To Spinco - TEI-Houston Chapter

Transcription

Section 355 - Cross Border
Considerations
Houston TEI – May 9, 2013
Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding
penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.
Limitation of Use/Circular 230
►
Any US tax advice contained herein was not intended or written
to be used, and cannot be used, for the purpose of avoiding
penalties that may be imposed under the Internal Revenue Code
or applicable state or local tax law provisions.
►
The information set forth herein is for discussion purposes only and
should not be relied upon in connection with implementing an actual
transaction or series of transactions.
►
These slides are for educational purposes only and are not intended
to provide any US tax advice. The views expressed by the speakers
at this event are not necessarily those of Ernst & Young LLP.
Page 2
FOR EDUCATIONAL PURPOSES ONLY
Presenter
►
Brett Enzor
Partner, Transaction Advisory Services – Transaction Tax
[email protected]
214.969.8980
►
Janet Jardin
Sr. Manager, Transaction Advisory Services – Transaction Tax
[email protected]
214.969.9859
Page 3
Agenda
► Fundamentals
► Tax
Efficient Monetization
► Cross
Page 4
of Section 355
Border Considerations
FUNDAMENTALS OF SECTION
355
Page 5
Section 355: General Background
►
A frequent objective of a Spin-off is for a corporate group to divest itself
of one or more lines of business in order to focus on a core business (or
businesses).
►
►
The group may want or need to receive compensation for the divestiture but, for a
variety of reasons, a sale of the unwanted business may not be possible or practical.
Another frequent objective is to optimize the capital structures of the
businesses of the distributing corporation and the controlled
corporation, providing each business with a capital structure tailored to
how it operates.
►
Page 6
These objectives can be achieved through a variety of means, including assumptions
of debt, incurrence of new debt and transfer of borrowed proceeds (or use of
proceeds to purchase assets), debt-for-debt exchanges, stock-for-debt exchanges,
and leveraged reverse spins.
Basic Spin-off Transaction – Straight 355
Shareholders
Shareholders
Distribute
“Spinco”
shares
D
D
Spinco
(Old)
Spinco
(Old)
• If the requirements of Section
355 are satisfied, the transaction
generally will be tax-free to D,
Spinco, and D’s shareholders.
Page 7
Basic Spin-off Transaction – 355/”D” Reorg
Shareholders
Shareholders
Distribute
“Spinco”
shares
D
D
Spinco
(Newco)
Unwanted
Business
Spinco
(Newco)
• If the requirements of Sections
368(a)(1)(D) and 355 are satisfied,
the transaction generally will be
tax-free to D, Spinco, and D’s
shareholders.
Page 8
Basic Tax Consequences
►
To Spinco
►
Gain/Loss:
►
►
Basis:
►
►
355/”D” Reorg - Holding period in each asset received from D includes the
period during which D held the assets. (Section 1223(2))
E&P :
►
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355/”D” Reorg - Basis in each asset received from D will be the same as D’s
basis in such asset, increased by the amount of gain recognized by D on the
transfer. (Section 362(b))
Holding Period:
►
►
355/”D” Reorg - No gain or loss on issuance of its stock in exchange for assets.
(Section 1032(a))
Proper adjustment to the E&P of D and Spinco must be made, and depends on
whether the spin-off is a straight 355 or a 355/”D” transaction. (Section 312(h);
Treas. Reg. §1.312-10)
Basic Tax Consequences (cont’d)
►
To D
►
Gain/Loss:
►
►
►
E&P :
►
Page 10
Straight 355 – D does not recognize gain or loss on the distribution of Spinco
stock/securities in pursuance of a plan of reorganization, but does recognize
gain on any appreciation in any “boot” distributed. (Section 355(c))
355/”D” Reorg –
► D does not recognize gain or loss on the transfer of assets to Spinco and
Spinco’s assumption of D’s liabilities. (Section 361(a); Section 357(a))
► D does not recognize gain or loss on receipt of boot, provided that the boot
is distributed to its shareholders or creditors in pursuance of the plan of
reorganization. (Section 361(b)).
► D does not recognize gain or loss on the distribution of Spinco
stock/securities in pursuance of a plan of reorganization. (Section 361(c))
Proper adjustment to the E&P of D and Spinco must be made, and depends on
whether the spin-off is a straight 355 or a 355/”D” transaction. (Section 312(h);
Treas. Reg. §1.312-10)
Basic Tax Consequences (cont’d)
►
To D Shareholders
►
Gain/Loss:
►
►
►
Basis:
►
►
►
Basis in D stock is allocated between D and Spinco stock in proportion to their
fair market values. (Section 358; Treas. Reg. §1.358-2(a)(2))
Note: Different basis results would result if the shareholder surrenders D
shares in exchange for Spinco shares (i.e., a split-off)
Holding Period:
►
Page 11
No gain or loss on receipt of Spinco stock/securities distributed with respect to
D stock (Section 355(a)(1))
Any boot is taxable as a distribution under Section 301 (Section 356).
Includes the holding period of its D stock. (Section 1223(1))
Section 355: General Requirements
►
Complex set of statutory and non-statutory rules
►
Statutory requirements
►
►
►
►
►
Non statutory requirements
►
►
►
►
Control immediately before
Distribution of all the stock of the controlled corporation
Not a device
Active conduct of a trade or business
Business Purpose
Continuity of interest
Continuity of business enterprise
Disqualification of transaction
►
►
Page 12
Not subject to Section 355(d) or (e) corporate-level tax
Not an investment company
Statutory Requirements:
1. Control Immediately Before (Section 355(a)(1)(A))
►
D must control, within the meaning of Section 368(c) (80% or more of the combined total voting
power and total number of shares of each class of non-voting stock), Spinco immediately
before the distribution.
2. Distribution (Section 355(a)(1)(D))
►
D must distribute all of its stock and securities in Spinco or distribute Spinco stock representing
control (where the IRS is satisfied that any retention of Spinco stock is not for tax avoidance)
3. Non-Device (Section 355(a)(1)(B))
►
Page 13
The transaction must not be used principally as a device for the distribution of the earnings and
profits of D, Spinco or both
►
Regulations apply a facts and circumstances test
►
Primarily concerned with prearranged sale of stock of D or Spinco
►
IRS does not issue rulings on device.
Statutory Requirements (cont’d):
4. Active Trade or Business (ATB) (Section 355(a)(1)(C) and (b))
►
Requirements:
(1) Immediately after the distribution, both D and Spinco must be engaged in an ATB, and
(2) At the time of the distribution, both D and Spinco must satisfy a five-year ATB requirement.
►
Expansion - Same line of business as original business (expansion) or new or
different business (not expansion)
►
For both of these rules, a separate affiliated group (“SAG”) concept applies.
Page 14
Non-Statutory Requirements:
5. Corporate business purpose (Treas. Reg. §1.355-2(b))
►
Section 355 applies to a transaction only if motivated, in whole or substantial part, by a real and
substantial non-federal tax purpose germane to the business of D, Spinco or the affiliated
group…to which D belongs
►
There must be one or more corporate business purposes - Shareholder purpose alone will
not suffice, but can be “coextensive”
►
Should not be to facilitate S election or other federal income tax savings
►
Can be for state or foreign tax purposes unless those tax savings are parallel to federal tax
savings and the federal tax savings are greater
►
Business purpose, and the strength of that purpose, is also important in meeting the non-device
requirement
►
IRS does not issue rulings on business purpose.
Page 15
Non-Statutory Requirements (cont’d):
6. Continuity of Interest (Treas. Reg. §1.355-2(c))
►
►
The transactions must effect only a readjustment of a continuing
interest in the distributing and controlled corporations under
modified corporate forms, and a sufficient continuity of interest in
the enterprise prior to the transaction must continue in each of the
modified corporate forms in which the enterprise is conducted after
the separation.
50% is adequate
7. Continuity of Business Enterprise (Treas. Reg. §1.355-1(b))
►
Page 16
The historical businesses of D and Spinco must be continued or a
significant portion of their assets must be used in a business.
Disqualified Transactions
►
Hot Stock Consideration (Section 355(a)(3)(B))
►
►
►
►
If shares of stock of Spinco were acquired during the 5 years before the distribution in a
transaction in which gain or loss was recognized in whole or in part, the distribution of those
shares generally is treated as a distribution of property other than Spinco stock, generally
resulting in taxation to both D and D shareholders.
Does not apply to a direct or indirect acquisition of a trade or business by one member of an
affiliated group from another member of that affiliated group.
If Spinco is a member of the DSAG immediately after the distributing corporation’s taxable
acquisition of the controlled corporation stock, then the Spinco stock is not hot stock.
Section 355(d) Consideration
►
Section 355(d) applies if any person holds “disqualified stock” in D or Spinco representing 50%
or greater interest.
►
►
Page 17
“Disqualified stock” is stock acquired by “purchase” during the five-year period preceding the date of
distribution
D recognizes gain (but not loss) on the distribution. No impact on D shareholders.
Disqualified Transactions (cont’d)
►
Section 355(e) Consideration
►
►
►
►
Nonqualified Preferred Stock (Section 355(a)(3)(D))
►
►
NQPS distributed on stock other than NQPS of D is treated as boot.
Intragroup Distributions (Section 355(f))
►
►
Section 355(e) applies if distribution is part of a plan by which 50% or more (vote or value) of
stock of either D or Spinco is acquired by one or more persons (generally outsiders).
D recognizes gain (but not loss) on the distribution. No impact on D shareholders.
IRS does not issue rulings on Section 355(e).
Section 355(a) does not apply to an internal spin if it is part of a plan that would trigger Section
355(e), i.e., if Spinco leaves the affiliated group in a second distribution.
Investment Company (Section 355(g))
►
Transaction will not qualify if either (1) D or Spinco is a “disqualified investment corporation”
and (2) after the transaction, any person holds a 50% or greater interest in a disqualified
investment corporation that such person did not hold before the transaction,
►
►
Page 18
FMV of investment assets is 2/3 or more of FMV of all assets
Exceptions for certain financial trades or businesses, securities marked to market, and stock or
securities in a 20% controlled entity
TAX EFFICIENT MONETIZATION
Page 19
General Methods
►
A basic spin-off leaves D poorer by the value of the Spinco stock distributed.
Monetization techniques permit D to extract value from Spinco while still
satisfying the requirements for tax-free treatment.
►
The following are five methods by which value can be extracted from a noncore business in connection with the separation of core and non-core
operations.
1. Controlled Assumption of Liabilities: assumption of liabilities of the distributing
corporation (D) by the controlled corporation (Spinco);
2. Controlled Cash Distribution: distribution of Spinco’s cash to D in connection with
the distribution;
3. Controlled Securities Exchange: exchange of Spinco securities (long-term debt) for
D debt;
4. Controlled Stock Exchange: exchange of a portion of Spinco stock for D debt; and
5. Reverse Direction Spin-off: leverage the non-core business and spin the core
business (together with the proceeds of leveraging)
Page 20
Base case – no monetization
D owns Business 1 and Business 2 and has bank debt of $300M
Business 1 has a FMV of $1B
► Business 2 has a net tax basis of $100M and a FMV of $1B
► D transfers Business 2 to newly formed Spinco in exchange solely for Spinco stock, and distributes the Spinco stock
to D S/Hs
►
►
D S/Hs
Spinco stock
v: 1B
D S/Hs
2
$300M
bank debt
FI
D
Bus. 1
$300M
bank debt
Bus. 2
FI
v: 1B
D
Spinco
Bus. 1
Spinco stock
v: 1B
Bus. 2
b: 100M
v: 1B
1
Spinco
* Assumes all requirements of Section 355 are met
Page 21
v: 1B
Bus. 2
(1) Controlled Assumption of Liabilities:
Mechanics
►
D S/Hs
2
Spinco
stock
D
Bus 1
Bus 2
1
1
Business
2
Spinco stock +
assumption of
$100M of D
liabilities
Spinco
Bus 2
Page 22
D owns Business 1 and Business
2. Business 2 has a tax basis of
$100M and a FMV of $1B.
1. D transfers Business 2 to newly
formed Spinco in exchange for
$900M of Spinco stock and
Spinco’s assumption of $100M
of D’s outstanding debt.
2. D distributes the stock of Spinco
to D shareholders in a
distribution intended to qualify
under Sections 355 and
368(a)(1)(D).
(1) Controlled Assumption of Liabilities:
Limitations
►
Generally, the assumption of liabilities is not treated as boot under Section
357(a).
►
Assumed liabilities must be limited to the basis of the assets transferred by D
to Spinco. To the extent that the liabilities assumed exceed the basis in the
transferred assets, D will recognize gain under Section 357(c).
►
Section 357(c)(3) – May permit certain liabilities to be excluded from the
computation:
If a taxpayer transfers, in an exchange to which Section 351 applies, a liability the
payment of which either, (i) would give rise to a deduction, or, (ii) would be
described in Section 736(a), the amount of such liability shall be excluded in
determining the amount of liabilities assumed.
►
►
►
Page 23
Section 357(c)(3) does not specifically reference an exchange pursuant to a Section 368
reorganization.
However, see, e.g., PLRs 200501025, 200422018, and 200310005 (permitting the exclusion
of Section 357(c)(3) liabilities in the context of a divisive “D” reorganization).
(2) Controlled Cash Distribution:
Mechanics
►
D S/Hs
2
Spinco
stock
D
Bus 1
Bus 2
1
1
Spinco stock
+ $100M cash
distribution
Business
2
Spinco
Bus 2
Page 24
D owns Business 1 and Business
2. Business 2 has a tax basis of
$100M and a FMV of $1B.
formed Spinco in exchange for
$900M of Spinco stock and
$100M cash (existing cash, debt
funded cash, or IPO cash).
368(a)(1)(D).
Limitations
►
D may receive cash tax-free from a newly-formed Spinco to the extent
of the net basis of property that D transfers to Spinco (basis of
assets/stock transferred less liabilities assumed).
►
►
Under Section 361(b), D recognizes no gain or loss on boot received from
Spinco if distributed to shareholder or creditors, except to the extent that
the boot transferred (Spinco cash) exceeds basis of assets transferred to
Spinco.
Subject to the limitations discussed below, D generally must use the
Spinco cash to repay D indebtedness or make distributions to
shareholders.
Page 25
Permitted Uses of Cash
►
Limitations:
►
►
►
►
►
In general, D must expend the cash within 12 months of the Spin-off.
In general, D must segregate the cash in a separate bank account.
The sum of D debt (i) exchanged in a Controlled Securities Exchange, (ii)
exchanged in a Controlled Stock Exchange and, (iii) repaid in a Controlled Cash
Distribution must be less than the weighted quarterly average of D’s third party debt
for the 12 months before its board first discussed the proposed divestiture.
Clearly permissible uses include repayment of historic D debt not
incurred in connection with the Spin-off.
Other potentially permissible uses
►
►
►
►
Page 26
Payment of consent fees to retire historic D debt.
Repayment of intercompany debt.
Repayment of D’s newly created debt (e.g., newly-issued commercial paper or
drawings on a revolving credit facility).
Repayment of D’s ordinary course liabilities (e.g., trade payables).
(3) Controlled Securities Exchange:
Mechanics
D owns Business 2. Business 2 has a FMV of $1B and
an aggregate tax basis of $100M.
Steps
1. D transfers Business 2 to a newly formed Spinco in
exchange for $100M of cash (debt funded), $300M of
Spinco securities (long term debt), and $600M of Spinco
stock.
2. D uses the $100M of cash in accordance with the rules
for a Controlled Cash Distribution.
3. D transfers the Spinco securities to FI in satisfaction of
$300M D debt and distributes the Spinco stock to D’s
shareholders in a distribution intended to qualify under
Sections 355 and 368(a)(1)(D).
►
D S/Hs
2
3
Spinco stock
(FV = $600M)
and cash
$300M Spinco
securities
D
FI
$300M D
Debt
New
Lender
1
Spinco
$100M
1
Bus 2
Page 27
3
Bus 2 stock
for Spinco
stock,
Spinco
securities,
and cash
Note
► Previosuly, FI might be a “facilitating” short-term lender
that (1) holds the D short-term debt for its own account at
least 5 days before entering into an exchange agreement
and (2) holds the D short-term debt for at least 14 days
before exchanging such debt for Spinco securities. But
see Rev. Proc. 2013-3.
Limitations
►
►
►
Under Section 361(a) – (c), D recognizes no gain or loss (i) on the
transfer of property in exchange for stock and securities; (ii) on the
receipt of cash not exceeding basis of assets transferred, if used for
permissible purposes; and (iii) on the distribution of Spinco stock to D
shareholders and transfer of Spinco securities to creditors.
Under current law, the amount of Spinco securities issued in
exchange for D’s assets is not basis limited.
Limitations:
►
►
►
Page 28
Debt-equity (i.e., the Spinco securities must constitute bona fide debt, not equity,
for US federal income tax purposes).
The Spinco securities must constitute a “security” for subchapter C purposes.
The sum of D debt (i) exchanged in a Controlled Securities Exchange, (ii)
exchanged in a Controlled Stock Exchange and, (iii) repaid in a Controlled Cash
Exchange must be less than the weighted quarterly average of D’s third party debt
for the 12 months before its board first discussed the proposed divestiture.
Potential Legislative & Recent Administrative Change
►
Legislation first proposed in 2010 and then again in 2012 eliminated
D’s ability to extract value in excess of D’s basis in its Spinco stock
through the Controlled Securities Exchange method.
►
►
The 2012 legislation contained a prospective effective date to date of enactment
and a transition rule for transactions entered into or announced on or before
February 6, 2012.
Rev. Proc. 2013-3: Area of No Rule
►
Page 29
“Whether either Section 355 or Section 361 applies to a distributing corporation’s
distribution of stock or securities of a controlled corporation in exchange for, and in
retirement of, any putative debt of the distributing corporation if such distributing
corporation debt is issued in anticipation of the distribution.”
(4) Controlled Stock Exchange:
Mechanics
►
D S/Hs
D owns Business 2. Business has a FMV of $1B, with
an aggregate tax basis of $100M.
2
3
Class B
stock
Class A
stock
D
FI
$300M D
debt
New
Lender
$100M
1
Spinco
1
Bus 2 stock
for Class A
& B shares
and cash
Steps
1. D contributes Business 2 to a newly formed subsidiary
Spinco in exchange for $100M of Spinco cash (debt
funded) and $900M Spinco stock. The Spinco stock
consists of two classes: (i) Class A – 33% value, 20%
vote; and (ii) Class B – 67% value; 80% vote.
2. D uses the $100M of cash in accordance with the rules
for a Controlled Cash Distribution.
3. D transfers the Class A shares of Spinco stock to FI in
exchange for the $300M debt owed to FI and
distributes the Class B shares of Spinco stock to D’s
shareholders in a distribution intended to qualify under
Sections 355 and 368(a)(1)(D).
Bus 2
Page 30
(4) Controlled Stock Exchange:
Limitations
►
►
Generally, under Section 361(a) – (c), D recognizes no gain or loss (i) on the transfer of
property in exchange for stock; (ii) on the receipt of cash, not exceeding basis of assets
transferred, if used for permissible purposes; and (iii) on the distribution of Spinco stock
to D shareholders and transfer of Spinco stock to creditors.
Spinco stock used to pay D debt generally must represent less than 20 percent of
Spinco's voting equity
► High-vote / low-vote stock structure may be used to exceed this limitation in terms
of value and satisfy the limitation in terms of voting. But see Rev. Proc. 2013-13.
►
The transaction must continue to satisfy Section 355(e) to avoid corporate-level tax.
Therefore, the shareholders of Spinco must maintain greater than 50% of the voting
power and value of the Spinco stock. Any Spinco stock issued to pay D creditors will
be taken into account as stock that is not maintained by the Spinco shareholders.
►
The sum of D debt (i) exchanged in a Controlled Securities Exchange, (ii) exchanged in
a Controlled Stock Exchange and, (iii) repaid in a Controlled Cash Exchange must be
less than the weighted quarterly average of D’s third party debt for the 12 months
before its board first discussed the proposed divestiture.
Page 31
PLR 201216023: Illustration of Multiple
Financing Techniques
►
3
4
80%
Spinco
stock
Public
5
FI
1st exchange: D debt for
cash
2nd exchange: Spinco
securities and Spinco stock
D
1
A
Sub 1
Spinco
Bus Y
Sub 2
Bus Y
2
Bus Y
for cash
D operated several lines of business, including
Business Y. Business Y was conducted by entity
A, a disregarded entity and by Sub 2.
Entity A for:
• Spinco
securities
• Spinco
stock
• Liability
assumption
• Cash
Steps:
1. D formed Spinco and contributed entity A to
Spinco in exchange for additional shares of
Spinco stock, Spinco Securities, Spinco's
assumption of liabilities, and cash (debt funded,
Spinco borrowed cash from an unrelated third
party).
2. Spinco used its remaining cash to purchase
Business Y assets from Sub 2.
3. D distributed 80% of Spinco stock to its
shareholders.
4. D borrowed cash from an unrelated Financial
Institution.
5. D used its Spinco Securities and/or its Spinco
Stock to satisfy its debt to Financial Institution
(Financial Institution then sells the Spinco Stock
and Securities for cash).
Page 32
(5) Reverse Direction Spin-off:
Mechanics
►
S/Hs
P
Steps
Bus 1 Bus 2
Merger
D
1
1.
P forms D which in turn forms Merger Sub. P
merges with Merger Sub with P surviving. P
shareholders exchange their P stock for D stock.
2.
P converts to a limited liability company and
becomes a disregarded entity for US federal tax
purposes.
Merger Sub
• Steps 1-2 are intended to qualify as a
reorganization under Section 368(a)(1)(F) and
are undertaken to minimize contract renegotiation
and licensing issues that would be associated
with a conveyance of Business 1 assets and
liabilities to Spinco.
S/Hs
4
Debt
3
P operates Business 1 and Business 2. Business 2
has a FMV of $1B.
3.
P distributes Business 2 to D in a transaction that is
disregarded for US federal tax purposes
4.
D borrows $400M of cash from a third party
Lender
D
Bus 2
P
2
Bus 1 Bus 2
Page 33
Mechanics
Historic
S/Hs
Steps (continued)
6
5.
D contributes the interests in P and the
$400M cash proceeds received from the
debt financing to a newly formed Spinco.
6.
D distributes the Spinco stock to its historic
shareholders in a distribution intended to
qualify under Sections 355 and
368(a)(1)(D).
Spinco stock
D
Debt
Bus 2
Bus 1
5
P interests and
$400M cash
Spinco
P
Historic
S/Hs
Debt
D
Bus 2
Spinco
$400M
P
Bus 1
Page 34
Limitations
►
A reverse Spin-off involves extracting value from D instead of Spinco.
Therefore, there is no basis limitation on the amount of cash
contributed to Spinco or on the use of such cash. However, the sum
of (a) the basis of the assets contributed to Spinco plus (b) the
amount of cash contributed must exceed the amount of liabilities
deemed assumed by Spinco (i.e., P’s historic liabilities). To the extent
that assumed liabilities exceed the assets/cash contributed, D
recognizes gain.
►
Note that “flipping” D and Spinco (i.e., spinning the core business)
may involve significant corporate and legal complexities and
impediments. In addition, the tax costs of a “busted” spin may be
substantially larger in the reverse Spin-off scenario.
Page 35
CROSS BORDER
CONSIDERATIONS
Page 36
(1) Domestic Distributing/Pre-Existing CFC
Spinco
►
D S/Hs
1
Spinco
stock
US
D
Domestic D owns Spinco, a preexisting foreign corporation.
under Section 355.
CFC
Spinco
Page 37
(1) Domestic Distributing/Pre-Existing CFC
Spinco
►
To the extent the Spinco shares are distributed to foreign shareholders, D
must recognize gain but not loss. (Treas. Reg. §1.367(e)-1(b))
►
►
To the extent the Spinco shares are distributed to US individual shareholders,
D must recognize gain but not loss. (Treas. Reg. §1.367(b)-5(b)(1)(ii))
►
►
Section 1248(a) potentially recharacterizes the gain as a dividend.
To the extent that neither Section 367(b) nor (e) require the recognition of
gain, if Spinco is a CFC to which D was a Section 1248 shareholder, D must
include its gain on the Spinco stock in income as a dividend to the extent of
the E&P of Spinco that: (i) are attributable to D’s period and percentage
ownership in Spinco and (ii) were accumulated during periods in which
Spinco was a CFC. (Section 1248(f))
►
►
See Treas. Reg. §1.1248(f)-2(b) for an exception to this income inclusion; see also Notice 8764.
Query as to D’s E&P and Spinco's E&P post-distribution?
►
►
Page 38
See Treas. Reg. §1.312-10, Prop. Reg. §1.367(b)-8(b)(1), & Former Temp. Reg. §7.367(b)10(d).
Query as to the treatment of PTI? See Prop. Reg. §§1.367(b)-8(d)(4), (e)(4).
(2) Domestic Distributing/Newly Formed CFC
Spinco
►
D S/Hs
2
Spinco
stock
US D
Bus 1
Bus 2
1
1
Business
2
Spinco stock
Domestic D owns Business 1
and Business 2.
formed foreign Spinco in
exchange for Spinco stock.
368(a)(1)(D).
CFC Spinco
Bus 2
Page 39
Spinco
►
If D is not controlled by five or fewer domestic corporations, D must recognize gain (but not loss) on
the tangible assets transferred to Spinco. (Section 367(a)(5))
►
►
►
►
To the extent D transfers intangibles to Spinco, D must include a deemed royalty over the useful life
of the intangible property. (Section 367(d))
►
►
Gain is recognized on a disposition of Spinco stock, other than to related person. Instead, the related person is
required to include in income the annual amounts that D would have otherwise been required to include.
To the extent the Spinco shares are distributed to foreign shareholders, D must recognize gain (if
any remains) but not loss. (Treas. Reg. §1.367(e)-1(b))
►
►
If D is controlled by five or fewer domestic corporations, generally applicable rules of Section 367(a) must be
applied to determine extent of nonrecognition treatment, e.g. active trade or business exception of Section
367(a)(2).
D must reduce its basis in the Spinco stock such that D’s gain on Spinco stock will at least equal D’s gain on
the assets transferred. (Treas. Reg. §1.367(a)-7(c)(3))
If gain is recognized on the transferred assets, D gets an increase in its basis in the Spinco stock.
To the extent the Spinco shares are distributed to individual shareholders, D must recognize gain (if
any remains) but not loss. (Treas. Reg. §1.367(b)-5(b)(1)(ii))
►
Page 40
Spinco
►
In general, D is required to include in income as a dividend the Section 1248(f) amount attributable
to the Spinco stock distributed. (Treas. Reg. §1.1248(f)-1(b)(3))
►
See Treas. Reg. §1.1248(f)-2(c) for an exception to this income inclusion; see also Notice 8764.
►
►
►
Page 41
See Treas. Reg. §1.312-10, Prop. Reg. §1.367(b)-8(b)(1), & Former Temp. Reg. §7.367(b)-10(d).
(3) CFC Distributing/Pre-Existing CFC Spinco
►
D S/Hs
1
Spinco
stock
CFC D
Foreign D owns Spinco, a preexisting foreign corporation. D
and Spinco are CFCs.
under Section 355.
CFC Spinco
Page 42
►
The Section 367(b) regulations require a comparison of each distributee’s “predistribution Section 1248 amount” with its “post-distribution Section 1248 amount” with
respect to each of its D stock and its Spinco stock.
►
►
►
►
In general, in a pro-rata distribution, the amount by which the pre-distribution Section
1248 amount exceeds the post-distribution Section 1248 amount reduces the basis in
the stock of the relevant corporation. (Treas. Reg. §1.367(b)-5(c)(2))
►
►
►
Pre-distribution Section 1248 amount is the shareholder’s Section 1248 amount with respect to
its D stock and Spinco stock immediately before the distribution. (Treas. Reg. §1.367(b)-5(e)(1))
Post-distribution Section 1248 amount is determined by looking to the D and Spinco stock
retained by each Section 1248 shareholder after the distribution and after adjustments have
been made to the corporate E&P of D and Spinco. (Treas. Reg. §1.367(b)-5(e)(2))
Consider impact of gain limitation.
If this amount exceeds the basis, a deemed dividend must be included in income.
Under proposed regulations, a basis reduction is available only to the extent that it increases the distributee’s
Section 1248 amount. As a practical matter, where CFC Spinco is pre-existing, an income inclusion most likely
will be required. (Prop. Reg. §1.367(b)-5(c)(2)(ii))
In a non pro-rata distribution, the amount by which the pre-distribution Section 1248
amount exceeds the post-distribution Section 1248 amount is included in income as a
deemed dividend. (Treas. Reg. §1.367(b)-5(d)(3))
Page 43
►
Where the distributee is required to reduce basis or recognize a deemed dividend, the
distributee generally is permitted an offsetting increase to its basis in the D or Spinco
stock. (Treas. Reg. §1.367(b)-5(c)(4) (pro-rata) and -5(d)(4) (non pro-rata))
►
►
►
►
See Treas. Reg. §1.312-10, Prop. Reg. §1.367(b)-8(b)(1), & Former Temp. Reg. §7.367(b)-10(d).
Query as to the treatment of PTI?
►
►
The increase may not be (i) in excess of FMV of the D or Spinco stock or (ii) diminish the
distributee’s post-distribution Section 1248 amount.
See Prop. Reg. §§1.367(b)-8(d)(4), (e)(4).
Under Prop. Reg. §1.367(b)-8(b)(1), it appears that a portion of D’s E&P would
disappear in the distribution of a pre-existing Spinco.
►
Page 44
Is this the proper result from a policy perspective? What are the alternatives? See Former
Temp. Reg. §§7.367(b)-10(d)-(f); Preamble to Treas. Reg. §1.367(b)-5, T.D. 8862, 2000-1 C.B.
466.
(4) CFC Distributing/Newly Formed CFC
Spinco
►
D S/Hs
2
Spinco
stock
CFC D
Bus 1
Bus 2
1
1
Business
2
Spinco stock
Foreign D owns Business 1 and
Business 2. D is a CFC.
formed foreign Spinco in
368(a)(1)(D).
CFC Spinco
Bus 2
Page 45
Spinco
►
As above, the Section 367(b) regulations require a comparison of each distributee
shareholder’s “pre-distribution Section 1248 amount” with its “post-distribution Section
1248 amount” with respect to each of its D stock and its Spinco stock.
►
In general, in a pro-rata distribution, the amount by which the pre-distribution Section
1248 amount exceeds the post-distribution Section 1248 amount is used to reduce the
basis in the stock of the relevant corporation. (Treas. Reg. §1.367(b)-5(c)(2))
►
►
►
►
If this amount exceeds the basis, a deemed dividend must be included in income.
With a newly formed Spinco, a portion of the D E&P is allocated to Spinco. Thus, each Section
1248 shareholder should maintain the same percentage ownership in D’s E&P.
Under proposed regulations, a basis reduction is available only to the extent that it increases
the distributee’s Section 1248 amount. As a practical matter, where CFC Spinco is newly
formed, an basis reduction likely will be permitted. (Prop. Reg. §1.367(b)-5(c)(2)(ii))
In a non pro-rata distribution, the amount by which the pre-distribution Section 1248
amount exceeds the post-distribution Section 1248 amount is included in income as a
deemed dividend. (Treas. Reg. §1.367(b)-5(d)(3))
Page 46
Spinco
►
Where the distributee is required to reduce basis or recognize a deemed dividend, the
distributee generally is permitted an offsetting increase to its basis in the D or Spinco
stock. (Treas. Reg. §1.367(b)-5(c)(4))
►
►
The increase may not be (i) in excess of FMV of the D or Spinco stock or (ii) diminish the
distributee’s post-distribution Section 1248 amount.
►
►
Page 47
(5) CFC Distributing/Pre-Existing Domestic
Spinco
►
D S/Hs
1
Spinco
stock
CFC
D
Foreign D owns Spinco, a preexisting domestic corporation. D
is a CFC.
under Section 355.
US
Spinco
Page 48
(5) CFC Distributing/Pre-Existing Domestic
Spinco
►
The Section 367(b) regulations in this situation are only concerned with the D stock
because Spinco is a domestic corporation and, therefore, has no Section 1248 amount.
►
The same rules for pro-rata and non pro-rata distributions discussed above with
respect to CFC Distributing/Pre-Existing CFC Spinco apply, i.e., income inclusion
generally is required.
►
►
►
►
Under Prop. Reg. §1.367(b)-8(b)(1), it appears that a portion of D’s E&P would
disappear in the distribution of a pre-existing Spinco.
►
Page 49
In a pro-rata distribution, the lost E&P of D may have to be included in the income of the
Section 1248 shareholders.
(6) CFC Distributing/Newly Formed Domestic
Spinco
►
D S/Hs
2
Spinco
stock
CFC D
Bus 1
Bus 2
1
1
Business
2
Spinco stock
Foreign D owns Business 1 and
Business 2. D is a CFC.
formed domestic Spinco in
368(a)(1)(D).
US Spinco
Bus 2
Page 50
(6) Foreign Distributing/Newly Formed
Domestic Spinco
►
Because the initial contribution is an inbound asset reorganization, each US
shareholder that owns at least 10% of the vote of D must include in its income
as a dividend its share of the “all E&P amount” of D. (Treas. Reg. §1.367(b)3(b))
►
►
►
►
►
►
►
In a non pro-rata distribution, it is unclear whether only the distributee shareholder (and not the
shareholders who do not receive Spinco stock) should include the all E&P amount in income.
See Prop. Reg. §1.367(b)-8(d)(2)(v).
With respect to the Section 1248 amount, the Section 367(b) regulations in
this situation are only concerned with the D stock because Spinco is a
domestic corporation and, therefore, has no Section 1248 amount.
In a pro-rata distribution, a current income inclusion is not required in most
instances.
In a non pro-rata distribution, a current income inclusion generally will be
required.
Page 51
E&P Allocations and Adjustments
In General
►
If Distributing and Spinco are domestic corporations:
►
►
►
►
Apply Reg. §1.312-10
If Distributing and/or Spinco is a foreign corporation:
►
Apply Reg. §1.312-10, and/or
►
Apply Prop. Reg. §1.367(b)-8
Note that the status of shareholder is not relevant.
The application of Treas. Reg. §1.312-10 and Prop. Reg.
§1.367(b)-8 depends on whether the distribution is a
straight Section 355 distribution or a Section 355/“D”
distribution.
Page 52
Section 355/“D” Reorg
►
Application of Reg. §1.312-10(a)
►
The E&P of D immediately before the distribution is allocated
between D and Spinco.
►
Where Spinco is newly formed, allocate generally in proportion to
the fair market value of the assets retained by D and the assets of
Spinco immediately after the distribution.
►
“In a proper case,” allocation is made in proportion to the net
basis of the assets transferred and of the assets retained or by
such other method as may be appropriate under the facts and
circumstances of the case.
►
The term “net basis” means the basis of the assets less liabilities
assumed or liabilities to which such assets are subject.
Page 53
Straight Section 355
►
Application of Reg. §1.312-10(b)
►
►
►
Reduce D’s E&P by the lesser of:
►
The amount by which the E&P of D would have been decreased if the E&P of D
immediately before the distribution is allocated between D and Spinco based on the fair
market value of the assets retained by D and the assets of Spinco immediately after the
distribution
►
Spinco's net worth (i.e. the sum of the basis of all properties plus cash less liabilities)
Increase Spinco's E&P if immediately after the distribution, Spinco's E&P is less
than the adjustment to D’s E&P; otherwise, do not change.
Application of Prop. Reg. §1.367(b)-8
►
►
Page 54
D’s E&P:
►
Reduce in accordance with Reg. §1.312-10(b), except reduce by the amount by which
the E&P of Distributing would have been decreased if it had transferred the stock of
Spinco to a new corporation in a reorganization to which section 368(a)(1)(D) applied,
and immediately thereafter distributed the stock of such new corporation (but based on
the net basis in assets)
►
Not limited to Spinco's net worth
Spinco's E&P immediately after the distribution is unchanged.
FIRPTA
►
Always Beware of FIRPTA, Section 897–
►
Where a foreign Distributing distributes stock in a Section 355 distribution of a Spinco that has
substantial real estate holdings, classified as a United States Real Property Holding
Corporation (“USRPHC”); or
►
If Distributing is a USRPHC with foreign shareholders.
►
►
A USRPHC, generally, is any corporation in which the fair market value of its USRPIs equals or exceeds
50% of the fair market value of (1) its USRPIs, (2) its interests in real property located outside of the
United States, plus (3) any other assets that are used or held in a trade or business.
Section 897(a) generally provides that a nonresident alien individual or
foreign corporation is subject to US income taxation on gain from the
disposition of a United States Real Property Interest (“USRPI”) as effectively
connected income from a US trade or business.
►
Regulations create a deemed exchange at the shareholder level in the case of pro-rata Section
355 distributions.
►
A USRPI, generally, is an interest in real property (which is defined broadly) located in the US
or US Virgin Islands and interests in certain foreign or domestic corporations that are/were
USRPHCs.
