taxpayer’s interpretation of from all sales derives at least in part from its definition of from we agree with taxpayer that in the context of the opp fraction the word from indicates a source cause agent or basis in our view the word from - as used in the opp fraction - refers only to the specified sales whereas taxpayer’s interpretation assumes that from refers also to non-sale transactions that arise from sales we believe that the context of the opp fraction and the marginal_costing rules in general does not support the connotation of from espoused by taxpayer taxpayer’s interpretation inappropriately stretches the meaning of from to require merely a sufficient connection between a cause eg a sale and an effect eg licensing income we find no reasonable support in the language of the marginal_costing rules or the fsc legislative_history for taxpayer’s argument that non-sale receipts should be included in the opp fraction simply because they have a cause-and-effect relationship however tangential to qualifying sales even under taxpayer’s interpretation of the opp fraction the tax effect claimed by taxpayer does not logically follow taxpayer describes a relationship in which sales of a product or product line are the source cause agent or basis for non-sales receipts in other words the sales precede and give rise to other transactions that produce income that should be included as receipts from sales therefore according to taxpayer’s interpretation non-sale receipts are included in the opp only if they ultimately result from an antecedent qualifying_sale after analyzing taxpayer’s trading patterns we conclude that this prerequisite of an antecedent is not met in trading pattern sales of products are negotiated and contracted between taxpayer and manufacturing cfcs in combination with licenses of the manufacturing know-how necessary to further manufacture the products on the one hand a manufacturing cfc will not license know-how from taxpayer unless the cfc also purchases products because the know-how is useless without products on the other hand a manufacturing cfc will not purchase products from taxpayer unless the cfc also licenses manufacturing know-how from we note that given taxpayer’s position that from indicates a causal or similar relationship taxpayer’s characterization of the required nexus for non-sales receipts to be included in the opp fraction as a sufficient connection must refer to a causal or similar relationship as opposed to a mere correlation postf-163926-01 taxpayer because products are useless to the cfc without the know-how necessary to further manufacture them the sale transaction is neither chronologically nor causally antecedent to the licensing transaction neither transaction necessarily precedes or may be said to give rise to the other taxpayer may not logically maintain that sales of products gave rise to licenses of know-how when but for the licenses of know-how the sales of products would not have occurred thus even under taxpayer’s reading of the opp fraction licensing royalties earned by taxpayer under trading pattern could not be included in the opp because the accompanying sales of products were not antecedent to the licenses in trading pattern taxpayer’s interpretation is even less supportive of taxpayer’s argument because no sales of products preceded or even accompanied the licenses of manufacturing know-how there cannot be a sufficient connection between qualifying sales and royalty receipts because there were no sales of the products’ product line much less any sales antecedent to licenses thus even under taxpayer’s reading of the opp fraction royalties earned by taxpayer under trading pattern could not be included in the opp calculation because the royalties do not have antecedent sales of the products’ product line as their source cause agent or basis moreover taxpayer’s usage of trading pattern confirms that the sales and licensing transactions involved in trading pattern are not necessarily connected and interdependent in the manner suggested by taxpayer finally taxpayer argues that if the drafters intended the opp fraction to include only sales receipts then the drafters should have used unambiguous language to that effect specifically taxpayer suggests that the drafters could have clarified the opp fraction by wording it to refer to gross_receipts received for a sale we disagree that taxpayer’s suggested received for language can refer only to sales receipts webster’s defines for to mean among other things because of under that definition one might interpret taxpayer’s suggested language to mean received because of sales we do not consider received because of sales to be more precise or specific than from all sales therefore we reject taxpayer’s assertion that the drafters could have more clearly specified the sales-only nature of the opp fraction simply by substituting the phrase received for a sale for from all sales moreover we believe that the phrase from all sales as used in the opp fraction enabled the drafters to convey the concepts of combined taxable worldwide sales income and total worldwide sales gross_receipts in the most syntactically sound technically accurate and articulate manner for instance the phrase combined taxable worldwide sales income though undeniably descriptive postf-163926-01 would be unacceptable in the fsc context because the defined term combined taxable_income would lose its specific meaning if its component words were separated furthermore the phrase from all sales in the opp fraction is consistent with other usage in the fsc provisions to convey a consistent meaning please call the branch at if you have any further questions elizabeth g beck chief branch office of the associate chief_counsel international


