Transfer of Shares in CFCs to Qualify as Tax-Free

November 30, 2010, 07:25 PM

On November 1, 2010, the IRS issued a letter ruling (LTR 201043021) permitting the tax-free transfer of shares in several controlled foreign corporations (“CFCs”) to a new holding company under Sections 351(a) and 357(a) of the Internal Revenue Code (“IRC”). In essence, three entities were organized in three separate countries, all classified as corporations and all qualified as CFCs within the meaning of IRC Section 957(a). All of the equity interests of the CFCs were owned by a holding company that was organized in the United States and taxed as a corporation. The holding company was owned by a parent corporation that desired to transfer the CFCs to a new holding company (“NewCo”) for several business reasons. To accomplish this, the holding company formed NewCo in a foreign company and transferred the stock of the CFCs to NewCo in exchange for voting and nonvoting stock in NewCo. The IRS determined that no gain or loss would be recognized by the holding company or NewCo upon the transfer, exchange, and receipt of the stock of the CFCs. Furthermore, the IRS noted that the holding company’s aggregate basis of the received stock would remain the same as the stock of the CFCs, as allocated between the voting and nonvoting stock received. Likewise, the basis of the shares of stock received by NewCo would remain the same as the basis of those shares in the holding company before the transfer. Finally, the IRS provided that the holding period of the stock would include the time that HoldCo. held the stock pursuant to IRC Section 1223. Please note that letter rulings cannot be used or cited as precedent. – Elaina L. Blanks