SF Tax Club. Recent Corporate Tax Developments

Transcription

1 F ax Club Recent Corporate ax Developments October 14, 2004 Julie Divola Pillsbury Winthrop LLP 1

2 Recent Corporate ax Developments Proposed Regulations Continuity of Interest Valuation Regs. Prop. Regs (e)(2) 1(e)(2) sset ransfer Regs. Prop. Regs (d) 1(d) and 2(k) E and F Reorganization Regs. Prop. Regs (b) 1(b) and -2(m) 2

3 COI Valuation Prop. Reg (e)(2) 1(e)(2) Prop. Regs (e) 1(e) Provides a rule of administrative convenience for measuring value for COI purposes Consideration is valued as of the end of the last business day before a binding contract is executed 3

4 COI Valuation Prop. Reg (e)(2) 1(e)(2) Rule only applies to transactions if consideration is fixed consideration is limited to issuer s s stock and cash e.g., transaction involving issuer s s debt, put options, CVRs or other property will not qualify 4

5 COI Valuation Prop. Reg (e)(2) 1(e)(2) Fixed Consideration General Rule: Consideration is fixed if the contract states the exact number of issuer s s shares and cash Placing part of issuer s s shares or cash in escrow to secure customary target reps. and warranties does not prevent consideration from being fixed Cash election merger will be treated as fixed consideration if the minimum amount of stock and the maximum amount of cash is specified COI is measured assuming issuance of minimum amount of stock and maximum amount of cash 5

6 COI Valuation Prop. Reg (e)(2) 1(e)(2) Binding Contract General Rule: Contract is binding if it is enforceable against the parties under applicable law Presence of a condition outside of the control of the parties does not prevent an instrument from being a binding contract e.g., transactions involving regulatory approval can qualify e.g., tender offers requiring shareholder vote or requiring tender of a sufficient amount of target stock can qualify 6

7 COI Valuation Prop. Reg (e)(2) 1(e)(2) Binding Contract Contract can be binding even though insubstantial terms remain to be negotiated or customary conditions remain to be satisfied If contract is binding but a subsequent modification (made prior to closing) relates to the amount or type of consideration then modification date if treated as the first date that contract is binding 7

8 COI Valuation Prop. Reg (e)(2) 1(e)(2) Binding Contract ender offer will be treated as a binding contract on the date of announcement even though it may be modified by offeror or is not enforceable against offerees If modification of a tender offer relates to amount or type of consideration, then modification date is treated as the first date that the contract is binding 8

9 COI Valuation Prop. Reg (e)(7)(i), 1(e)(7)(i), Exs Jan 3, Yr. 1: and P sign binding contract Pursuant to contract /Hs will receive 40 P shares and $60 10 P shares will be placed in escrow to secure customary reps. and warranties /Hs $30 P tock $10 Escrowed P tock & $60 Jan 2, Yr. 1: P stock trades for $1/H P Date (June 1, Yr. 1), P stock trades for $ 0.25/H What if contract is modified on March 31, Yr. 1 (when P stock trades for $0.80/H to provide that /Hs will receive 50 P shares and $60? What if P stock had been trading at $0.51/H on March 31, Yr 1? 9

10 COI Valuation Prop. Reg (e)(2) 1(e)(2) Unresolved Issues What valuation method is used when regs. do not apply? Example 10 could be read to suggest that value on the day prior to closing is relevant (see reference to June 1; closing date is June 20 If contract provides for consideration to be set based on a formula prior to closing, is closing date value used or should value be measured on date prior to date that the consideration becomes fixed? What if consideration is variable but it is also a cash election merger and minimum amount of stock and maximum amount of cash is stated? 10

11 Post-Reorg. ransfers: Prop. Regs (d) 1(d) & -2(k) In March 2004, proposed regulations were issued to amend: Regs (k) to provide that a section 368(a) reorg. will not be disqualified as a result of a transfer (or successive transfers) to one or more corporation controlled in each transfer by the transferor corporation of part or all of (i) the assets of any party to the reorg.; and (ii) the stock of any party to the reorg. other than the issuer Continuity of business enterprise (COBE) rules Regs. under (d) 1(d) Definition of a party to a reorg. under (f) 11

12 Prop. Regs. on Post-Reorg. ransfers ugust 2004 prop. regs. expand the March 2004 prop. regs. by addressing asset push-ups: ups: ection 368(a) reorg. will not be disqualified as a result of a subsequent distribution of the acquired assets or stock if (i) no transferee receives substantially all of the acquired assets, substantially all of the assets of the acquired or surviving corporation in a transaction otherwise qualifying as a stock reorg, (i.e., B reorg. or reverse triangular), or stock constituting control of the acquired corporation ration (ii) the transferee is either a member of the qualified group (as s defined for COBE purposes) or a partnership the business of which is treated as conducted by a member of the qualified group; and (ii) the COBE requirement is satisfied Preamble to new prop. regs. also says that IR is studying post- reorg. drop-downs downs to a partnership in which transferor owns an interest 12

