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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In my recently published book, The Supreme Court, Federal Taxation and the Constitution, I review several constitutional issues that could impact the coming consideration of broad scale tax reform in Congress. It is likely that Congress will be more attentive to possible constitutional issues than it was when it enacted the health care tax provisions in 2010. The failure to clearly label that tax as a tax fueled multiple lawsuits against the tax that ultimately had to be decided by the Supreme Court in a surprising split decision in which Chief Justice Roberts wound up siding with the supporters of the tax.
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This advisory discusses recently released Field Attorney Advice whereby the IRS reaffirmed its position that gain on the sale of a partnership interest by a nonresident alien may be subject to U.S. tax as effectively connected income (ECI). The taxpayer was also liable for annually assessed interest on the deferred tax on the sale under the installment sale rules.
The advisory is provided in PDF on the Alston & Bird website: www.alston.com/advisories/Int-tax-march-2013
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LTR 201308001 rules on sections 305 and 306 are bread and butter subchapter C provisions that were designed for “tax shelters” that are so quaint and old fashioned that the sections mostly serve today as traps for the unwary. The ruling also involves tracking stock, a more up-to-date matter.
Facts. Taxpayer is a closely held corporation, the parent of a consolidated group. All of its shareholders are either directors or employees. Employees have been allowed to buy stock based on book value. The stock has become too expensive due to group members’ ownership of substantial investment assets that are dispersed throughout the group members—possibly cash. The ruling refers to these investment assets as working capital.
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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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LPCiminelli Interests, Inc. v. United States, 110 AFTR 2d 2012-6631 (W.D. N.Y. 2012) ruled that a consolidated group did not have to amend its returns to assert that a subsidiary became worthless before the year the IRS claimed it was worthless. This ruling confirms the general rule that taxpayers have no obligation to amend a previously filed return. It also illustrates the pitfalls of dealing with broken subsidiaries, and the wisdom of sometimes doing nothing.
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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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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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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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Pepsico, Inc., and Pepsico Puerto Rico, Inc. v. Commissioner, T.C. Memo 2012-269, ruled that the U.S. holder of an ambiguous security issued by its foreign affiliate did not have to treat the periodic payments received as interest, even though the affiliate was deducting interest paid under Dutch tax law.
Keys to taxpayer victory. The keys to the taxpayer victory were the following: (1) the issuer was a corporation and not a partnership; taxpayers have lost all recent debt-equity disputes with the IRS in the partnership context; (2) the hybrid security was carefully crafted to have equity-like characteristics in some factual circumstances; (3) the court was unwilling to ignore the possibility that those circumstances would not arise because the holder effectively controlled the issuer; and (4) the tax benefit achieved by the taxpayer was not in one of the hot button areas like foreign tax credit generators or “sale” of historic rehabilitation tax credits.
Two features of the opinion are out of the ordinary: (1) the taxpayer actually got credit for carefully negotiating different treatment of debt and equity in the United States and Holland, and (2) the relatedness of the parties did not count against the taxpayer.
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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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Dividends received by December 31, 2012, may be the last dividends in decades to be taxed at a rate as low as 15 percent. Therefore, common corporate practice of mailing dividends on December 31, 2012, or even in the first week of January 2013, may have the effect of unnecessarily forcing shareholders to pay tax that could have been avoided by mailing a week or so earlier. The downside to the corporation of accelerating the dividend mailing date, or even paying a special dividend, is minimal—principally affecting after-dividend profits, which is not the standard measure.
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In order for a corporation to be taxed (or not taxed) as an S corporation, it must file an election on Form 2553 no more than two months and 15 days after the beginning of the first year that it wants to be treated as an S corporation. Many things can go wrong with filing the initial election and with maintaining the election, including failure to qualify as a small business corporation, failure to obtain consents of shareholders, and most importantly, just a garden variety failure to file the initial election on time.
A common scenario seems to be that the organizers of the corporation intend that it be an S corporation and somehow assume that they can take care of that when the time comes to file the first return. But, Congress thought otherwise, because it wanted the proper taxpayers to start making estimated tax payments way ahead of return filing time, hence the two month and 15 day due date for the election.
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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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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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United States v. ConocoPhillips, 2012 WL 3646809 (WD Okla) provides a good illustration on how closing agreements with the IRS are like any other contracts, only moreso, because the IRS is likely to be a particularly unbending contract partner if interpretive issues arise.
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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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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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