What is the definition of a qualified stock purchase?
Purchase of at least 80% of the target’s stock within a 12 month period.
Taxable Stock Acquisition with 338(h)(10)
What did IRS Notice 2008-83 do?
Allowed acquiring firms to use tax losses of qualifying financial institution target firms without limitation
What is it about put-call parity and the taxation of financial securities that provides an opportunity for tax arbitrage?
With differentially taxed assets and investors, can’t simultaneously have pre-tax and after-tax put-call parity. Thus, opportunity for arbitrage to exploit whatever inconsistency exists.
Sources of Tax Arbitrage
1. Time
2. Type of Income
3. Organizational Form
4. Jurisdiction
5. Investors
I. Sale of Snapple by Quaker Oats to Triarc:
Why did (i.e., what factors caused) the decision to make or forgo the 338(h)(10) election in the sale of Snapple to Triarc have a $250 million+ after tax cash flow effect for Quaker Oats?
Large spread between Quaker Oat’s basis in the stock of Snapple and the asset basis.
In the actual sale of Snapple to Triarc, why didn’t Quaker Oats recognize an income tax benefit for GAAP purposes equal to the full amount of the loss multiplied by the corporate tax rate?
Took a valuation allowance against the deferred tax asset from the capital loss carryforward
II. Sale of Snapple by Triarc to Cadbury Schweppes:
When Triarc sold Snapple to Cadbury, the transaction included a 338(h)(10) election. Why did it make sense to make that election in this sale of Snapple, but not in the original sale of Snapple to Triarc?
Stock Basis and Asset Basis are similar
How much, approximately, did Cadbury pay Triarc to make the 338(h)(10) election?
$200 million
What are five basic requirements necessary for a spin-off to qualify as tax-free?
1. Parent must own 80% of subsidiary’s stock pre-spin-off
2. Parent and subsidiary must be in an active trade or business post-spin-off
3. The spin-off cannot be a “device” for distributing profits to shareholders
4. Control (80%) of the subsidiary must be distributed
5. The parent and the divested business cannot have a greater than 50% ownership change post-spin-off
6. The spin-off must have a valid business purpose
When Google bought YouTube for $1.2 billion, approximately how much tax deductible goodwill was created in the transaction?
$0 (no tax deductible goodwill created in the deal)
How much, in dollars, were the tax benefits for Express Scripts in the NextRx transaction?
$800M to $1.2B
What expense or cost did the Ninth Circuit Court rule did not have to be “shared” by Xilinx with its Irish subsidiary?
stock option costs
How did Wal-Mart seek to reduce its state income tax liabilities?
Restructured so that ownership of stores (WalMart stores) so ownership was in Delaware. Rent paid on stores shifted income into Delaware which has/had a 0% tax rate on that type of income.
After the IRS issued the “Wells Fargo” ruling in 2008, how much more did Wells Fargo offer for Wachovia than Citigroup had previously offered?
About $13 billion.
What is the minimum price that the target's shareholders will accept under part a?
min price 338(h)(10)=
Price no election + (stockbasist_cg-historicalassetcostttcg+accumdepr*toi)/(1-tcg)
To make a valid Section 338(h)(10) election, when the target is a subsidiary of a C corporation, what three things must be factually present and what steps must the parties execute?
a. Parent owns at least 80% of subsidiary
b. Acquirer purchases at least 80% of T within 12 months
c. Make the election within 8.5 months of deal closing
#11. What were five significant changes in U.S. corporate taxation included in the 2017 Tax Cut and Jobs Act discussed in class?
1. Corporate tax rate cut to 21% (from 35%) 2. Move toward a territorial tax system
3. Repeal of the Corporate Alternative Minimum Tax
4. Immediate expensing of purchase of qualified assets
5. Limits on Corporate interest expense deductions
Other acceptable answers include:
– greater limits of deductibility of executive compensation above $1 million,
Change in carryback/carryforward of NOLs (no longer any carryback, unlimited carryforward)
I.R.C. § 197
provides that amortization on goodwill and other intangibles is tax deductible
When is a 338(h)(10) election sub-optimal in the sale of a subsidiary of a C-corporation? Be specific.
When the stock basis exceeds the asset basis by a large amount
d. What type of event causes the fact pattern that makes a 338(h)(10) election sub-optimal (when the target is a subsidiary of a C corporation)?
The Target was acquired previously in a carryover basis transaction such that the tax basis in the stock of the subsidiary exceeds the tax basis of the sub’s assets.
A prior carryover basis acquisition of the subsidiary that is now for sale.
What are the requirements that must be met to make a valid 338(h)(10) election when the target is a subsidiary?
i. divesting parent owns at least 80% of the target.
ii. Acquirer obtains at least 80% of target within 12 months (qualified stock purchase)
iii. Acquirer and divesting parent both make the 338(h)(10) election
When is a 338(h)(10) election sub-optimal in the sale of a subsidiary of a C-corporation? Be specific
What type of event causes the fact pattern that makes a 338(h)(10) election sub-optimal (when the target is a subsidiary of a C corporation)?