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp 1-plr-124348-01 date date parent company company company company holding_company sub sub sub sub sub plr-124348-01 sub sub sub sub shareholder shareholder shareholder shareholder shareholder a b c d e f g plr-124348-01 h j k deed business l country u country v state x country y country z dear this letter is in reply to your letter dated date requesting rulings with respect to a plan_of_reorganization described below the proposed transaction additional information relating to the proposed transaction was submitted in letters dated july september september october november december and date and january february march and date the information submitted for consideration is summarized below parent is a publicly held country v corporation parent is engaged in business l through its subsidiaries company is a country u corporation parent owns a percent of company directly and indirectly company is a country y corporation company is a wholly owned subsidiary of company holding_company is a country y corporation holding_company is active through certain lower tier subsidiaries which are primarily engaged in business l holding_company is a wholly owned subsidiary of company holding_company has never been a controlled_foreign_corporation cfc within the meaning of sec_957 of the internal_revenue_code_of_1986 as amended the code plr-124348-01 sub is a country y holding_company sub is a wholly owned subsidiary of holding_company sub has never been a cfc within the meaning of sec_957 of the code sub is a country z holding_company prior to the proposed transaction sub will have been a cfc within the meaning of sec_957 of the code sub owns b percent of sub shareholder a state x corporation owns c percent of sub shareholder a state x corporation owns d percent of sub shareholder a country y corporation is a wholly owned subsidiary of shareholder and owns e percent of sub sub is a country z corporation prior to the proposed transaction sub will have been a cfc within the meaning of sec_957 of the code sub owns f percent of sub sub owns g percent of sub sub is actively_engaged_in_business l sub sub sub sub and sub are actively_engaged_in_business l and are wholly owned direct and indirect lower tier country z subsidiaries of sub sub is a country z holding_company prior to the proposed transaction sub will have been a cfc within the meaning of sec_957 of the code company owns h percent of sub shareholder a country y corporation is a lower tier subsidiary of parent and owns j percent of sub shareholder an unrelated country z limited_liability_company owns k percent of sub shareholder is a wholly owned subsidiary of company which is a country y corporation company is a cfc within the meaning of sec_957 of the code and is a wholly owned subsidiary of company a us corporation that is a lower tier subsidiary of parent the above corporations represent that in order to accomplish corporate business purposes they desire to streamline company 2’s corporate structure and eliminate several holding_companies to accomplish these goals they have submitted the following proposed plan_of_reorganization the proposed transaction a b company will move its management and control to country z becoming a tax resident of country z in accordance with a treaty between country y and country z company will remain a country y corporation for country y domestic corporate law purposes holding_company will move its management and control to country z becoming a tax resident of country z in accordance with a treaty between country y and country z holding_company will remain a country y corporation for country y domestic corporate law purposes plr-124348-01 c d sub will move its management and control to country z becoming a tax resident of country z in accordance with a treaty between country y and country z sub will remain a country y corporation for country y domestic corporate law purposes company will acquire all of the assets of holding_company sub sub sub and sub in accordance with country z corporate law by completing the following five sequential transactions in a single operation resulting from a single agreement the deed approved by company holding_company sub sub sub and sub i ii iii iv v sub will merge into sub the sub shareholders will be entitled to shares of sub in accordance with a specified exchange ratio for each sub share held the allotment of sub shares to the sub shareholders will take place only in a virtual way upon the actual cancellation of the sub shares the sub shareholders will ultimately be allotted only company shares sub will merge into sub the sub shares outstanding will be cancelled sub will merge into sub the sub shareholders will be entitled to shares of sub in accordance with a specified exchange ratio for each sub share held the allotment of sub shares to the sub shareholders will take place only in a virtual way upon the actual cancellation of the sub shares the sub shareholders will ultimately be allotted only company shares sub will merge into holding_company the sub shareholders will be entitled to shares of holding_company in accordance with a specified exchange ratio for each holding_company share held the allotment of holding_company shares to the sub shareholders will take place only in a virtual way upon the actual cancellation of the sub shares the sub shareholders will ultimately be allotted only company shares holding_company will merge into company the holding_company shareholders will be entitled to shares of company in accordance with a specified exchange ratio for each holding_company share held company shares will be issued to the holding_company shareholders in accordance with their proportionate interests in the merged corporations plr-124348-01 the deed specifies that if any one of the above mergers fails to be implemented all of the mergers described in the deed will be canceled we hold that for federal_income_tax purposes the five transactions required to effect the proposed country z unitary merger described above will be treated as the following sequence of transactions sub will acquire all of the assets of sub in exchange for sub stock and the assumption of all of the liabilities of sub the shareholders of sub will be deemed to receive sub shares in exchange for their sub shares sub will acquire all of the assets of sub and the sub shares outstanding will be cancelled pursuant to a plan deemed to be adopted after the merger of sub into sub sub will acquire all of the assets of sub in exchange for sub stock and the assumption of all of the liabilities of sub the shareholders of sub will be deemed to receive sub shares in exchange for their sub shares holding_company will acquire all of the assets of sub in exchange for holding_company stock and the assumption of all of the liabilities of sub the shareholders of sub will be deemed to receive holding_company shares in exchange for their sub shares company will acquire all of the assets of holding_company in exchange for company stock and the assumption of all of the liabilities of holding_company the shareholders of holding_company will receive company shares in exchange for their holding_company shares the parties submitted the following representations with respect to step d i the sub merger ai bi the fair_market_value of the sub stock deemed received by each sub shareholder will be approximately equal to the fair_market_value of the sub stock deemed