bti e 11-6-130 -mergers-&-acquisitions

Presented by:Presented by:

Presented by:

Mergers & Acquisitions

• Nick Gruidl – McGladrey, Washington National Tax• Ron Kolodkin – McGladrey, Los Angeles• Moderator: Colleen Delger, Vice President, Tax Manager, AmericanWest Bank

Presented by:

Agenda‐ Proposed next‐day rule regulations‐ New F reorganization regulations‐ Proposed §367 regulations‐ §481 within M&A‐ §355 ATB guidance (Yahoo & Opco/Propco)‐ AmerGen & liability assumption‐ §1504(a)(4) & reasonable premiums‐ §382 and the S corp bank‐ Section 597

Recent guidance:

Presented by:

RECENT GUIDANCE

Presented by:

Next Day Rule

Presented by:

Next Day Rule Currently

Seller Buyer

• Elective exception to the ‘End of Day’ rule• Leaves room for broad interpretation of ‘reasonable’• Successor consolidated group entitled to certain deductions arising from transaction subject to agreement of parties

End of transaction date

Presented by:

Next‐day rule issues• Reg. §1.1502‐76(b)(1)(ii)(B)

– Next day rule: certain items incurred on day of change in status but after event causing the change of status, deemed to occur on next day

– When properly allocable to post transaction portion of day– Allocation respected when consistently applied by all parties and

allocation is reasonable– What is reasonable has been an area of controversy– Compare TAM 200548022 with GLAM 2012‐010

Presented by:

TAM 200548022• Success‐based fees paid by Target on acquisition date were

not next‐day expenses• IRS argued allocation not reasonable• IRS held Target’s success‐based fees should be included in its

short‐year separate return because:– “they were incurred and the services were rendered either prior to, or

on, the respective acquisition date, and [T] benefited from the services.”

Presented by:

GLAM 2012‐010• Target paid:

– Employees for and in cancellation of nonqualified stock options (NQSOs) and stock appreciation rights (SARs) in the event of a change in control

– Success‐based fees to financial advisory and investment banking firms• IRS held:

– Next day rule did not permit costs of the stock options, SARs, and success‐based fees to be allocated to the period after the acquisition

• Deductions were attributable to transaction– Next day rule may be applicable to retirement of Target’s bonds at a

premium• Liability to retire bonds at a premium did not become fixed and determinable until after closing of transaction

Presented by:

Next Day Rule Proposed Changes

Seller Buyer

• Provides all costs are subject to end of the day rule unless extraordinary- Success based fees & compensation items are not extraordinary

• Mandatory & ignores who funds the costs • Specifically address success based fees and compensation related costs

through an example

End of transaction date

Presented by:

Treatment of Costs under Proposed Regs.

Examples:• Success‐based fees incurred upon closing

– Arose simultaneously with acquisition• included on target’s short period return

• Payment for cancelled stock options– Arose simultaneously with acquisition

• included on target’s short period return• Premiums paid on early satisfaction of debt

– Flexibility exists• Unwanted assets sold to third party after closing

– Occurs on day target joins but after event resulting in target joining

• included on post‐transaction consolidated return

Presented by:

Treatment of Costs under Proposed Regs.

Anti‐abuse rule• Intended to address modifications and changes to

agreements that are intended to circumvent the regulations

Sections 382 • If subject to end of day rule then not incurred in the

recognition period• If subject to next day rule then in recognition period

Presented by:

Special Rule for S Corporations Currently• S corporation target becomes a member of the

consolidated group at the beginning of the termination date • Taxable year ends on the end of the preceding day• Eliminates the need for S corporations to file a one‐day return

when it joins a new consolidated group

• Problem: forces the S corporation into the next‐day rule• Success‐based fees are not fixed the day prior to the transaction

Presented by:

Changes to Special Rule for S Corporations

• Proposed regs. add a previous‐day rule for S corporations• Extraordinary items resulting from transactions on the termination date are allocated to the target’s tax return for the short period ending on the day preceding the termination date

• Only includes transactions that occur before or simultaneously with the event terminating target’s S corporation status

• Mirrors the principles of the proposed next‐day rule• Special rule for S corporations otherwise still retained

Presented by:

New f‐reog regs.

