Category Archives: Mergers and Acquisitions – Domestic

Section 336(e) and S Corporations

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The regulations issued in 2013 putting Section 336(e) into effect allow a result like that of a Section 338(h)(10) election when the buyer is not a corporation. Like the Section 338(h)(10) election, the Section 336(e) election can be made by shareholders selling an S corporation, as well as when one corporation sells the stock of another corporation. Therefore, unlike Section 338(h)(10), a Section 336(e) election can be made in a case like this: Example 1: A and B each own 50 percent of the stock of S corporation. Partnership Private Equity Firm (PPEF) wants to buy the stock and have a Section [...]Read more

Internal Spinoffs

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LTR 201347005 is a straightforward ruling on multiple internal spin-offs of Controlled holding one of the two businesses of a domestic group. The spins only push Controlled up to two levels below the Parent, and do not appear to involve any unusual features. The stated reason for the spins is to allow the spun business to grow and avoid some regulatory burdens. The spinoffs had occurred before the ruling was issued. Why did this taxpayer go to the trouble to obtain these rulings? The only hint is the fact that the group previously experienced losses. An Investor previously bought common, preferred [...]Read more

Section 304 Games

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Since the repeal of the collapsible corporation rules, section 304 has been the most confusing corporate tax section in the domestic context. Its function is to convert a stock sale into a redemption for purposes of applying section 302 to determine whether the sale proceeds will be taxed as a dividend, or at least will be taxed under section 301 rather than section 1001. But to accomplish this goal, the section has employed numerous deemings and hypothetical transactions. Every 10-15 years, either Congress or Treasury decides that these fictions require another tweak, and somehow they never quite [...]Read more

REIT Conversions

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LTR 201314002 has caused quite a buzz in the investment community. Stock pickers want to know how far the envelope can be pushed on the definition of a real estate investment trust. The ruling seemed to allow it to be pushed fairly far, to include racks in buildings where computer servers are stored, called data centers. However, two companies in somewhat similar businesses recently filed information with the SEC indicating that the IRS was closely examining whether their real estate should receive REIT treatment. Facts A domestic consolidated group headed by a parent is now in the business of [...]Read more

Limiting Capitalization

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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 [...]Read more

Section 355 No-Rule Tightened

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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. In addition the IRS is studying and will not rule on the [...]Read more

Non-355 Ruling

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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 [...]Read more

CERT Regulation Proposed

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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.” If that were all section 172(h) was aimed at it [...]Read more

Avoiding the Section 338 Consistency Rules

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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 [...]Read more

Downstream D

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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 [...]Read more