Blake D. Rubin Ernst & Young LLP 1101 New York Avenue, N.W. Washington, D.C (202)

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1 1101 New York Avenue, N.W. Washington, D.C (202)

2 A Property $300 asis $600 Value $200 Cash $400 Cash A has no gain; $100 basis Contrib/Distrib w/out anti-abuse 2

3 A Property $300 asis $600 Value $200 Cash $400 Cash A is deemed to sell 1/3 of property for $200; has $100 gain, $200 basis in interest Contrib/Distrib w/ 707(a)(2)() 3

4 A 1/1/10 Property $300 asis $600 Value 7/1/11 $200 Cash 1/1/10 $400 Cash A is presumed to have sold 185/600 of property on 1/1/10 for $185 plus $15 imputed interest Contri/Distrib Nonsimul. w/in 2 yrs. 4

5 A 1/1/10 Property $300 asis $600 Value 2/1/12 $200 Cash 1/1/10 $400 Cash A is presumed not to have sold the property. Contrib/Distrib Nonsimul. Outside 2 yrs. 5

6 As Maintained As Adjusted Prop 600 Cash 200 Prop Cont 415 Purch A 400 Cash A Imputed interest expense must be specially allocated to A to avoid capital account distortion. Capital Account Distortions 6

7 1. Distributions of operating cash flow not in excess of lowest percentage of overall partnership profits for any year. 2. Reasonable preferred returns on capital % of AFR rule. 3. Reasonable guaranteed payments for capital % of AFR rule. 4. Reimbursement of preformation expenditures -- incurred within 2 years; 20/120 % rule. Safe Harbored Distribs. 7

8 A Property $800 Value $300 asis $400 Liab. $400 Cash 1. A must keep at least $100 of liability to avoid gain. 2. If recourse, A s share is $ If nonrecourse, A s share is at least $250. Contrib. Of Encumb. Prop. 752/731 8

9 A Property $600 Value $300 asis $200 Liab. $200 Loan ank $400 Cash Whether there is a disguised sale depends on whether the $200 loan is a qualified liability. Contrib. Of Encumb. Prop. 707(a)(2)() 9

10 1. More than 2 years old and secured by contributed property 2. Less than 2 years old but facts and circumstances clearly establish not incurred in anticipation of transfer; secured. 3. Traceable to capital expenditures with respect to the property. 4. Incurred in ordinary course of trade or business; substantially all assets contributed. Qualified Liabs. 10

11 A Prop. A $600 Value $100 asis Prop. $600 Value $600 Cash used to buy Prop. A recognizes no gain; takes $100 basis in Prop.. If sec. 754 election, gets $500 step-up in Prop. A. Prop. Distrib. W/out Anti-Abuse 11

12 A Prop. A $600 Value $100 asis Prop. $600 Value $600 Cash used to buy Prop. If disguised sale, A recognizes $500 gain (subject to imputed interest adjustment). Prop. Distrib. 707(a)(2)() 12

13 A Prop. A $600 Value $100 asis A Prop. A $600 Cash If Prop. A is distributed to within 7 years, A recognizes any remaining built-in gain allocable under sec. 704(c)(1)(A). Prop. Distrib. 704(c)(1)() 13

14 A Prop. A $600 Value $100 asis Prop. $600 Value $600 Cash used to buy Prop. If Prop. is distributed within 7 years, A recognizes gain equal to lesser of (1) remaining sec. 704(c)(1)(A) built-in gain on Prop. A, or (2) excess of value of Prop. over basis of partnership interest. Prop. Distrib. 737 ase 14

15 A Prop. A $600 Value $100 asis Prop. $600 Value $600 Cash used to buy Prop. Loan ank If A s share of liabilities is sufficient to increase its basis to $600, A will recognize no gain under sec. 737 on the distribution. Prop. Distrib. 737 Liab. 15

16 A Prop. A $600 Value $100 asis Marketable Securities $600 Value $600 Cash used to buy Marketable Securities Marketable securities treated like cash. A recognizes $500 gain. 731(c) 16

17 A Stock or Securities Cash 1. Gain recognized if more than 80% of assets stocks and securities held for investment and diversification Act treats as stocks and securities nonmarketable securities, cash, debt, etc. 721(b) 17

18 If a partnership is formed or availed of in connection with a transaction a principal purpose of which is to reduce substantially the present value of the partners aggregate federal tax liability in a manner that is inconsistent with the intent of Subchapter K, Then the Commissioner can recast the transaction as appropriate. The Commissioner can treat a partnership as an aggregate of its partners in whole or in part as appropriate to carry out the purpose of any Code provision. 701 Reg. 18

19 A A Contribs. Prop. A $400 Value $0 asis A Sells Prop. A $200 Value $200 asis $200 Cash $400 Cash If form is respected, A recognizes no gain. Sell Hi, Contrib. Low 19

20 A Property $600 Value $100 asis $200 Loan $400 Cash 1. Preamble to final sec. 707 regulations says bona fide loan should not be treated as disguised sale. 2. What if s interest income on loan is specially allocated to A? Loan Out 20

21 A $300 Value $100 asis $300 Value $100 asis Property $600 Value $200 asis Loan Out 21

22 A $297 Cash 1% 99% $297 Loan 1. and agree not to cause sale of Property for X years 2. Debt amortization schedule to be agreed upon 3. Option to acquire Taxpayer s interest after X years Loan Out 22

23 books up under sec. 704(b) Regulations Guarantee of debt by A? Even if A does not guarantee, A will keep enough debt in basis to avoid gain on distribution Sec. 704(c) burn-off Choice of sec. 704(c) method? Loan Out 23

