Transaction That Was Part of Qualified Stock Purchase Treated as Distribution in Liquidation

Transcription

1 Transaction That Was Part of Qualified Stock Purchase Treated as Distribution in Liquidation PLR IRS has privately ruled that an acquisition was a qualified stock purchase under Code Sec. 338(d)(3). In so doing, it concluded that an asset sale in exchange for an asset sale note, followed by the note cancellation, would be treated as a distribution in proposed liquidation rather than a sale of property to an acquisition subsidiary. The proposed liquidation would be treated as if the target corporation distributed all of its business assets, subject to liabilities, to the acquisition subsidiary, and distributed cash to the minority shareholders in complete liquidation. A corporate acquirer that makes a qualified stock purchase of the stock of another corporation (target) may be able to get a stepped-up basis for the target's assets by making a Code Sec. 338 election to treat the stock purchase as an asset purchase. If a Code Sec. 338 election is made, the target is treated (for tax purposes only) as two corporations: an old target and a new target. The old target is treated as if it sold its assets as of the close of the acquisition date for their fair market value (FMV) in a single transaction. ( Code Sec. 338(a)(1), Reg (a) ) The new target is treated as though it had purchased all of the assets of the old target as of the beginning of the day after the acquisition date ( Code Sec. 338(a)(2) ), for an amount equal to the sum of: the grossed-up basis of the acquiring corporation's recently purchased stock, the basis of the acquiring corporation's nonrecently purchased stock, the target's liabilities, and other relevant items. ( Code Sec. 338(b), Reg (b)(1) ) The Code Sec. 338 election may be made only if the acquiring corporation 1

2 makes a qualified stock purchase of the target. ( Code Sec. 338(a) ) A qualified stock purchase occurs when one corporation (acquiring) purchases, in one or more transactions during a 12-month acquisition period, another corporation's (target's) stock, if the shares so purchased have at least 80% of the target's total combined voting power and at least 80% of the value of all the target's stock. ( Code Sec. 338(d)(3) ) In Rev Rul , CB 68, a domestic corporation, in order to meet the requirements of foreign law (which didn't recognize tax-free spin-offs), paid cash to its first-tier foreign subsidiary for the stock of a second-tier subsidiary spun off by the first-tier subsidiary, and then had the first-tier subsidiary distribute cash that was equal (after foreign taxes withheld) to what the parent had just paid. IRS ruled that the parent had to pick up as a dividend only the deemed distribution equal to the foreign tax withheld. The circular flow of cash from the parent to the first-tier subsidiary and back was a transitory step that had no federal income tax consequences. Thus, the basis of the parent in the stock of the first-tier subsidiary was unaffected. (The payment of the withholding taxes by the first-tier subsidiary, however, was an additional distribution that was treated as a dividend to the parent.) In Rev Rul , CB 150, incorporators representing a banking corporation formed a holding company and its subsidiary in order to merge the banking corporation into the subsidiary in a reorganization qualifying under Code Sec. 368(a). IRS held that the circular cash flows coupled with stock transfers among the banking corporation, the holding company, the subsidiary, and the incorporators, that were instituted solely to meet minimum state capitalization requirements and that resulted in the original shareholders of the merged banking corporation holding all the stock of the holding company (which held all the stock of the subsidiary), were disregarded for federal income tax purposes. 2

3 Parent is a publicly traded corporation and is the common parent of an affiliated group of companies that files a consolidated return for U.S. federal income tax purposes. Parent owns, directly or indirectly, all of the stock of Country A FSub, which is treated as a corporation for U.S. federal income tax purposes. FSub owns all of the interests in Country A Acquisition Sub, which is treated as a disregarded entity for U.S. federal income tax purposes. Country A Target is a corporation and is the common parent of an affiliated group of companies. Target's stock is traded on a Country A stock exchange and has one class of shares outstanding. Target's stock includes ordinary shares represented by American Depositary Receipts (ADRs) traded on a U.S. stock exchange. Under an agreement between Parent and Target: (1) Parent will make a public tender offer (Tender Offer) to acquire all issued and outstanding shares of Target, including all issued and outstanding ADRs. The Tender Offer will be open during the Acceptance Period, and will be subject to the Offer Conditions, including the Minimum Acceptance Percentage. If, after settlement of the Tender Offer, Acquisition Sub were to own Target stock representing the Asset Sale Range, Target shareholders would be required to approve the Asset Sale Resolutions. (2) Assuming all Offer Conditions are satisfied, Acquisition Sub will buy tendered shares at the agreed upon price per share as stated in the Tender Offer (Settlement). Acquisition Sub may continue to purchase Target shares or ADRs after the Settlement. (The Settlement and any subsequent purchase of Target shares by Acquisition Sub together make up the Acquisition). (3) If, following the Settlement, Acquisition Sub owns an amount of Target stock falling within the Asset Sale Range, the board of directors of 3

4 Acquisition Sub will adopt a resolution (Acquisition Sub Resolution) in order to implement the Asset Sale and the dissolution of Target (the Asset Sale and the dissolution of Target, collectively, make up the proposed liquidation). (4) After the Acquisition Sub Resolution and all Asset Sale Resolutions have been approved, Target and Acquisition Sub will enter into an agreement (Asset Sale Agreement). Execution of the Asset Sale Agreement will be subject to the Signing Conditions. (5) Once the Signing Conditions are satisfied, Acquisition Sub will cause Target to sell all of Target's business assets to Acquisition Sub (Asset Sale) for a note (the Asset Sale Note). (6) Following the Asset Sale, Target will make liquidating distributions consisting of (a) the cancellation of the Asset Sale Note via setoff against any payment by Target to Acquisition Sub pursuant to the liquidating distribution, and (b) cash to any shareholder other than Acquisition Sub or its affiliates (Minority Shareholders) in redemption of their shares. (7) Following the cancellation of the Asset Sale Note and the redemption of shares held by the Minority Shareholders, the shares and ADRs of Target will be delisted from the Country A stock exchange. (8) Following the delisting of its shares, Target will convert into Business Entity A pursuant to Country A law and will elect to be disregarded as separate from its owner for U.S. federal income tax purposes. (9) Once the opposition period under Country A law lapses, and all opposition is withdrawn or settled, Target will make a final distribution of its assets (if any) to its shareholders. (10) In the event that, after the Settlement of the Tender Offer, Acquisition Sub owns more than X% of the stock of Target, then Acquisition Sub will be required under Country A law to acquire the Target stock held by any 4

5 Minority Shareholders through a statutory buy-out proceeding and steps (3) through (7), above, will not occur. In the Private Letter Ruling (PLR), IRS ruled that the Asset Sale for the Asset Sale Note and the cancellation of the Asset Sale Note would be treated as a distribution in the proposed liquidation rather than as a sale of property to Acquisition Sub. The proposed liquidation would be treated as if Target distributed all of its business assets subject to liabilities to Acquisition Sub and distributed cash to the Minority Shareholders in complete liquidation. (See Rev Rul and Rev Rul ) The Acquisition would be a qualified stock purchase under Code Sec. 338(d)(3). 5