Rev. Proc. 2013-32, issued on June 25, 2013, substantially restricts the scope of letter rulings that taxpayers can obtain from chief counsel (corporate) on the core subchapter C nonrecognition transactions covered by sections 332, 351, 355 and 368, as well as related issues under sections 354, 356, 358 and 361.
Comfort Rulings. There has been in place a ban on various “comfort rulings” and limitations on certain factual issues in section 355 rulings. There has been a way around some of these limitations. If the taxpayer could ask for a ruling on a “significant issue,” then the IRS might rule on both the significant issue and the entire transaction.
Significant Issues. Under the new procedure, basically, the IRS will only rule on the significant issue and there is no flexibility to expand the ruling to cover all corporate issues in the transaction. This also applies to spinoff rulings, which means that the day of the long rulings up to 200 pages on spinoffs is over, at least so far as the domestic subchapter C issues are concerned.
A significant issue is one on which private counsel will not issue a “will” opinion. Thus, pretty much any issue that a taxpayer may be worried about can be a significant issue and can potentially be ruled on under this procedure.
Upstream Mergers. It is likely significant that the procedure goes out of its way to use the example of an upstream merger of a wholly owned subsidiary to illustrate this point: a ruling cannot be obtained that one problematic nonrecognition rule applies if another nonrecognition rule also surely applies. The example given is the upstream reorganization versus the section 332 liquidation. In fact, the IRS has issued rulings that an upstream reorganization/liquidation was a nonrecognition event without specifying whether section 332 or 368 applied. LTR 201111003, LTR 201149012.
But this is a limited set of cases. A potential section 332 liquidation might turn out not to be a liquidation if the assets are reincorporated. Yet, the failed liquidation could be an upstream reorganization with a drop down of assets that does not cause recharacterization under Reg. section 1.368-2(k). Or, alternately, the subsidiary into which the reincorporated assets are placed may be spun off, in which case the liquidation rule can apply but the reorganization rule might not apply.
The procedure references this type of transaction in another place where it cites the COBE regulation and Reg. section 1.368-2(k) as examples of regulations under which there might be significant issues on which it would rule. These have come to be the “hottest” ruling area in the spinoff and liquidation-reincorporation area. So the procedure is signaling that such rulings will continue, just not as part of a full ruling.
Conclusion. The principal effect of this change is there will no longer be any more or less complete rulings on section 355 spinoffs. Rulings on significant issues in spinoffs likely will be more numerous than other significant issue rulings have been up to now. Practitioners will have to opine on spinoffs that otherwise might have been ruled on.
