in Acquisitions and Corporate Spin-Offs THURSDAY, AUGUST 22, 2013 - PowerPoint PPT Presentation

Presenting a live 110-minute teleconference with interactive Q&A Leveraging Final Sect. 336(e) Regulation Benefits in Acquisitions and Corporate Spin-Offs THURSDAY, AUGUST 22, 2013 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Leigh Griffith, Partner, Waller Lansden Dortch & Davis , Nashville, Tenn. Pamela Glazier , Attorney, Ropes & Gray , Boston For this program, attendees must listen to the audio over the telephone. Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .

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Leveraging Final Sect. 336(e) Regulation Benefits in Acquisitions and Corporate Spin-Offs Aug. 22, 2013 Pamela L. Glazier , JD, Ropes & Gray pamela.glazier@ropesgray.com J. Leigh Griffith, Waller leigh.griffith@wallerlaw.com

Today’s Program Nomenclature Slide 7 – Slide 9 Background Slide 10 – Slide 17 [J. Leigh Griffith] Overview Slide 18 – Slide 31 [J. Leigh Griffith] Basic Transaction Structures And Consequences Of The 336(e) Slide 32 – Slide 48 Election [Pamela Glazier] Calculation of Gain and Basis Slide 49 – Slide 72 [J. Leigh Griffith] Making the 336(e) election Slide 73 – Slide 81 [Pamela Glazier] Tax Alchemy? Slide 82 – Slide 87 [J. Leigh Griffith] Miscellaneous Slide 88 – Slide 93 [Pamela Glazier and J. Leigh Griffith]

NOMENCLATURE

8 Nomenclature  Disposition Date : The date on which a QSD occurs  New Target : Target for periods beginning after the disposition date  Old Target : Target for periods ending on or before the disposition date  PS : Partnership  Purchasers : Persons that purchase or receive by taxable distribution Target stock  QSD : Qualified Stock Disposition – transaction or series of transactions within a 12-month period in which at least 80% of the stock of Target is sold, exchanged or distributed by Seller or S Shareholders  Reg : Treasury Regulation

9 Nomenclature  S Shareholders : The shareholders of a Target that is an S corporation  Seller : A domestic corporation that owns at least 80% of the stock of Target. Seller may sell or distribute Target stock  Shareholders : The shareholders of Seller  T : Target  Target : A domestic corporation that is either (i) a part of Seller’s affiliated or consolidated group or (ii) an S corporation  TP : Taxpayer

J. Leigh Griffith, JD, LLM, CPA, Waller BACKGROUND

11 Background of §336(e)  1986 Congress repealed General Utilities that permitted a corporation to liquidate and not recognize gain  As a result gain embedded in the assets of a sold or distributed subsidiary generally subject to triple tax: – Gain on original sale/distribution of subsidiary T stock – Shareholder of selling corporation will have income or gain when proceeds exit selling corporation to shareholder – T subsidiary will have gain when sell assets

12 Background of §336(e)  § 336(e) was to provide relief from the potential multiple taxation of the same economic gain that results when a transfer of appreciated corporate stock is taxed to the corporate seller without providing a corresponding basis step up in the assets of the subsidiary target  § 336(h)(10) was already in Code for limited relief in certain all corporate transactions  Purpose was to expand the § 336(h)(10)type of relief

13 Background of §336(e)  Statute starts, “Under regulations prescribed by the Secretary if …”  IRS position - not applicable until regulations were issued (CCA 201009013)  27 years later, regulations finally issued on May 10, 2013 – Effective for dispositions with a “disposition date” on or after May 15, 2013 – Only in the tax world can you have a newly effective statutory provision after almost 27 years after passage

14 Tax Policy Observation  § 338(h)(10) provides for election if T corporation was a member of the selling consolidated group. – Regulations expanded the scope to include S corporations (definitionally not in a consolidated group but concept of income being taxable elsewhere)  § 336(e)(1) provides “a corporation owns stock of another corporation …” – S corporations cannot have another corporation as a shareholder. IRC § 1361(b)(1)(B)

15 Tax Policy Observation  Proposed regulations for § 336(e) did not include S corporations  Final regulations include S corporations on basis (h)(10) parity  While I like the result and intend to use this expansion with great vigor for client benefit – Do two positions arguably contrary to the Code equal a right position? – Does one position (clearly contrary to language of Code but favorable to TP) equal a right position? – As tax professionals and/or taxpayers, are we comfortable with regulations interpreting intent when statutory language is clearly to the contrary? – We may like the exercise of power today, but not tomorrow

16 Tax Policy Observation  IRS heart is in right place  IRS action is with best intentions  Personal opinion. Although I like where this specific road goes, it will be well traveled, and understand the parity rationale, unfortunately the statutory language is not there and there is no grey to interpret  I fear the application of the adage: “The road to hell is paved with good intentions.”

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J. Leigh Griffith, JD, LLM, CPA, Waller OVERVIEW

19 Overview of §336(e)  Elective deemed asset sale treatment with respect to 80% (vote and value) or more sale of stock by S corporation shareholders or corporation sale of subsidiary stock. – New T in hands of Purchaser (includes distributee) has stepped-up asset basis  Similar to IRC § 338(h)(10) in effect, but available to a much broader scope of transactions – Seller recognizes no gain or loss on disposition of T stock – T is deemed to sell all of its assets

Overview of Basic Requirements 20 for a §336(e) Transaction - QSD  Must have a Qualified Stock Disposition (“QSD”) – Transaction or series of transactions – Stock [80% or more in vote and value of shares (excluding § 1504(a)(4) stock)] of a domestic corp – Sold, exchanged or distributed (or combination) • Stock reacquired by Seller or related person in 12-month disposition period not count – By another domestic corporation or S corp SH – In a disposition  Reg. § 1.336-1(b)(6)

Overview of Basic Requirements 21 for a §336(e) Transaction-Disposition  Taxable disposition or series of dispositions – Sale or distribution of stock in a taxable transaction • No transferred basis exchange or by 1014(a) • No transaction in which §§ 351, 354, 355 or 356 applies except § 355(d)(2) and (e)(2)  Not sold, exchanged or distributed to a related person (related person restriction not in Code)

Overview of Basic Requirements for a 22 §336(e) Transaction  By Domestic parent corporation or S corporation shareholders  Of domestic T corporation  Within a 12-month period (disposition period)  Treas. Reg. § 1.336-1(b)(5)

Overview of Basic Requirements 23 for a §336(e) Transaction  If the preceding requirements are met, must be a timely election: – Generally by Purchaser/distributee and T – If S corporation, all S shareholders must elect – Large amount of information involved in the complete election