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 appreciated team assets, because Glazer wound up with well over 80 percent of the vote after selling some of the low vote stock in a secondary offering. A second point of tax significance is that the new holding company is a foreign corporation that will be treated as domestic under section 7874(b), because of the high voting control retained over it by Glazer.

Facts. The ruling describes one individual who owns grantor trusts and an S corporation. The trusts and the S corporation own Partnership. The foreign business of the Partnership will be transferred to a new foreign corporation, Newco, for its X and Y stock. The foreign corporation will be treated as a domestic corporation under section 7874(b). Newco will issue X stock to the public and Partnership will sell X stock to the public in a secondary offering. The Y stock evidently has an unspecified higher vote than the X stock. The taxpayer represented that the Partnership and the public will be in control of Newco for section 351 purposes.

Ruling. The IRS ruled section 351 applied to the Partnership’s asset exchanges with Newco. The taxpayer represented that Partnership and the public were in control of Newco, taking into account any dispositions of shares initially bought. This must mean that Partnership’s shares—not counting the shares it sold in the secondary offering—plus the public’s shares, held 80 percent or more of the voting power. The shares that Partnership sold in the secondary offering did not count because they were not sold to other members of the control group. It would be impossible to show that they were sold to persons who had also bought shares in the IPO from the issuer (unless the issuer required a sort of stapled offering, which was not stated).

One wonders why the ruling was sought unless the vote of the X shares was so low the taxpayer was afraid it would not be treated as voting at all. If this ruling is Manchester United, then that may have been the concern. The answer may be that a 1:10 voting ratio in shares of the same value was accepted by the IRS.

Manchester IPO. Manchester United PLC filed a prospectus dated August 9, 2012, about a month after the ruling date, as a Cayman company. It described a public offering of Class A common with one vote per share, half of which will be sold by the PLC and half will be sold by the Glazer interests, which also holds Class B voting shares with ten votes per share. A 2/3 vote is required to approve mergers, charter changes and the like; so long as any Class B shares are outstanding, their vote will be specially weighted so that they will have 67 percent of the voting power for purposes of these votes. The classes share equally in dividends and liquidation.

The public offering price is set to raise approximately one quarter of a billion dollars at $14 per share. The prospectus shows the Glazer interests to have 98.7 percent of the vote and the public to have 1.3 percent of the vote after the primary and secondary offerings. The Glazer vote is a combination of 58 percent of the Class A and all of the Class B.

  Class A Class B 
Vote per share 1 10
Value per share     $14  $14 (presumed)
Outstanding shares    39,685,700 124,000,000 
Net equity value  555,599,800   1,736,000,000 (presumed) 
Total votes  39,685,700  1,240,000,000 
Glazer votes  23,017,706  1,240,000,000 

Presumably, the Class B share is worth at least as much as the Class A share – $14. Therefore, it can be said that the low vote shares get 1/10 as much vote per the same value. Perhaps the IRS blessed that spread and respects the low vote stock as voting stock, even when the high vote stock has the additional special voting power described above.

However, the ruling stated that the Partnership and the public were in control; if it were treating all of the outstanding stock as voting, it could have said that the Partnership was in control, because the public’s contribution and voting stock was not needed to make the Partnership’s exchange qualify under section 351. The fact that the taxpayer had to represent that the Partnership and the public were in control suggests that the IRS was not comfortable with relying solely on treating all the stock as voting stock; therefore, the IRS wanted the section 351 control to work either way: if the Class A stock were nonvoting stock, then the “control group” had control by owning 80 percent or more of the vote and of all nonvoting classes (i.e., Class A).

Section 7874. The team will be in a corporation organized in the UK, owned by the new Cayman holding company, which is treated as a CFC. The prospectus and the ruling do not entirely match up in terms of the number of disregarded entities between Cayman and the team corporation. The Cayman company could not avoid section 7874 treatment as a domestic corporation due to the high level of U.S. ownership maintained. The decision to incorporate outside the United States presumably was due to the solely foreign operations and the largely foreign shareholder base that was expected.

Few other foreign corporations have volunteered into section 7874(b) treatment as a domestic corporation. One of the few is Xtra-Gold Resources Corp., which filed Form S-4/A on October 15, 2012. It described a F reorganization from a Nevada corporation to a BVI corporation, explaining as the purposes that it is an international business that has no connection with Nevada, and BVI does not impose any taxes, and corporate law may be more accommodating.