Consolidated Group Continuation Issues

American Bar Association

Affiliated and Related Corporations Committee
Washington, D.C.
May 6, 2016

Jonathan Forrest Mark Schneider

Deloitte Tax LLP Deloitte Tax LLP
Washington National Tax Washington National Tax
Washington, D.C. Washington D.C.

Lawrence Axelrod Michael Wilder

Internal Revenue Service McDermott, Will & Emery
Washington, D.C. Washington, D.C.

Copyright 2016
Axelrod, Forrest, Schneider & Wilder
All Rights Reserved
Group Continuation
Issues

2
 Continuation of a Group (1.1502-75(d))

1.1502-75(d)(1) -- Common parent remains as the

common parent

1.1502-75(d)(2) -- Common parent ceases to exist by

reason of:

Change in Identity, Form, etc. (e.g., F Reorganization)

Transfer of assets to subsidiary

1.1502-75(d)(3) -- Reverse Acquisitions

3
Continuation of a Group (1.1502-75(d)(1))

Group remains in existence if:

Common parent remains as the common parent, and

At least one subsidiary that was affiliated with it at the

end of the prior year remains affiliated with it at the
beginning of the current year

Irrelevant whether one or more corporations

became or ceased to be subsidiaries after the
group was formed
4
 Continuation of a Group (1.1502-75(d))

Case #1

P
Merger Merger

S1 S2

In 2015, P, S1, and S2 file a consolidated return using a calendar

year. If, in 2016, S1 and S2 merge into P, does the group terminate?
When? Does the answer change if P subsequently forms another
subsidiary before the end of 2016?
5
 Continuation of a Group (1.1502-75(d))

Case #2

P
1. Merger 2. Merger

S1 S2

If, in 2016, S1 merges into P and P merges into S2, does the group
terminate?

6
 Exception to Termination of a Group

1.1502-75(d)(2)
(i) Change in identity of common parent (e.g., F reorganization), or

(ii) If the common parent ceases to exist but the members of the group
own substantially all of the assets of the common parent and there
remains one or more chains of includible corporations connected
through section 1504 ownership that were members of the group prior to
the common parent ceasing to exist

7
 1.1502-75(d)(2)(ii) Exception

P
(Operating Co.)

S1 Newco

S2 Newco2

Assume that P merges into Newco2 (Newco2 survives) and in the transaction the P shareholders
exchange their P stock for stock of Newco.

8
 1.1502-75(d)(2)(ii) -- Falconwood
Before Shareholders

TMCH 2. Sale of FSC and MFC

1. Merger

Falconwood FSC

MFC

TMCH merged downstream into Falconwood. Three hours later, Falconwood sold the stock
of FSC and MFC to the TMCH shareholders. Subsequently, Falconwood carried back losses
to prior tax years of the TMCH group. Issue: Does the TMCH group continue following the
merger of TMCH into Falconwood? 9
 1.1502-75(d)(2)(ii) -- Falconwood
After
Shareholders

Falconwood MFC FSC

On appeal, the court concluded that the TMCH Group continued

because the requirement that a chain of corporations remain
following the downstream merger was satisfied during the 3 hours
between the downstream merger and the sale of the stock of MFC and
FSC. The Court also concluded that the step transaction doctrine did
not apply for this purpose. 10
 Revenue Ruling 82-152

P
(Operating Co.)

S1 Newco

S2 Newco2

Assume that Newco2 merges into P (P survives) and in the transaction

the P shareholders exchange their P stock for stock of Newco, and
Newcos stock in Newco2 is converted into stock of P. 11
 1.1502-75(d)(2)(ii) Interlake Corp.
Step 1: Step 2:

Shareholders Shareholders

A I

A
I AMC

AMC

Acme (A) is the common parent of a group
which includes AMC.
On February 26, 1986, A organizes I as a
wholly owned subsidiary in anticipation of a
restructuring.
On May 29, 1986, in the restructuring, A
becomes a wholly owned subsidiary of I.
AMC remains a wholly owned subsidiary of
A.
12
 1.1502-75(d)(2)(ii) Interlake Corp.
Step 3:
Shareholders
I I
A
AMC
On June 23, 1986, 25 days after the
restructuring, I spins-off A to Is public
shareholders.
The Tax Court states that I became a
successor common parent to the A group.
Step 4:
Shareholders Shareholders
A
AMC
Following the spin-off, A and I are separate
corporations owned by the public with no ties
other than common public shareholders.
The Tax Court and both A and I treat I as the
successor common parent of the pre-split A
group. But see Tech. Adv. Mem. 8947007
(Aug. 22, 1989) and Tech Adv. Mem.
8946006 (Jul. 31, 1989). 13
Exception Two -- Reverse Acquisitions (1.1502-75(d)(3))