24 A Property $600 Value $100 asis $200 Liab. $200 Loan ank $400 Cash 1. If debt is recourse to A and, A has $100 disguised sale proceeds, $83 gain. 2. If debt is recourse only to A, A has no disguised sale proceeds. Precontrib. Nonqual. Rec. 24

25 A Property $600 Value $100 asis $200 Liab. $200 Loan ank $400 Cash 1. If third tier of debt under sec. 752 is shared equally, A has $100 disguised sale proceeds, $83 gain. 2. If third tier of debt is allocated solely to A because of preferred return, A has no disguised sale proceeds. Precontrib. Nonqual. Nonrec. 25

26 A $200 Cash Property $600 Value $200 $100 asis Loan ank $400 Cash 1. Interest tracing rules apply to determine if distribution is debt financed. 2. If debt is recourse to A and, A has $100 disguised sale proceeds, $83 gain. 3. If loan is recourse to A but not to, A has no disguised sale proceeds. Debt Distrib. Rec. 26

27 A $200 Cash ank Property $600 Value $200 $100 asis Loan $400 Cash 1. Interest tracing rules apply to determine if debt financed. 2. If third tier under sec. 752 is shared equally, A has $100 disguised sale proceeds, $83 gain. 3. If third tier is allocated solely to A because of preferred return, A has no disguised sale proceeds. Debt Distrib. Nonrec. 27

28 A Property $300 asis $600 Value $400 Cash Int. Sale/Redemption #1 28

29 A Property $300 asis $600 Value A Sale of Interest for Note $400 Cash Int. Sale/Redemption #2 29

30 A Property $300 asis $600 Value $200 Cash A $400 Cash 1. Sec. 381 does not apply to sale of partnership interest to A, so Rev. Rul inapplicable. 2. Treas. Reg. Sec technically inapplicable because transfer of cash to A, not A. Int. Sale/Redemption #3 30

31 A Property $600 Value $100 asis $200 Liab. $200 Loan ank $400 Cash 1. Sec. 707 regulations require partnership to assume or take subject to non-qualified liability for disguised sale treatment. 2. What if parties structure a wraparound contribution as in Stonecrest and Professional Equities? Wraparound Contrib. 31

32 A Property Preferred Return Loan Pledge ank Cash 1. Preferred return of up to 150% of AFR on A s unreturned capital used to pay interest and principal on bank loan. 2. Preferred return in later years not matched with income allocation to make A s capital account go away. McDermott Will & Eery LLP Pref. Return and Pledge 32

33 A Corp. Property $600 Value $100 asis $600 Cash A $600 Loan Sub. Liq. Step 1 33

34 A Corp. Newcorp A Owes $600 Newcorp $600 Receivable 1. A Corp. takes $100 basis in Newcorp stock. gets $500 basis step-up under sec 754/734(b). 2. Upon liquidation of Newcorp, A will get $600 basis in loan receivable from A under sec. 334(b). Sub. Liq. Step 2 34

35 A Corp. $300 Value $100 asis $300 Value $100 asis Property $600 Value $200 asis Sec. 732(f) #1 36

36 A Corp. $300 Value $100 asis $300 Value $100 asis NewCorp. $300 Value $300 asis Property $600 Value $200 asis $300 Loan Sec. 732(f) #2 37

37 A Corp. $300 NewCorp. Value $100 $300 asis Value $300 asis $300 Value $100 asis NewCorp. $300 Value $300 asis Property $600 Value $200 asis $300 Loan Sec. 732(f) #3 38

38 A Corp. NewCorp. $300 Value $300 asis $300 Value $100 asis 1. A Corp. takes $100 basis in NewCorp. stock. gets $200 basis step-up under sec. 754/734(b). 2. Upon liquidation of NewCorp, A will get $300 basis in NewCorp. assets under sec. 334(b). $200 A Corp. gain permanently escapes tax. Sec. 732(f) #4 39

39 A Corp. A Corp. Stock Value $1000 asis $0 Cash Rev. Rul #1 40

40 A Corp. A Corp. Stock Value $100 asis $0 Cash 1. If Sec. 704(c) remedial allocation method elected, A Corp. allocated remedial gain on sale that is unrecognized under Sec but increases outside basis. Rev. Rul #2 41

41 A Corp. A Corp. Stock Value $100 asis $0 Cash 2. is allocated remedial loss that is deductible assuming sufficient outside basis. Rev. Rul #3 42

42 A Corp. A Corp. Stock Value $100 asis $0 Cash 3. oth parties end up deducting loss for decline in value of $0 basis stock!! Rev. Rul #4 43

43 Property $600 Value $100 asis A A $600 Cash Installment Sale of Property Install/Red. Step 1 44

44 A A Installment Note $600 Cash Property $600 Value $600 asis 1. After 2 years, installment note owed by is distributed to in complete redemption of its interest. 2. Sec. 704(c)(1)() does not apply because installment note is not sec. 704(c) property. 3. takes a $600 basis in the installment note under sec. 732(b). Install/Red. Step 2 45

45 A C $100 CASH $100 CASH $100 Property CASH $300 Value $50 $100 asis Property A $250 $600 Value $250 asis Property $300 $50 Value $50 asis 1. Property gets step up in basis in C s hands from $50 to $ Mandatory step down in basis in Property A under 2004 Jobs Act. Distrib. Low asis Prop. 46

46 A C $100 CASH $100 CASH $100 Property CASH $200 Value $250 $100 asis Property A $50 $400 Value $50 $200 asis Property $250 $200 Value $250 asis 1. Property gets step down in basis in C s hands from $250 to $ If sec. 754 election, step up in basis in Property A from $50 to $200. Distrib. High asis Prop. 48

