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(2004), stating that, upon a corporation’s Co., which met the requirements under necessary to determine whether Hold-
elective change to a disregarded entity, Sec. 1504(a)(2). Holding Co. directly ing Co. was affiliated with US Sub for
the deemed liquidation “is character- wholly owned two corporations, Foreign purposes of Sec. 165(g)(3).
ized as an actual liquidation of [the Sub 1 and Foreign Sub 2.
corporation] for income tax purposes”). Foreign Sub 1 was formed in year 1 Commentary
Regs. Sec. 301.7701-3(g)(2)(i) states to focus on developing a product. For- The facts and ruling in Letter Ruling
that the tax treatment of an elective eign Sub 2 was formed in year 2 to be 202140002 are noteworthy and contain
change is determined under all relevant the European operating corporation to some planning considerations for tax-
provisions of the Code and general facilitate the development and ultimate payers related to Sec. 165(g). First, the
principles of tax law, including the step- exploitation of the product. Holding Co. ruling confirms that the IRS may re-
transaction doctrine. was formed in year 3 and subsequently quire an acquiring corporation in a Sec.
Applying the rationale in Dover and acquired the stock of Foreign Sub 1 and 381 transaction to take into account the
Regs. Sec. 301.7701-3(g)(2)(i), the IRS Foreign Sub 2 through separate transac- gross receipts of a transferor corpora-
ruled in Rev. Rul. 2003-125 whether tions under Secs. 351 and 368(a)(1)(B) tion for purposes of the gross-receipts
Sec. 332 applied to a deemed liquida- on date 1 and date 2, respectively. test, notwithstanding that “gross
tion in two situations involving an elec- On date 3, US Sub concluded that receipts” are not listed in Sec. 381(c).
tive change of an eligible entity from a the product was not effective but con- There has been no guidance for this
corporation to a disregarded entity. The tinued to investigate monetizing related principle other than letter rulings.
pivotal issue was the requirement under intellectual property. Subsequently, it Second, the IRS applied this ra-
Regs. Sec. 1.332-2(b) that the recipient became clear that monetization was tionale notwithstanding that Holding
corporation receive at least partial pay- impossible, and US Sub began to wind Co. was historically a holding company
ment for the stock that it owned in the down its operations related to the with no gross receipts. Presumably,
liquidating corporation. product by eliminating Foreign Sub 2’s there was no potential that Holding
In Situation 1 of Rev. Rul. 2003-125, workforce and disposing of substantially Co. would have met the gross-receipts
the corporation was solvent immediately all of Foreign Sub 2’s assets. Foreign test without taking into account the
before the effective date of the elec- Sub 2 was insolvent on date 5. gross receipts of Foreign Sub 2.
tive change (i.e., the fair market value On date 6, Holding Co. filed an Finally, the availability of an elec-
(FMV) of its assets exceeded its liabili- elective change to treat Foreign Sub 2 tive change may present tax planning
ties), and the IRS ruled that Sec. 332 as a disregarded entity that was effective considerations in this area when a
applied because the shareholder would on date 4. The taxpayer represented in subsidiary becomes insolvent. As noted
have received at least partial payment on the letter ruling that Foreign Sub 2 was above, taxpayers may be able to make a
its stock in the deemed liquidation. solvent on date 4 and that the deemed retroactive election. In the letter ruling,
In Situation 2 of Rev. Rul. 2003-125, liquidation of Foreign Sub 2 qualified Foreign Sub 2 was insolvent by date
the corporation was insolvent imme- under Sec. 332. 5, but the election was filed on date 6
diately before the effective date of the The equity interests of Holding Co., and effective on date 4. Assuming the
elective change (i.e., the FMV of its Foreign Sub 1, and Foreign Sub 2 were dates were sequenced chronologically,
assets did not exceed its liabilities). The determined to be worthless on date 7. Foreign Sub 2 was insolvent when the
IRS ruled that Sec. 332 did not apply US Sub filed an elective change to election was filed. Therefore, the tax-
because the shareholder did not receive treat Holding Co. as a disregarded en- payer may have designated an effective
any payment on its stock in the deemed tity that was effective on date 8, which date when Foreign Sub 2 was solvent
liquidation, and the shareholder was allowed US Sub a worthless security to get a result similar to Situation 1
allowed a worthless security loss under loss under Sec. 165(g) on the stock of of Rev. Rul. 2003-125, as opposed to
Sec. 165(g). Holding Co., similar to Situation 2 of designating an effective date when
Rev. Rul. 2003-125. Foreign Sub 2 was insolvent, which
Letter Ruling 202140002 Holding Co. had no gross receipts would get a result similar to Situation
In Letter Ruling 202140002, the tax- since its incorporation. 2 of the same revenue ruling. As shown
payer was a corporation that was the The IRS ruled that Holding Co. in Rev. Rul. 2003-125, those differences
common parent of a consolidated group. would take into account the historic in facts could significantly affect the
The taxpayer directly wholly owned a gross receipts of Foreign Sub 2 for tax consequences.
corporation, US Sub. US Sub directly computing the gross-receipts test. The From Jeff Borghino, CPA, Washing-
wholly owned a corporation, Holding gross-receipts test would have been ton, D.C.

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