August 21 24, 2007 Presentation Executives Institute Indianapolis, IN Introduction to Corporate Planning by Jeffrey M. Vesely and Carl R. Erdman I. Introduction In this presentation, we will be providing an introduction to corporate tax planning issues from a state and local tax perspective. The discussion will principally focus upon state income tax issues from the point of view of both the buyer and the seller. By necessity, the discussion is relatively general and is not intended to be fully comprehensive. II. Overview of Transactions This section of the outline focuses on the state tax implications of selling, buying, reorganizing or dividing a corporation. First is a brief overview of the most common forms of transactions under sub chapter C of the Internal Revenue Code. Following is a brief checklist of state tax issues one should consider when involved in any corporate reorganization. A. "-Free" Transactions 1. Contributions to Capital IRC 351 a. No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock. Shareholders need to "control" the corporation after transaction No gain or loss recognized by shareholders unless boot is received No gain or loss recognized by recipient corporation 2. Mergers and Reorganizations IRC 368 a. Reorganizations under IRC 368 are extremely complex and well beyond the scope of this outline. However, it is important for state tax professionals Executive Institute Pillsbury Winthrop Shaw Pittman LLP 1
to have at least a passing knowledge of the types of transactions, and at a high level, some of the consequences of these transactions. The following is a list of the most common types of reorganizations under 368: 368(a)(1) Statutory Merger 368(a)(2)(D) Forward Triangular Merger 368(a)(2)(E) Reverse Triangular Merger 368(a)(1)(B) Stock for Stock Exchange 368(a)(1)(C) Stock for Assets Exchange 368(a)(1)(D) Non-divisive "D" Reorganizations 368(a)(1)(E) Recapitalization 368(a)(1)(F) Change in Identity, Form or Place of Incorporation 368(a)(1)(G) Insolvency Reorganization Generally, there is no gain or loss recognized by shareholders except to the extent boot is received. Nor is there gain or loss to the target or the acquiring corporation. Gain is recognized by target if appreciated property is distributed. 3. Corporate Divisions IRC 355 and 368(a)(1)(D) a. Spinoff, split-up and divisive "D" reorganizations are principally governed under Sections 355 and 368(a)(1)(D). Generally, there is no gain or loss to shareholders except to the extent boot is received. Ordinarily, no gain or loss is recognized by a corporation transferring assets to the "controlled" corporation. Nor is there any gain or loss recognized to the "controlled" corporation whose stock is distributed. 4. Liquidation of Subsidiaries IRC 331, 332, 336 and 337 a. A complete liquidation of a subsidiary into its parent corporation (i.e., an 80% or greater owner) is governed by IRC Sections 332 and 337. Generally, there is no gain or loss recognized by the parent corporation (but full gain or loss is recognized by any minority shareholders). Also, there is, in general, no gain or loss to the liquidating subsidiary, except to the extent there are distributions to minority shareholders. b. All other liquidation transactions are governed by IRC Sections 331 and 336. Typically, full gain or loss is recognized by shareholders and the liquidating corporation. Executive Institute Pillsbury Winthrop Shaw Pittman LLP 2
5. Conformity with Internal Revenue Code a. Generally, state tax treatment of "tax free" reorganizations conforms with Federal law because most states incorporate the Internal Revenue Code into state law for purposes of determining state taxable income. Note that some states automatically adopt changes to the Internal Revenue Code, while others only incorporate the Internal Revenue Code into state law as of a specific date. b. Increase Prevention and Reconciliation Act of 2005 and the Holding Company Test under IRC 355(b)(3). 6. State Issues a. Transfer taxes B. able Transactions b. Net Operating Loss (NOL) Issues IRC 381 Conformity c. Income / Apportionment / Attribute Modeling d. Planning for Losses and Leverage e. Differences between Combined/Consolidated Return Jurisdictions and Separate Return Jurisdictions f. Net Worth / Franchise es 1. Stock Sales 2. Asset Sales 3. Deemed Asset Sales III. Stock Sales A. Seller s Considerations 1. Basis Issues a. Differences between federal and state law Differences between state and federal tax basis may be material due to a state s non-adoption of the federal consolidated return regulations (Treas. Reg. 1.1502), and method of filing differences. Most states do not adopt the federal consolidated return regulations. Executive Institute Pillsbury Winthrop Shaw Pittman LLP 3