Purpose of Provision

Generally treats the larger group as the acquiring corporation regardless

of the form of the acquisition (prevents transactions to break group)

Overrides the Section 381 provisions that permit the form of an

acquisition to control by treating the surviving corporation as the acquired
corporation

Precludes a small group with attribute carryovers from acquiring a large

group and using its attributes against the income of the large group

May be beneficial or detrimental depending on factors such as which

group has NOLs or built in losses

14
 Reverse Acquisitions - 1.1502-75(d)(3)

Definitional requirements:
If a corporation (first corporation) acquires the stock or
substantially all of the assets of another corporation
(second corporation) in a taxable or nontaxable
transaction (it is easier to think of the first corporation as
the acquiring corporation and the second corporation as
the target corporation), and

As a result of their ownership in the second

corporation/target, shareholders of the second
corporation/target own more than 50% of the stock of the
first corporation/acquiring corporation.
15
 Reverse Acquisitions - 1.1502-75(d)(3)

Before After

P Old T
P T shareholders shareholders
shareholders shareholders

40% 60%
100% 100%

P Group
P Group T Group (T Assets)

12/31 Taxable Year 9/30 Taxable Year

T Subsidiaries

Assume that T merges into P in an A reorganization on June 30, 20XX and the
Old T shareholders receive 60% of the stock of P.
16
 Reverse Acquisitions - 1.1502-75(d)(3)
Before After

P Old T
shareholders shareholders
P T
shareholders shareholders
40% 60%

100% 100%
P Group
P Group T Group

T Group

Assume that P acquires T in a taxable transaction.

17
 Reverse Acquisitions - 1.1502-75(d)(3)

Revenue Ruling 73-303

Before After

P
P (Tax Exempt)
(Tax Exempt)

M
T U
Group Group
T U
Issue: Group Group
If P contributes its stock in T and U to M
(a newly-formed corporation), is this a
reverse acquisition? 18
Reverse Acquisitions - 1.1502-75(d)(3)
Before After

F
(Foreign) F

S1 P
S2 S3
NOLs
FMV=$120 FMV=$80 FMV=$60
S1 S2 S3
Issue:
If F contributes its stock in
S1, S2, and S3 to P (US), is this a
reverse acquisition?
19
 Reverse Acquisitions Practical Considerations

There is no guidance regarding any particular presentation in the

consolidated return regarding the groups continuation following a
reverse acquisition.

In the case of either a stock or asset acquisition, the correct

presentation on the face of the Form 1120 appears to be inserting:

Acquiring Corporation (successor by Treas. Reg. 1.1502-75(d)(3) to

Target Corporation, EIN: XX-XXXXXXX) in the name block, and

The Acquiring Corporations EIN in the EIN block.

In both cases, it would be advisable to attach a statement to the

group's consolidated return describing the transaction and the
groups continuation.

20
 Reverse Acquisitions NOL Carrybacks
If an asset reorganization described in Section 381(a) occurs in a transaction that is also a
reverse acquisition, Treas. Reg. 1.1502-75(d)(3)(v)(b) reverses the direction of the
application of Section 381(b)(3).

Section 381(b)(3) provides that the corporation acquiring property in a distribution or

transfer described in Section 381(a) shall not be entitled to carry back an NOL or net
capital loss for a taxable year ending after the date of the distribution or transfer to a
taxable year of the distributor or transferor corporation.

Treas. Reg. 1.1502-75(d)(3)(v)(b) provides that, if there is a reverse acquisition and the
transaction is described in Section 381(a)(2)

(1) All taxable years ending on or before the date of acquisition, of the first
corporation and each corporation which, immediately before the acquisition, is a
member of the group of which the first corporation is the common parent, shall be
treated as taxable years of the transfer[or] corporation, and

