LTR 200440009 Underscores Need for Guidance Under Substantiality Test

The IRS, through Ltr. Rul. 200440009 and prior rulings, has provided de facto guidance on the substantiality test dealing with outbound stock reorganization. In connection with an outbound stock reorganization, the substantiality test is satisfied if the fair market value of the transferee foreign corporation is at least equal to the fair market value of the US target. The structure of the regulations blunts the relevance of existing substantial compliance rulings. If an outbound stock reorganization technically fails the substantiality test, the parties must seek a substantial compliance ruling - or the transaction will not qualify for an exception to Section 367(a). The IRS could eliminate uncertainty, delay and expense by publishing guidance on the central substantiality issues. Additional guidance would permit tax advisors to issue opinions under circumstances that currently prompt a ruling request under Reg. 1.367(a)-3(c)(9).