Corporate Tax Developments: Part 5 of 5

Transcription

1 Crprate Tax Develpments: Part 5 f 5 Bill Zimbalist Senir Technician Reviewer (Branch 1) Internal Revenue Service Office f Assciate Chief Cunsel (Crprate) Devn Bdh Principal KPMG LLP Lawrence Axelrd Special Cunsel (Crprate) Internal Revenue Service Office f Assciate Chief Cunsel (Crprate) Sctt Levine Partner Jnes Day Washingtn, DC May 19, 2015

2 Agenda Service recnsidering significant issue limitatin n spin-ff and rerganizatin rulings Rev. Ruls and Next day rule and agent fr the grup regulatins 2

3 REVISITING SIGNIFICANT ISSUE RULING PRACTICE

4 Revisiting Subchapter C Ruling Practice? At a May 9, 2015 ABA cnference, IRS Deputy Assciate Chief Cunsel (Crprate) Alisn Burns asked fr practitiner cmments regarding the Service s practice t issue rulings nly n significant issues in sectins 332, 351, 355, and 368 transactins. Burns asked [w]hat are the issues that are giving yu the mst amunt f heartburn that we re nt ruling n?... We have decided that we have sme bandwidth t rethink whether we can pen back up the PLR prgram smewhat t make it mre respnsive t yur needs. Burns said that the significant issue limitatin reduced the number f rulings mre than expected. Sectin 355 may be an area where practitiners need additinal PLR supprt. 4

5 REV. RULS &

6 Rev. Rul P 2 Frm 1. S2 frms N. 2. P transfers all f its S1 stck t S2. 3. X, Y, Z, and S1 transfer substantially all f their assets t N fr N stck. 4. X, Y, Z, and S1 liquidate. S1 4 S2 1 S1, S2, X, Y, Z, and N are freign. If the frm is respected, Step 2 culd be treated as a sectin 351 exchange and Steps 3 and 4 culd qualify as a D rerganizatin. X/Y/Z S1 N 3 Cnclusins The Service ruled that Step 2 was ignred and S1 was treated as directly transferring assets t N fr S2 stck. This recharacterized transactin wuld nt qualify as a D rerganizatin, but culd be a triangular C rerganizatin. 6

7 Rev. Rul Why was Rev. Rul issued? In 1978, taxpayers engaging in sectin 367 transactins were required t btain rulings. Rev. Rul states that the Cmmissiner f Internal Revenue has determined [the transactin] is nt in pursuance f a plan having as ne f its principal purpses the avidance f Federal incme taxes within the meaning f sectin 367 f the Cde. Sectin 367(a) wuld have applied t the frm f the transactin under Treas. Reg. sectin 7.367(b)-4, but nt t the recast, s the ruling was apparently issued t help taxpayers wh were unaware f the sectin 367 ruling requirement. 7

8 Rev. Rul Step 1: Frmatin f N Step 2: Transfer f S-1 t S-2 P P 2 S-1 stck S-1 S-2 S-1 S-2 1 X Y Z N S-1 X Y Z N P is a U.S. crpratin. S-1, S-2, X, Y, and Z are all Cuntry R crpratins. S-1 is an perating subsidiary and S-2 is a hlding cmpany. S-2 frms N, a freign crpratin incrprated in Cuntry R. P transfers the stck f S-1 t S-2 fr additinal S-2 cmmn vting stck. P enters int a gain recgnitin agreement. 8

9 Rev. Rul (cnt d) Step 3: Transfer f S-1, X, Y, and Z Assets t N Step 4: Liquidatins f S-1, X, Y, and Z P P S-2 N stck 4 S-2 4 N stck 4 N stck 4 N stck S-1 X Y Z S-1 X Y Z 3 S-1, X, Y, and Z assets N N S-1, X, Y, and Z transfer substantially all f their assets t N in exchange fr N cmmn stck. N will cntinue t cnduct the businesses cnducted by S- 1, X, Y, and Z. S-1, X, Y, and Z liquidate, distributing the N cmmn stck received in Step 3 t S-2. 9

10 Rev. Rul (cnt d) Cnclusins: P s transfer f its S-1 stck t S-2 is an exchange gverned by sectin 351. The transfers by S-1, X, Y, and Z f substantially all f their assets t N fllwed by the liquidatins f S-1, X, Y, and Z qualify as rerganizatins under sectin 368(a)(1)(D). Rev. Rul is revked. 10