b. Federal tax basis in domestic subsidiaries. Non-consolidated subsidiaries (B) (C) The basis in stock is generally the original cost as adjusted under IRC 1016. Additions to basis would include additional contributions to capital. Reductions to basis would include tax-free distributions representing a return of capital. Consolidated Subsidiaries (B) (C) (D) Same starting point, additions and reductions to basis as non-consolidated subsidiaries. Federal consolidated return regulations require several positive and negative adjustments. (Positive adjustments include the subsidiary s current year separate taxable income. Negative adjustments include the subsidiary s current year separate taxable loss. c. Federal tax basis in controlled foreign corporations The general cost basis rules of IRC 1011, et seq., apply with adjustments for subpart F income. d. basis in combined reporting states Combined reports are not the same as federal consolidated returns. In states which require combined reporting and which do not adopt the federal consolidated return regulations, the basis in subsidiary stock may be significantly different. California (1) Federal consolidated return regulations have not been adopted. (2) Stock basis is the original cost as adjusted for contributions to capital and distributions representing a return of capital. See, California Regulation 25106.5-1(d)(3) Example 1 ( California does not conform to the stock basis adjustments required for federal purposes by Treasury Regula- Executive Institute Pillsbury Winthrop Shaw Pittman LLP 4
e. basis in separate filing states tion section 1.1502-32. P s basis in S s stock will be P s original cost, increased by any contributions and decreased by any returns of capital. ) (3) Appeal of Rapid American Corporation, 96-SBE- 019 (1996) i) payer unsuccessfully argued that the basis should be increased by the subsidiary s retained earnings which were included in the combined reporting group s income in prior years. (4) Jim Beam Brands Co. v. Franchise Board, 133 Cal. App. 4th 514 (2005) i) Court of Appeal followed Rapid American and found no double taxation. (iii) Most states adopt federal taxable income, on a separate company basis, as the starting point for determining state taxable income. Federal consolidated return regulations generally do not apply. Stock basis will generally be cost as adjusted for contributions to capital and distributions representing a return of capital. 2. Classification of Income a. UDITPA definition of business and non-business income Majority of states adopt some variation of the Uniform Division of Income to Purposes Act ( UDITPA ) Business income (B) Income arising from transactions and activity in the regular course of the taxpayer s trade or business ( transactional test ) and includes income from tangible and intangible property if the acquisition, management and disposition of the property constitutes integral parts of the taxpayer s regular trade or business operations ( functional test ). Business income is subject to apportionment in all states in which the seller and/or its unitary business conducts its operations. (iii) Nonbusiness income All income other than business income Executive Institute Pillsbury Winthrop Shaw Pittman LLP 5
(B) Nonbusiness income from a stock sale is sourced to the seller s commercial domicile. b. Allied-Signal, Inc. v. Director, Division of ation, 504 U.S. 768 (1992) Was subsidiary conducting a unitary business with seller? Did the holding of the stock play an operational role in the seller s business? c. Cessation of line of business / liquidation exception Some states recognize an exception to business income treatment when an entire line of business is sold, even if it was part of the seller s unitary business. See, e.g., Lenox v. Offerman, 548 S.E. 2d 513 (N.C. Sup. Ct. 2001); Blessing/White, Inc. v. Department of Revenue, 768 N.E. 2d 332 (Ill. Ct. of App. 2002). 3. Apportionment Formula a. Property Factor (iii) Sale of subsidiary may require the filing of a short period return. Generally, no annualization requirement for owned property. With respect to rented property, the short period rent may be required to be annualized. b. Payroll Factor Generally, there will not be any material adjustments to the payroll factor due to a stock sale. Certain timing issues may arise with respect to large payments such as termination payments, stock option compensation, golden parachute payments. c. Sales Factor Generally, the gross proceeds from a sale of stock which produces business income should be included in the sales factor denominator. The location of the sale negotiations may be determinative whether the proceeds are included in the numerator. MTC Regulation IV.18.(c) Under the MTC regulation, where business income from intangible personal property cannot readily be attributed to any particular income producing activity of the taxpayer, the income is excluded from the numerator and denominator of the sales factor. Executive Institute Pillsbury Winthrop Shaw Pittman LLP 6
(iii) California Regulation 25137(c)(1) Where substantial amounts of gross receipts arise from an occasional sale of a fixed asset or other property held or used the regular course of the taxpayer s trade or business, such gross receipts shall be excluded from the sales factor. 