surrendered in the exchange the sub shareholders company shareholder and shareholder will receive no consideration other than sub stock no sub shares will be exchanged for cash in lieu of fractional share interests and there will be plr-124348-01 no dissenters to the transaction neither sub nor persons related to sub within the meaning of sec_1_368-1 of the income_tax regulations the regulations acquired stock of sub in connection with the reorganization for consideration other than sub stock sub neither redeemed its stock nor made distributions to its shareholders in connection with the reorganization sub will acquire at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets held by sub immediately prior to sub merger for purposes of this representation amounts used by sub to pay its reorganization expenses all redemptions and any distributions except for regular normal dividends made by sub immediately preceding the transfer will be included as assets of sub held immediately prior to the sub merger after the sub merger the shareholders of sub shareholder company and shareholder will be in control of sub within the meaning of sec_368 and sec_304 of the code sub has no plan or intention to dispose_of any of the assets of sub acquired in the sub merger other than dispositions made in the normal course of its business operations and other than the dispositions described as part of this proposed transaction the fair_market_value of the assets of sub transferred to sub will equal or exceed the sum of the liabilities assumed by sub as determined under sec_357 of the code the total adjusted_basis of the assets of sub transferred to sub will equal or exceed the sum of the liabilities assumed by sub as determined under sec_357 of the code the liabilities of sub assumed by sub as determined under sec_357 of the code were incurred by sub in the ordinary course of its business and are associated with the assets transferred following the sub merger sub and its successors sub holding_company and company will continue the historic_business of sub and its subsidiary sub and use a significant portion of the historic_business_assets of sub and its subsidiary sub in a business ci di ei fi gi hi ii ji at the time of the sub merger neither sub nor sub will have outstanding any warrants options convertible securities or any other type plr-124348-01 or right pursuant to which any person could acquire stock in sub that if exercised or converted would affect the acquisition or retention of control of sub by company shareholder and shareholder as defined in sec_368 and sec_304 of the code ki li sub sub and the shareholders of sub will pay their respective expenses if any incurred in connection with sub merger there is no intercorporate indebtedness existing between sub and sub that was issued acquired or will be settled at a discount mi no two parties to the sub merger are investment companies as defined in sec_368 and iv of the code ni neither sub nor sub is under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 of the code the parties submitted the following representations with respect to step d ii the sub merger aii sub on the date of the adoption of the plan_of_liquidation and at all times until the final liquidating_distribution is completed will be the owner of at least percent of the single class of outstanding_stock of sub for the purpose of this representation the plan_of_liquidation of sub is considered to be adopted after the sub merger bii no shares of the stock of sub will have been redeemed during the three years preceding the adoption of the plan of complete_liquidation of sub cii all distributions from sub to sub pursuant to the plan of complete_liquidation will be made within a single taxable_year of sub dii as soon as the first liquidating_distribution has been made sub will cease to be a going concern and its activities will be limited to winding up its affairs paying its debts and distributing its remaining assets to its shareholders eii sub will retain no assets following the final liquidating_distribution fii sub will not have acquired assets in any nontaxable_transaction at any time except for acquisitions occurring more than three years prior to the date of adoption of the plan_of_liquidation gii no assets of sub have been or will be disposed of by either sub or plr-124348-01 sub except for dispositions in the ordinary course of business dispositions occurring more than three years prior to adoption of the plan_of_liquidation and except as otherwise described as part of this proposed transaction hii except as otherwise described as part of this proposed transaction the liquidation of sub will not be preceded or followed by the reincorporation in or transfer or sale to a recipient corporation recipient of any of the businesses or assets of sub if persons holding directly or indirectly more than percent in value of the stock of sub also hold directly or indirectly more than percent in value of the stock of recipient for purposes of this representation ownership will be determined by application of the constructive_ownership rules of sec_318 as modified by sec_304 of the code iii no assets of sub will have been distributed in_kind transferred or sold to sub except for i transactions occurring in the normal course of business and ii transactions occurring more than three years prior to adoption of the liquidation plan jii sub will report all earned_income represented by assets that will be distributed to its shareholders such as receivables being reported on a cash_basis unfinished construction contracts commissions due etc kii lii the fair_market_value of the assets of sub will exceed its liabilities both at the date of the adoption of the plan of complete_liquidation and immediately prior to the time the first liquidating distributing is made there is no intercorporate debt existing between sub and sub no intercorporate debt has been cancelled forgiven or discounted except for transactions that occurred more than three years prior to the date of adoption of the plan of complete_liquidation mii sub is not an organization that is exempt from federal_income_tax under sec_501 or any other provision of the code nii all other transactions undertaken contemporaneously with in anticipation of in conjunction with or in any way related to the proposed liquidation of sub have been fully disclosed the parties submitted the following representations with respect to step d iii the sub merger aiii the fair_market_value of the sub stock deemed received by each sub plr-124348-01 shareholder will be approximately equal to the fair_market_value