LTR 201319009 seems to be an odd ruling, because the taxpayer sought a ruling that it had to capitalize certain costs of an acquisition through use of a double dummy structure. However, the taxpayer actually was limiting its capitalization by obtaining a ruling that a section 351 exchange with boot was a “covered transaction” for purposes of Reg. Section 1.263(a)-5(b).
Facts. Company 1 wanted to acquire Company 2. Company 1 created Parent. Parent created two mergersubs. One mergersub merged into Company 1 for Parent stock. The other mergersub merged into Company 2 for Parent stock and cash. The amount of cash is not stated but we know it had to be more than 20 percent of the consideration because the merger did not qualify under section 368(a)(2)(E).
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The IRS issued its annual no-ruling revenue procedure, Rev. Proc. 2013-3, which added several items relating to Section 355 distributions.
The IRS is studying, and therefore, will not rule on (1) whether “control” is distributed if the distributing corporation acquired control by virtue of some transaction involving stock of the controlled corporation having different voting power, and (2) whether debt is exchanged for stock of the controlled corporation under Section 355 if the debt was issued in anticipation of the spinoff.
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Sometimes, a corporation wants to distribute stock of a subsidiary to its shareholders in a taxable transaction and does not want Section 355 to apply to prevent income recognition to both the corporation and the shareholders. Perhaps the corporation has expiring losses it can use to offset any Section 311 gain, and perhaps the shareholders wanted to enjoy the waning moments of the 15 percent tax rate on dividends in 2012.
Of course, Section 355 is not elective. Therefore, the corporation may have to do something to avoid the application of Section 355. One thing to do is to state that it is distributing the stock so that its shareholders can sell it, or sell the stock of the distributing corporation, or both. This appears to have been the plan of the taxpayer in LTR 201252014.
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Twenty-three years after it was enacted in 1989, the Treasury issued proposed regulations interpreting section 172(h), the corporate equity reduction transaction (CERT) loss carryback disallowance rule dating from the heyday of the leveraged buyouts. Most of us have tried to remember this rule as one aimed at preventing carrying back a loss generated by large interest deductions, and obtaining a refund, when the loan causing the interest deductions was incurred to make a large equity purchase—hence a “corporate equity reduction.”
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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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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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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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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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LTR 201133003 (released 8/19/11) is a spin-off ruling that illustrates why the standard advice is to get a ruling on a spin-off. The taxpayer did an internal spin-off without a ruling and then planned to have Controlled accept a capital contribution from an unrelated investor that would result in the disaffiliation of Controlled. Naturally, the investor was interested in the prior spin-off being a non recognition transaction under section 355 because the tax sharing agreement between Controlled and the rest of the group probably loaded any tax cost from failure of the spin-off onto Controlled.
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This presentation was given by Tim Fallaw at this year's CBIZ and MHM Annual Conference.
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LTR 201129005, released July 22, 2011, is the same as LTR 201123030, released June 10. Presumably they were issued to different parties to the same split-off; the reason for the timing difference is unknown. One thing that is known is that the Chief Counsel had trouble issuing the rulings: the taxpayer submitted the ruling request just before Christmas in 2009.
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The new LB&I Directive on the economic subject doctrine (ESD) (dated July 15, 2011) probably could not be much better for taxpayers.
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Just released LTR 201127004 is like LTR 200952032, but they are near the only ones that treat an intragroup liquidation/reincorporation as a section 368(a)(1)(C) reorganization. Here is the transaction:
· Parent owns Sub, which owns two businesses.
· Parent wants to hold one business directly, leaving the other business in Sub.
· Parent causes Sub to turn into a disregarded LLC, distribute one of the businesses to Parent and then Sub “reincorporates.”
· As a result, Parent owns the distributed business directly and owns the Sub/corporation, which still owns its other business.
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LTR 201126003 shows an alternate way to obtain the benefits of the yet-to-be-effective section 336(e) election for the distribution of stock of a subsidiary to shareholders.
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Say you are a foreign person that owns the Parent of a U.S. consolidated group. You would like (1) to "buy" part of the group (perhaps to create a foreign tax benefit through basis?), (2) to eliminate intercompany debt so that the part you "buy" will not owe money to the remaining part of the group (so, if perchance you sell one part, unrelated owners will not have your debt), (3) you would like to make sure that none of the substantial restructuring needed to effect these transactions creates U.S. gain recognition, and (4) oh by the way, arranging to own two U.S. subs rather than one is always a nice idea if you think you might sell one (nothing definite, of course).
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The Administration's 2012 budget proposal would repeal Section 351(g) and nonqualified preferred stock. Nonqualified preferred stock is debt-like preferred stock that is treated as boot in a Section 351 exchange or a reorganization, for purposes of the shareholder's taxation; however, it is treated as stock for other purposes. Although the 1997 statute authorizes regulations, only minor regulations have been issued on nonqualified preferred stock.
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