Ninth Annual Domestic Tax Conference - EY · PDF fileAcquiring wants Target Sub, a US...

Ninth AnnualDomestic Tax Conference8 May 2014 | Chicago

Planning for corporateacquisitions and divestitures

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Todays presenters
Marc CountrymanMaryann DAngelo
Don BakkeSteve Fattman

Agenda
Corporate acquisitions and dispositions Post-acquisition integration Stock DITs IRS ruling practice update

Corporate acquisitions and dispositions

The impact of IRS regulations providing for anelection to treat a qualified stock disposition as adeemed asset acquisition

BackgroundSection 336(e)
Section 336(e), enacted in 1986, provides thatCertain stock sales and dispositions may be treated as asset transfers. Underregulations prescribed by the Secretary, if both:1. A corporation owns stock in another corporation meeting the requirements of
Section 1504(a)(2).2. Such corporation sells, exchanges or distributes all of such stock.Then an election may be made to treat such sale, exchange or distribution as adisposition of all of the assets of such other corporation, and no gain or loss shall berecognized on the sale, exchange or distribution of such stock.
The statute envisioned regulations that would apply a similar concept asSection 338(h)(10) for other corporate dispositions, sales and exchanges oftarget corporation stock.
Proposed regulations were published August 2008. Final regulations were published and became effective 15 May 2013.

Overview/basic concepts
It expands the scope of elective deemed asset sale treatment to coverany taxable disposition or series of dispositions by a domestic parent(or S corporation shareholders) of at least 80% of the stock of adomestic target (or S corporation target) to non-related persons within12 months. Plain vanilla preferred stock is disregarded.
It is modeled on Section 338(h)(10), except Section 338(h)(10) ismore purchaser-focused, whereas Section 336(e) is more seller-focused.
The election has the following consequences: Seller generally recognizes no gain or loss on the disposition of
Target stock. Target is deemed to dispose of all of its assets. Target attributes are generally transferred to Seller.
The purpose is to avoid imposition of an additional layer on the sameeconomic gain.

Form of transaction Result of Section 336(e) election
Transaction: Seller sells the stock of Target to PE Fund. Seller and Target enter into a legalagreement to jointly elect Section 336(e) to apply to the sale. PE Fund is not a party to the election.
Results: Legal sale of Old Target stock is essentially treated as sale of Old Targets assets to anewly formed corporation owned by PE Fund. The results are similar to those from a Section338(h)(10) election, but corporate purchaser is not required.
Target stock
Cash
SellerCorp.
BuyerPE Fund
NewTarget
1
OldTarget
UnrelatedParty
Cash
Targetassets
UnrelatedParty
2
Cash
Targetassets
SellerCorp.
OldTarget
3
Tax attributesand cash
OldTargetOldTarget
SellerCorp.
BuyerPE Fund
OldTarget
Section 336(e) converts legal stock sale intoasset sale for federal tax purposes

Alternative disposition structure for a targetbusiness that includes a CFC

Base case
Buyer wants to purchase the stock of US Target from US Parent. The parties contractually agree that US Parent willcause a Section 336(e) election to be made, to treat the transaction as an asset acquisition for US tax purposes
Absent restructuring, US Target would recognize $100 of gain on the deemed sale of its assets (equity of US LLCand Foreign Sub)
USTarget
USParent
ForeignSub
V = 200B = 100
$200 US Targetstock
USLLC
V = 100B = 50
V = 100B = 50
Old USTarget
USParent
ForeignSub
V = 200B = 100
$200
Old USTargetassets
USLLC
V = 100B = 50
V = 100B = 50
New USTarget
$200
Actual transaction Section 336(e) fictions
Assets
V = 100B = 50
Assets
V = 100B = 50
BuyerBuyer

Alternative disposition structureExtraction of Foreign Sub
Transaction steps1) US Target adopts a plan of complete liquidation
2) US Parent enters into an agreement to sell US Target's stock to Buyer, at a price that excludes the value of ForeignSub ($100)
3) US Parent distributes all of Foreign Subs equity to US Parent (the First Liquidating Distribution)
USTarget
USParent
ForeignSub
V = 200B = 100
USLLC
V = 100B = 50
V = 100B = 50
(3) Distributionof Foreign Sub
stock
(2) Agreement
(1) Adoption ofplan of
liquidation
Buyer

Alternative disposition structureSale of US Target with a Section 336(e) election
Transaction steps, contd.4) Pursuant to the agreement reached in step 2, Buyer purchases all of US Targets stock for $100
5) US Parent and US Target make a Section 336(e) election for US Target. The parties are treated as if (a) Old USTarget sold the equity of US LLC to New US Target for $100, and then (b) Old Target distributed the proceeds of thedeemed asset sale to US Parent in liquidation (the Deemed Liquidating Distribution, and together with the FirstLiquidating Distribution, the Deemed Liquidation). The Deemed Liquidation is intended to qualify for nonrecognitiontreatment under Sections 332 and 337
Old USTarget
USParent
ForeignSub (5a) Deemed
asset sale
USLLC
V = 100B = 50
V = 100B = 50
New USTarget
(5b) Deemedliquidatingdistribution
($100)
Section 336(e) fictions
Buyer

Alternative disposition structureSale of Foreign Subs assets for US tax purposes
Transaction steps, contd.6) (a) US Parent transfers all of the equity of Foreign Sub to Foreign Newco, and then (b) Foreign Sub files a check-
the-box election to be treated as a disregarded entity for US tax purposes. Steps 6a and 6b are intended to qualifyas an F reorganization.
7) Foreign Newco sells all of the equity of Foreign Sub to Buyer for $100, recognizing $50 of gain. Assume that none ofthe assets of Foreign Sub are of a kind which generate subpart F income. If Buyer is a US corporation, Buyer may prefer to structure its acquisition of Foreign Sub through a foreign entity classified as a
corporation for US tax purposes
8) Foreign Newco reinvests the proceeds from the sale of Foreign Sub in foreign business assets (not depicted)
ForeignNewco
USParent
ForeignSub
USLLC
V = 100B = 100
V = 100B = 50
USTarget
(6a) Transfer ofForeign Sub
(6b) CTBelection
$100
ForeignSub equity(7) Sale
Buyer

Alternative disposition structureFinal structure
ForeignNewco
USParent
USLLC
V = 100B = 100
V = 100B = 100
USTarget
Foreignassets
ForeignSub
V = 100B = 100
$100
V = 100B = 100
Buyer

Post-acquisition integration

Post-acquisition integration
Unwinding sandwich structures

Unwinding Target sandwich structures
Acquiring will purchasestock of Target, a foreignentity, for cash.
Acquiring wants TargetSub, a US corporation, tobecome a member of itsconsolidated group.
Consolidation is notavailable while Targetremains a foreigncorporation for US taxpurposes and continues tohold Target Sub.
Acquiring(US)
Target(non-US)
Target Sub(US)
T ShareholdersCash
Targetshares
Target(non-US)
Target Sub(US)

Unwinding Target sandwich structures
Implications of leaving Target Subunder Target: Target Sub does not join the
Acquiring US tax consolidatedgroup.
Target has an investment inUS property for purposes ofSection 956.
While a dividend re

Ninth Annual Domestic Tax Conference - EY · PDF fileAcquiring wants Target Sub, a US...

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