47 A C $100 CASH $100 CASH $100 CASH Property Distrib. of Lev. Prop. #1 50

48 A C Property $900 Value $300 asis Distrib. of Lev. Prop. #2 51

49 A C ank $600 Loan Property $900 Value $300 asis $600 Liab. Distrib. of Lev. Prop. #3 52

50 ank $600 Loan A C Property $900 Value $300 $700 asis $600 Liab. 1. C takes Property with $700 basis; A and have $600 cash in ; total outside basis of $ Mandatory step down in property basis under 2004 Jobs Act. 3. Disguised sale of Property from to C? Distrib. of Lev. Prop. #4 53

51 A $100 Value $100 asis ($100) CA $100 Value $100 asis ($100) CA New Prop. $200 Value $200 asis $100 Debt Property $600 Value $200 asis $400 Debt $100 Loan Lev. Acq./Dist. #1 54

52 A New Prop. $100 Value $200 Value $100 asis $200 asis ($100) CA $100 Debt $100 Value $200 asis ($100) CA New Prop. $200 Value $200 asis $100 Debt Property $600 Value $200 asis $400 Debt $100 Loan Lev. Acq./Dist. #2 55

53 A New Prop. $200 Value $0 asis $100 Debt $100 Value $400 asis ($100) CA Property $600 Value $400 asis $500 Debt Lev. Acq./Dist. #3 56

54 A New Prop. $200 Value $0 asis $100 Debt $100 Value $400 asis ($100) CA 1. A s outside basis before distribution of New Prop. is $200 ($100 negative capital account plus $300 share of liabilities). 2. Upon distribution of New Prop., A s share of liabilities is reduced by $300; personal liabilities increased by $100; net reduction of $200. Lev. Acq./Dist. #4 57

55 A New Prop. $200 Value $0 asis $100 Debt $100 Value $400 asis ($100) CA 3. New Prop. basis stepped down $200 from $200 to $0; under sec. 754 and 734, property gets $200 step-up in basis. 4. Disguised sale of half of New Prop. from to A? See Reg. sec (b)(2). Lev. Acq./Dist. #5 58

56 1% 50% A C 50% 1% 98% 0% Prop A $100 Value $0 $98 asis $100 Liab. Prop. $120 Value $120 asis $100 Liab. Prop. $20 $120 Value CASH $120 $22 asis $100 Liab. Pre-Disp. Red. 59

57 50% A C 50% 0% Prop A $100 Value $ 98 asis $100 Liab. Prop. $120 Value $22 asis $100 Liab. 1. C s outside basis before distribution of Prop. is $118 ($78 negative capital account plus $196 share of liabilities). 2. Upon distribution of Prop., C s share of liabilities is reduced by $96 to $100; Prop. takes remaining outside basis of $22. Pre-Disp. Red. 60

58 50% A C 50% 0% Prop A $100 Value $ 98 asis $100 Liab. Prop. $120 Value $22 asis $100 Liab. 3. Prop. basis stepped down $98 from $120 to $22; under sec. 754 and 734, Prop. A gets $98 step-up in basis. 4. Disguised sale of Prop. from to C? No gain, but not a distribution? orrow $20 equity from C affiliate? Pre-Disp. Red. 61

59 A CORP. Assets FMV = $100 Purchase $95 5% Callable Preferred Assets or Cash FMV = $ A Corp. receives $10 common interest (5%) plus $90 preferred interest paying 5.3% coupon 2. Coupon on preferred partnership interest sufficient to pay coupon on preferred stock 3. and agree not to cause sale of business for X years 4. Option to acquire A Corp. s interest after X years Pre-Disp. Red. 63

60 (Foreign) Intangibles Cash/Obligation to Fund R&D PARENT (U.S) CFC (Foreign) 1. Parent receives 5% common interest and 100% preferred interest 2. Contribution of intangibles tax-free under sec. 721(a); no regulations under sec. 721(c) 3. Parent taxed annually on preferred coupon plus 5% of remaining partnership profits Pre-Disp. Red. 64

61 A Property A Property Mixing owl: Classic #1 65

62 A 90% of Property Items 90% of Property A Items Property Property A Mixing owl: Classic #2 66

63 A Property Property A 1. After seven years, A receives Property plus cash equal to 10% of the excess, if any, of the appreciation in Property A over the appreciation in Property. 2. receives Property A plus cash equal to 10% of the excess, if any, of the appreciation in Property over the appreciation in Property A. Mixing owl: Classic #3 67

64 Old Partners $200 Value $200 asis ($200) CA Acquiror $200 Cash Property $600 Value $200 asis $400 Debt Mix owl: Dist. Old Prop. #1 68

65 Old Partners 85% of Items From Cash Investment Acquiror 85% of Items From Property $200 Cash Invested at Old Partners Direction Property $600 Value $200 asis $400 Debt Mix owl: Dist. Old Prop. #2 69

66 Old Partners 85% of Items From Cash Investment Acquiror 85% of Items From Property 1. After 3 years, Acquiror has option to be redeemed for Old Property plus 15% of Cash Investment excess appreciation or minus 15% of Old Property excess appreciation. 2. New cash from Acquiror may trigger gain. 3. Old Partners may also want put. Mix owl: Dist. Old Prop. #3 70

67 Old Partners Acquiror Property $200 Cash Invested at Old Partners Direction Mix owl: Dist. Old Prop. #4 71

68 Old Partners Acquiror Property 1. Old Partners must cause to incur at least $200 of debt to protect their negative capital accounts. 2. Disguised sale? See Reg. sec (f) Ex. 8. Mix owl: Dist. Old Prop. #5 72