Presented by:

F Reorganization TransactionCurrent Structure

T

Shareholder

Presented by:

Standard F Reorganization Holding Company Transaction

• Newco is formed by Target shareholder and T is transferred to Newco followed by a conversion into an LLC (“F” Reorganization) or QSUB election if an S Corp

• Newco is, for tax purposes, a continuation of T• T is able to retain EIN as an LLC• Conversion is a non-event for federal income tax

purposes• T is now considered a division of Newco for tax purposes

Newco

T

SHs

Presented by:

Acquisition of T LLC Units

TLLC

• PE acquires units in T from Newco for cash• SHs retain tax deferral through Newco• Rollover not fully tax deferred if rollover is not

ratable• Treated as a taxable asset acquisition of

proportionate assets by PE followed by a transfer of assets to T LLC (taxed as a partnership)

– Generally Rev Rul 99-5 applies• COBE not required with an “F” • “F” in a bubble

SHs

PE

Newco Blocker(if desired)

Cash for Units

Presented by:

• Proposed regulations issued in 2004 finalized with minimal changes– 2005 regs eliminated COI & COBE requirements

• Continues to follow prior case law and rulings• Retains taxpayer favorable “F in a bubble” concept for

application of step transaction• Confirms that an F is a “single entity” reorganization• Confirms actual liquidation of corporation not required

Provides rules for overlapping reorganizations– Overrides reorgs other than “E”

• Confirms distributions are separate from the reorganization

Final “F” Reorganization Regulations: TD 9739

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Presented by:

Mere change in identity:1. Resulting corp stock distributed in exchange for transferor

– or deemed distributed2. Identity of stock ownership

– Different terms (“E” reorg) and redemptions OK 3. All assets and attributes to resulting corp

– But remember “F” is a bubble is OK4. Transferor liquidates (actual or deemed)

– QSUB elections, LLC conversions & “Check the box”5. Resulting corp is the only surviving corp

– Resulting corp has no assets or attributes pre “F”6. Transferor is the only acquired corporation

“F” Reorganization Requirements

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Presented by:

• Historically step transaction applies differently to an “F”• Do not step together to cause failure of an F

– Rev Rul 96‐29: F reorganization immediately prior to a C is respected as an F then a C

• Step together to attain an “F” then shut off – Subsequent prearranged plan to sell LLC units in a Rev Rul 99‐5

transaction do not cause failure

• Certain limitations where established step‐transaction principles apply– Certain liquidation reincorporation transactions– Rev Rul 2001‐46 type transactions

What is an “F in a bubble”

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Presented by:

Example 1:• P owns two subsidiaries S1 & S2• P transfers both S1 and S2 into a New holding company and convert each

to DREs

Example 2:• P owns S and they file a consolidated group• S converts into an LLC (DRE) and then distributes certain assets to P• Following the distribution S elects C corp treatment

Is it an “F”?

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Presented by:

Example 3:• Partnership PS owns S• PS causes S to convert into an LLC (DRE) • PS then transfers the LLC to Newco, a newly created corporation

Example 4:• P acquires T for 50% cash and 50% stock in a RTM• T them merges with and into a wholly owned subsidiary S • S was newly created and had no assets or liabilities

– Two‐step merger transaction

• QSP followed by an F or an A merger?• What if a Section 338(h)(10) election is made?

Is it an “F”?

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Presented by:

Proposed Regulations under §367

Presented by:

• Proposal to close “loophole” on offshoring of intangible property

• §367(a) in general (current rules):– Applies to outbound tax deferred transactions– Generally does not treat the foreign corporation as a

“corporation” resulting in taxable transfers– Exception for property used in an ATB

• Certain intangibles are not eligible for the exception and instead are subject to §367(d)

• Foreign goodwill is generally assumed by taxpayers as separate from intangibles and is not subject to §367 gain recognition under §§367(a) or (d)

– §367(d) requires sale of property for future income stream


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Presented by:

• Many taxpayers argue that vast majority of value in an outbound transfer is “foreign goodwill” and therefore falls outside of §§367(a) or (d)– Consider how this compares to GAAP as well as taxpayer positions often claimed to avoid anti‐churning, depreciation recapture, BIG tax etc.

• Concern by IRS on taxpayer argument that foreign goodwill is created by US employee activity generating sales to foreign customers– Inconsistent with legislative intent?


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Presented by:

Proposed changes:• Eliminate the exception for foreign goodwill entirely

– All intangibles in effect would become subject to §§367(a) or (d)• Adds option to apply either §§367(a) or (d) to the transfer

– Sale approach or income stream approach• Removes 20yr life on intangibles and utilizes entire period of

exploitation• Provides that exploitation includes use of property in R&D

– If the intangible transferred is expected to contribute to future development of the intangible or other intangibles then it includes the life of that intangible as well


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Presented by:

• P a US corporation owns T, also a US corporation with significant foreign customers and operations not held in a CFC

• T undergoes a outbound “F” reorganization whereby it merges with and into a foreign company in what represents a mere change in identity

• Assume FMV of assets exceeds Basis by $100M and all property is intangible– Current rules: T will argue that the appreciation primarily in

foreign goodwill and going concern value to avoid §367(a)– Proposed rules: $100M in value is treated as either sold in a

taxable transaction or income is recognized over expected exploitation period of the intangibles (including goodwill)