of the sub stock deemed surrendered in the exchange biii the sub shareholders company shareholder shareholder shareholder shareholder and shareholder will receive no consideration other than sub stock no sub shares will be exchanged for cash in lieu of fractional share interests and there will be no dissenters to the transaction neither sub nor persons related to sub within the meaning of sec_1_368-1 of the regulations acquired stock of sub in connection with the reorganization for consideration other than sub stock sub neither redeemed its stock nor made distributions to its shareholders in connection with the reorganization ciii sub will acquire at least percent of the fair_market_value of the net assets and least percent of the fair_market_value of the gross assets held by sub immediately prior to sub merger for purposes of this representation amounts used by sub to pay its reorganization expenses all redemptions and any distributions except for regular normal dividends made by sub immediately preceding the transfer will be included as assets of sub held immediately prior to the sub merger diii after the sub merger the shareholders of sub company shareholder shareholder shareholder shareholder and shareholder will be in control of sub within the meaning of sec_368 and sec_304 of the code eiii sub has no plan or intention to dispose_of any of the assets of sub acquired in the sub merger other than dispositions made in the normal course of its business operations and other than the dispositions made in the normal course of its business operations and other than the dispositions described as part of this proposed transaction fiii the fair_market_value of the assets of sub transferred to sub will equal or exceed the sum of the liabilities assumed by sub as determined under sec_357 of the code giii the total adjusted_basis of the assets of sub transferred to sub will equal or exceed the sum of the liabilities assumed by sub as determined under sec_357 of the code hiii the liabilities of sub assumed by sub as determined under sec_357 of the code were incurred by sub in the ordinary course of its business and are associated with the assets transferred plr-124348-01 iiii following the sub merger sub and its successors holding_company and company will continue the historic_business of sub and use a significant portion of the historic_business_assets of sub in a business jiii at the time of the sub merger neither sub nor sub will have outstanding any warrants options convertible securities or any other type or right pursuant to which any person could acquire stock sub that if exercised or converted would affect the acquisition or retention of control of sub by company shareholder shareholder shareholder shareholder and shareholder as defined in sec_368 and sec_304 of the code kiii sub sub and the shareholders of sub will pay their respective expenses if any incurred in connection with the sub merger liii there is no intercorporate indebtedness existing between sub and sub that was issued acquired or will be settled at a discount miii no two parties to the sub merger are investment companies as defined in sec_368 and iv of the code niii neither sub nor sub is under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 of the code the parties submitted the following representations with respect to step d iv the sub merger aiv the fair_market_value of the holding_company stock deemed received by each sub shareholder will be approximately equal to the fair_market_value of the sub stock deemed surrendered in the exchange biv the sub shareholders company shareholder shareholder shareholder shareholder and shareholder will receive no consideration other than holding_company stock no sub shares will be exchanged for cash in lieu of fractional share interests and there will be no dissenters to the transaction neither holding_company nor persons related to holding_company within the meaning of sec_1_368-1 of the regulations acquired stock of sub in connection with the reorganization for consideration other than holding_company stock sub neither redeemed its stock nor made distributions to its shareholders in connection with the reorganization civ holding_company will acquire at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the plr-124348-01 gross assets held by sub immediately prior to sub merger for purposes of this representation amounts used by sub to pay its reorganization expenses all redemptions and any distributions except for regular normal dividends made by sub immediately preceding the transfer will be included as assets of sub held immediately prior to the sub merger div after the sub merger the shareholders of sub company shareholder shareholder shareholder shareholder and shareholder will be in control of holding_company within the meaning of sec_368 and sec_304 of the code eiv holding_company has no plan or intention to dispose_of any of the assets of sub acquired in the sub merger other than dispositions made in the normal course of its business operations and other than the dispositions described as part of this proposed transaction fiv the fair_market_value of the assets of sub transferred to holding_company will equal or exceed the sum of the liabilities assumed by holding_company as determined under sec_357 of the code giv the total adjusted_basis of the assets of sub transferred to holding_company will equal or exceed the sum of the liabilities assumed by holding_company as determined under sec_357 of the code hiv the liabilities of sub assumed by holding_company as determined under sec_357 of the code were incurred by sub in the ordinary course of its business and are associated with the assets transferred iiv following the sub merger holding_company and its successor company will continue the historic_business of sub and use a significant portion of the historic_business_assets of sub in a business jiv at the time of the sub merger neither sub nor holding_company will have outstanding any warrants options convertible securities or any other type or right pursuant to which any person could acquire stock in holding_company that if exercised or converted would affect the acquisition or retention of control of holding_company by company shareholder shareholder shareholder shareholder and shareholder as defined in sec_368 and sec_304 of the code kiv holding_company sub and the shareholders of sub will pay their respective expenses if any incurred in connection with the sub merger plr-124348-01 liv there is no intercorporate indebtedness existing between sub and holding_company that was issued acquired or will