Small Business Corp Seeks Change to Transition Tax Regs

October 9, 2018

Internal Revenue Service
Courier's Desk
CC:PA:LPD:PR (REG-104226-18)
1111 Constitution Avenue NW
Washington, DC 20224

Dear Sir or Madam:

On behalf of Saltchuk Resources, Inc (“Saltchuk”), we respectfully submit this comment letter providing recommendations with respect to proposed regulations (REG-104226-18) under I.R.C. § 965, which the Department of Treasury and the Internal Revenue Service issued on August 1, 2018 (the “Proposed Regulations”). More particularly, this comment letter addresses issues raised by the Proposed Regulations that involve the application of the election to pay, in installments, the net tax liability under I.R.C. § 965 (the “Section 965 Liability”).

I. Background

The Proposed Regulations provide that if: (i) a person makes an election to pay its Section 965 Liability in installments under I.R.C. § 965(h) (the “Section 965(h) Election”), (ii) any one of the events described in Treas. Reg. § 1.96s-7(b)(3)(ii) (the “Acceleration Events” and each of the Acceleration Events, an “Acceleration Event”) occurs subsequent to the Section 965(h) Election, and (iii) Treas. Reg. § 1.965-7(b)(3)(iii) does not apply, the unpaid portion of such person's Section 965 Liability will be due on the date of the Acceleration Event.

One such Acceleration Event, as described under Treas. Reg. § 1-965-7(b)(3)(ii)(F), occurs when, in the case of a consolidated group, the group ceases to exist (including by reason of the acquisition of a consolidated group within the meaning of Treas. Reg. § 1.1502-13(j)(5)) or the group otherwise discontinues in the filing of a consolidated return.

Under Treas. Reg. § 1.965-7(b)(3)(iii), however, if: (i) the person electing to pay its Section 965 Liability in installments is an “eligible section 965(h) transferor” and (ii) such eligible section 965(h) transferor enters into an agreement as required by Treas. Reg. §§ 1.96s-7(b)(3)(iii)(A)(2) and (b)(3)(iii)(B), then the unpaid portion of such transferor's Section 965 Liability will not be due on file date of the Acceleration Event (i.e., the eligible section 965(h) transferor may continue to pay its Section 965 Liability in installments). An “eligible section 965(h) transferor” is a person with respect to which any of the acceleration events described under Treas. Reg. § 1.965-7(b)(3)(iii)(A) (the “Covered Acceleration Events” and each of the Covered Acceleration Events, a “Covered Acceleration Event”) occurs.

One such Covered Acceleration Event, as described under Treas. Reg. § 1.965-7(b)(3)(iii)(A)(1)(iv), occurs when: (i) an event is described under Treas. Reg. § 1.965-7(b)(3)(ii)(F) due to the acquisition of a consolidated group within the meaning of Treas. Reg. § 1.1502-13(j)(5), and (ii) the acquired consolidated group members join a different consolidated group as of the day following the acquisition (the “Terminating Group Exception”). The acquisition of a consolidated group within the meaning of Treas. Reg. § 1.1502-13(j)(5) includes the acquisition of: (i) the assets of the common parent of the terminating group in a reorganization described in I.R.C. § 381(a)(2), or (ii) the stock of the common parent of the terminating group.

II. The Terminating Group Exception

Saltchuk agrees that if one of the Accelerations Events is a Covered Acceleration Event and the eligible section 965(h) transferor enters into an agreement as required by Treas. Reg. §§ 1.965-7(b)(3)(iii)(A)(2) and (b)(3)(iii)(B), a taxpayer should not be required to settle the unpaid portion of the Section 965 Liability on the date of the Acceleration Event.

However, with respect to the Terminating Group Exception, Saltchuk believes this Covered Acceleration Event should extend to a consolidated group that terminates as a result of being wholly owned by a corporation (“P”), which was not an includible corporation within the meaning of I.R.C. § 1504(b) at the time of the Section 965(h) Election but becomes an includible corporation after the Section 965(h) Election and P and the former group members join in the filing of a consolidated group immediately after such event. The Terminating Group Exception should extend to such an event because, although it does not involve an acquisition of the stock of the common parent, such an event generally does not result in any ownership change with respect to the common parent and the consolidated return filings after such an event are the same as those of a Covered Acceleration Event.