69 Old Partners $200 Value $200 asis ($200) CA Acquiror $200 Cash Property $600 Value $200 asis $400 Debt Mix owl: Dist. New Prop. #1 73

70 Old Partners 95% of Items From New Property Acquiror 95% of Items From Old Property $200 Cash Used to uy New Property $200 Debt Old Property $600 Value $200 asis $400 Debt Mix owl: Dist. New Prop. #2 74

71 Old Partners 95% of Items From New Property Acquiror 95% of Items From Old Property 1. After 2 years, Old Partners have option to be redeemed for New Property plus 5% of Old Property excess appreciation or minus 5% of New Property excess appreciation. 2. If Old Partners have to pay cash, structure as purchase of interest from Acquiror. 3. Acquiror may also want put. Mix owl: Dist. New Prop. #3 75

72 Old Partners Acquiror New Property Old Property $600 Value $200 asis $400 Debt Mix owl: Dist. New Prop. #5 76

73 Old Partners Acquiror New Property 1. New Property must be subject to at least $200 of debt to protect Old Partners negative capital accounts. 2. Disguised sale of Old Partners interest in the to Acquiror? See Reg. sec Mix owl: Dist. New Prop. #4 77

74 A C $100 CASH $100 CASH $50 $100 Cash CASH $50 Loss Property A $250 $100 Value $250 asis $50 Cash 1. C recognizes $50 loss on redemption. If no sec. 754 election, no step down in basis in Property A. 2. Same loss will be duplicated on sale of Property A. Loss Duplication Redemption 78

75 A C $100 CASH Property A $200 $100 Value $200 asis $100 $50 Sale CASH $50 Loss 1. recognizes $50 loss on sale of interest. If no sec. 754 election, no step down in basis in Property A. 2. Same loss will be duplicated on sale of Property A. Loss Duplication Sale 80

76 A A $1 Sale $99 Loss C Cash/ Property $100 Value $100 asis $99 Contingent Liability 1. A recognizes $99 loss on sale to C. If no sec. 754 election, no step down in inside basis. 2. Same loss will be duplicated and deducted by C when partnership satisfies liability. Loss Duplication Contingent Liabs. 82

77 A C $100 CASH Property A $250 $100 Value $250 asis $100 Sec Prop. CASH $100 $50 Value CASH $100 asis $50 Sec. Cash 1231 Prop. $50 Value $50 asis 1. C recognizes no loss on redemption, takes sec property with $100 basis. If no sec. 754 election, no step down in basis in Property A. 2. On sale of section 1231 property, C will have ordinary (sec. 1231) loss. Loss Character Conversion 83

78 REIT OP INVESTOR Cash 1. Investor receives interest that tracks performance of specified property. Convertible Property Tracking After 30 Interest Months 2. After 30 months, Investor must elect to receive either property or REIT stock. 3. Disguised sale from OP to Investor? See Reg. Sec ; Ex. 8. Convert. Track Int. 85

79 A $100 Value $100 asis ($100) CA (Old & Cold) $600 Value $200 asis $400 Debt Disg. Sale of Int. #1 86

80 A $100 Value $100 asis ($100) CA (Old & Cold) C $99 Cash $99 Cash $600 Value $200 asis $400 Debt Disg. Sale of Int. #2 87

81 A $100 Value $100 asis ($100) CA (Old & Cold) $600 Value $200 asis $400 Debt Disg. Sale of Int. #3 88

82 A $100 Value $100 asis ($100) CA (Old & Cold) C $99 New Prop. $99 Cash $600 Value $200 asis $400 Debt Disg. Sale of Int. #4 89

83 A $100 Value $100 asis ($100) CA $100 Value $100 asis ($100) CA Property $600 Value $200 asis $400 Debt Disg. Sale of Int. #5 90

84 A $100 Value $100 asis ($100) CA $100 Value $100 asis ($100) CA New Prop. $200 Value $200 asis $100 Debt Property $600 Value $200 asis $500 $400 Debt $200 Loan ($100 Secured by New Prop.) Disg. Sale of Int. #6 91

85 A New Prop. $100 Value $200 Value $100 asis $200 asis ($100) CA $100 Debt $100 Value $100 asis ($100) CA New Prop. $200 Value $200 asis $100 Debt Property $600 Value $200 asis $500 Debt $200 Loan ($100 Secured by New Prop.) Disg. Sale of Int. #7 92

86 A New Prop. $200 Value $0 asis $100 Debt $100 Value $100 asis ($100) CA Property $600 Value $400 asis $500 Debt Disg. Sale of Int. #8 93

87 A New Prop. $200 Value $0 asis $100 Debt $100 Value $100 asis ($100) CA 1. A s outside basis before distribution of New Prop. is $100 ($100 negative capital account plus $200 share of liabilities). 2. Upon distribution of New Prop., A s share of liabilities is reduced by $200; personal liabilities increased by $100; net reduction of $100. Disg. Sale of Int. #9 94

88 A New Prop. $200 Value $0 asis $100 Debt $100 Value $100 asis ($100) CA 3. New Prop. basis stepped down $200 from $200 to $0; under Sec. 754 and 734, Property gets $200 step-up in basis. 4. Disguised sale of half of New Prop. from to A? See Reg. Sec (b)(2). Disg. Sale of Int. #10 95

89 PULIC CASH REIT CASH GP LP OP PROPERTY OWNERS APPRECIATED REAL ESTATE UPREIT #1 96

90 SHAREHOLDERS 7 MILLION SHARES REIT CONTRIUTING PARTNERS GP OP LP 3 MILLION UNITS CONVERTILE INTO 3 MILLION SHARES UPREIT #2 97