be settled at a discount miv no two parties to the sub merger are investment companies as defined in sec_368 and iv of the code niv neither sub nor holding_company is under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 of the code the parties submitted the following representations with respect to step d v the holding_company merger av the fair_market_value of the company stock received by each holding_company shareholder will be approximately equal to the fair_market_value of the holding_company stock surrendered in the exchange bv the holding_company shareholders company shareholder shareholder shareholder shareholder and shareholder will receive no consideration other than company stock no holding_company shares will be exchanged for cash in lieu of fractional share interests and there will be no dissenters to the transaction neither company nor persons related to company within the meaning of sec_1_368-1 of the regulations acquired stock of holding_company in connection with the reorganization for consideration other than company stock holding_company neither redeemed its stock nor made distributions to its shareholders in connection with the reorganization cv company will acquire at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets held by holding_company immediately prior to holding_company merger for purposes of this representation amounts used by holding_company to pay its reorganization expenses all redemptions and any distributions except for regular normal dividends made by holding_company immediately preceding the transfer will be in included as assets of holding_company held immediately prior to the holding_company merger dv after the holding_company merger the shareholders of holding_company company shareholder shareholder shareholder shareholder and shareholder will be in control of company within the meaning of sec_368 and sec_304 of the code plr-124348-01 ev company has no plan or intention to dispose_of any of the assets of holding_company acquired in the holding_company merger other than dispositions made in the normal course of its business operations fv the fair_market_value of the assets of holding_company transferred to company will equal or exceed the sum of the liabilities assumed by company as determined under sec_357 of the code gv the total adjusted_basis of the assets of holding_company transferred to company will equal or exceed the sum of the liabilities assumed by company as determined under sec_357 of the code hv the liabilities of holding_company assumed by company as determined under sec_357 of the code were incurred by holding_company in the ordinary course of its business and are associated with the assets of holding_company in a business iv jv following the holding_company merger company will continue the historic_business of holding_company and use a significant portion of the historic_business_assets of holding_company in a business at the time of the holding_company merger neither holding_company nor company will have outstanding any warrants options convertible securities or any other type or right pursuant to which any person could acquire stock in company that if exercised or converted would affect the acquisition or retention of control of company by company shareholder shareholder shareholder shareholder and shareholder as defined in sec_368 and sec_304 of the code kv company holding_company and the shareholders of holding_company will pay their respective expenses if any incurred in connection with the holding_company merger lv there is no intercorporate indebtedness existing between holding_company and company that was issued acquired or will be settled at a discount mv no two parties to the holding_company merger are investment companies as defined in sec_368 and iv of the code nv neither holding_company nor company is under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 of the code plr-124348-01 based solely on the information submitted and on the representations set forth above we hold as follows with respect to the sub merger the acquisition by sub of substantially_all of the assets of sub solely in exchange for sub voting_stock and sub 2’s assumption of sub 4’s liabilities if any followed by sub 4’s distribution of sub stock will constitute a reorganization within the meaning of sec_368 of the code for purposes of this ruling substantially_all means at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets of sub sub and sub will each be a_party_to_a_reorganization within the meaning of sec_368 of the code no gain_or_loss will be recognized to sub on the transfer of substantially_all of its assets to sub subject_to liabilities in exchange for sub voting_stock sec_361 and sec_357 of the code no gain_or_loss will be recognized to sub upon the receipt of substantially_all of the assets of sub in exchange for sub voting_stock sec_1032 of the code no gain_or_loss will be recognized to the sub shareholders by reason of the exchange of their shares of sub stock solely for shares of sub voting_stock sec_354 of the code no gain_or_loss will be recognized to sub upon the distribution of sub voting_stock to the sub shareholders sec_361 of the code the basis of the sub assets in the hands of sub will be the same as the basis of those assets in the hands of sub immediately prior to the transfer sec_362 of the code the holding_period of the sub assets in the hands of sub will include the period during which such assets were held by sub sec_1223 of the code the basis of the shares of sub voting_stock received by the sub shareholders will be the same in each instance as their basis in the sub stock surrendered in exchange therefor sec_358 of the code the holding_period of the sub voting_stock received by the sub plr-124348-01 shareholders will include the holding_period of the sub stock surrendered in exchange therefor provided that such sub stock is held as a capital_asset on the date of the exchange sec_1223 of the code the taxable_year of sub will end on the date of the transfer of its assets to sub sec_381 of the code and sec_1_381_b_-1 of the regulations pursuant to sec_381 and sec_381 a -1 of the code sub will succeed to and take into account as of the date of the proposed transfer as defined in sec_1_381_b_-1 of the regulations the items of sub described in sec_381 of the code subject_to the conditions and limitations specified in sec_381 sec_382 sec_383 and sec_384 of the code and the regulations thereunder as provided by sec_381 of the code and sec_1_381_c_2_-1 of the regulations sub will succeed to and take into account the earnings_and_profits or deficit in