(2) The second corporation shall not close its taxable year merely because of such
acquisition, and all taxable years ending on or before the date of acquisition, of the
second corporation and each corporation which, immediately before the acquisition,
is a member of any group of which the second corporation is the common parent,
shall be treated as taxable years of the acquiring corporation
21
 Reverse Acquisitions NOL Carrybacks
Example
P and S file separate returns for Year 1 and Year 2,
P Shareholders T Shareholders and file their first consolidated return for Year 3.
T and U are an unrelated group and filed
consolidated returns for Year 1, Year 2, and Year
3.
P T On December 31, Year 3, T merges into S in a
statutory merger described in Sections
368(a)(1)(a) and (a)(2)(D). The transaction is
also described in Section 381(a)(2).
T shareholders receive stock in P representing
S U more than 50 percent in value of P.
The merger constitutes a reverse acquisition. As a
result, for Year 4, the group (comprised of P, S,
and U) is treated as the T group with P as the
common parent.
In Year 4 the group sustains a CNOL, all of which
is attributable to S.

22
 Reverse Acquisitions NOL Carrybacks

Former Under Treas. Reg. 1.1502-75(d)(3)(v)(b), Ts

P Shareholders taxable years ending on or before the date of the
T Shareholders
merger are treated as those of the acquiring
corporation and the corresponding taxable years
< 50% > 50% of S are treated as those of the transferor
corporation.
P Accordingly, the CNOL apportioned to S must be
carried back to the taxable years of T.
No part of the CNOL apportioned to S may be
carried back to taxable years of S (separate or
S consolidated) ending on or before December 31,
Year 3.
See. e.g., TAM 8527001 (Mar. 20, 1985); PLR
8601099 (Oct. 10, 1985), PLR 8514047 (Jan. 9,
1985).
U

23
Structuring Alternatives For
Third Party Acquisitions

24
 Scope of Group Continuation Rules -- Example

Before After

P Old T
P T shareholders shareholders
shareholders shareholders

100% 100%

P Group
P Group T Group (T Assets)

T Subsidiaries

Assume that T merges into P in an A reorganization. If the mix of consideration in the

transaction is determined with group continuation considerations in mind, is the
Service concerned with this electivity? 25
Scope of Group Continuation Rules -- Example

A. Purchase for Cash

Public
PEI
P

Newco

S1 S2
C. PEI purchases P stock for
cash and contributes the stock of
P to Newco

There are three possible structures that have the same economic
consequences to the parties, but the group continuation
consequences vary. Is this electivity of concern to the Service? 26
Scope of Group Continuation Rules -- Example

Public
Foreign Parent
FP Stock
P
Other
Assets US Group Merger

S1 S2

What is the appropriate standard to determine whether the P Group

or the US Group continues? What if the acquisition is structured
differently (e.g., an acquisition of the P stock, followed by a
contribution of the P stock to the US Group). 27
Recent Group Continuation
Rulings

28
 PLR 201505006
shareholder inbound F reorg does not terminate group

Public?

Public
Facts:
Public

Series B
Foreign
Parent
Domestic
On Date 2, Foreign Parent
Series A
p/s converted into Domestic Parent,
p/s 100% c/s in a transaction represented to be
an F reorganization.
Parent
On Date 3, Domestic Parent
merged downstream into Parent
Subs
Subs in a transaction intended to be
Parent consolidated group
treated as an A reorganization,
but no representation to this
effect.
29
 PLR 201505006
shareholder inbound F reorg does not terminate group

Representations :
Public?
Before Date 2, Foreign Parent owned 100% of
Public Parents c/s, and but for the Series A, Foreign
Public Foreign Domestic
Parent Parents ownership of Parent satisfied 1504(a)(2).
Series B
p/s
Immediately after Date 2 transaction through Date
Series A 3, Domestic Parent owned 100% of Parents c/s, and
p/s 100% c/s but for the Series A, Domestic Parents ownership
of Parent satisfied 1504(a)(2).
Parent
Domestication of Foreign Parent on Date 2 was a
reorganization under 368(a)(1)(F).
Parent and Domestic Parent were includible
Subs corporations under 1504(b) from Date 2 through
Subs
Date 3.

Parent consolidated group

Ruling:
The Date 2 transaction did not cause a termination
of the Parent consolidated group, with Domestic
Parent as the common parent of the Parent
consolidated group through Date 3, citing -75(d).
30
 PLR 201505006
shareholder inbound F reorg does not terminate group

Questions:
Public?
The ruling merely cites -75(d), so what
Public
Public Foreign Domestic was the rationale for the Parent groups
Parent
Series B continuation despite Foreign Parent not
p/s
Series A being the shareholder of Domestic
p/s 100% c/s Parent?
Was it based on applying -75(d)(3)
Parent relying on subchapter C fictions for
the 361 exchange and no continuity
Subs requirement?
Subs
Was it based on general application of
Parent consolidated group Rev. Rul. 82-152 principles to
disregard literal rules?

