On April 25, 2012 the Supreme Court ruled that the overstatement of the basis of property sold, resulting in a substantial understatement of gain, is not an omission from gross income, and so the three year and not the six year statute of limitations applied to the taxpayer’s assessment, meaning the assessment came too late. United States v. Home Concrete & Supply, LLP, 2012 U.S. LEXIS 3274, affirming, 634 F.3d 249 (4th Cir. 2011).
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LTRS 201213013 and 201214012 are the same ruling, evidently issued to a buyer and a seller, in the common scenario where the seller consolidated group wants to sell subsidiary stock and the buyer wants to buy assets and obtain a cost basis; both taxpayers got what they wanted, including placing the target corporation into the buying consolidated group, without having a qualified stock purchase and thereby avoiding the consistency rules.
Facts. Seller and Buyer are both privately owned domestic consolidated groups. Seller has a domestic subsidiary, Seller 2, which holds the stock of Seller’s foreign subsidiaries in two lines of business, directly or indirectly. Seller wants to sell Seller 2. Buyer is a domestic group that wants to buy Seller 2’s assets in one l line of business, principally the foreign business.
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LTR 201214013 applies a 55 year old ruling to treat a subsidiary liquidation as a downstream D reorganization, thus preserving the basis in the liquidating subsidiary’s stock, which would not be the case if it had liquidated under section 332.
Facts. Holdco owns Parent, which owns Target Parent, which owns Target Sub. Holdco wants to wind up owning Target Sub directly, but evidently did not want to lose its basis in its Parent stock and wanted to maintain Parent in existence as an entity.
The transaction involves Target Parent recapitalizing (so that Parent can claim it transferred its assets for stock of the acquirer), Parent converting to DRE status, and Target Parent merging into Target Sub.
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IRS Notice CC-2012-008 announces new Chief Counsel coordination procedures for assertion of the economic substance doctrine, which incorporate the LB&I Directives previously issued.
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LTR 201213011 rules that a domestic corporation can generate a section 301 distribution to its shareholder(s), possibly for the purpose of creating capital gain, possibly to allow use of an expiring capital loss of the shareholder. Sec. 1212(a). The ruling is unusual both for its brevity and for dealing with section 305, which does not attract many letter rulings.
Facts. Taxpayer had outstanding common stock and at least two and possibly three classes of preferred stock: (1) cumulative preferred stock with dividends in arrears, (2) preferred stock convertible into common, and (3) other preferred stock. Taxpayer capitalized the dividends in arrears into some form of stock, which Reg. secs. 1.368-2(e)(5) and 1.305-7(c)(1)(ii) treat under section 305(c) as a deemed distribution to which sections 305(b)(4) and 301 apply. Then taxpayer issued common in exchange for some of the convertible preferred and also for other preferred that evidently was not convertible. Then taxpayer issued warrants to buy more common stock to all of its common shareholders as of the record date.
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A North-South spinoff is a section 355 distribution that is accompanied by a contribution of property from the shareholder to the Distributing corporation. The IRS has consistently ruled in recent years that the contribution will not be integrated with the spinoff. Taxpayers like this result because integrating the contribution with the spinoff could generate tax liabilities: the shareholder and Distributing might be found to have exchanged property in a taxable exchange. Given the state of play allowed by the IRS, the more interesting question is why so many shareholders evidently want to make such contributions incident to spinoffs.
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LTR 201203004 rules favorably on a spinoff of Controlled to public shareholders in which Controlled will be allowed to use in its corporate name the trade name of Distributing, which will be licensed to Controlled by Distributing. This appears to be the first time that a section 355 ruling has explicitly allowed such a close continuing connection between two corporations that split up for the business purpose of conducting separately Businesses A and B.
Facts: Distributing is a domestic public corporation that conducts Businesses A and B. For the usual “fit and focus” reasons it desires to separate the two businesses by spinning off the Business B group to the public shareholders. Preliminary steps include the following:
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The usual Friday release of a large number of letter rulings by the IRS included several rulings of interest on reorganizations and consolidated return issues.
Bankruptcy Reorganization: LTR 201208036 addresses the use of qualified settlement funds, disputed ownership funds and liquidating trusts (all referred to as trusts) to hold both some of the assets of the debtor and the securities of Newco, the corporation into which the debtor was reorganized. This debtor evidently was brought down in part by environmental liabilities. It is not clear what assets the debtor transferred to Newco in exchange for securities, but the debtor also transferred plant and equipment to one trust, other assets to another trust and Newco securities to two other trusts.
