Response
December 18, 1992
December
18, 1992
XXXXX,
Dear
XXXXX:
Your
request for an advisory opinion regarding whether Utah will follow the federal
provisions of IRC 332 relating to the tax-free liquidation of two wholly owned
subsidiaries was referred to the Tax Commission's Auditing Division for their
analysis and recommendation. You indicated that you are representing XXXXX
which is considering the merger of two of its subsidiaries, XXXXX and XXXXX
into XXXXX under IRC 332.
The
division staff recommendation is as follows:
Utah
has not adopted IRC 332 and the Utah statute is silent as to Utah's treatment
of this type of corporate liquidation. Therefore, U.C.A. 59-7-117(2) is the
controlling statute relating to this matter. It states:
"Amounts
distributed in complete liquidation of a corporation shall be treated as in
full payment in exchange for the stock, ...The gain or loss to the distributee
resulting from such exchange shall be determined under Section 59-7-114 but
shall be recognized only to the extent provided in Section 59-7-115..."
U.C.A.
59-7-114(1) states that "... the gain from the sale or other disposition
of property shall be the excess of the amount realized therefrom over the basis
provided in Section 59-7-116, and the loss shall be the excess of such basis
over the amount realized." U.C.A.
59-7-114(3) defines "amount realized" as "...the sum of any
money received plus the fair market value of the property (other than money)
received."
Therefore,
U.C.A. 59-7-117(2) standing alone, provides that a gain or loss would be
recognizable in a corporate liquidation (unless expressly not recognizable
under U.C.A. 59-7-115) for the difference between the basis of the assets and
their fair market value. Since, there is no provision in U.C.A. 59-7-115 which
would exclude a complete liquidation from the provisions of 59-7-114,
59-7-117(2) standing alone, would create a taxable event in a complete
liquidation of a subsidiary into its parent.
However,
U.C.A. 59-7-108(9) provides that amounts claimed as depreciation, cost
recovery, etc. are the same as used in determining tax liabilities under the
IRC. This section clearly indicates that the legislative intent was to keep the
Utah basis of assets the same as it is for federal purposes.
U.C.A.
59-7-117(2) and 59-7-108(9) potentially create conflicting provisions in the
case of an IRC 332 liquidation. Since, the recognition of gain or loss under
U.C.A. 59-7-117(2) would create a different basis of assets for Utah purposes
than the basis would be under federal law, which is contrary to the provisions
of U.C.A. 59-7-108(9), Utah will follow the tax-free provisions of IRC 332.
Based
upon the facts presented in your letter, we are in agreement with the Auditing
Division's recommendations. Obviously, if there are deviations from these
facts, this opinion may be negated.
If
you do not agree with this determination, you may appeal to the Tax Commission
for a formal hearing. The results of that hearing would constitute a
declaratory judgement and be appealable to the Utah State Supreme Court.
A
Notice of Appeal Rights and a copy of the Utah Taxpayer Bill of Rights are
attached. In contacting the Tax Commission, if special accommodations are
needed in accordance with the Americans with Disabilities Act, please call
(801) 530-6290, (801) 530-6077 or TDD (801) 530-6269 allowing three working
days notice.
For
the Commission
Joe
B. Pacheco
Mr.
H. R. Hansen, Chairman
Utah
State Tax Commission
Heber
M. Wells Building
160
East Third South
Salt
Lake City, Utah 84134-0300
Dear
Chairman Hansen:
We
are writing on behalf of our client, XXXXX (XXXXX), to request an advisory
opinion regarding the proposed liquidation of two wholly-owned subsidiaries
into their parent company. This matter has been discussed with XXXXX in advance
of our submitting this request. We have included below a discussion of the
background of the entities involved and a complete description of the proposed
transaction. The company wishes to
finalize this transaction before the close of the current calendar year and we
therefore respectfully request a response to our inquiry by December 20, 1992,
if possible.
BACKGROUND
XXXXX,
a California corporation domiciled in California, is the parent of a group of
subsidiaries doing business in a number
of states and foreign countries. XXXXX
and its subsidiaries design, manufacture, and market various electronic
components. The company is privately held and headquartered in XXXXX,
California.
XXXXX
(XXXXX), a California corporation domiciled in Utah, is a wholly-owned XXXXX
subsidiary which designs and manufactures electronic sensing and control
devices. The company occupies a manufacturing facility in XXXXX, Utah.
XXXXX(XXXXX),
a California corporation domiciled in Utah, is a wholly-owned XXXXX subsidiary
which designs and manufactures resistive networks. The company occupies a
manufacturing facility in XXXXX, Utah.
Prior
to 1989, both XXXXX and XXXXX were operated in Utah for a number of years as divisions
of XXXXX. Due to unfavorable business and economic conditions, these operations
were spun-off as wholly-owned subsidiaries in December 1988. Recently,
substantially improved business and economic conditions both internally and
externally have made the merger of these two subsidiaries back into the parent
a favorable option. XXXXX has
determined that numerous financial and operating efficiencies could be achieved
by once again operating XXXXX and XXXXX as divisions of XXXXX. It is
anticipated that manufacturing operations in these two divisions would continue
in Utah for the foreseeable future.
PROPOSED
TRANSACTION
XXXXX
is considering a complete liquidation of two wholly-owned subsidiaries, XXXXX
and XXXXX, into XXXXX. It has been determined that this transaction will
qualify for nontaxable treatment for federal income tax purposes under Internal
Revenue Code Section (IRC §) 332. Utah law appears to follow the federal
provisions for tax-free reorganizations, however, the Utah statutes are silent as
to whether or not Utah will follow the federal provisions under IRC §332.
Therefore, we are requesting an advisory opinion on the State of Utah's
position with regard to tax-free liquidations of wholly-owned subsidiaries
which qualify under IRC §332.
If
you have any questions or need additional information regarding this proposed
transaction please do not hesitate to contact me directly. Again, due to the
timing of this liquidation, we would like to thank you in advance for your
prompt attention to this matter.
Very
truly yours,
XXXXX
XXXXX,
Partner
The
Utah State Tax Commission will allow this tax-free liquidation as provided
under IRC §332 for the indicated subsidiaries.
UTAH
STATE TAX COMMISSION