31
Partnership Incorporation Example

Assume that LLC, a partnership for U.S. federal

Members income tax purposes, owns all of the stock of P,
the parent of a consolidated group. LLCs only
asset is the stock of P.
LLC makes an election to be treated as a
corporation for U.S. federal income tax purposes.
LLC As a result, LLC is deemed to transfer all of its
assets and liabilities to Newco in exchange for
Newco stock, and immediately thereafter, LLC
liquidates by distributing the stock of Newco to
P Newco its members (See Treas. Reg. 301.7701-
3(g)(1)(i)).
Should this be considered a reverse acquisition?
Consider Rev. Rul. 84-111.
S P See e.g., PLR 201027030 (Mar. 29, 2010); PLR
200744006 (July 31, 2007), supplemented by PLR
200829007 (Apr. 15, 2008).
S
32
 PLR 201424010 (simplified)
Rev. Rul. 82-152 on different facts

Parent
(nonstock)

Subs

Background:
Parent is a non-profit, non-stock, non-member corporation taxed under 833(a)(1),
and the common parent of a consolidated group (Parent Group) engaged in
business subject to regulation by State Regulator
Parents board of directors has typical powers for the board of a for-profit, stock
corporation, its bylaws provide for a portion of the board to be effectively self-
perpetuating (i.e., elect their successors), and the remaining directors are appointed
by officials of State X and surrounding local governments
Parent owns direct/indirect interests in several subsidiaries and partnerships
33
 PLR 201424010 (simplified)
Rev. Rul. 82-152 on different facts

Parent
(nonstock)
New
HoldCo
(nonstock)

Subs

Proposed Transaction:
Parent will simplify its corporate structure and reorganize its business under the
State X Division Law, rather than its corporate law
For federal income tax purposes, the transaction will be deemed by Parent Group to
consist of the following sequential steps:
New HoldCo will be organized as a State X non-profit, non-stock, non-
member, corporation, it will be the holding company for Parent, its board of
directors will be the same as Parents board, its board will have similar powers,
and it will be taxable under 501(m)
34
 PLR 201424010 (simplified)
Rev. Rul. 82-152 on different facts

New
HoldCo
(nonstock)

Sub

Parent

Subs

Proposed Transaction (contd):

All of Parents proprietary interests are transferred to New HoldCo in exchange
for all of the proprietary interests in New HoldCo (Exchange), and Parents
proprietary interests are recapitalized (Recapitalization) and contributed to Sub
There will be a multi-step internal restructuring of the Parent Groups assets and
subsidiaries
35
 PLR 201424010 (simplified)
Rev. Rul. 82-152 on different facts

New
HoldCo
(nonstock)

Subs

Parent

Subs

Ruling:
(4) The Parent Group will be treated as remaining in existence immediately
following the Exchange, with New HoldCo as the new common parent of the
continuing group. See Rev. Rul. 82-152, 1982-2 C.B. 205

36
 PLR 201424010 (simplified)
Rev. Rul. 82-152 on different facts

Implications:
The facts of Rev. Rul. 82-152 are meaningfully different from the Parent Groups facts, so why
is it authority for concluding that the Parent Group survives (i.e., are the facts of Rev. Rul. 82-
152 simply irrelevant at this point)?
Parent and New HoldCo have no shareholders
A portion of their boards is self-perpetuating
Cf. PLR 200935002 (applying Rev. Rul. 82-152 to mutuals conversion into mutual
holding company structure)
Is there any case in which introducing a shell holding company as a new common parent will
terminate a group?
ECC 201003019 (disregard literal -75(d)(3) requirements)
What if the common parent is insolvent and new holding company shares are issued to
creditors (e.g., PLR 9231036 applied Rev. Rul. 82-152 where shareholders squeezed out)?
What if substantial assets are also removed from the group (e.g., PLR 200451013 did not
apply Rev. Rul. 82-152 where assets were removed and shareholders changed)?
What about a 355 distribution of a majority of group assets?
Should it matter if Rev. Rul. 82-152 is interpreted as applying -75(d)(2)(ii) rather than -
75(d)(3), but -75(d)(3) principles appear to apply where New HoldCo was formed outside the
Parent Group?
37