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Technocom Business Systems Inc. v. North Carolina Dep't of Revenue; No. COA11-655 (NCAPP 2/21/2012). Taxpayer sold and leased equipment. It also serviced the equipment sold and leased and charged customers for the maintenance service. It also bought property to use in performing its service agreements. It did not pay use tax on the purchases of that property. A final determination was made that taxpayer owed use tax on its purchases of such property. Taxpayer also erroneously collected sales tax on the charges for its maintenance agreements, which were services and not taxable sales of property. A final determination was made that such maintenance agreement charges were not subject to sales tax.
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Just before New Year’s Eve 2011 the Tenth Circuit affirmed the Tax Court’s ruling against the taxpayer Anschutz Company in a case involving a variable prepaid forward contract. Anschutz Co. v. CIR (10th Cir. 2011). The ruling required the taxpayer to recognize immediately the gain on the stock to be sold under the prepaid forward, rather than postponing gain recognition to the future closing of the sale. The court’s reasoning reflected an unfortunate tendency of courts to default to a “benefits and burdens” analysis of ownership of property rather than grappling with the details of the transactions and the code sections at issue.
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LTR 201150021 is a surprising cross chain restructuring ruling that treats the transfer of the assets of one subsidiary of P to a subsidiary at the bottom of another chain of subsidiaries below P as a series of section 351 exchanges and a D reorganization at the bottom of the acquiring chain. This is somewhat inconsistent with Rev. Rul. 78-130, 1978-1 C.B. 140. Although not the focus of the ruling, it appears that what was actually going on with the taxpayer was repatriation of foreign earnings in a most efficient manner, plus a reshuffling of assets to facilitate further repatriations.
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LTR 201203004 illustrates how to split up a public company’s two businesses, while monetizing the tax losses of one of the businesses so that it can have a better chance to survive.
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Effective February 1, 2012 the NCDOR will charge $5,000 for most answers to taxpayer’s questions through “expedited” letter rulings, and more taxpayers will be forced to seek private letter rulings, because the DOR officers are generally unwilling to give oral advice. If not “expedited,” the rulings will cost a minimum of $500. The new policy applies to ruling requests mailed after on or February 1, 2012.
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This article considers the intersection of the corporate law tool known as the “top up option” with the Internal Revenue Code’s section 338, which permits an election that can be favorable after certain corporate stock purchases.
The Top Up Option under Delaware Law. Two step taxable stock acquisitions by tender offer and follow-on squeeze out merger frequently employ what are called top up options. These are best explained by the Delaware Chancery Court opinion that approved their use, Olson v. ev3, Inc., 2011 Del. Ch. LEXIS 34 (Feb. 21, 2011):
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Chief Counsel (Corporate) has advised the field that cumulative preferred stock on which the dividend mandatorily cumulated until redemption (and so section 305(c) applied) was section 1504(a)(4) preferred because it did not have a redemption premium (reasonable or unreasonable). CCA 201152016 (Sept. 1, 2011). As a result, the taxpayer was limited to a 70% rather than a 80% dividends received deduction, which also means that the AMT will apply and section 246A(c) will apply. This was definitely not the tax results on which the taxpayer and the issuer had priced the preferred stock and set its dividends.
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LTR 201150023 allowed a taxpayer to obtain an exemption for income by voluntarily accelerating the income.
The taxpayer is a REIT that converted from C corporation status and thereafter sold property (through disregarded entities) to a lower tier subsidiary of a taxable REIT subsidiary. The sale had been on the installment method taxed under section 453, evidently with no installment to be paid within the ten year recognition period for built in gain taxation under section 1374.
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Earlier this year the General Assembly made significant changes in the statutes authorizing forced combinations of multistate corporate groups for income tax filing. The DOR has been scrambling to figure out how to enforce the old law and the new law, as reflected in three notices it has issued, discussed below, as well as a revised voluntary disclosure program discussed below. The changes offer significant promise for corporate taxpayers.
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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.
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LTR 201140008 is the latest ruling approving the rescission of a corporate transaction. It is unusual in that it does not specifically state that the rescission occurred in the year of the original transaction, and the reason for the rescission is odd.
Facts: P is the common parent of a group containing at least S1, 2, 3 and 4. S3 owns S5, which owns some stock in S6, the rest of which is owned by P. The facts do not state that S5 and S6 are in the group. S1 sells some S3 stock to S2 at book value. Then taxpayer realized that S3 owned some assets not intended to be indirectly owned by S2, so S3 sold those assets to S2 at book value and S2 sold them to S1 at book value. Then taxpayer realized that S3 indirectly owned some of S6.
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Please click here to read an article by Ethan Millar and Kendall Houghton on current developments in unclaimed property. This article was published in the Sept. 12 edition of State Tax Notes.
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