4. Special Rules Regarding Stock Sales (1) A sale is substantial if its exclusion results in a five percent or greater decrease in the sales factor denominator of the taxpayer or, if the taxpayer is part of a combined reporting group, a five percent or greater decrease in the sales factor denominator of the group as a whole. (2) A sale is occasional if the transaction is outside of the taxpayer s normal course of business and occurs infrequently. (3) California s rule is unique. Most other states limit this treatment to sales of fixed assets. (4) Appeal of Fluor Corp., 95-SBE-016 (1995) i) If a transaction falls within the elements of the special sales factor computation under Regulation 25137(c)(1), such regulation shall apply. The party seeking to deviate from the special formula has the burden of proof. a. There are several states that do not follow the general rules discussed above with regard to the sales of subsidiary stock. For example, for purposes of the New York State Franchise and the New York City General Corporation income and gains on subsidiary capital generally are excluded for the income tax base. Thus, gains and losses realized from the sale of stock if a greater then 50% owned subsidiary are excluded from tax. See, N.Y. Laws 208.9(1)(a); NY Regs. 3-2(4)(a). 5. Straddle Returns and Non-Income es a. States that impose net income based taxes generally conform to the federal tax rules regarding the definition of a tax year. Thus, in situations where a corporation's federal tax year terminates because its stock is sold (i.e., when it is no longer eligible to be included in the federal consolidated return) the corporation's tax year terminates for state income tax purposes. This is generally the case even in circumstances when no state combined or consolidated return is filed. However, there are states where this is not the case, and, in any event, generally "straddle" tax returns generally need to be filed for non-income purposes when there has been a sale of stock of Executive Institute Pillsbury Winthrop Shaw Pittman LLP 7
B. Buyer s Considerations 1. Instant Unity the entity. Thus, the acquisition agreement should provide a contractual provision for properly allocating taxes to be reported on a straddle return as well as the responsibility for filing returns, conducting audits, and resolving related disputes. a. The issue is not whether entities are unitary, but when they became unitary. b. California Administrative Policy When a corporation acquires another corporation, a period of time often elapses before enough unitary ties exist. It is a factual determination whether unity exists and when. See, e.g., Appeal of Atlas Hotels, Inc. and Picnic n Chicken, 85-SBE- 001 (1985); Appeal of The Signal Companies, Inc., 90-SBE-003 (1990); Appeal of Dr. Pepper Bottling Company of Southern California, 90-SBE-015 (1990). 2. Dividend Issues a. California Revenue and ation Code 25106 Intercompany dividends paid out of earnings from the combined unitary business are eliminated from the income of the recipient corporation. b. Tainted Earnings and Profits Where intercompany dividends are paid from pre-affiliation earnings and profits, such distribution is not eliminated under Section 25106. See, Willamette Industries, Inc. v. Franchise Board, 34 Cal. App. 4th 1242 (1995). Under California law, earnings and profits are calculated on a separate company basis. Thus, even though a subsidiary that incurs losses on a separate basis may be apportioned a large share of the combined business income of the unitary group, its earnings and profits will still reflect losses. See Appeal of Young s Market Company, 86-SBE-198 (1986). 3. Net Operating Losses and Credits a. IRC 382-384 Limitations are placed on the use of tax attributes of target corporations following an ownership change. Executive Institute Pillsbury Winthrop Shaw Pittman LLP 8
Most states conform to IRC 382-384. b. Siloing of net operating losses and credits In certain states such as California, NOLs and credits are siloed to the specific corporate entity and not available for use by other unitary members. See, General Motors Corp. v. Franchise Board, 39 Cal. 4th 773 (2006). 4. Pre-Closing Indemnity / Escrow a. A purchaser of the stock of a subsidiary corporation, for all practical purposes, is also purchasing any outstanding tax obligations including any future audit assessments. Thus, it is extremely important to conduct due diligence regarding tax matters and/or to obtain tax indemnity for all preclosing taxes through the acquisition agreement. In certain situations, such as when a particularly large exposure exists or when the credit worthiness of an entity is in doubt, an escrow fund for a part of the sales price may be considered. IV. Asset Sales A. Seller s Considerations 1. Basis Differences a. Depreciation California ACRS and MACRS depreciation rules not adopted. Thus, the amount of gain or loss for California purposes will often differ from the federal gain or loss. Majority of states do not conform to federal bonus depreciation which may result in different gain or loss amounts if the asset is sold during the decoupling period. 2. 2. Classification of Income a. Query, was the asset used in the seller s unitary business operations? California Regulation 25120(c)(2) provides that the gain or loss from the sale, exchange or other disposition of real or tangible or intangible property constitutes business income of the property while owned by the taxpayer was used in the taxpayer s trade or business. b. Was the asset removed from the unitary business operations? If so, when? California Regulation 25120(c)(2) provides that if property was used to produce nonbusiness income or was otherwise removed from the property factor before its sale, exchange or other disposition, the gain or loss will constitute nonbusiness income. Executive Institute Pillsbury Winthrop Shaw Pittman LLP 9
