September 13, 2022
Chief Counsel memo clarifies process for determining assessment statute expiration date in multi-year IRC Section 332 liquidation
An IRS Chief Counsel memorandum (AM 2022-002, September 2, 2022) concludes that the IRS should not only rely on the Form 952 when determining the ASED for a multi-year IRC Section 332 liquidation, but should thoroughly review all the information filed by the parent and subsidiary to identify the tax year in which the first distribution was made.
The memo was written in response to an LB&I Workflow Coordination Liaison (WCL) request about how to determine the ASED if the parent has not yet filed its return for its third tax year beginning after the end of the tax year of the first liquidating distribution.
IRC Section 332 liquidations
Under IRC Section 332, certain liquidations are nontaxable events such that the parent recognizes neither gain nor loss if (1) the parent corporation owns 80% or more of a subsidiary; (2) the parent receives, or is deemed to receive, distributions of property from that subsidiary in complete cancellation or redemption of all of the subsidiary's stock; (3) the subsidiary distributes all of its property within one tax year (the one-year alternative) or within three tax years after the close of the tax year during which it made the first of a series of distributions (the multi-year alternative).
When using the multi-year alternative, the parent must file Form 952 to waive the statute of limitations on assessment for each of its tax years that falls wholly or partly within the liquidation period. The statute of limitations waiver only applies to the issues pertaining to the IRC 332(b) liquidation. If the parent does not file Form 952 for all the years that fall within the liquidation period, the IRS may deny nonrecognition treatment that otherwise would have qualified under IRC Section 332.
Filing Form 952 extends the parent's period of assessment for at least four years for each tax year for which it is filed. This extended period begins when the usual three-year limitation period expires and ends four years (on the ASED) after the later of (1) the due date of the parent's tax return for the third tax year beginning after the end of the tax year of the first liquidating distribution (without extensions) or (2) the date on which that return is filed.
Memo clarifies ASED determination
The memo addresses the question of the proper ASED if the parent has not yet filed its return for its third tax year beginning after the end of the tax year of the first liquidating distribution. The memo says the IRS should assume that the ASED is the earliest possible date and adjust that date later if it receives information from the fourth year after the first distribution.
The memo also clarifies that the ASED is the same for all tax years during which the parent received a liquidating distribution from the subsidiary and for which it filed Form 952.
Sometimes it is not clear when the subsidiary made its first distribution, according to the memo, but it is the understanding of the Chief Counsel that "the current practice is to treat the taxable year for which the initial Form 952 was filed as the year of the first liquidating distribution." The memo recommends modifying that practice by thoroughly reviewing all the information filed by the parent and subsidiary to identify the tax year in which the first distribution was made. Specifically, the IRS should review (1) Form 952, (2) Form 966, Corporate Dissolution or Liquidation, (3) when the first distribution was made, (4) each statement the parent filed with its income tax returns and (4) the events that occurred before the liquidation plan was formerly adopted.
The memo also specifies who may execute Form 952 on behalf of the parent for each tax year.
Memo provides corporate technical insights
Although the memo principally addresses ASED considerations, it also provides corporate technical insights from the Chief Counsel.
First, the IRS states that "[a]ny case in which Parent attempts to retrospectively render [IRC S]ection 332 inapplicable to a complete liquidation solely due to its failure to file Form 952 should be coordinated with Area Counsel. Such cases should be closely scrutinized, and the reported tax treatment challenged when appropriate." This approach by the IRS is consistent with case law that has prevented taxpayers from using the Form 952 requirement as a mechanism for busting the application of IRC Section 332. See, e.g., Barkley Company of Arizona, TC Memo 1988-324.
Second, the IRS notes that a plan of liquidation may be adopted informally, before formal action by the subsidiary's board of directors, so distributions under such a plan may take place before a plan of liquidation is formally adopted. The IRS also notes that actions by the parent or subsidiary (including entering into negotiations or agreements) before formal shareholder adoption of the plan could be interpreted as indicating a prior informal adoption of a liquidation plan, citing Revenue Ruling 75-521 (pre-liquidation stock purchase is not a plan adoption); Revenue Ruling 70-106 (pre-liquidation redemption is a plan adoption); and Revenue Ruling 65-235 (informal shareholder agreement is a plan adoption) for this proposition.
Third, the IRS states that the agent of the consolidated group (generally the common parent corporation) must sign the Form 952 if the parent is a consolidated group member and has filed a petition in bankruptcy. Implicit in this statement is that a member in bankruptcy remains a member of the consolidated group, meaning that, in the Chief Counsel's view, the creditors' rights do not preclude the consolidated group's satisfaction of the IRC Section 1504(a) ownership requirements with respect to the bankrupt member. This is consistent with the IRS's long-standing views of IRC Section 1504(a) ownership. See, e.g., Revenue Ruling 63-104.
Chief Counsel Memo AM 2022-002 reminds taxpayers that filing Form 952 is a specific requirement for IRC Section 332 treatment for a complete liquidation under the multi-year alternative under IRC Section 332(b)(3). Failure to file Form 952 may result in the IRS denying nonrecognition treatment to a complete liquidation that would otherwise have qualified under IRC Section 332.
The Memo provides a useful overview of the ASED's mechanics when a Form 952 is filed. Moreover, the Memo provides specific guidance on who has signatory authority to execute a Form 952. The Memo should be read in conjunction with the IRS's Internal Revenue Manual (IRM) Section 184.108.40.206.2.3.1.
In addition, the memo usefully reiterates the IRS's positions with respect to busting IRC Section 332 liquidations, the timing of the plan of liquidation adoption and the continuation of consolidated group membership in financially stressed situations.