11 Rev. Rul Step 1: P Transfer f LLC t S1 Step 2: S1 Transfer f LLC t S2 P 1 P LLC interests S1 LLC S1 2 LLC interests S2 LLC S2 LLC S3 S3 LLC S4 S4 LLC is a limited liability cmpany that elected t be treated as a crpratin fr U.S. federal tax purpses. P transfers all f the LLC interests t S1 fr additinal vting cmmn stck f S1. S1 transfers all f the LLC interests t S2 fr additinal vting cmmn stck f S2. 11

12 Rev. Rul (cnt d) Step 3: S2 Transfer f LLC t S3 Step 4: LLC Entity Classificatin Electin P P S1 S1 S2 S2 3 LLC interests S3 LLC S3 4 S4 LLC S4 LLC S2 transfers all f the LLC interests t S3 fr additinal vting cmmn stck f S3. LLC elects t be treated as a disregarded entity fr U.S. federal tax purpses effective at least ne day fllwing Step 3. S3, thrugh LLC as a branch, will cntinue the histrical business f LLC. 12

13 Rev. Rul (cnt d) Analysis: A transfer f stck can be respected as a sectin 351 exchange even if it is fllwed by subsequent transfers f the prperty as part f an integrated plan. See Rev. Rul ; Rev. Rul ; Rev. Rul A transfer f prperty in an exchange therwise described in sectin 351 will nt qualify as a sectin 351 exchange if, fr example, a different treatment is warranted t reflect the substance f the transactin as a whle. See Rev. Rul ; Rev. Rul P s transfer t S1 and S1 s transfer t S2 satisfy the frmal requirements f sectin 351, and the transactin as a whle des nt require the transfers t be treated ther than in accrdance with their frm. S2 s transfer f LLC t S3 in a sectin 351 exchange fllwed by LLC s deemed liquidatin is mre prperly characterized as a rerganizatin t the extent it s qualifies. See Rev. Rul , Rev. Rul

14 Rev. Rul (cnt d) Cnclusins: P s transfer f the LLC interests t S1 fr additinal S1 stck is an exchange gverned by sectin 351. S1 s transfer f the LLC interests t S2 fr additinal S2 stck is an exchange gverned by sectin 351. S2 s transfer f the LLC interests t S3, tgether with the electin by LLC t be treated as a disregarded entity fr U.S. federal tax purpses, qualifies as a D rerganizatin. 14

15 Questins Why was Rev. Rul revked instead f bsleted? Why d the rulings cnclude that the stck drps are gverned by sectin 351? Culd they als be B rerganizatins? The rulings factually prvide that stck was issued by the transferee in each exchange. Wuld the result change if stck, in frm, was nt issued? If the stck drp is a B rerganizatin, there may be basis implicatins in certain fact patterns. See Treas. Reg. sectin (a)(2)(viii). Why was S4 included in the facts f Rev. Rul ? If the final step in Rev. Rul had nt qualified as a D rerganizatin, wuld it be characterized as a sectin 351 exchange fllwed by a sectin 332 liquidatin? 15

16 Rev. Rul and Check-the-Bx The Service cncluded that S2 s transfer f the LLC interests t S3, fllwed by LLC s check-the-bx ( CTB ) electin effective n earlier than the fllwing day, qualifies as a D rerganizatin. Treas. Reg. sectin (g)(3) prvides that the deemed liquidatin in a CTB electin ccurs immediately befre the clse f the day befre the electin is effective. Des Rev. Rul prvide any guidance in a situatin where the stck transfer preceding the CTB electin als ccurs at the end f the day befre the CTB electin is t be effective, as a result f either lcal law r drafting? Practitiners smetimes recmmend that the CTB electin be effective n earlier than tw days after the transfer t avid this issue. 16

17 Rev. Rul , Situatin 1 Step 1: X Acquires T via Reverse Subsidiary Merger Step 2: T Merges Upstream int X X 70% X v/s 30% cash T sharehlders X & T sharehlders Y 1 Acquisitin Merger T 2 Upstream Merger X T Y merges int T in a transactin where the T sharehlders receive a mix f 70% X vting stck and 30% cash (the Acquisitin Merger). As part f the same plan as the Acquisitin Merger, T merges int X (the Upstream Merger). Cnclusins: The Acquisitin Merger and the Upstream Merger are nt treated as a stck acquisitin that is a qualified stck purchase fllwed by a 332 liquidatin. N sectin 338 electin is permitted. The Acquisitin Merger and the Upstream Merger are treated as an acquisitin f T s assets thrugh a single statutry merger f T int X that qualifies as an A rerganizatin. 17