Property used in the regular course of the trade or business of the taxpayer shall remain in the property factor until its permanent withdrawal is established by an identifiable event such as the conversion to production of nonbusiness income, its sale, or the lapse of an extended period of time (normally, five years) during which the property is held for sale. See California Regulation 25129(b). c. Business gain or loss from the sale of assets is apportioned to the states in which the seller and/or its unitary business conducts its operations. d. Nonbusiness gain or loss from the sale of tangible assets is allocated to the location of the assets. With respect to intangibles, the gain or loss is allocated to the seller s commercial domicile. 3. Apportionment formula a. Property Factor Generally, the average value of property owned by the taxpayer is determined by averaging the values at the beginning and ending of the tax year or short period. When a sale of assets occurs, the general rule may result in a distortion. Monthly averaging of values may be required in such a case. b. Payroll Factor Generally, no material adjustments are required. c. Sales Factor The general rule is that the gross receipts from a sale of assets should be included in the denominator of the sales factor. Whether the gross receipts should be included in the numerator will depend upon whether the assets are tangible or intangible. Tangible versus intangible assets (B) If tangible assets are sold, the state in which the assets are located is where the gross receipts will be assigned. If intangible assets are sold, the assignment of the gross receipts will be dependent upon the location of the income producing activity which gave rise to the receipts. If the income producing activity is performed in multiple locations, the receipts will be assigned to the state where the majority of income producing activities occur, based on cost of performance. Executive Institute Pillsbury Winthrop Shaw Pittman LLP 10
(iii) MTC Regulation IV.18.(c) Under the MTC regulation where business income from intangible personal property cannot readily be attributed to any particular income producing activity of the taxpayer, the income is excluded from the numerator and denominator of the sales factor. (iv) icalifornia Regulation 25137(c)(1) Where substantial amounts of gross receipts arise from an occasional sale of a fixed asset or other property held or used the regular course of the taxpayer s trade or business, such gross receipts shall be excluded from the sales factor. 4. Recapture of Credits and Incentives a. California (1) A sale is substantial if its exclusion results in a five percent or greater decrease in the sales factor denominator of the taxpayer or, if the taxpayer is part of a combined reporting group, a five percent or greater decrease in the sales factor denominator of the group as a whole. (2) A sale is occasional if the transaction is outside of the taxpayer s normal course of business and occurs infrequently. (3) California s rule is unique. Most other states limit this treatment to sales of fixed assets. (4) Appeal of Fluor Corp., 95-SBE-016 (1995) i) If a transaction falls within the elements of the special sales factor computation under Regulation 25137(c)(1), such regulation shall apply. The party seeking to deviate from the special formula has the burden of proof. Manufacturer s Investment Credit ( MIC ) recapture If qualified property for which MIC was allowed, is disposed of to an unrelated party within one year from the date the qualified property is first placed in service in the state, the amount of MIC claimed will be recaptured in the year of such disposition. Executive Institute Pillsbury Winthrop Shaw Pittman LLP 11
b. Contractual Clawback Provisions To the extent a selling entity previously obtained tax credits or other incentives from a state or local jurisdiction (for example, upon expansion of a facility), a sale of such a facility may, depending upon the existing incentive contract with the government, trigger an obligation to repay some or all of those credits or incentives. B. Buyer s Considerations. 1. Who should be the acquiring entity or entities? a. Nexus issues (iii) The entity purchasing the assets will have nexus wherever the assets are located. Is the acquiring entity already filing in these jurisdictions? Is the acquiring entity profitable? b. Separate versus combined reporting states In separate filing states, it is important to analyze the profitability of the assets being acquired and the entity acquiring them. It may also be important to separate out sales and distribution assets into entities which already have nexus in the various states. In combined reporting states, it is often less important which entity is acquiring the assets. c. Holding company issues If intangible assets are being purchased, you may want to consider using a holding company as the acquiring entity and set it up in a unitary state (e.g., California) or in a state that does not tax the income of the corporation (e.g., Delaware). Some unitary states have taken the position that holding companies cannot be combined. This may result in disallowed acquisition and debt interest deductions and possible nonbusiness treatment of dividends. 2. Where should the acquisition indebtedness be placed? a. Separate versus combined reporting states In separate filing states, it is important that the acquisition indebtedness be placed in the entity that has the assets which are generating income. Executive Institute Pillsbury Winthrop Shaw Pittman LLP 12
