This advisory discusses United States v. Gary Woods, 471 Fed. Appx. 320 (5th Cir. 2012), affirming per curiam, 794 F. Supp. 2d 714 (WD Tex. 2011), which will be reviewed by the Supreme Court under its writ of certiorari issued at the request of the United States on March 25, 2013.
The advisory is provided in PDF on the Alston & Bird website: www.alston.com/advisories/fed-tax-April2013
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On Feb. 11, 2013, a regular Tax Court opinion was issued in a case that the opinion said was of first impression, ruling against Bank of New York Mellon (BNY). 140 T.C. No. 2. BNY had engaged in a cross-border transaction called STARS that KPMG created around 2000 in cooperation with the foreign bank Barclays. Barclays desired to obtain UK tax credits and deductions that required making an investment in a UK trust in conjunction with investments by a U.S. bank. The benefit for the U.S. bank was to be receipt as a loan of Barclays’ investment of $1.5 billion in the trust, with a very reduced interest rate.
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In the late 20th century, the IRS made a combination of unrelated decisions resulting in a proliferation of upstream C reorganizations. This advisory discusses how the ease with which an upstream C reorganization can occur can cause problems.
The advisory is provided in PDF on the Alston & Bird website:
www.alston.com/advisories/federal-tax-advisory-february-2013
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All global banks currently being audited by the IRS, which have engaged in cross-border withholding planning for clients, should take careful notice of AM 2012-009.
This GLAM explains to IRS LB&I how to assess foreign affiliates of domestic banks that did not withhold tax on foreign stock borrowing and back-to-back swaps, in reliance on Notice 97-66. The basic advice is to assert the economic substance doctrine. Fortunately, the advice applies only to transactions prior to the partial codification of the doctrine in 2010, which happened to coincide with legislation fixing the Notice 97-66 problem.
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This advisory discusses LTR 201250004, which involved a domestic corporate Parent’s purchase of a foreign group that had one domestic subsidiary, and summarizes the specific steps that were taken in this situation.
The advisory is provided in PDF on the Alston & Bird website:
www.alston.com/advisories/federal-tax-advisory-january-2013
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This advisory discusses a general legal advice memorandum (GLAM) in which the IRS Chief Counsel advises the field that a subsidiary does not enter a corporate group when the common parent buys the stock needed for affiliation for a note carrying below-market interest so as to compel the seller to exercise its right to take the stock back after two years.
The advisory is provided in PDF on the Alston & Bird website:
www.alston.com/advisories/federal-tax-advisory-december-2012
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This advisory discusses LTR 201240017—the world’s longest letter ruling, 111 pages in PDF format. Not surprisingly, it is a Section 355 ruling. It was issued three-and-a-half months after the original submission, with those dates bridging Christmas and New Year’s Day. There were seven additional submissions from the taxpayer in the interim. The release of the ruling was delayed for a couple of months.
As best as this reader can tell from spending a couple of hours with the ruling, there is not groundbreaking legal news in it, but then you can’t be sure about 111 pages. Probably the most interesting points about the ruling are points that normally escape attention: (1) why did the taxpayer go to the trouble and expense to get this ruling, and (2) why does the Chief Counsel provide this sort of super service?
The advisory is provided in PDF on the Alston & Bird website:
www.alston.com/advisories/federal-tax-report-november-2012
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TAM 201214021 appears to reconsider an issue addressed in CCA 201104031, issued about a year earlier. Both involved versions of a combination of a type of forward contract with the settling of the contract by physical delivery of borrowed shares—that is, a short sale. Both conclude that the value of the forward at the time of delivery of the borrowed shares should be the amount of gain recognized by the forward seller. The TAM is better reasoned than the CCA, but still just announces a conclusion without any on point authority.
The CCA’s facts were like the simplified Example 1, below. The CCA is discussed in Cummings, “Variable Prepaid Forward or Short Against the Box or Both?” 38 DTR J-1 (2/25/2011).
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This advisory discusses LTR 201222014, which ruled that persons contributing property to a new corporation in exchange for stock can form a control group with other persons contributing the stock of another corporation (target), and therefore enjoy Section 351 nonrecognition treatment. This might seem obvious to practitioners familiar with combined reorganization/351 contributions that were first treated favorably under Section 351 by LTR 9143025. The transaction often takes the form of a double dummy drop down, whereby a new holding company puts the contributed property in one subsidiary and holds the acquired target corporation as the other subsidiary.
The advisory is provided in PDF on the Alston & Bird website:
www.alston.com/advisories/federal-tax-report-september-2012
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Short sales are either everyday events or mysterious to most people. This advisory discusses the tax implications of short sales in the corporate world, as featured in a recent transaction in which a controlled foreign corporation bought its parent’s publicly traded stock and used the stock as part of the acquisition currency to buy a domestic subsidiary.
The advisory is provided in PDF on the Alston & Bird website:
www.alston.com/advisories/federal-tax-advisory-august-2012
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LTR 201228002 involves a plain vanilla group structure change in a consolidated group owned by a foreign parent. The ruling is so obvious that one wonders why the taxpayer sought it. The explanation likely lies in the substantial tax savings that can be facilitated by the reverse acquisition. It is likely that someone at the taxpayers’ office said “this is too good to be true, no matter how clear my tax director says the results are, I don’t mind paying to get an IRS seal of approval on the transaction, no matter how many caveats it carries.”
The following example, with made up numbers, shows how tax benefits might be facilitated.
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LTRs 20122014, 20122015, 20122016, and 20122017, are identical rulings showing how the “control immediately after” requirement of section 351 really doesn’t mean that. They also show how to resolve the classic problem of a Bigco Corp. acquiring the corner grocery store tax free for Bigco stock, despite the fact that the grocery owners do not control Bigco and the grocery was not incorporated.
Facts: Three individuals owned LLC, a partnership. Bigco wanted to acquire LLC for Bigco stock in a tax free exchange. We know that the individuals could not incorporate the LLC and reorganize it into Bigco. Rev. Rul. 70-140, 1970-1 C.B. 73. Assuming LLC is smaller than Bigco, we know that the individuals could not acquire 80% control of Bigco by directly exchanging LLC for Bigco stock, so a direct section 351 exchange is not possible. How about an indirect section 351 exchange?
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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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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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