Page 55
ILLUSTRATIVE TRANSACTIONS
Page 56
(A) Pro-rata Straight 355 Distribution of CFC
Operating Company
Pre-Transaction
The Transaction
USP
USP
CFC Parent
Equity Value = __
AB = __
Liabilities = $0
E&P = __
Tax Rate = 10%
CFC
Parent
CFC
Opco
CFC
Parent
CFC Opco
Equity Value = __
AB = __
USP
[1] Distribute
CFC Opco
Shares
CFC
Parent
CFC Parent
Equity Value = __
AB = __
CFC
Opco
Liabilities = $0
E&P = __
Tax Rate = 40%
Page 57
Post-Transaction
Liabilities = $0
E&P = __
Tax Rate = 10%
CFC
Opco
CFC Opco
Equity Value = __
AB = __
Liabilities = $0
E&P = __
Tax Rate = 40%
(B) Pro-rata 355/”D” Reorg of CFC Operating
Company
Pre-Transaction
Spin-off
Post-Transaction
USP
USP
USP
[2] Distribute
CFC Newco
Shares
CFC Parent
Equity Value = __
AB = __
Liabilities = $0
E&P = __
Tax Rate = 10%
CFC
Parent
CFC
Parent
CFC
Opco
CFC Opco
Equity Value = __
AB = __
Liabilities = $0
E&P = __
Tax Rate = 40%
Page 58
CFC
Newco
CFC
Opco
CFC
Parent
[1] Form CFC CFC Parent
Newco and
Equity Value = __
contribute CFC
AB = __
Opco
CFC Newco
Equity Value = __
AB = __
Liabilities = $0
E&P = __
Tax Rate = 10%
Liabilities = $0
E&P = __
Tax Rate = 10%
CFC
Newco
CFC Newco
Equity Value = __
AB = __
Liabilities = $0
E&P = __
Tax Rate = 10%
CFC
Opco
CFC Opco
Equity Value = __
AB = __
Liabilities = $0
E&P = __
Tax Rate = 40%
(C) Non Pro-rata Straight 355 Distribution of
CFC Operating Company
Pre-Transaction
USP
USP
CFC
Holdco
CFC
Holdco
CFC 1
CFC 2
50%
CFC 3
Equity Value = __
AB = __
Liabilities = $0
E&P = __
Tax Rate = 10%
Page 59
The Transaction
CFC 1
Post-Transaction
USP
CFC 1
CFC 2
CFC 3
CFC 4
CFC 2
50%
CFC 3
CFC 4
CFC 4
Equity Value = __
AB = __
Liabilities = $0
E&P = __
Tax Rate = 40%
CFC 3
CFC 4
[1] Distribute
CFC 4
Shares in
redemption of
CFC 3
Shares
CFC 3
Equity Value = __
AB = __
CFC 4
Equity Value = __
AB = __
Liabilities = $0
E&P = __
Tax Rate = 10%
Liabilities = $0
E&P = __
Tax Rate = 40%
(D) Foreign Securities-for-Securities
Exchange to Repay I/C Debt
►
S/Hs
2
►
2
CFC Spinco
securities
CFCSpinco
stock
CFC Parent
►
CFC Parent is a holding company. CPC Parent owns CFC
Opco and has an “old and cold” note issued to Finco.
CFC Opco has trapped cash.
CFC Parent wishes to repay its note to Finco using CFC
Opco’s cash; CFC Opco’s distribution of cash to CFC Parent
would trigger a significant withholding tax.
1
CFC Parent
Securities CFC Spinco
Finco
CFC Opco
CFC Opco
stock for
CFC Spinco
stock and
CFC Spinco
securities
S/Hs
CFC Parent
4
CFC Spinco
Cash
Steps
1. CFC Parent transfers CFC Opco to a newly formed CFC
Spinco in exchange for CFC Spinco securities (long- term
debt) and CFC Spinco stock.
2. CFC Parent transfers the CFC Spinco securities to Finco in
payment of the CFC Parent debt and distributes the CFC
Spinco stock to CFC Parent’s shareholders in a distribution
intended to qualify under Sections 355 and 368(a)(1)(D).
3. CFC Opco transfers cash to CFC Spinco in a distribution not
subject to withholding tax because both companies are
incorporated in the same country.
4. CFC Spinco uses the cash received from CFC Opco to repay
debt to Finco.
3
Cash
Note
►
Finco
Page 60
CFC Spinco
securities
CFC Opco
Alternatively, CFC Parent could have sold CFC Opco to CFC
Spinco in a Section 304 transaction. However, this would
have increased CFC Parent’s E&P, which does not occur in
the Section 355 transaction.
(E) Inbound Multinational - Integration of US
Groups
FP
FS 1
FS 2
US Sub 1
FS 3
US Sub 2
Page 61
Background:
►
FP owns, among others, FS 1 and FS
2.
►
FS 1 has a domestic subsidiary, US
Sub 1.
►
FS 2 recently acquired a foreign target,
FS 3, which has a domestic subsidiary,
US Sub 2.
Groups (cont’d)
Step 1:
►
FS 1 forms US Newco.
FP
FS 1
FS 2
[2] Distribute US
Newco equity &
US Newco Note
US Sub 1
[1] Form
Newco
US
Newco
US Sub 1
Page 62
FS 3
[2] Contribute
US Sub 1
shares
US Sub 2
Step 2:
►
FS 1 contributes 100% of the shares of
US Sub 1 to US Newco in exchange for
debt (“US Newco Note”) and equity of
US Newco.
Groups (cont’d)
[3] Distribute US
Newco Note & US
Newco Shares
US
Newco
US Sub 1
Step 3:
►
FS 1 distributes 100% of the shares of
US Newco to FP and the US Newco
Note to FP [or affiliated creditors].
FP
FS 1
FS 2
FS 3
US Sub 2
Page 63
Anticipated US federal income tax
consequences and rationale:
►
Assuming all of the relevant
requirements are satisfied, steps 1, 2,
and 3 should be treated as a tax-free
Section 355 / “D” reorganization
transaction.
►
Assuming there are no US
shareholders of FP, no All E&P
inclusion is required.
►
The US Newco Note should not be
treated as a distribution subject to US
withholding tax.
Groups (cont’d)
[4] Contribute US
Newco common
stock down the
chain, ultimately to
US Sub 2.
FP
FS 1
FS 2
FS 3
US Sub 2
US
Newco
US Sub 1
Page 64
Step 4:
►
Foreign Parent contributes US Newco
shares to FS 2 in exchange for
common shares of FS 2.
►
FS 2 then contributes US Newco
shares to FS 3 in exchange for
common shares of FS 3.
►
FS 3, in turn, contributes US Newco
shares to US Sub 2 in exchange for
common shares of US Sub 2.
Anticipated US federal income tax
consequences and rationale:
►
Assuming all of the relevant
requirements are satisfied, step 4
should be treated as a series of taxfree transactions.
Questions
Page 65
Thank you
For your participation and feedback!
Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding
penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

To Spinco - TEI-Houston Chapter

Transcription

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