earnings_and_profits of sub as of the date of transfer any deficit in the earnings or profits of either sub or sub will be used only to offset the earnings_and_profits accumulated after the date of transfer sec_381 of the code based solely on the information submitted and on the representations set forth above we hold as follows with respect to the sub merger the acquisition by sub of all of the assets of sub will be treated as a complete_liquidation of sub under sec_332 of the code no gain_or_loss will be recognized to sub on the distribution of its assets to sub sec_336 sec_337 and sec_337 of the code no gain_or_loss will be recognized to sub upon the receipt of the assets of sub sec_332 of the code the basis of the sub assets in the hands of sub will be the same as the basis of those assets in the hands of sub immediately prior to the transfer sec_334 of the code the holding_period of the sub assets in the hands of sub will include the period during which such assets were held by sub sec_1223 of the code the tax_year of sub will end on the date of the transfer of its plr-124348-01 assets to sub sec_381 of the code and sec_1_381_b_-1 of the regulations pursuant to sec_381 and sec_381 a -1 of the code sub will succeed to and take into account as of the date of the proposed transfer as defined in sec_1_381_b_-1 of the regulations the items of sub described in sec_381 of the code subject_to the conditions and limitations specified in sec_381 sec_382 sec_383 and sec_384 of the code and the regulations thereunder as provided by sec_381 of the code and sec_1_381_c_2_-1 of the regulations sub will succeed to and take into account the earnings_and_profits or deficit in earnings_and_profits of sub as of the date of transfer any deficit in the earnings or profits of either sub or sub will be used only to offset the earnings_and_profits accumulated after the date of transfer sec_381of the code based solely on the information submitted and on the representations set forth above we hold as follows with respect to the sub merger the acquisition by sub of substantially_all of the assets of sub solely in exchange for sub voting_stock and sub 1's assumption of sub 2's liabilities if any followed by sub 2's distribution of sub stock will constitute a reorganization within the meaning of sec_368 of the code for purposes of this ruling substantially_all means at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets of sub sub and sub will each be a_party_to_a_reorganization within the meaning of sec_368 of the code no gain_or_loss will be recognized to sub on the transfer of substantially_all of its assets to sub subject_to liabilities in exchange for sub voting_stock sec_361 and sec_357 of the code no gain_or_loss will be recognized to sub upon the receipt of substantially_all of the assets of sub in exchange for sub voting_stock sec_1032 of the code no gain_or_loss will be recognized to the sub shareholders by reason of the exchange of their shares of sub stock solely for shares of sub voting_stock sec_354 of the code no gain_or_loss will be recognized to sub upon the distribution of sub voting_stock to the sub shareholders sec_361 of the plr-124348-01 code the basis of the sub assets in the hands of sub will be the same as the basis of those assets in the hands of sub immediately prior to the transfer sec_362 of the code the holding_period of the sub assets in the hands of sub will include the period during which such assets were held by sub sec_1223 of the code the basis of the shares of sub voting_stock received by the sub shareholders will be the same in each instance as their basis in the sub stock surrendered in exchange therefor sec_358 of the code the holding_period of the sub voting_stock received by the sub shareholders will include the holding_period of the sub stock surrendered in exchange therefor provided that such sub stock is held as a capital_asset on the date of the exchange sec_1223 of the code the taxable_year of sub will end on the date of the transfer of its assets to sub sec_381 of the code and sec_1_381_b_-1 of the regulations pursuant to sec_381 and sec_381 a -1 of the code sub will succeed to and take into account as of the date of the proposed transfer as defined in sec_1_381_b_-1 of the regulations the items of sub described in sec_381 of the code subject_to the conditions and limitations specified in sec_381 sec_382 sec_383 and sec_384 of the code and the regulations thereunder as provided by sec_381 of the code and sec_1_381_c_2_-1 of the regulations sub will succeed to and take into account the earnings_and_profits or deficit in earnings_and_profits of sub as of the date of transfer any deficit in the earnings or profits of either sub or sub will be used only to offset the earnings_and_profits accumulated after the date of transfer sec_381 of the code based solely on the information submitted and on the representations set forth above we hold as follows with respect to the sub merger the acquisition by holding_company of substantially_all of the assets of sub solely in exchange for holding_company voting_stock and holding company's assumption of sub 1's liabilities if plr-124348-01 any followed by sub 1’s distribution of holding_company stock will constitute a reorganization within the meaning of sec_368 of the code for purposes of this ruling substantially_all means at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets of sub holding_company and sub will each be a_party_to_a_reorganization within the meaning of sec_368 of the code no gain_or_loss will be recognized to sub on the transfer of substantially_all of its assets to holding_company subject_to liabilities in exchange for holding_company voting_stock sec_361 and sec_357 of the code no gain_or_loss will be recognized to holding_company upon the receipt of substantially_all of the assets of sub in exchange for holding_company voting_stock sec_1032 of the code no gain_or_loss will be recognized to the sub shareholders by reason of the exchange of their shares of sub stock solely for shares of holding_company voting_stock sec_354 of the code no gain_or_loss will be recognized to sub upon the distribution of holding_company voting_stock to the sub shareholders sec_361 of the code the basis of the sub assets in the hands of holding_company will be the same as the basis of those assets in the hands of sub immediately prior to the transfer sec_362 of the code the holding_period of the sub assets in the hands of holding_company will include the period during which such assets were held by sub sec_1223 of the code the basis of the shares of holding_company