18 Treas. Reg. sectin 1.338(h)(10)-1(e), Ex. 13 Step 1: Y Merges int T Step 2: T Merges int X P sharehlders P sharehlders S P 50% cash, 50% P stck S P X Y 1 Merger T X Merger 2 T P, X, Y, S, and T are all dmestic crpratins. Y merges int T in a transactin where S receives a mix f 50% cash and 50% P stck. T merges int X. Assumes Step 1 did nt qualify fr sectin 351 treatment. Absent applicatin f the step transactin dctrine, Step 1 wuld be treated as a QSP (see, e.g., Rev. Rul ) and Step 2 wuld be treated as a D rerganizatin. The regulatin states that absent the applicatin f [Treas. Reg. sectin 1.338(h)(10)-1(c)(2)], the step transactin dctrine wuld apply t treat P s acquisitin f the T stck and T s merger int X as an acquisitin by X f T s assets in a rerganizatin described in sectin 368(a). Fllwing the revcatin f Rev. Rul , is Step 1 a taxable exchange and Step 2 a D rerganizatin? Are Rev. Ruls and limited t multi-step transactins where the first step is a sectin 351 exchange? A nn-recgnitin transactin? 18

19 Rev. Rul Step 1: Y Acquires X Step 2: Z Acquires Y Y sharehlders 1 X sharehlders Z sharehlders 2 X & Y sharehlders Y Y X Z X Y acquires all f the X stck slely fr Y vting stck. Z acquires all f the Y stck slely fr Z vting stck. Cnclusins: Z s acquisitin f the Y stck in Step 2 is a B rerganizatin. The receipt and surrender f Y stck by X sharehlders is disregarded. Y is treated as acquiring all f the X stck fr Z stck in a triangular B rerganizatin. Questin What, if any, is the impact f Rev. Ruls and n Rev. Rul ? 19

20 Rev. Rul Step 1: A Cntributes Assets t X Step 2: A Transfers X t Y Public A 1 Sle prprietrship A 2 X stck fr Y stck Y Sle Prprietrship X X Sle Prprietrship A transfers the sle prprietrship t X in exchange fr additinal shares f X stck. As part f a plan as Step 1, A transfers all f his X stck t Y slely in exchange fr vting cmmn stck f Y, which is widely held. Cnclusins: The receipt by A f additinal X stck in Step 1 is transitry and withut substance. A is treated as directly transferring the sle prprietrship assets and the X stck t Y in exchange fr Y stck. The transfer f sle prprietrship assets is a taxable exchange. The transfer f the X stck t Y slely fr Y stck is a B rerganizatin. 20

21 Rev. Rul Step 1 Step 2 Business A1 assets 1 W X W 2 Z stck X 2 $30x Z Business A1 Assets Businesses B & C Y Z Businesses B & C Y Value = $40x Value = $60x Value = $60x Business A2 Assets Value = $30x Business A1 Assets Value = $40x Business A2 Assets Value = $30x W frms Z and transfers all f its Business A1 assets t Z in exchange fr all f the stck f Z. W transfers all f the Z stck t Y in exchange fr Y stck. X simultaneusly cntributes $30x f cash t Y. Immediately after this Step 2, W wns 40% f the Y stck and X wns 60% f the Y stck. 21

22 Rev. Rul (cnt d) Step 3 W X 40% 60% Businesses B & C 3 Business A2 assets and $30X Y Z Business A1 & A2 Assets & $30x Business A Assets Y cntributes its Business A2 assets and $30X t Z. Step 1-3 are all executed pursuant t a binding cmmitment. Cnclusins: The Step 1 transfer f Business A1 assets frm W t Z qualifies as a sectin 351 exchange even thugh, as part f the same binding cmmitment, W transfers the Z stck t Y simultaneusly with a transfer f assets by X t Y, immediately after which W and X are in cntrl f Y. 22

23 PLR Step 1: Cntributin f Assets t Crp C Step 2: Cntributin f Crp C Stck t P Ship B Crp1 Crp2 New Investrs Crp1 Crp2 New Investrs P Ship A 1 1 P Ship A 2 2 Crp A P Ship B Crp A 2 P Ship B 1 Crp C Crp C Partnership A, Crp A, and New Investrs transfer assets t Crp C slely in exchange fr Crp C stck. The taxpayer represented that Step 1 qualified fr sectin 351 treatment. Pursuant t a pre-existing binding plan, New Investrs, Crp A, and Partnership A transfer the Crp C stck received in Step 1 t Partnership B slely in exchange fr Partnership B interests. The taxpayer represented that Step 2 qualified fr sectin 721 treatment. Rulings: Step 1 qualifies fr tax-free treatment under sectin 351. Step 2 did nt prevent Step 1 frm satisfying the requirements f sectin