Saltchuk, a corporation that is currently treated as a small business corporation within the meaning of I.R.C. § 1361(b) (an “S Corp”), wholly owns Aqua Acquisition Corp (“Aqua”), the common parent of a consolidated group (the “Aqua Group”). If Saltchuk were to revoke its election to be treated as an S Corp, it would convert into an includible corporation within the meaning of I.R.C. § 1504(b), and thus cause the Aqua Group to terminate.

Under Treas. Reg. § 1.1502-75(d)(1), a group generally remains in existence for a tax year if the common parent remains as the common parent and at least one subsidiary that was affiliated with such common parent at the end of the prior year remains affiliated with it at the beginning of that year. If Saltchuk revokes its election to be treated as an S Corp and is thus an includible corporation, Aqua will cease to be the common parent of the Aqua Group as a result of being wholly owned by another includible corporation — Saltchuk. While Treas. Reg. §§ 1.1502-75(d)(2) and (3) provide two exceptions to this general rule (such that the consolidated group would remain in existence despite a violation of the general rule), the mechanical application of neither rule allows the Aqua Group to remain in existence, and thus Saltchuk and all includible corporations would need to elect to file a consolidated federal income tax return as of the day after termination of the Aqua Group.

Thus, Saltchuk's revocation of its election to be treated as an S Corp would result in an Acceleration Event under Treas. Reg. § 1.96s-7(b)(3)(ii)(F). Further, because the Terminating Group Exception only applies to acquisitions and the revocation of an election to be treated as an S Corp does not result in an actual or deemed acquisition, Saltchuk will not be able to avail itself of the Terminating Group Exception as it is currently written despite the lack of any ownership change with respect to Aqua.

While Saltchuk believes this result was not the intention of the Department of Treasury and the Internal Revenue Service, the unpaid portion of the Aqua Group's Section 965 Liability would be accelerated upon a termination of Saltchuk's status as an S Corp unless the Covered Acceleration Events were extended to the type of transaction discussed above. Accordingly, Saltchuk recommends the final regulations include, as a Covered Acceleration Event, any transaction whereby the former consolidated group joins another consolidated group in a transaction whereby immediately after such transaction, the indirect owners of the former consolidated group are the same as those immediately before such acquisition. In such instances, Saltchuk recommends that the eligible section 965(h) transferee be the agent (within the meaning of Treas. Reg. § 1.1502-77) of the new consolidated group.

III. Conclusion

Thank you in advance for your consideration of the above comments. Saltchuk is happy to participate in any further discussions concerning the proposed regulations under Treas. Reg. § 1-965-7(b)(3)(iii)(A)(1)(iv). Should you have additional questions, please contact one of the following:

Very truly yours,

Michael DiFronzo
Partner, PricewaterhouseCoopers LLP
Washington, DC

Cc:
Ms. Brenda Zent, Special Advisor to the International Tax Counsel, Office of Tax Policy, U.S. Department of Treasury

Mr. Douglas L. Poms, International Tax Counsel, U.S. Department of Treasury

Mr. Brian Jenn, Deputy International Tax Counsel, U.S. Department of Treasury

Ms. Margie Rollinson, Associate Chief Counsel (International), Internal Revenue Service

Mr. Daniel McCall, Deputy Associate Chief Counsel (International — Technical), Internal Revenue Service

Mr. John J. Merrick, Senior Special Counsel to the Associate Chief Counsel (International), Internal Revenue Service

Leni C. Perkins, Attorney-Advisor, Branch 2, Office of Associate Chief Counsel (International), Internal Revenue Service

Karen J. Cate, Tax Law Specialist, Branch 3, Office of Associate Chief Counsel (International), Internal Revenue Service