voting_stock received by the sub shareholders will be the same in each instance as their basis in the sub stock surrendered in exchange therefor sec_358 of the code the holding_period of the holding_company voting_stock received by the sub shareholders will include the holding_period of the sub stock surrendered in exchange therefor provided that such sub stock is held as a capital_asset on the date of the exchange sec_1223 of the code plr-124348-01 the taxable_year of sub will end on the date of the transfer of its assets to holding_company sec_381 of the code and sec_1 b - a of the regulations pursuant to sec_381 and sec_381 a -1 of the code holding_company will succeed to and take into account as of the code of the date of the proposed transfer as defined in sec_1_381_b_-1 of the regulations the items of sub described in sec_381 of the code subject_to the conditions and limitations specified in sec_381 sec_382 sec_383 and sec_384 of the code and the regulations thereunder as provided by sec_381 of the code and sec_1_381_c_2_-1 of the regulations holding_company will succeed to and take into account the earnings_and_profits or deficit in earnings_and_profits of sub as of the date of transfer any deficit in the earnings or profits of either sub or holding_company will be used only to offset the earnings_and_profits accumulated after the date of transfer sec_381 of the code based solely on the information submitted and on the representations set forth above we hold as follows with respect to the holding_company merger the acquisition by company of substantially_all of the assets of holding_company solely in exchange for company voting_stock and company 2's assumption of holding company's liabilities if any followed by holding company's distribution of company stock will constitute a reorganization within the meaning of sec_368 of the code for purposes of this ruling substantially_all means at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets of holding_company company and holding_company will each be a_party_to_a_reorganization within the meaning of sec_368 of the code no gain_or_loss will be recognized to holding_company on the transfer of substantially_all of its assets to company subject_to liabilities in exchange for company voting_stock sec_361 and sec_357 of the code no gain_or_loss will be recognized to company upon the receipt of substantially_all of the assets of holding_company in exchange for company voting_stock sec_1032 of the code no gain_or_loss will be recognized to the holding_company shareholders by reason of the exchange of their shares of holding plr-124348-01 company stock solely for shares of company voting_stock sec_354 of the code no gain_or_loss will be recognized to holding_company upon the distribution of company voting_stock to the holding_company shareholders sec_361 of the code the basis of the holding_company assets in the hands of company will be the same as the basis of those assets in the hands of holding_company immediately prior to the transfer sec_362 of the code the holding_period of the holding_company assets in the hands of company will include the period during which such assets were held by holding_company sec_1223 of the code the basis of the shares of company voting_stock received by the holding_company shareholders will be the same in each instance as their basis in the holding_company stock surrendered in exchange therefor sec_358 of the code the holding_period of the company voting_stock received by the holding_company shareholders will include the holding_period of the holding_company stock surrendered in exchange therefor provided that such holding_company stock is held as a capital_asset on the date of the exchange sec_1223 of the code the taxable_year of holding_company will end on the date of the transfer of its assets to company sec_381 of the code and sec_1_381_b_-1 of the regulations pursuant to sec_381 and sec_381 a -1 of the code company will succeed to and take into account as of the date of the proposed transfer as defined in sec_1_381_b_-1 of the regulations the items of holding_company described in sec_381 of the code subject_to the conditions and limitations specified in sec_381 sec_382 sec_383 and sec_384 of the code and the regulations thereunder as provided by sec_381 of the code and sec_1_381_c_2_-1 of the regulations company will succeed to and take into account the earnings_and_profits or deficit in earnings_and_profits of holding_company as of the date of transfer any deficit in the earnings or profits of either holding_company or company will be used only to offset the earnings_and_profits accumulated after the date of transfer sec_381 of the code plr-124348-01 we express no opinion about the tax treatment of the transaction under other provisions of the code or the regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings specifically no opinion is expressed regarding whether any or all of the above-referenced foreign_corporations are passive foreign investment companies within the meaning of sec_1297 of the code if it is determined that any or all of the above-described foreign_corporations are passive foreign investment companies no opinion is expressed with respect to the application of sec_1291 through of the code to the proposed transaction in particular in a transaction in which gain is not otherwise recognized regulations under sec_1291 of the code may require gain recognition notwithstanding any other provision of the code additionally no opinion is expressed regarding the application of sec_367 of the code to the successive reorganizations or the application of sec_367 of the code to the sec_332 liquidation see sec_1_367_b_-4 and d and sec_1_367_e_-2 of the regulations the rulings contained in this letter are based upon facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for a ruling as part of the audit process the taxpayer may be required to verify the information representations and other data submitted this ruling letter has no effect on any earlier documents and is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent each affected taxpayer must attach a copy of this letter to the taxpayer’s federal_income_tax return for the taxable_year in which the transaction covered by this letter_ruling is consummated in accordance with the power_of_attorney on file in this office a copy of this letter is being sent to the taxpayer cc sincerely yours associate chief_counsel corporate by lisa a fuller assistant to the chief branch