In combined reporting states, it is important that the acquisition indebtedness be placed in an entity which is part of the unitary group. b. Related party interest expense disallowance States are aggressively challenging the deductibility of interest and royalty payments between related parties. The use of arm s length rates and terms is essential. 3. Credits a. Intrastate apportionment and siloing issues In combined reporting states, a significant issue arises under intrastate apportionment and the siloing of credits. It is critical to ensure that the entity with the creditable expenditures has sufficient presence in the state so as to be able to use the credits against its intrastate apportioned liability. 4. Successor Liability a. Even in a situation where a contract specifically provides that a purchaser of a business is not liable for pre-closing taxes, a state can find a purchaser liable for certain taxes as a successor business. For example, in New York, a bulk purchaser of business assets is liable for any unpaid sales and use tax of the seller unless there is compliance with certain notification provisions. NY. Law 1141(C); NYCRR 20 537.4. Thus, as discussed above, due diligence and a tax indemnity are crucial. 5. Continuity of Seller's Incentives. V. Stock Sales Treated as Asset Sales A. IRC 338 a. The purchase price for a business is often based upon future projections of profits and cash flow. Thus, to the extent that a seller of a business obtained property tax or other tax incentives or abatements in a particular jurisdiction, a potential purchaser should confirm such incentives or abatements will continue after the sale of the facility. 1. IRC 338(g) a. Old Target is treated as having sold all of its assets in a single transaction at fair market value, at the close of business on the date it is acquired. b. Purchaser of the stock makes the election. Executive Institute Pillsbury Winthrop Shaw Pittman LLP 13
c. Purchase price of the stock is the purchaser s basis in the stock of New Target. d. Selling corporation recognizes the gain from the sale of stock. e. New Target s basis in the assets purchased is the deemed purchase price. f. Double taxation potential at the seller and Old Target levels. 2. IRC 338(h)(10) a. Selling consolidated group and the purchaser make a joint election. b. Old Target is treated as a member of the selling consolidated group with respect to its deemed sale of assets. c. Gain or loss is recognized by Old Target on the deemed sale of assets. d. Old Parent does not treat the transaction as a sale of stock and no gain on the sale of stock is reported. e. New Target s basis in the assets purchased is the deemed purchase price. f. Old Target is deemed to liquidate into Old Parent tax-free. 3. Conformity a. Most states conform to IRC 338 4. California Split Election a. Revenue and ation Code 23051.5(e)(1) and (e)(3) Under California law, taxpayers are permitted to make split elections. In other words, a taxpayer can make a separate California 338 election notwithstanding the fact no federal election was made and vice versa. b. Planning Opportunities The option of making a separate 338 election for California purposes creates great flexibility and allows taxpayers to take advantage of nexus, unitary and apportionment rules. c. Use of IRC 338(g) Target conducts no business activities in California and is part of an affiliated group of corporations which conducts no portion of its unitary business in California, a separate California 338(g) election may be attractive. Executive Institute Pillsbury Winthrop Shaw Pittman LLP 14
(iii) None of the Old Target s gain on the deemed sale of assets would be taxable by California. New Target will get a stepped-up basis in the assets of Old Target both for property factor and depreciation (and depletion) purposes. B. Seller s Considerations 1. Classification of Income a. Nature of assets being sold will determine whether income is business or non-business Pennsylvania (B) Canteen Corp. v. Pennsylvania, 818 2d 594 (Pa. Comwth. 2003). Definition of non-business income modified for tax years beginning after January 1, 1999; no more liquidation exception Indiana Ind. Dept. of Rev., LOF 98-0523 (11/1/02) (B) 338(h)(10) gain is business income where deemed liquidation into corporation is same line of business. (iii) Illinois (B) American States Insurance Co. v. Hamer, 352 Ill. App. 3d 521 (2004). 338(h)(10) gain is non-business income under liquidation/cessation of the business exception to the functional test. (iv) Missouri (B) ABB C-E Nuclear Power, Inc. v. Director of Rev., No. SC 87811 (Mo. 1/30/07). 338(h)(10) gain is non-business income because of deemed liquidation. 2. Apportionment Formula a. Sales Factor Treatment of proceeds Executive Institute Pillsbury Winthrop Shaw Pittman LLP 15
