LTR 201214013 applies a 55 year old ruling to treat a subsidiary liquidation as a downstream D reorganization, thus preserving the basis in the liquidating subsidiary’s stock, which would not be the case if it had liquidated under section 332.
Facts. Holdco owns Parent, which owns Target Parent, which owns Target Sub. Holdco wants to wind up owning Target Sub directly, but evidently did not want to lose its basis in its Parent stock and wanted to maintain Parent in existence as an entity.
The transaction involves Target Parent recapitalizing (so that Parent can claim it transferred its assets for stock of the acquirer), Parent converting to DRE status, and Target Parent merging into Target Sub.
Rulings. Parent was the target in a D reorganization downstream into Target Parent and Target Parent was the target in an A reorganization downstream into Target Sub.
The ruling relied on (but did not cite) Rev. Rul. 57-465, which treated a foreign to foreign downstream merger as a D reorganization for the benefit of foreign corporations that could not then effect offshore A reorganizations.
Analysis. The assets that Parent transferred to Target Parent in the D reorganization were the stock of Target Parent. The IRS went along with treating the preliminary recapitalization of Target Parent as part of the Parent reorganization. That did not occur in Rev. Rul. 57-465 because that ruling involved a downstream merger.
As a result of the recharacterizations Holdco was able to retain its basis in its Parent stock and to retain Parent as an entity for state law purposes, but eliminate two tiers of holding companies between it and its operating subsidiary.