91 REIT GP ASSETS/ PARTNERSHIPS CASH PROPERTY OWNERS LP APPRECIATED REAL ESTATE DOWNREIT PSHP. DownREIT 98

92 A C REIT LPs Operating 1. AC transfers its property to Operating for OP Units and cash, cash goes to C in liquidation of AC. 2. Or, A and transfer their interests for OP Units and C transfers its interest for cash. Merger w/ oot #1 99

93 A C REIT LPs Operating 3. Or, C sells interest for cash, C transfers its property to Operating for OP Units and liquidates. 4. Or, C sells interest for cash, followed by state law merger of A into Operating. 5. Or, state law merger with cash boot; C gets cash. Merger w/ oot #2 100

94 IN EACH CASE, TREATED AS ASSETS OVER MERGER OF AC INTO OP. GAIN FROM CASH THEREFORE REALIZED AT AC LEVEL UNDER SEC. 707 DISGUISED SALE RULES SPECIAL ALLOCATION OF GAIN TO C RAISES SEC. 704(b) SUSTANTIALITY ISSUE Merger w/ oot #3 101

95 SEC. 708 REGS PERMIT MERGER OR OTHER DOCUMENT TO TREAT C AS SELLING INTEREST IMMEDIATELY EFORE MERGER, PROVIDED C CONSENTS PRIOR TO OR CONTEMPORANEOUSLY WITH MERGER C IS TAXED ON SALE OF INTEREST; NO 704(b) PROLEM Merger w/ oot #4 102

96 A A A Prop. 1 Prop. 2 Prop. 3 A wants Prop. 1 and 2; wants Prop. 3. Empire Division #1 103

97 A A A Prop.1 1 Prop. 2 Prop. 3 Each Property is transferred to a single-member LLC. Empire Division #2 104

98 A A A Prop.1 1 Prop. 2 Prop. 3 A and transfer interests in s 1, 2 and 3 into Master. Empire Division #3 105

99 A A Prop.1 Master Prop.1 Pshp. Prop. 3 Prop.1 Prop. 2 Prop. 3 After 2 years, Prop. 1 and 2 LLCs are distributed to A; Prop. 3 LLC is distributed to. Empire Division #4 106

100 NO STATE REAL PROPERTY TRANSFER TAX ECAUSE TRANSFER OF INTERESTS MASTER PARTNERSHIP IS TREATED AS CONTINUATION OF PARTNERSHIP THAT CONTRIUTES MOST NET ASSETS -- PARTNERSHIP 3 Empire Division #5 107

101 PARTNERSHIPS 1 AND 2 AND MASTER PARTNERSHIP ARE TREATED AS CONTRIUTING ALL ASSETS TO PARTNERSHIP 3 FOR INTERESTS AND THEN LIQUIDATING NOTWITHSTANDING STATE LAW INTEREST TRANSFER, NO SECTION 708(b)(1)() TERMINATION - NO DEPRECIATION RE-START Empire Division #6 108

102 ECAUSE SEC. 708 REGS ADOPT ASSETS OVER FORM, ANTI-MIXING OWL RULES DO NOT APPLY TO MASTER PARTNERSHIP (PARTNERSHIP 3 CONTINUATION) - SEE (b)(4); (2)(b) CONTRIUTIONS AND DISTRIUTIONS PRESUMED NOT TO CONSTITUTE DISGUISED SALE Empire Division #7 109

103 A A Raw Land $100x Value uilding $500x Value 110

104 A A uilding 100% LLC Interest A LLC 111

105 A LLC Interest A LLC Interest 112

106 A A A A LLC C $1,000x Raw Land uilding 113

107 A A Raw Land 100% LLC Interest A LLC 114

108 A LLC Interest A LLC Interest 115

109 C $1,000x A A A A LLC uilding Raw Land 116

110 A Raw Land $100x Value uilding $500x Value 117

111 A A A LLC Raw Land $100x Value uilding $500x Value 118

112 A $0 A A LLC Raw Land $100x Value uilding 119

113 A A C $1,000x A A LLC Raw Land uilding 120

114 T A X P A Y E R RELINQUISHED PROPERTY REPLACEMENT PROPERTY UYER OF RELINQUISHED PROPERTY QI SELLER OF REPLACEMENT PROPERTY 1031 w/ QI 121

115 T A X P A Y E R STEP 1 RELINQUISHED PROPERTY REPLACEMENT PROPERTY QI SELLER OF REPLACEMENT PROPERTY LENDER SPE Rev Ex. First #1 122

116 T A X P A Y E R STEP 2 RELINQUISHED PROPERTY REPLACEMENT PROPERTY UYER OF RELINQUISHED PROPERTY QI LENDER CASH SPE Rev Ex. First #2 123

117 T A X P A Y E R RELINQUISHED PROPERTY STEP 1 QI LENDER SPE SELLER OF REPLACEMENT PROPERTY Rev Ex. Last #1 124

118 T A X P A Y E R STEP 2 RELINQUISHED PROPERTY REPLACEMENT PROPERTY QI UYER OF RELINQUISHED PROPERTY LENDER CASH SPE Rev Ex. Last #2 125

119 A Prop. 1/2 Prop. Prop. A A 1/2 Prop. A Prop. Prop. A 1. A extracts 1/2 its equity tax-free through exchange. 2. Exchange should qualify from A s perspective regardless of what does with Prop. A. 3. Exchange may not qualify from s perspective, but if Prop. purchased for the exchange, no problem. Precontrib. Like-Kind Exchange 126