Proposed Regulations under §367: Example

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Presented by:

Sec. 481 ACCELERATION GUIDANCE

Presented by:

Sec. 481(a) Acceleration: Rev Proc 2015‐13

• Election by selling entity in year of transaction or year prior to transaction (before return filing) to accelerate the entire 481(a) adjustment into the year of change

• Eligible Transactions– Stock acquisitions, including “B” Reorgs– Asset acquisitions subject to Sec. 381(a)– Partnership and S corp transactions other than tech term

• Ineligible Transactions– Acquisition where seller doesn’t exist post‐transaction

• Pship DRE, LLC DRE (Deemed asset sales)– Asset acquisitions subject to Sec. 1060

Presented by:

Sec. 481(a) Acceleration Opportunities• Inclusion in buy side due diligence• Bad Methods (impermissible or not advantageous)

• Alleviate RBIL limitation on Sec. 382 NOLs from Sec. 481(a) adjustments

• Keep taxable income with exiting partners

Presented by:

Sec. 481(a): Opportunities & Traps

Acquire a C corp that is a built in loss company (FMV in assets < Basis)– Deferred Revenue of $100M– Company has NOLs of at least $100M

Of the $100M in deferred revenue only $50M is eligible for deferral under Rev. Proc. 2004‐34.

Under the normal rules, the 481(a) adjustment would occur post ownership change, but the ability to utilize the NOLs will be limited by 382. Further, this 481(a) adjustment is not RBIG and the Company is in a NUBIL.

Adopting full inclusion and acceleration of the adjustment into the pre‐acquisition period allows NOL offset free of section 382 limitation. - Or adopt Rev Proc 2004‐34 to accelerate $50M

Presented by:

Yahoo/REIT Spin/355(g) & IRS Response

Presented by:

355 Generally ‐ ATB

• Each of D and C must have ATB post spin. • How big does the ATB have to be?• Historically it was a relatively low threshold.• IRS, through their recent guidance, has shown a shift in

policy. Appears their view that a small ATB is okay may have changed. – Do SAG rules partially eliminate the reason to allow very small

ATB as Treasury seems to suggest

• Leads to concerns that we have a device.

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Presented by:

Spin‐offs/REIT – under §355

1. Real property and an active trade or business is contributed to Prop‐Co

2.Op‐co distributes Pro‐co stock pursuant to section 355

Op‐co

Prop‐Co

ATBReal Prop.

Presented by:

Spin‐offs/REIT – end result

Op‐co REITProp‐Co

TRSATB

Long‐term lease

Presented by:

IRS 355 spin‐off Pause

YHOO

BABAATB

Public

Spinco

BABAATB

Public

YHOO

>20% >20%

How big does this ATB need to be to pass device test??

Satisfies 355(g)

355 Spin

Presented by:

355 ATB w/REIT & Yahoo‐Alibaba• Historically, taxpayers were utilizing cash rich spin offs • Congress attempted to address this small ATB issue in

355(g)– Cannot have more than 2/3 cash or investment type assets.

• REIT assets are generally not investment assets, but also not generally ATB assets either – Did we just move from cash rich spins to other investment type

assets to yield the same outcome?– In the case of Yahoo, because they own in excess of 20% of

Alibaba, the Alibaba stock does not fall within the definition of an investment assets.

– Does prior ruling history support that with a small ATB the type of other assets matters? ATB assets <5yr history?

• Rev. Rul. 74‐79

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Presented by:

§355 – Device Test• Historically this was shareholder focused

– Distribution to shareholder that should be a dividend?

• Post repeal of General Utilities (post ‘86) this has become more of a corporate issue

– Distributing significant BIG assets without triggering a corporate tax?

• Movement from shareholder to corporate issue. • Looking not just at current and accumulated E&P but

also at all of the gains that you would recognize in a taxable transaction.

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Presented by:

355 – Business Purpose

• Stronger the business purpose, the less concerned we are that the transaction is a Device.

• 355 business purpose test is a stronger business purpose needed than in 368 transactions.

• Service now raising business purpose concerns when you have a small ATB therefore, taxpayers should be concerned with this as well.

• Rev. Proc. 2015‐43 and Notice 2015‐59.• IRS has significant concerns with all these items, device,

ATB and business purpose.

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Presented by:

Rev. Proc. 2015‐43 and Notice 2015‐59

• How does the Rev. Proc., notice and potential change in policy impact future transactions?

• Darden & Yahoo have each stated their intention to move forward with their respective proposed transactions despite the IRS no‐rule policy – Moving forward based solely upon receipt of a tax opinion– 9/29 statements by Treasury add additional concern of

challenges under exam based upon policy change w/out change in law

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Presented by:

• Assumed Liabilities in a Taxable Asset Acquisition

Presented by:

What is Contingent Liability

• Contingent vs Fixed Liabilities– What is contingent?– May be contingent in terms of whether they will be incurred, the amount and/or timing.