13 Prop. Regs. on Post-Reorg. ransfers For purposes of the prop. regs. on asset push- ups: ubstantially all has the same meaning as in section 368(a)(1)(C) Qualified group means one or more chains of corporations connected through stock ownership with the issuer, but only if the issuer owns directly stock meeting the requirements of section 368(c) in at least one other corporation, and stock meeting the requirements of section 368(c) in each of the corporations (except the issuer) is owned directly by one of the other corporations 13

14 Prop. Regs. on Post-Reorg. ransfers Rev. Rul tep 1 tep 2 liquidates into of into () tep 1: Forward subsidiary merger of into. survives. tep 2: liquidates into. ransaction collapsed and tested as a C reorganization What if tep 2 is an upstream merger of into? 14

15 Prop. Regs. on Post-Reorg. ransfers Rev. Rul tep 1 tep 2 tock tock /Hs liquidates into tep 1: tock-for-stock exchange tep 2: liquidates into ested as a C reorganization 15

16 Prop. Regs. on Post-Reorg. ransfers Rev. Rul tep 1 tep 2 tock tock /Hs 30% ssets tep 1: tock-for-stock exchange tep 2: distributes investment assets equal to 30% of its value to No recast. Qualifies as a B reorg. followed by a dividend (since arget does not distribute substantially all of its assets to cquiring) 16

17 Prop. Regs. on Post-Reorg. ransfers Rev. Rul tep 1 tep 2 50% ssets $$ X tep 1: Reverse subsidiary merger of into tep 2: sells 50% of its assets to unrelated X; retains proceeds ee Rev. Rul (sale of 50% assets did not disqualify subsequent C reorg. where proceeds transferred to cquiring) 17

18 Prop. Regs. on Post-Reorg. ransfers tep 1 tep 2 distributes 50% assets to of into tep 1: Forward subsidiary merger of into tep 2: distributes 50% assets to OK. Less than sub all transferred to qualified group; COBE satisfied Prop. Reg (k)(iii)(3), Example 2 18

19 Prop. Regs. on Post-Reorg. ransfers tep 1 teps 2 & 3 (3) 50% ssets (2) 50% ssets of into 1 tep 1: Forward subsidiary merger of into tep 2: distributes 50% assets to tep 3: contributes 50% assets to 1 Reg (f) and (k); Prop. Reg (f) and (k) 19

20 Prop. Regs. on Post-Reorg. ransfers P 80% tep 1 50% P tock & 50% $$ 80% P tep 2 P/ /Hs P/ 20% 20% (2) 50% ssets -1 of into -1-1 tep 1: Forward subsidiary merger of into -1; otherwise qualifies? tep 2: distributes 50% assets to P/ in redemption of 5% -1 stock Prop. Reg (k)(iii)(3), Example 6 20

21 Prop. Regs. on Post-Reorg. ransfers tep 1 tep 2 distributes 90% assets to of into tep 1: Forward subsidiary merger of into tep 2: distributes 90% assets to Prop. Reg (f) and (k) 21

22 Prop. Regs. on Post-Reorg. ransfers tep 1 tep 2 /Hs tock distributes 50% assets to tep 1: of into for shares tep 2: distributes 50% assets to Prop. Reg (f) and (k) 22

23 Prop. Regs. on Post-Reorg. ransfers: ubstantially ll tandard tep 1 tep 2 ( ssets) of into ( assets) distributes assets to tep 1: Forward subsidiary merger of into (with historic assets) tep 2: distributes assets to No actual or defacto liquidation. ee Rev. Rul What if tep 2 is an upstream merger of into? 23

24 Prop. Regs. on Post-Reorg. ransfers tep 1 tep 2 /Hs / /Hs / /Hs /Hs tock distributes 1 tock distributes 1 tock 1 1 ssume distributions of 1 (by and ) both qualify under section 355 What if distribution is pro-rata to shareholders? What if distribution is a split-off to shareholders (but not former shareholders)? 24

25 Prop. Regs. on Post-Reorg. ransfers /Hs tock tock (1) (2) % tock 2 50% 2 (3) 50% tock % Reg (d) and -2(k); Prop. Reg (k) ssets 1 25

26 E and F Reorganizations Prop. Regs (b) 1(b) & -2(m) E reorganizations involve a recapitalization or reshuffling of a capital structure within a framework of an existing corporation F reorganizations involve a mere change in identity, form or place of organization of one corporation, however effected 26