120 A $10 CASH $10 CASH Prop. A. Value $100 Value $120 asis $20 $0 asis asis $120 Liab. $100 $100 Liab. ank Q.I. Prop A. $100 Value $100 asis $100 Liab. 1. holds Prop. with low basis; Q.I. recognizes no gain on foreclosure. 2. Is there an exchange when Prop. A has no equity value? Pre-Foreclosure

121 A A ldg. Land A $100 Value $100 $0 asis asis ldg. Land A $100 Value $100 $0 asis 1. Depreciable building basis is stepped up; nondepreciable land basis is stepped down. 2. If either land or building is disposed of within 2 years after the exchange, both sides of the exchange become taxable. Related Party

122 Partners Step 1: transfers relinquished property to purchaser through QI. Relinquished Prop. Q.I. Purchaser Related Party

123 Partners 40% Interest in LLC Members LLC Replacement Prop. Step 2: Members of Replacement Property LLC contribute 40% interest to Relinquished Property in exchange for interest. Related Party

124 Partners Members 60% 40% Interim (momentary) structure LLC Replacement Prop. Related Party

125 Partners Members 60% $ 60% Q.I. Step 3: Relinquished Property buys 60% interest in Replacement Property through QI using exchange proceeds. 40% LLC Replacement Prop. Related Party

126 Partners Members Final structure 100% LLC Replacement Prop. Related Party

127 Lessor Property 10 Year Lease Lessee $10 Million Prepaid Rent (10 Years) 1. Assuming 110% of AFR equals 10%, Lessor treated as receiving $10 million loan, receiving $1,627,454 rent each year, paying interest and principal on loan. 2. Net of imputed interest expense, Lessor s ordinary income is $627,454 in year 1, $9,372,546 in years Prepaid Rent/

128 Lend Shares Younger Elder Lauders Lauders Sell orrowed Shares Public Lauder Cosmetic Corp. IPO 1. Elder Lauders raise cash for estate planning purposes by selling borrowed shares into IPO. Lauder #1 139

129 Lend Shares Younger Elder Lauders Lauders Sell orrowed Shares Public Lauder Cosmetic Corp. IPO 2. They are short against the box because they own identical shares. Lauder #2 140

130 Lend Shares Younger Elder Lauders Lauders Sell orrowed Shares Public Lauder Cosmetic Corp. IPO 3. If short sale covered after death with shares that get basis step-up, gain avoided. Lauder #3 141

131 1. Merger Agreement signed 2. ESOP formed and purchased newly issued common stock paid for with a $250 million note from Tribune (ESOP Loan) 3. Zell Entity purchased newly issued common stock and an exchangeable note for $250 million in cash 4. (a) Tribune raises over $8.0 billion of debt. (b) Tribune returns $4.3 billion of capital to shareholders via a share repurchase. Shareholders receive $34 per share. (c) Tribune refinances $2.8 billion of existing debt. Zell Entity 3 Cash ($250 mm) Common Shares & Exch. Note ESOP Loan ESOP Tribune Common Shares ($250 mm) 2 4a Cash ($7.0bn) 3 rd Party Debt Investors 4b 1 Cash ($34/share, $4.3 bn) Merger Agreement Signed Tribune Public Shareholders 4c Repay existing credit facilities ($2.8 bn) Lauder #3 142

132 1. Tribune receives shareholder and other necessary approvals 2. The ESOP Merger Sub merges into Tribune with Tribune as the surviving entity wholly owned by the ESOP a. Tribune raises $4.2 billion of debt b. Remaining public shares are converted to cash for $34 per share, equivalent to $4.3 billion in total value 3. Zell Entity purchases a subordinated note and a warrant, bringing total investment to $315 million - Warrant entitles Zell Entity to purchase approximately 40% of the fully diluted economic interest in the Company 4. Post-transaction - Tribune makes S Corp election - Asset sales 1 Receive approvals Tribune Public Shareholders 2b Shares ($4.3 bn) New Debt ($4.2 bn) Tribune 2a 3 rd Party Debt Investors Cash 3 ($34/share) Sub. Note + Warrant ($315 mm) Common Shares + Exch. Note + $65mm cash ($315 mm) Cash ($4.2 bn) Lauder #3 4 Zell Entity S Corp Election Asset sales 143

133 Estimated present value of tax savings from ESOP/S Corp structure is approximately $1 billion Elimination of Company 401(k) cash contributions results in substantial cash savings of approximately $60 million per year Deferred taxes recorded by Tribune ($1.9 billion) cease to be liabilities of the corporation Corporate tax on built-in gains on assets held at time of conversion to an S Corp disappears if assets are sold more than 10 years after conversion Value of Savings at 7.5% Discount Rate Per Year 5-year PV 10-year PV Value of Tax Savings from ESOP/S Corp Structure $418 $1,056 Value of the Elimination of Company 401(k) Cash Contributions $ Value of Public Company and Other Cost Reductions Total Value of Savings $742 $1,605 Lauder #3 144

134 NEWSDAY, INC. (QSU) CSC HOLDINGS, INC. NMG HOLDINGS, INC. NEWSDAY ASSETS FMV = $632M NEWSDAY HOLDINGS LLC CALEVISION SENIOR PULIC NOTES FMV = $650M PLUS $35M CASH NEWSDAY LLC NEWSDAY ASSETS FMV = $632M CALEVISION SENIOR PULIC NOTES FMV = $650M $35M CASH Lauder #3 145

