Structuring Tax -Free Type D Business Reorganizations

1 Presenting a live 110-minute teleconference with interactive Q&A. Structuring Tax -Free Type "D". Business Reorganizations Navigating IRC 368(a)(1)(D) Complexities and Selecting the Appropriate Transaction TUESDAY, MARCH 18, 2014. 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today's faculty features: William R. Skinner, Attorney, Fenwick & West, Mountain View, Calif. Richard M. Nugent, Partner, Cadwalader Wickersham & Taft, New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext.

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3 A session, and record verification codes in the corresponding spaces found on the CPE form, in order to qualify for full continuing education credits. Strafford is required to monitor attendance. If you have not printed out the CPE Form, please print it now (see Handouts . tab in Conference Materials box on left-hand side of your computer screen). Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926. ext. 10. Program Materials FOR LIVE EVENT ONLY. If you have not printed the conference materials for this program, please complete the following steps: Click on the ^ symbol next to Conference Materials in the middle of the left- hand column on your screen.

4 Click on the tab labeled Handouts that appears, and there you will see a PDF of the slides for today's program. Double click on the PDF and a separate page will open. Print the slides by clicking on the printer icon. Tax -Free Acquisitive D. Reorganziations Strafford CLE Webinar March 18, 2014. William R. Skinner, Esq. Fenwick & West LLP. Silicon Valley Center 801 California Street Mountain View, CA 94041. Phone: Fenwick & West LLP, 2012. All rights reserved. Overview Statutory Requirements for the Two Types of D. Reorganizations All Cash Acquisitive D Reorganizations Tax Consequences to the Parties to the d reorganization Characterization Issues 6. The Type d reorganization Statutory Requirements Sec.

5 368(a)(1)(D) defines a d reorganization as involving the following elements: Transfer of all or part of transferor's assets to a corporation Transferor and/or its shareholders control the corporation immediately after the transfer Transferor distributes the stock or securities received as part of plan of reorganization in a distribution qualifying under 354, 355 or 356. 7. The Type d reorganization Two Paradigms Divisive D Acquisitive D. Shareholders 2. 2. Liquidation P. 355 of S1. Distribution P S1 1. S2. Substantially All S1's Assets 1. Assets S. 8. The Type d reorganization Two Paradigms Divisive D Reorganizations . Acquiring's stock must be distributed in a spin-off that qualifies under 355. Control test looks to 368(c) definition.

6 Acquisitive D Reorganizations . Acquiring must acquire substantially all of the assets of Transferor. 354(b)(1)(A). Definition of control looks to 304(c): Control = 50% vote or value Control may be direct or indirect. 318 constructive ownership rules also apply. 9. Acquisitive D Reorganizations - Liquidation Reincorporation Doctrine A. 2. 331. Liquidation 1. $700 Cash T S. Sell T. $300 Cash Business Assets $700 Business Assets Under pre-1986 law, the shareholder sought to receive T's cash in a tax-favored capital gain transaction. d reorganization treatment resulted in A being taxable at ordinary rates on the boot dividend (see 356(a)(2)). 10. Special Rules for Acquisitive Ds Non-Statutory Reorganization Requirements.

7 Continuity of interest test appears not to apply to Acquisitive D Reorganizations . See Prop. Reg. (b)(1); Reg. (l). Continuity of Business enterprise does apply, but usually is met by virtue of T transferring substantially all of its assets to A. A non-tax corporate Business purpose is also required. Reg. (l) permits all cash D Reorganizations to satisfy 368(a)(1)(D) so long as A and T's shareholders own the two companies in identical proportions. T is deemed to receive a nominal share of A stock in order to satisfy the distribution requirement.. 11. Cash d reorganization Reg. (l)(3), Example 3. P Nominal Share . Nominal Share . S1 S2. 3. Distribution of Nominal S4. Share S3 S4. 2 1. T Liquidates T.

8 FMV $70. Conclusion: T undergoes a 368(a)(1)(D) reorganization into S4. 12. Integrated Transaction Doctrine P. Transfer T. Shares to S. T for $ S. T T LLC. 2. Convert T. to an LLC. Under integrated transaction doctrine, two steps (Drop and Check) are treated as a d reorganization of T into S. See Rev. Rul. 2004-83. 13. Tax Consequences of Acquisitive D Reorganizations Generally, no gain or loss is recognized to the transferor corporation. See 361(b)(1)(A). Acquiring corporation succeeds to Transferor's tax attributes under 381(a). Shareholder recognizes gain, but not loss, to the extent that (A). money and other property exceeds (B) gain on the exchange. 356(a)(1) (the Boot-within-Gain Limitation ).

9 If the gain has the effect of a dividend, the shareholder shall recognize a dividend to the extent of its ratable share of the undistributed earnings of the corporation. See 356(a)(2). Compare results of a 304 transaction. 14. Example of Boot Treatment D. Basis $100 $100 Cash FMV $100. F1 F2. d reorganization $20 E&P $500 E&P. $10 Foreign $55 Foreign Taxes (33% rate) Taxes (10% rate). Under 356(a)(2), D's gain / deemed dividend is limited to its gain realized on the exchange of F1's stock for cash (here $0). What would be the results if D's basis in F1's stock was only $50? 15. Cash d reorganization vs. Section 304 Transaction Comparison Point Cash D 304. Basis Recovery Recognize gain to the Recognize dividend to extent of cash, and the extent of E&P, then then recover basis recover basis before recognizing gain.

10 Source of Dividend Unclear (Target only Both Companies' E&P. vs. Target and Combined Acquiring Combined). Whose E&P First? Unclear Acquiring First, then Target Section 367(a) None. US Transferor must Consequences enter Gain-Recognition Agreement (GRA). See Notice 2012-15. Tax Attributes T's attributes carryover No carryover of to A under 381 attributes. 16. Rev. Rul. 70-240. 2 B. X Liquidates Gain $30. X Y. 1. Sale of Operating E&P $10 Assets E&P $50. B recognized a $30 deemed dividend (out of X and Y's combined E&P). See also CCA 201032035. Compare case law - , American Manufacturing, 55 204. (1970) ( 356(a)(2) looks to Target's E&P only). 17. Gain Recognition Agreement Consequences D. 1. Transfer F1's Stock to F2.