internal_revenue_service number release date index number --------------- ------------------------------- ------------------------------------ ------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number -------------------- refer reply to cc psi b03 plr-135667-08 date date company -------------------------------------------------------------------------------------------- ------------------------ legend shareholders ------------------------------------------ date state ----------------------- ------------- dear ----------- this letter responds to a letter dated date and subsequent correspondence submitted by company requesting a ruling under sec_1362 of the internal_revenue_code facts company was incorporated under the laws of state on date company represents that it was the intent of shareholders for company to be an s_corporation as of date however company’s form_2553 election by a small_business_corporation was not timely filed company represents that company and shareholders have reported their income consistent with company’s intended status as an s_corporation company requests a ruling that it will be recognized as an s_corporation effective date law and analysis plr-135667-08 sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 may be made by a small_business_corporation for any taxable_year a at any time during the preceding_taxable_year or b at any time during the taxable_year and on or before the 15th day of the third month of the taxable_year sec_1362 provides that if a a small_business_corporation makes an election under sec_1362 for any taxable_year and b the election is made after the 15th day of the third month of the taxable_year and on or before the 15th day of the third month of the following taxable_year then such election shall be treated as made for the following taxable_year sec_1362 provides that if a an election under sec_1362 is made for any taxable_year determined without regard to sec_1362 after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat the election as timely made for the taxable_year and sec_1362 shall not apply conclusion based solely on the facts submitted and representations made we conclude that company has established reasonable_cause for failing to make an s_corporation_election thus we conclude that company is eligible for relief under sec_1362 accordingly if company makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 effective date within days following the date of this letter we rule that the election shall be treated as timely made a copy of this letter should be attached to form_2553 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied as to whether company otherwise qualifies as a subchapter_s_corporation under sec_1361 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-135667-08 the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination sincerely s tara p volungis senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures a copy of this letter a copy for sec_6110 purposes cc


internal_revenue_service number release date index numbers --------------------------------- -------------------------------------------------- ---------------------------------- ------------------------------------------------- --------------------------------- department of the treasury washington dc person to contact ----------------------- id no -------------- telephone number ---------------------- refer reply to cc psi b03 - plr-134308-12 date date legend company ------------------------------------------------------------ ---------------------------------- parent ------------------------------------------------------------ ---------------------------------------------- territory country a b c dear ---------------- --------------- ---------- ---------------------------- --------------------- ------------------------ we received a letter dated date submitted on behalf of parent requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for parent as successor to company to file an election under sec_301_7701-3 for company to be classified as a disregarded_entity for federal tax purposes facts plr-134308-12 the information submitted discloses that company was formed on a as a corporation under the laws of territory company’s sole owner was parent a corporation under the laws of country before company liquidated into parent on b company failed to timely file form_8832 entity classification election to be classified as a disregarded_entity for federal tax purposes effective c law and analysis sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301 b unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides in part that for purposes of sec_301_7701-3 a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides in part that except as provided in sec_301_7701-3 and v an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 entity classification election with the service_center designated on form_8832 sec_301_7701-3 provides in part that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register plr-134308-12 sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based on the facts and representations submitted parent has established on behalf of company that the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied consequently parent is granted on behalf of company an extension of time of one hundred twenty days from the date of this letter to elect under sec_301 for company to be treated as a disregarded_entity effective c parent must file on behalf of company form_8832 within the extension period with the appropriate service_center with a copy of this letter attached this ruling is contingent on parent filing within days of the date of this letter all required returns and an amended income_tax return consistent with the requested relief being effective c these returns must include but are not limited to form_8858 information_return of u s persons with respect to foreign disregarded entities such that the form reflects the consequences of the relief granted in this letter except for the specific ruling above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code in addition sec_301_9100-1 provides that the granting of an extension of time for making an election is not a determination that the taxpayer is otherwise eligible to make the election this ruling is directed only to the taxpayer requesting it according to sec_6110 of the code this ruling may not be used or cited as precedent plr-134308-12 under a power_of_attorney on file with this office we are sending a copy of this letter to parent’s authorized representatives sincerely associate chief_counsel passthroughs special industries by s mary beth carchia senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes