LTR 201140008 is the latest ruling approving the rescission of a corporate transaction. It is unusual in that it does not specifically state that the rescission occurred in the year of the original transaction, and the reason for the rescission is odd.
Facts: P is the common parent of a group containing at least S1, 2, 3 and 4. S3 owns S5, which owns some stock in S6, the rest of which is owned by P. The facts do not state that S5 and S6 are in the group. S1 sells some S3 stock to S2 at book value. Then taxpayer realized that S3 owned some assets not intended to be indirectly owned by S2, so S3 sold those assets to S2 at book value and S2 sold them to S1 at book value. Then taxpayer realized that S3 indirectly owned some of S6.
For some reason that fact required that the earlier sales be made at FMV rather than at book value. The ruling does not explain why the book value sale became inappropriate. Taxpayer did not want to go to the expense of conducting a valuation of the various stocks and assets sold, and so taxpayer rescinded all of the sales. Thereafter, S3 sold one asset, a partnership interest, to S4 at a price that was not said to be either book value or FMV. Taxpayer represented that the rescissions put everything back into status quo ante except for the relocation of the partnership interest from S3 to S4, a subsidiary of S2.
The ruling rules that the rescinded transactions will be disregarded. There are several unusual features of the ruling:
- The taxpayer did not represent that the rescission occurred in the year of sales. Of course that does not mean it did not so occur. Also the taxpayer went ahead and effected the rescissions without prior IRS approval. Perhaps that shows that the taxpayer realized it had to make the rescission in the year and did so. There has been no indication that the Chief Counsel has relaxed his requirement for rescission rulings that the rescission occur in the same year.
- The ruling suggests but does not state that S5 and S6 were not group members, but it is not clear how that could be. A member owned all of the stock of S5. The ruling does not state that they were foreign. It does not state that the partnership owned part of the stock of S6. Perhaps it did own enough S6 stock to cause its disaffiliation, but that would not have disaffiliated S5. Perhaps S5 was some other type of corporation that is excluded from consolidation.
- The taxpayer thought it was appropriate to sell assets within the group at book value until it learned that some of the assets sold needed to be valued, for some reason. Those assets were the stock of S6, the corporation that we are guessing was outside the group.
Assuming that S6 was outside the group, and that somehow that fact required the stock of its indirect owner, two tiers up, to need to be fair market valued for purposes of an intercompany sale, why was that so?
It is not a general rule that intragroup sales may be made at off market prices; such a rule would render the entire matching regime of Reg. 1.1502-13 largely irrelevant. However, as a practical matter, corporate groups tend to sell assets among members at book value, leaving any IRS objection to that to be subject to a section 482 adjustment, which usually never comes. On the other hand, state tax authorities are not so tolerant of non FMV sales between affiliates; indeed many state statutes make such sales the subject of required adjustments for state filing purposes to reflect book value.
The moral of this ruling may be that tax basis sales prices within groups perhaps should be subject to more scrutiny by taxpayers themselves. But lacking that, the ruling shows yet another ground for a rescission ruling, if a ground is needed.