24 Rev. Rul P Machinery S1 2 Machinery S2 P, S1, and S2 are U.S. crpratins. P transfers machinery t S1 fr additinal shares f S1 stck, and S1 transfers the machinery t S2 slely fr additinal shares f S2 stck. S2 retains the machinery fr use in its trade r business. Cnclusins: Each transfer is treated as a separate sectin 351 exchange. See als Rev. Ruls ,

25 Rev. Rul Steps 1-3 Step 4 1 P P Prperty Prperty 2 S-1 Branch B 4 S-1 Branch B Newc 1. P transfers certain prperty t S S-1 sets up Branch B t use the assets in a business peratin. 3. S-1 incrprates Newc, which brrws perating funds frm a bank. 3 $ Branch B PRS Newc S-1 and Newc frm PRS. Newc cntributes cash brrwed in Step 3 t PRS and S-1 cntributes Branch B t PRS. 4 $ Cnclusins: The transfer f certain prperty frm P t S-1 in Step 1 is treated as a sectin 351 exchange. The transfer f cash and Branch B frm Newc and S-1, respectively, t PRS in Step 4 is treated as a sectin 721 exchange. Amplifies Rev. Rul

26 Extensin f Rev. Rul ? 1 Asset fr 100% Y stck X Y Z 2 Asset fr 5% PRS interest PRS 1. X transfers an asset t Y fr all f the Y stck. 2. Y transfers the asset t PRS fr a 5% PRS interest. The ther 95% PRS interest is held by an unrelated party. Is X s transfer f the asset t Y a sectin 351 exchange? Des it matter whether Y cntrls PRS? 26

27 Resrts Internatinal Example Step 1: Cntributin f S2 Stck Step 2: Check-the-Bx Electins A 1 S2 stck A S1 S2 S1 S2 2 S3 S3 S4 S4 A cntributes all f its S2 stck t S1. S2, S3, and S4 elect t be disregarded entities. Under Resrts Internatinal, the transactin wuld be treated as crss-chain rerganizatins f S2, S3, and S4. Is that still the apprpriate result? Cmpare PLR

28 NEXT DAY RULE & AGENT FOR THE GROUP REGULATIONS

29 Next Day Rule P P sells S t A at 8:00AM A S S S sells asset at 10:00AM Suppse S sells an asset at 10:00 a.m. resulting in a significant taxable gain. Treas. Reg. sectin (b)(1)(ii)(B): If n the day f S s change in status as a member, a transactin ccurs that is prperly allcable t the prtin f S s day after the event resulting in the change, S and all persns related t S under sectin 267(b) immediately after the event must treat the transactin fr all Federal incme tax purpses as ccurring at the beginning f the fllwing day. A determinatin as t whether a transactin is prperly allcable t the prtin f S s day after the event will be respected if it is reasnable and cnsistently applied by all affected persns. 29

30 Next Day Rule Reg (b)(1)(ii)(B) The factrs t be cnsidered include: Whether incme, gain, deductin, lss, and credit are allcated incnsistently; If the item is frm a transactin with respect t S stck, whether it reflects wnership f the stck befre r after the event; Whether the allcatin is incnsistent with ther requirements under the Cde; and Whether ther facts exist, such as a prearranged transactin r multiple changes f S s status. 30

31 Next Day Rule GLAM Stand-alne crpratin T was acquired by a cnslidated grup. T incurred the fllwing csts: Amunts paid t emplyees fr and in cancellatin f nnqualified stck ptins and stck appreciatin rights (SARs) in the event f a change in cntrl; Fees paid t financial advisry and investment banking firms t prvide cnsulting services fr T in cnnectin with the acquisitin and cntingent upn the successful clsing f the acquisitin; and Retirement f T bnds at a premium after the acquisitin clsed. 31