27 E and F Reorganizations Prop. Regs (b) 1(b) & -2(m) Proposed regulations provide: COI and COBE do not apply to E or F reorgs. Four characteristics of qualifying F reorgs. Limited application of the step transaction doctrine in connection with F reorgs. Distributions of money or other property to a shareholder in connection with an F reorg. will be treated as a distribution immediately before the F reorg. (in a distribution governed by 301 or 302 rather than 356) 27

28 E and F Reorganizations Prop. Regs (b) 1(b) & -2(m) Four characteristics of qualifying F reorgs. ll stock of resulting corp. (including stock issued prior to transfer) must be issued in respect of stock of the transferring corporation here must be no change in ownership of the corporation in the transaction (other than a change that has no effect other than that of a redemption of less than all of the shares of the corporation he transferring corporation must completely liquidate in the transaction he resulting corporation must not hold any property or have any tax attributes (including under 381(c)) immediately before the transfer 28

29 E and F Reorganizations Prop. Regs (5)(m), Ex. 1 V (tate B) W tock C $$ $$ U W (tate ) U U stock is not issued in respect of W stock (-2(m)(1)(i)()) and transaction results in a change in ownership that is more than a mere redemption (-2(m)(1)(i)(B)) Fails to qualify as an F reorg. 29

30 E and F Reorganizations Prop. Regs (m)(5), Ex. 2 $$ for X tock 75% X 25% B X tock for Y tock B (tate ) Y Y (tate B) (tate B) X reorganized in tate B through merger of X into Y. redeemed for cash Mere redemption of less than all of the shares of X (see -2(m)(1)(i)(B)) Qualifies as an F reorg. What if owned 90% of X? 99% of X?? 30

31 E and F Reorganizations Prop. Regs (m)(5), Ex. 3 D 990 Hs tock E D E tock $$ 10 Hs tock 99% 10% (Country ) (Country B) (Country B) reorganizes in Country B. o enjoy limited liability status, corps. in Country B must have 2 or more shareholders. hares issued to E are nominal and used to facilitate organization of Qualifies as an F reorg. 31

32 E and F Reorganizations Prop. Regs (m)(5), Ex. 4 H HoldCo OpCo (tate B) H (holding co.) merges into (operating co), which it has owned for many years. has historic tax attributes (see -2(m)(1)(i)(D)) Does not qualifies as an F reorg. ame result if merged into H 32

33 E and F Reorganizations Prop. Regs (m)(5), Ex. 5 P (1) 1 tock P 1 (tate X) 2 (tate Y) (2) 1 (tate X) 2 (tate Y) P forms new 2. P contributes 1 to 2. 1 is merged into 2. eries of transactions, but result is mere change of one corp. (see -2(m)(3)(i)) Qualifies as an F reorg. 1 is treated as transferring assets to 2 in exchange for 2 stock and distributing 2 stock to P in exchange for P s 1 stock 33

34 E and F Reorganizations Prop. Regs (m)(5), Ex. 6 P (3) ale Unrelated Party Unrelated Party (1) (tate X) (2) New (tate Y) New (tate Y) P forms New. is merged into New. P sells New stock to unrelated party. ale is not taken into account in determining whether initial transactions qualifies as an F reorg. (see -2(m)(3)(ii)) of into New qualifies as an F reorg. 34

35 E and F Reorganizations Prop. Regs (m)(5), Ex. 7 B B P $$ P tock (tate M) (2) B New P (tate N) (tate M) (1) New P (tate N) (tate M) tep One: acquired in a forward subsidiary merger. tep wo: P (issuer) merges into New P in a qualified F reorg. tep hree: New P redeems all stock in exchange for cash F reorg. remains valid. However, redemption of causes forward subsidiary merger to be taxable. F in the middle does not change this result. (see -2(m)(3)(ii)) 35

36 E and F Reorganizations Prop. Regs (m)(5), Ex. 8 P (1) P 1% tock (tate ) LLC (tate ) 99% LP (tate ) 1% GP LLC (tate ) (2) converts to LP under state law (3) makes tax election to be treated as a corp. tep One: forms new LLC and transfers 1% of to LLC. tep wo: Under statute, converts to a limited partnership. tep hree: makes tax election to be treated as a corporation for tax purposes Valid F reorg. since s conversion to an LP and tax election are a mere change. 36

37 E and F Reorganizations Prop. Regs (b) 1(b) & -2(m) $$ X (1) tock X tock & $$ Y Y X (tate D) (2) New (tate E) (3) (tate E) (tate E) tep One: redeems part of X s shares for cash tep wo: merges into New in a valid F reorg. tep hree: New merges into in a purported reorg. F reorg. remains valid. How is initial cash to X treated? ection 301? 302? 356? ee -2(m)(4) 37