PLR Confirms Section 332 Coverage of Check-The-Box Election of Wholly-Owned Subsidiary

When an existing corporation makes a check-the-box election to be a disregarded entity, this is treated as a corporate liquidation. This can result in gains to the electing entity under Code Section 337 pursuant to a deemed sale of assets, and gains to the shareholder on a deemed disposition of its stock.

Regs. Section 301.7701-3(g)(2)(ii) implies that Code Section 332 applies to a conversion of an existing corporation to a disregarded entity when it is owned wholly by a domestic parent corporation. A recent private letter ruling expressly confirms this. The ruling further confirms the application of all of the benefits and consequences of a Code Section 332 liquidation applying at the time of the election (when otherwise applicable), including no gain or loss to the parent corporation, no gain or loss to the electing subsidiary, carryover basis for the subsidiary’s assets, carryover holding periods for those assets, and carryover of corporate attributes under Code Sections 381-384.

PLR 201452016, December 26, 2014