135 NEWSDAY, INC. (QSU) CSC HOLDINGS, INC. NMG HOLDINGS, INC. $612M CASH DISTRIUTION PLUS $18M PREPAYMENT OF RENT FOR LEASE OF NEWSDAY FACILITIES 3% 97% NEWSDAY HOLDINGS LLC ANK OF AMERICA $650M LOAN GUARANTEED Y CSC HOLDINGS, INC. INDEMNIFIED Y TRIUNE NEWSDAY LLC NEWSDAY ASSETS FMV = $632M CALEVISION SENIOR PULIC NOTES FMV = $650M $35M CASH Lauder #3 146

136 INTENDED TAX CONSEQUENCES TRIUNE NOT TAXALE ON DET-FINANCED DISTRIUTION CALEVISION ALLOCATED $40M TAX DEDUCTION PER YEAR FOR 15 YEARS UNDER REMEDIAL ALLOCATION METHOD TRIUNE HAS TAXALE ORDINARY INCOME FROM REMEDIAL ALLOCATIONS AND RENT, UT NOT SUJECT TO UILT-IN GAINS TAX Lauder #3 147

137 INTENDED OOK CONSEQUENCES UNDER GAAP, ANY REDEMPTION OF A PORTION OF A PARTNER S INTEREST IS TREATED AS A SALE OF THE REDEEMED PORTION SO TRIUNE RECOGNIZES GAAP INCOME FROM TRANSACTION Lauder #3 148

138 Can the IRS challenge this outcome? The transaction, meticulously structured to fall within the guidelines for avoidance of the disguised sale rules, seems to our way of thinking impervious to any sort of technical challenge. [A]ll precautions were taken to render this transaction impregnable to an assault by the IRS on the grounds that the details of the regulations were not scrupulously adhered to. Thus, the IRS's only hope is to assert the application of one or more of the antiabuse rules that populate these regulations.... Nevertheless, when a transaction is from a technical perspective letter perfect, and when the provisions with which the transaction complied are exceedingly detailed and specific, it could be argued that the Service should not be permitted to upend the transaction by resorting to broad antiabuse rules of uncertain application. Accordingly, on balance, it is my view that, ultimately, an IRS challenge to the results obtained by the parties to this novel transaction would be unsuccessful. -- Robert Willens Lauder #3 149

139 TRIUNE COMPANY RICKETTS ACQUISITION LLC CUS ASSETS FMV = $844M $150M CASH CHICAGO ASEALL HOLDING, LLC CUS ASSETS $150M CASH Lauder #3 150

140 TRIUNE COMPANY TRIUNE S CUS LLC SUSIDIARIES RICKETTS ACQUISITION LLC RAC EDUCATION TRUST FINANCE, LLC $720M CASH DISTRIUTION 5% 95% CHICAGO ASEALL HOLDINGS, LLC $248.75M UNSECURED SUORDINATED DET GUARANTEED Y TRIUNE SENIOR LENDERS $450M SENIOR ANK DET/PRIVATE PLACEMENT NOTES (INCLUDING $25M REVOLVER) GUARANTEED Y TRIUNE Lauder #3 151

141 OTHER DEAL TERMS TRIUNE GUARANTY OF COLLECTION REQUIRES LENDERS FIRST TO EXHAUST ALL RIGHTS AND REMEDIES AGAINST ORROWER AND COLLATERAL RICKETTS AFFILIATE PROVIDES OPERATING SUPPORT AGREEMENT $35M REVOLVING SUORDINATED LOAN COMMITMENT TO SUPPORT TEAM OPERATING EXPENSES UT NOT TO MAKE PAYMENTS UNDER SENIOR OR SUORDINATED DET PARTIES AGREE TO USE IRC SECTION 704(c) REMEDIAL ALLOCATION METHOD FOR TRIUNE S CONTRIUTED ASSETS Lauder #3 152

142 OTHER DEAL TERMS RICKETTS AND LLC AGREE NOT TO CAUSE (OR ALLOW) TAXALE SALE OF CUS ASSETS PRIOR TO JANUARY 2, 2018 UT RICKETTS CAN SELL ITS 95% INTEREST RICKETTS AND LLC AGREE THAT LLC WILL MAINTAIN $673.75M OF DET UNTIL JANUARY 1, 2018, SUJECT TO AGREED AMORTIZATION SCHEDULE Lauder #3 153

143 OTHER DEAL TERMS TRIUNE DESIGNATES ONE MEMER OF OARD WITH UP TO 19 MEMERS APPOINTED Y RICKETTS RICKETTS HAS OPTION TO PURCHASE TRIUNE S INTEREST FOR 6 MONTHS AFTER JANUARY 1, 2018 AND JANUARY 1, 2022 AT FMV, PLUS RIGHT OF FIRST REFUSAL TRIUNE HAS OPTION TO PUT ITS INTEREST TO THE COMPANY OR RICKETTS FOR 12 MONTHS AFTER JANUARY 1, 2021 AND JANUARY 1, 2027 AT FMV Lauder #3 154

144 INTENDED TAX CONSEQUENCES TRIUNE NOT TAXALE ON DET-FINANCED PORTION OF DISTRIUTION TREATED AS ORROWING THROUGH THE PARTNERSHIP RICKETTS ALLOCATED SUSTANTIAL TAX DEDUCTIONS EACH YEAR FOR 15+ YEARS UNDER REMEDIAL ALLOCATION METHOD TRIUNE HAS TAXALE ORDINARY INCOME FROM REMEDIAL ALLOCATIONS, NOT SUJECT TO S CORP UILT-IN GAINS TAX; UT SUJECT TO TAX IF TRIUNE CONVERTS TO A C CORP Lauder #3 155