32 Next Day Rule GLAM (cnt d) The Service cncluded that: The Next Day Rule des nt permit the expenses assciated with the stck ptins, the SARs, and the success-based cnsulting fees t be allcated t the perid after the acquisitin. This cnclusin was based n the view that these items are nt frm a transactin with respect t T stck; rather, they are items frm transactins that precede the acquisitin and invlve the perfrmance f services fr T by emplyees and cnsultants. Applicatin f the Next Day Rule may be apprpriate fr the retirement f T s bnds at a premium. This cnclusin was based n the view that the retirement relates t a decisin made by T after the clsing. The facts prvide that in cntemplatin f the acquisitin, A and T agree that T will give the bndhlders the pprtunity t tender their bnds at a premium by a date befre the acquisitin date. Hwever, T is nt bligated t purchase any f the tendered bnds and des s nly after the acquisitin. 32

33 Prpsed Reg Next Day Rule Prpsed Next Day Rule: If an extrardinary item results frm a transactin that ccurs n the day f S s change in status, but after the events resulting in the change, and that item wuld be taken int accunt by S n that day, the transactin resulting in the extrardinary item is treated as ccurring at the beginning f the fllwing day fr purpses f determining the perid in which S must reprt the item. The next day rule des nt apply t any extrardinary item that becmes includible r deductible simultaneusly with the event that causes the change in S s status. 33

34 Prpsed Reg Previus Day Rule Previus Day Rule: The prpsed regulatins add a Previus Day Rule that mirrrs the principles f the Prpsed Next Day Rule. The Previus Day Rule requires extrardinary items resulting frm the transactin that ccur n the terminatin date (but befre r simultaneusly with the event causing S s status as an S crpratin t terminate) t be allcated t S s tax return fr the shrt perid that ends n the previus day. 34

35 Prpsed Regulatins Scpe and Crdinatin Scpe The Current Next Day Rule applies fr all U.S. federal incme tax purpses. The Prpsed Next Day Rule and Previus Day Rule generally apply fr purpses f determining the perid in which S must reprt the item. Sectin 382(h) Crdinatin If the day f S s change in status is als the date f an wnership change fr purpses f sectin 382, the rules and principles f this sectin apply in determining the treatment f any item r asset fr purpses f sectin 382(h). Sectin 1374 Crdinatin If a member ceases t be an S crpratin upn becming a member f a cnslidated grup, r if a departing member elects t be an S crpratin after ceasing t be a member, the member s recgnized built-in gain r lss fr purpses f sectin 1374 will include nly the amunts reprted n the member s separate return (including items reprted n that return under the Previus Day Rule r the Next Day Rule). 35

36 Prpsed Regulatins Partial Redemptin and Anti- Abuse Rule Partial Redemptin Prp. Reg (b)(5), Example 9(c) P wns 80 shares f S stck and individual X wns 20 shares f S stck. S transfers appreciated prperty in redemptin f 20 shares f S stck held by P, such that after the redemptin P wns 75% f S. The End f Day rule des nt apply fr purpses f determining whether P and S are members f the same cnslidated grup immediately after the redemptin. Because P wns nly 75% f S's stck immediately after the redemptin, the distributin is nt an intercmpany distributin described in Reg (f)(2)(i). S's gain under sectin 311(b) must be reprted under the End f Day Rule in S s taxable year during which S was a member f the P grup. Anti-Abuse Rule If any persn acts with a principal purpse cntrary t this paragraph t substantially reduce the federal incme tax liability f any persn (including by mdifying an existing cntract r ther agreement in anticipatin f change in S s status t shift an item between the taxable years that end and begin as a result f S s change in status) adjustments must be made as necessary t carry ut the purpses f this sectin. 36

37 Treas. Reg. Sectin Effective April 1, 2015 the Service released final agent fr the grup regulatins. [O]ne entity (the agent) is the sle agent that is authrized t act in its wn name regarding all matters relating t the federal incme tax liability fr the cnslidated return year fr each member f the grup and any successr r transferee f a member (and any subsequent successrs and transferees theref). The regulatins are largely cnsistent with prpsed regulatins issued in The Service als released Rev. Prc cntaining prcedural rules fr identifying and designating an agent fr the grup under the final regulatins. 37

38 Treas. Reg. Sectin (cnt d) Under Treas. Reg. sectin : If there is a default successr t the current agent (e.g., by merger), it autmatically takes ver fr the ld agent. The cmmn parent f a grup can cntinue as the agent if it elects t be disregarded. An agent can resign and designate a new agent fr the grup. The IRS can designate an agent fr the grup if: The current agent ges ut f existence, there is n default successr, and the agent des nt designate a successr; The current agent r successr des nt respnd t ntices frm the IRS; The current agent leaves the cnslidated grup; The IRS receives a written request frm a grup member; The current agent fails t perfrm its bligatins; r The current agent becmes a freign entity. 38