Corporate Tax II – Weisbach 2009

  1. Taxable Acquisitions
  2. Asset Purchases
  3. 2 levels of tax – asset sale + liquidation
  4. Forward Merger – T mergers into Acq sub
  5. Rev. Ruling 69-6: where Acq sub is formed for purpose of merger & T s/hs get cash, transitory existence of Acq sub is disregarded and transaction is treated as an asset sale
  6. Intangibles,§197: permits amortization of intangible assets over 15 year period
  7. Purchase Price Allocation,Regs. §1.338-6: (see slide 5)
  8. Stock Purchases
  9. 1 level of tax, carryover basis
  10. Reverse Merger – Acq sub mergers into T
  11. Historical Treatment – Kimbell-Diamond: step trans makes stock purchase + liquidation = asset purchase; eventually repealed by statute
  12. Current Treatment of Stock Purchases,§338 – if corp makes “Qualified Stock Purchase” it may elect to qualify for either asset or stock purchase treatment
  13. Qualified Stock Purchase (QSP), Requirements and Consequences
  14. P must make taxable purchase of 80% of value and vote of T w/in 12 month period
  15. Election must be made no later than 9.5 months from QSP
  16. In QSP, “Old T” treated as selling assets to “New T” and liquidating into P one day after stock purchase and outside of any consolidated returns
  17. §338(h)(10): If S & T eligible to file consolidated return, then P & S may make joint election to treat stock purchase as an asset sale
  18. §336(e): if corp owns 80% of vote/value of sub & owner sells, exchanges or distributes stock (Qualified Stock Disposition, QSD), election may be made to treat the disposition as a disposition of assets w/ no gain/loss recognized with respect to stock
  19. Rev Ruling 90-95: where P created transitory acquisition sub to acquire T in reverse subsidiary cash merger;
  20. Situation 1: creation ofacquisition sub is disregarded, and merger is treated as QSP
  21. Situation 2: subsequent liquidation of T is given independent significance and does not result in QSP being recast as asset purchase; step trans turned off and trans treated as stock purchase + liquidation
  22. Rationale: Congress intended to completely repeal Kimbell-Diamond by enacting §338, thus §338 election principles control
  23. Sale/Redemption: where subsidiary borrows and distributes cash to s/h after a merger, distribution is treated as a redemption to be analyzed under §302
  1. Corporate Reorganizations
  2. Reorganization Checklist
  3. Determine the type of reorg and check requirements
  4. If stock/assets has been transferred check -2(k)
  5. Make sure entities involved are “parties to the reorganization” under -2(f)
  6. Statutory Forms
  7. “A” Reorganizations, §368(a)(1)(A)
  8. Requirements
  9. Merger or consolidation
  10. Rev. Rul 2000-5: where T transfers only half of assets to P and continues to exist, or where T transfers half of assets to each of two purchasers, such transfers are not mergers b/c merger contemplates T ceasing to exist and divisive mergers only dealt with in §355
  11. Continuity of interest (COI)
  12. Continuity of business Enterprise (COBE)
  13. (a)(2)(C) – may make one drop to a subsidiary
  14. Disregarded Entities
  15. Regs. 1.368-2(b)(1)(ii): assets/liabilities of transferors combining unit become assets/liabilities of transferee combined unit and transferor combining unit ceases to exist
  16. “B” Reorganizations, §368(a)(1)(B)
  17. Requirements
  18. Exchange of T stock solely for voting stock of acquiring (no boot allowed)
  19. Creeping B: may consummate creeping B so long as exchanges are solely for stock; possibly up to 16 years required to make cash purchases “old and cold”
  20. Contingent Consideration: P may agree to issue future stock under certain circumstances; contingent consideration/poison pill does not qualify as boot
  21. Rev. Ruling 98-10: B reorg + debenture exchange does not violate B reorg rules if substantially all holders of debentures are non-stockholders and principal of new debentures is same as old debentures
  22. Immediately after acquisition acquiring has control of target (no need to transfer control)
  23. Rev. Ruling 67-274: B reorg + liquidation of T or acq is a C reorg b/c no control immediately after is liquidation; no QSP b/c it is a stock for stock exchange, thus step trans applies
  24. Rev. Ruling 55-440: preferred stock called but not presented by exchange date is disregarded for purposes of control under §368(c)
  25. (a)(2)(C) – may make one drop to a subsidiary
  26. “C” Reorganizations, §368(a)(1)(C)
  27. Requirements
  28. Exchange sub allT assets/liabilities solely for voting stock of acquiring, may include unlimited assumption of liabilities
  29. Rev. Ruling 57-518: substantially all assets is 90% gross, 70% net
  30. Rev. Ruling 88-48: where T has two lines of business, sells one line of business to unrelated parties, then transfers proceeds + other lines of business to P in exchange for P stock, sub all requirement is met
  31. Creeping C: preexisting stock of T owned by P does not count as boot in a C reorg (must be “old and cold”)
  32. Boot relaxation: 20% boot allowed, but if boot used must count liabilities towards boot
  33. Target liquidates
  34. (a)(2)(C) – may make one drop to a subsidiary
  35. Triangular Reorganizations
  36. Triangular “A” by (a)(2)(D) – forward triangular merger
  37. Requirements
  38. All regular A requirements met (merger, COI, COBE)
  39. Exchange must be completely in parent stock (no S stock used in trans)
  40. Acquire sub all target assets
  41. Drop to subsidiary via (a)(2)(C)
  42. Rev. Ruling 2001-24: forward triangular merger w/ subsequent drop of acquiring into another wholly owned subsidiary of P qualifies as a valid reorg via (a)(2)(C) & -2(k)/-2(f)
  43. Triangular “A” by (a)(2)(E) – reverse triangular merger
  44. Requirements
  45. All regular A requirements met (merger, COI, COBE)
  46. Exchange must be completely in parent stock (no S stock used in trans)
  47. T must “hold” sub all assets
  48. Rev. Ruling 2001-25: sale of 50% of assets to unrelated party after reorg is valid if P “holds” proceeds
  49. T s/hs must surrender control in exchange (no creeping (a)(2)(E)’s)
  50. Drop to subsidiary via (a)(2)(C)
  51. Triangular C w/ solely parent stock
  52. Triangular B w/ solely parent stock
  53. Continuity of Interest,
  54. Generally, Regs. §1.368-1(e): “proprietary interest” in T must be preserved to get COI in a reorg
  55. Proprietary interest is preserved if
  56. It is exchanged for proprietary interest in P
  57. It is exchanged by acquirer for direct interest in T
  58. It otherwise continues as proprietary interest in T
  59. Measured by consideration received in merger, not stake in new company
  60. Amount
  61. 50% or greater is always granted
  62. Regs allow as low as 40%
  63. Southwest Natural Gas: statutory merger w/ 16% stock consideration does not qualify as tax free reorg b/c not sufficient COI
  64. Dispositions of stock to unrelated parties b/f or after the reorg to persons unrelated to P or T are disregarded for COI purposes
  65. Related party: 50% or greater ownership
  66. Redemptions by P pursuant to plan of reorg count as cash/property consideration
  67. Rev. Ruling 99-58: regular stock repurchase plan which causes P to buy back T stock on the open market after reorg will not affect COI if not purposefully directed at T s/hs
  68. Rev. Ruling 66-224: COI not measured w/ respect to individual s/h, instead look to s/h as a group (i.e., 50% stock to half of s/h and 50% cash to other half is identical to each s/h receiving 50% stock and 50% cash for COI purposes)
  69. Kass: where P purchased 80% of T stock, then T merged into P w/ P exchanging minority s/h T stock for P stock, COI for minority s/h measured from point b/f the initial purchase, and thus 20% s/hs did not qualify for A reorg treatment b/c they failed COI
  70. Seagrams: where P purchases stock from old s/h, P steps into shoes of old s/h for purposes of COI
  71. Regs 1.338-3(d): stock purchased in QSP immediately becomes “old and cold”
  72. Continuity of Business Enterprise
  73. Generally, Regs §1.368-1(d): P must either
  74. Continue significant line of T’s historic business, or
  75. Use a significant portion of T’s historic business assets in a business
  76. “Significant” is at least 1/3 of business/assets
  77. “Historic” must at least be longer than 2 years
  78. Bentsen: no need to carry on identical business of T to qualify for CBOE
  79. Rev. Ruling 81-25: CBOE does not require the acq corp to maintain its own line of business or assets during the reorg
  80. Qualified Group, Regs. §1.368-1(d)(4)(i), (ii): P treated as holding all businesses and assets of al the members of the “qualified group”
  81. Qualified Group: P owns directly stock meeting reqs of §368(c) in at least one corp, and stock meeting the reqs of §368(c) in each of the corps is owned by one or more of the other corps
  82. Direct subsidiary
  83. Subsidiary of a subsidiary
  84. Diamond pattern
  85. Partnership if P owns of significant interest or P has active and substantial management role
  86. NOT parent
  87. NOT sister corp
  88. Regulatory Modifications to Reorganization Requirements
  89. Grohman & Bashford Doctrine: dropping assets into subsidiary or using parent stock to acquire T violate reorg requirements (has since been mitigated by regs, but still good law)
  90. Asset/Stock Transfers, Regs. §1.368-2(k): transfer ofassets/stock after a reorg in accordance w/ this rule will not blow up an otherwise good reorg

Assets of acquired, acquiring + no liquidation

Distributions

Stock w/in qualified group + not all of acquired

Assets of acquired, acquiring

Other Transfers No Termination

Stock of acquired, acquiring w/in qualified group

  1. “Party to the Reorganization”, Regs. §1.368-2(f)

Acquired w/in -2(k)

Stock or assets

PRS w/in COBE

Stock of acquiring w/in -2(k)

  1. Step Transaction Doctrine in Reorganizations
  2. King Enterprises: where P exchanged 51% P stock and 49% cash/notes for T, then pursuant to a plan T merged into P in an upstream merger, the step trans doctrine operates to qualify the entire transaction as a valid A reorg
  3. Rev. Ruling 2001-26: where P exchanges P voting stock for 51% of T stock, then S merges into T w/ T surviving and T s/hs getting P stock + cash, such a transaction is a valid (a)(2)(E) reorg b/c step trans makes it so that 100% control is transferred from T s/hs to P in the “plan of reorganization”
  4. Rev. Ruling 2001-46: where P transfers 70% stock and30% cash to T s/hs so as to qualify independently as a QSP with S merging into T and T surviving, and the transaction is followed by a merger of T into P, the transaction will be treated as a single merger by T into P qualifying as an A reorg – QSP will be disregarded
  5. Rev. Ruling 2008-25: where T is leveraged, and P transfers 90% stock and 10% cash to T s/h and S merges into T w/ T surviving, followed by a liquidation of T’s assets into P, transaction is a fully taxable QSP (which turns off step trans) followed by an A reorg
  6. Consequences to a Reorganization
  7. To Target Shareholders
  8. Recognition of Gain/Loss
  9. §354(a)(1): no gain/loss if stock/securities exchanged solely for stock/securities of a “party to the reorg”
  10. §354(a)(2): principal amount of securities received cannot exceed principal amount of securities surrendered (see §356(d))
  11. §356(a)(1): gain recognized to the extent of boot
  12. §356(a)(2): if gain recognized, it is considered dividend if it has the effect of dividend
  13. Clark: where sole s/h of T receives stock + boot in connection w/ merger, exchange must be analyzed under §302 to determine whether it qualifies for dividend treatment
  14. §356(c): no loss recognized in a reorg
  15. §356(d): if principal amount of securities increased, the FMV of increase is taxed as boot
  16. Basis
  17. §358: basis is carryover increased by gain, decreased by boot
  18. To Target
  19. On Exchange
  20. §361(a): no gain/loss recognized if T exchanges property solely for P stock/securities
  21. If boot, then no gain/loss recognized on exchange if boot is distributed
  22. On Distribution
  23. No gain/loss recognized on distribution of “qualified property” (refers to stock, securities, etc) to creditors/shareholders
  24. Gain recognized on any property distributed that is not qualified property
  25. Basis
  26. §358: P stock gets carryover basis + gain - boot
  27. §358(f): boot given FMV basis on exchange
  28. To Acquiring
  29. Recognition of Gain
  30. §1032: no gain/loss recognized on receipt of money/property in exchange for stock
  31. Basis
  32. §362(b): basis is carryover increased by gain, decreased by boot
  33. P recognizes gain/loss on all transfers of boot
  34. Triangular Reorganizations
  35. Triangular C and (a)(2)(D) Forward Triangular Merger
  36. Regs. §1.358-6(c)(1)(i): P’s basis in stock adjusted as if P acquired the T assets in the reorg and dropped them into S as a §351
  37. Reverse Triangular
  38. Regs. §1.358-6(c)(2)(i): P’s basis determined as if transaction were a forward triangular merger
  39. Triangular B
  40. Regs. §1.358-6(c)(3):
  41. Consequences to S
  42. Regs. §1.1032-2(b): S does not recognize gain where P stock issued to S in a triangular reorg pursuant to plan of reorg