145 INTENDED OOK CONSEQUENCES UNDER GAAP, ANY REDEMPTION OF A PORTION OF A PARTNER S INTEREST IS TREATED AS A SALE OF THE REDEEMED PORTION SO TRIUNE RECOGNIZES GAAP INCOME FROM TRANSACTION Lauder #3 156

146 CANAL CORPORATION 100% WISCONSIN TISSUE MILLS, INC. 5% MEMERSHIP INTEREST 95% MEMERSHIP INTEREST GEORGIA PACIFIC TISSUE MANUFACTURING USINESS ASSETS FMV = $775M GEORGIA PACIFIC TISSUE LLC TISSUE MANUFACTURING USINESS ASSETS FMV = $376.4M ANK OF AMERICA $755M LOAN GUARANTEED Y GEORGIA PACIFIC WITH INDEMNITY OF PRINCIPAL FROM WISCONSIN TISSUE MILLS, INC. Lauder #3 157

147 Cash used to repay intercompany notes and dividend CANAL CORPORATION 100% WISCONSIN TISSUE MILLS, INC. 5% MEMERSHIP INTEREST 95% MEMERSHIP INTEREST GEORGIA PACIFIC $755M CASH GEORGIA PACIFIC TISSUE LLC TISSUE MANUFACTURING USINESS FMV = $1151.4M ANK OF AMERICA $755M LOAN GUARANTEED Y GEORGIA PACIFIC WITH INDEMNITY OF PRINCIPAL FROM WISCONSIN TISSUE MILLS, INC. Lauder #3 158

148 CANAL CORPORATION 100% WISCONSIN TISSUE MILLS, INC. GEORGIA PACIFIC $ MILLION INTERCOMPANY NOTE FROM CHESAPEAKE AND $6 MILLION CORPORATE JET 5% MEMERSHIP INTEREST GEORGIA PACIFIC TISSUE LLC 95% MEMERSHIP INTEREST TISSUE MANUFACTURING USINESS FMV = $1151.4M ANK OF AMERICA $755M LOAN GUARANTEED Y GEORGIA PACIFIC WITH INDEMNITY OF PRINCIPAL FROM WISCONSIN TISSUE MILLS, INC. Lauder #3 159

149 The section 752 anti-abuse rule applied, and the debt-financed distribution to the disguised sale rules was inapplicable, so transaction taxable as a disguised sale WISCO was chosen as the indemnitor, rather than Chesapeake, after PWC advised Chesapeake s executives that WISCO s indemnity would not only allow Chesapeake to defer tax on the transaction, but would also cause the economic risk of loss to be borne only by WISCO s assets, not Chesapeake s. Lauder #3 160

150 WISCO s principal asset after the transfer was the intercompany note. The indemnity agreement did not require WISCO to retain this note or any other asset. Chesapeake and its management had full and absolute control of WISCO. Nothing restricted Chesapeake from cancelling the note at its discretion at any time to reduce the asset level of WISCO to zero. Although WISCO was not a newly formed entity, the structure at issue was not distinguishable from the example in the section 752 anti-abuse regulation Lauder #3 161

151 The terms of the indemnity reduced the likelihood of GP invoking the indemnity against WISCO, including the fact that the indemnity only covered the loan s principal, which was due in 30 years, and not interest; that GP had to first proceed against the joint venture s assets before demanding indemnification from WISCO; and that, to the extent WISCO paid on the indemnity, it would receive an increased interest in the LLC Lauder #3 162

152 A thinly capitalized subsidiary with no business operations and no real assets cannot be used to shield a parent corporation with significant assets from being taxed on a deemed sale. [T]he indemnity agreement should be disregarded because it created no more than a remote possibility that WISCO would actually be liable for payment. Lauder #3 163

153 A S Corp. $100 Value $40 asis 1. A and want to sell business for $ A wants immediate cash; wants to sell for note to defer tax. S Corp Special Allocation 1 164

154 A Note 1 $50 Note 2 $50 2 Notes S Corp. 1. S Corp. sells assets $100 Note Value 1 for $50 two notes and liquidates. Note $40 asis 2 $50 Assets 2. Note 1 is distributed to A who wants cash; Note 2 is distributed to who wants deferral. 3. Note 1 is payable the day after the S Corp. liquidates; Note 2 is payable as negotiated. S Corp Special Allocation 2 165

155 A S Corp. Asset 1 - $100 Asset 2 - $ A and want to split up the business, with A getting Asset 1 and getting Asset S Corp. cannot meet sec. 355 requirements. S Corp Split-Up 1 168

156 A Note 2 $100 Note 1 $100 Note 1 $100 Note 2 $100 A Spouse Asset 1 S Corp. Asset Note 1 - $100 Asset Note 2 -- $100 Spouse Asset 2 1. A s spouse owns Asset 1; A owes s spouse $ s spouse owns Asset 2; owes A s spouse $100. S Corp Split-Up 2 169

157 The distressingly complex and confusing nature of the provisions of subchapter K present a formidable obstacle to the comprehension of these provisions without the expenditure of a disproportionate amount of time and effort even by one who is sophisticated in tax matters with many years of experience in the tax field. Its most complex provisions may confidently be dealt with by at most only a comparatively small number of specialists who have been initiated into its mysteries. Foxman, 41 T.C. 535, 551 (1964). 172

158 We are mindful that partnership taxation is... generally recognized as the most difficult area of the Internal Revenue Code. Twenty Mile Joint Venture v. Comm r, 200 F. 3d 1268 (10th Cir., 1999). 173

159 1101 New York Avenue, N.W. Washington, D.C (202)