LTR 201140009 ruled that a circular flow of cash can be used to effect a section 351 exchange, evidently for foreign tax reasons; it was treated as if the cash flow did not occur. Evidently the taxpayer felt it needed a letter ruling here due to the circular flow of cash.

Facts: The US Parent and S1 and S2 formed a consolidated group. S1 and S2 owned a foreign partnership that owned the foreign opco, FS4.

  • The foreign partnership checked the box to be treated as a corporation for US tax purposes, FS3.
  • Then FS3 evidently converted to be a de jure corporation under foreign law.
  • Then P borrowed money and lent it to S2, which exchanged the money with FS3 for its stock.
  • Then S2 sold FS4 to FS3 for the money just contributed to FS3, which was paid back to P, which paid off its note.
  • A gain recognition agreement was entered with respect to both the conversion of the partnership to a corporation and to the contribution of the FS4 stock to FS3.
  • Ruled: the conversion of the checked entity to a de jure corporation was a F reorganization; the transitory loan/transfer of FS4 stock was a section 351 exchange of FS4 stock for FS3 stock.

For further information on circular flows of cash, see Cummings, Circular Flow of Cash, 64 Tax Lawyer No. 2 (2011).