• Differs significantly from GAAP

Presented by:

Tax Basis in Assumed Liabilities

• Some taxpayers have relied upon Reg. §1.461‐4(d)(5) and included in basis at time of asset conveyance from seller

• AmerGen appeal to Federal Circuit affirmed lower court’s ruling that Sec. 461 economic performance rules apply– Nuclear decommissioning costs

• Must look to nature of liability to determine when economic performance, assumption, inclusion in basis happens

Presented by:

Tax Basis in Assumed Liabilities Example• AmerGen argued that liabilities arose upon the acquisition of

nuclear power assets– Argued relief of Seller by AmerGen of decommissioning

responsibilities established the liability– Decommissioning would not occur for a number of years

• Court found that liability arose from performing decommissioning services

Presented by:

Tax Basis in Assumed Liabilities Example• AmerGen impact felt far beyond nuclear

decommissioning– Warranty services?– Deferred revenue obligations?– Other potential performance liabilities?

• Must look to nature of liability to determine when economic performance, assumption, inclusion in basis happens

Presented by:

Pure plain vanilla preferred & redemption premiums

Presented by:

Section 1504(a)(4) stock & Section 382• In determining ownership changes under section 382 all stock is considered except for section 1504(a)(4)

• Section 1504(a)(4) stock:– Nonvoting– Nonconvertible– Limited and preferred as to dividends and does not participate in corporate growth

– Redemption premium and liquidation rights do not exceed issue price beyond a reasonable premium

Presented by:

Section 1504(a)(4) stock & Section 382What is a reasonable premium?Example:

– PS issued with following redemption rights:• 115% if within 0‐12 months• 110% if within 13‐24 months• 105% if within 25‐36 months• 100% after 36 months

– PS carries annual 8% preferred return– Taxpayer has no intention to call PS– Premium to compensate for lost return

Presented by:

Section 1504(a)(4) stock & Section 382• Does the annual preferred return represent an

unreasonable redemption premium if not paid until redemption? – See CCA 201152016 implying no

• Does fluctuation in redemption premium result in an unreasonable premium?– See PLR 201505006 implying no as ruling state the PS is section

1504(a)(4) stock– PLR silent as to actual %s so unclear the IRS view– How important is the likelihood of redemption of the PS at a

time when the premium is 15% or 10%?

Presented by:

Sub C To sub s & sec. 382

Presented by:

How does §382 apply within the S corporation context?• S corporation acquires T a C corporation for $100M

– Asset 1 $50M FMV and $250M basis– Asset 2 $50M FMV and $0 basis (new customer

relationship)• T has asset basis of $250M (T has a $150M NUBIL)• S makes a QSSS election on T• Are T’s recognized BILs subject to §382 limitations

thereby reducing the losses passed through to T’s shareholders? – Would your answer change if T had always been an S?

C Corp to S Corp: §382 Implications

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Presented by:

What we know:• §1374 NUBIG calculation:

– FMV of assets less adjusted basis– Less deductible liabilities– Less §481 adjustments that would be triggered– Plus any RBIL that would be limited under §§382‐384

• Same facts as previous page with exception that T had undergone an ownership change 12 months prior to being acquired by S at a time T held only Asset 1 with a FMV of $50M and basis was $250 ($200M NUBIL)

• When acquired by S T is a $50 NUBIG– $(150M) plus $200 RBIL that would be subject to §382


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Presented by:

But what about the S Corporation flow through of income:• $150M NUBIL – assuming all amortizable asset over 15yr– Is $10M annual amortization an RBIL subject to §382 limit of ≈ $3M/yr?

– Or is §382 inapplicable to flow through of income

– Authority is less than crystal clear


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Presented by:

What do the authorities say?• Sub C rules generally apply to S corps• Neither § 382 nor D corp regulations specifically state

that it does not apply to S corporations• S Corp rules state that income of an S corp is

computed in the same manner as an individual (§1363)– Items separately stated

• Rules of Sub C apply to an S corp unless specifically provided or if inconsistent with Sub C (§1371)– Business v non‐business bad debts– Charitable contribution carryovers– NOLs specifically disallowed


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Presented by:

• Supervisory Goodwill• Winstar/Glendale Federal Case• Washington Mutual Cases• Statute Issues

IRC Section 597 – PRE – FIREA

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Presented by:

IRC Section 597 – POST ‐ FIREA

Current Issues & History

IRS Exams

State Exams

Presented by:

Miscellaneous Items

Section 382 and NUBILS

NOL carryover exceeds maximum 382 limit

Enterprise Zone Issues in California

EZ Credit

Net Interest Deduction

Hiring credits in California

Presented by:

Questions & Answers?

Presented by:

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