The IRS has issued a private letter ruling (PLR 2014-05-009) addressing whether an option to acquire a partnership interest should be taken into account for purposes of determining whether the buyer acquired the target partnership's corporate subsidiaries in a "covered transaction."
Treas. Reg. Section 1.263(a)-5 provides various rules regarding the treatment of costs incurred in an acquisition of a trade or business. In particular, the regulations provide a favorable rule that permits taxpayers to treat certain investigatory costs as nonfacilitative costs if incurred in a covered transaction.
In PLR 201405009, a partnership owned all the common stock of multiple foreign corporations. In a taxable acquisition, a corporate buyer acquired a partial ownership interest in the target partnership (presumably less than 50%) and an option to acquire the remaining ownership. The issue was whether the option to buy the remaining ownership of the partnership was considered an option to buy the partnership's foreign subsidiaries for purposes of the covered transaction rules.
Treas. Reg. Sec. 1.263(a)-5(e)(3)(ii) states that a taxable acquisition of an ownership interest is a covered transaction if, immediately after the acquisition, the buyer and the target are related within the meaning of Section 267(b) or Section 707(b). Two corporations are related under Section 267(b) if they are members of the same controlled group under Section 1563 (substituting "more than 50%" for "at least 80%"). For purposes of Section 1563, an option to acquire stock is considered an ownership interest in the underlying stock.
The IRS ruled that the option to buy the partnership should be treated as an option to acquire the foreign subsidiaries' stock under Section 1563. As a result, the buyer and the foreign subsidiaries were considered related under Section 267(b) immediately after the acquisition. Thus, the buyer's indirect acquisition of the subsidiaries through the taxable acquisition of the partnership was treated as a covered transaction, and the generally favorable rules of Treas. Reg. Sec. 1.263(a)-5 applied.
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