Category Archives: Mergers and Acquisitions – International

Proposed Sec. 367 Regs Say Goodbye to Goodwill Exception

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Citing aggressive taxpayer positions, recently proposed regulations do away with the foreign goodwill exception to gain or income recognition for outbound transfers under Section 367. The rules also restrict the type of property eligible for the active business exception. Reasons for Change Per the preamble, taxpayers interpret Section 367 and the regulations in one of two ways when claiming favorable treatment of foreign goodwill and going concern value. One interpretation argues that goodwill and going concern value are not IP within the meaning of Section 936(h)(3)(B) and thus not subject [...]Read more

Final Anti-Inversion Regulations Keep Strict 25 Percent Tests for Substantial Business Activities

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In June, the IRS and U.S. Treasury released final regulations under the anti-inversion provisions of Section 7874 (T.D. 9720). The final rules, effective for acquisitions completed on or after June 3, 2015, include a few changes from the regulations proposed in 2012. Most notably, the final rules retain the 25 percent bright-line tests for whether an expanded affiliated group (EAG) has “substantial business activities” in a foreign country for the purpose of determining whether the foreign parent of an inverted corporation will be treated as a “surrogate foreign corporation.” The controversial [...]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

Manchester United Ruling?

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LTR 201242007 is a section 351 ruling with a public offering: not a busted 351, but a good 351. It likely involves the IPO of the new Manchester United football team holding company that was taken public by the Glazer interests, which acquired the UK football team in recent years. The main tax point of significance is that the IRS may have approved a 10:1 disparity in vote between voting classes, for purposes of respecting the low vote stock as voting stock. If so, for section 351 purposes, all of the stock was voting stock and section 351 applied to the Glazer’s contribution of the highly [...]Read more

Reverse Acquisitions and Tax Insurance

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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 [...]Read more

Bigco Acquires Small Partnership for Stock, Tax Free

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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 [...]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

North-South Spinoffs

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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 [...]Read more

Spinoff Can Use Corporate Name

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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 [...]Read more

Reorganization and Consolidated Rulings Issued

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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 [...]Read more