Same issues discussed above regarding whether the gross receipts are excludable from the sales factor. C. Buyer s Considerations 1. Apportionment Formula a. Property Factor Buyer obtains a step-up in basis of the real and tangible personal property of the acquired corporation. See California Regulation 25130(a)(1) Example (c). 2. Income Base a. Depreciation and Depletion Buyer obtains a step-up in basis of the tangible assets which have been acquired. This will result in a potential increase in depreciation and depletion deductions. VI. Additional Issues A. Deferred Intercompany Income 1. The Federal income tax regulations under IRC 1502, generally provide for the deferral of income or loss on intercompany transaction (i.e., those transactions among corporate members of the consolidated groups). There are many federal and state tax issues that arise in the context of the operations of these rules, most of which are beyond the scope of this outline. Any such issues must be analyzed in the context of states that require separate company tax returns, states that permit consolidated or combined returns and which generally follow the federal rules, as well as states like California that have their own version of the 1502 rules. The follow is a list of some of the issues to consider. Recognition or deferral of income, gain or loss Characterization of such income as business or non-business income Impact of intercompany transactions on the apportionment formula Calculation of subsidiary stock basis B. Post-Transaction Modeling Issues 1. Unitary Configuration a. Separate versus combined reporting states Both seller and buyer need to revisit the configuration of their respective unitary groups and determine whether the new groups should be filing unitary or not. Executive Institute Pillsbury Winthrop Shaw Pittman LLP 16
Both seller and buyer should review their separate company states and the entities that are filing in those states. b. Worldwide combination versus water s edge elections The acquisition/disposition may have a significant impact on whether to file worldwide unitary or to elect water s edge treatment. 2. Apportionment Factor Planning a. Joyce/Finnigan A majority of the states apply the Joyce rule which presents possible planning opportunities with respect to in-bound transactions and reduction in the numerator of the apportionment formula. In those states which apply Finnigan, the new configuration of the unitary group may allow the group to avoid throwback of outbound sales where a unitary member is present in a destination jurisdiction. 3. Generating income in proper entities C. Transfer es a. In a combined report setting, due to the mechanics of intrastate apportionment, it is critical for credit and NOL carryover purposes that the entity with these tax attributes have sufficient presence in the state so as to be able to take advantage of them. 1. Sales and Use es a. Sales and use taxes are generally imposed upon the sale of tangible personal property and certain services. Thus, sales of entities, including deemed asset sales or sales of entities which are disregarded entities for federal income tax purposes, are generally not subject to sales and use tax. b. Subject to various limitations, the casual or isolated sale of substantially all the assets of an entity are exempt from sales and use tax in most states. There are some notable exceptions to this generalization including in California, Colorado and New York State, so careful analysis of the sales and use tax rules should be conducted. 2. Documentary Transfer es a. Many states and most localities impose some form of documentary stamp or other transfer tax on the sale or transfer of real property. In certain jurisdictions, such taxes can be relatively insignificant. But in other jurisdictions it can be burdensome. For example, the combined New York State and Executive Institute Pillsbury Winthrop Shaw Pittman LLP 17
New York City real estate transfer tax exceeds 3% of the fair market value of the real estate and improvements. b. Such taxes are generally imposed only upon a change in record title of the real property (i.e., upon a sale of the asset). However, a growing number of states and localities impose such a tax when there is a change in control of an entity that owns real property located in the jurisdiction. A careful analysis of real estate transfer taxes should be made if a material amount of real property will be involved in any reorganization or sale. For further information, please contact: Jeffrey M. Vesely (bio) San Francisco +1.415.983.1075 jeffrey.vesely@pillsburylaw.com This material is not intended to constitute a complete analysis of all tax considerations. Internal Revenue Service regulations generally provide that, for the purpose of avoiding United States federal tax penalties, a taxpayer may rely only on formal written opinions meeting specific regulatory requirements. This material does not meet those requirements. Accordingly, this material was not intended or written to be used, and a taxpayer cannot use it, for the purpose of avoiding United States federal or other tax penalties or of promoting, marketing or recommending to another party any tax-related matters. This publication is issued periodically to keep Pillsbury Winthrop Shaw Pittman LLP clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The comments contained herein do not constitute legal opinion and should not be regarded as a substitute for legal advice. 2007 Pillsbury Winthrop Shaw Pittman LLP. All Rights Reserved. Executive Institute Pillsbury Winthrop Shaw Pittman LLP 18