I.R.C. § 351
corporate formations, tax-free to founders contributing property in return for Newco stock
I.R.C. § 338
- taxable stock sale of a freestanding company that is taxed like an asset sale. A rarely used structure since the Tax Reform Act of 1986.
I.R.C. § 338 (h)(10)
taxable stock sale of a subsidiary or an S-Corp that is taxed like an asset sale
makes goodwill and other intangible related amortization expense tax deductible
I.R.C. § 265
limits the deductibility of interest on debt when the proceeds of borrowing are used to purchase tax exempt securities
I.R.C. § 382
limits the use of a target’s tax attributes (e.g., NOLs) post-acquisition
I.R.C. § 162(m)
limits tax deductibility of executive compensation to $1 million.
I.R.C. § 1258
recharacterizes capital gain on sale of capital asset sold via a forward contract as ordinary income. Ignorance of this tax code section lead to a UCLA faculty member passing out during a Chicago Booth workshop.
specifies that long term gains resulting from use of forward contracts are taxed as ordinary income
I.R.C. § 332
– allows for tax-free liquidation of corporate subsidiaries
I.R.C. § 302(b)(1)
relates to the tax treatment of stock redemptions. Stock redemptions are taxed as sales if they are not essentially equivalent to a dividend.
I.R.C. § 754
provides for a step-up in tax basis in the assets of a partnership
I.R.C. § 302(b)(2)
relates to the tax treatment of stock redemptions. Stock redemptions are taxed as sales if they are substantially disproprotionate.
– provides for a step-up in tax basis in the assets of a partnership
I.R.C. § 368(a)(1)(B)
tax free stock for stock merger
What did U.S. Senator Richard Durbin suggest might happen to Walgreens if it completed its proposed inversion?
It would lose some or all of its revenues from government sources such as medicare
b) What tax planning strategy did the Rolling Stones use to reduce their tax liabilities?
Shift ownership of their music catalog to the Netherlands –
In T-Mobile’s acquisition of Sprint, how much did investment bankers in the transaction estimate Sprint’s NOLs were worth approximately?
$4.4 billion
What definition under the tax law was key to the tax benefits sought by the individuals in the Jade Trading case?
“liability” or “contingent obligation”
What type of transaction did Stamps.com complete to protect its net operating loss carryforwards?
NOL poison pill
When CIT purchase OneWest in 2015, how much did CIT report the use of OneWest’s profits to accelerated use of CIT’s NOLs would increase the net present value of CIT’s NOLs?
$300-400 million.
What created tax benefits for Proctor & Gamble in its acquisition of Clairol from Bristol Myers?
338(h)(10) election and resulting step up in basis of Clairol’s assets
How much, as a percentage of deal value, were the tax benefits for Proctor & Gamble in the Clairol transaction?
about 20% of the deal’s value
How much, in present value dollars at the time of the deal, were the tax benefits for Proctor & Gamble in the Clairol transaction?
about $1 billion
How much were the tax benefits worth in the 2016 acquisition of Bai Brands (Bai Water) by Dr. Pepper/Snapple?
$400 million
Approximately how much as a percentage of the equity value paid for Airtran were the tax benefits that Southwest expected to realize as a result of its acquisition of Airtran?
About 10%
Why were there substantial tax benefits in the Bai Brands acquisition, but not in many acquisitions that occurred in 2016? That is, what was different about the Bai Brands acquisition
Bai Brands was an LLC, a pass through entity
How did taxpayers in Cook County Illinois (Chicago area) respond to a large tax increase on soda and other sugary drinks?
They drove across county lines to buy soda in counties without the tax.
In week #3, double taxation was discussed at some length. In what valuation situations should you consider double taxation? Give two examples
i. Sale of a privately held company (income shifted out of business to owner)
ii. Sale of a subsidiary involved in intercompany transactions in which income is shifted from one subsidiary to another
[other possibles – income shifted across state or international boundries by interrelated companies, etc.]
How did Seagram account for the DuPont transaction on its GAAP statements
As a sale
Why did Seagram record a deferred tax liability on its GAAP financial statements as a result of the DuPont transaction
As a result of the DuPont transaction, what elements (line items) of Seagram’s GAAP financial statements contained amounts that did not coincide with and in fact were not close to their corresponding economic values
Deferred Tax Liability
Securities/Investments
Under what circumstances (fact pattern) does a 338 (h)(10) election make sense? Consider only circumstances involving the sale of a subsidiary of a C-corporation
i. stock basis < asset basis
ii. stock basis = asset basis
iii. stock basis > asset basis by a relatively small amount
iv. divesting parent has significant NOLs
To make a valid Section 338(h)(10) election, when the target is a subsidiary of a C corporation, what three things must be factually present and what steps must the parties execute? (3 pts)
- taxable stock sale of a subsidiary or an S-Corp that is taxed like an asset sale.
I.R.C. § 386(a)(1)(A)
– tax free merger, stock and cash possible consideration
– limits the use of a target’s tax attributes (e.g., NOLs) post-acquisition.
– limits deductibility of interest on borrowings used to purchase tax-exempt securities.
I.R.C. § 1259
– causes constructive sale of appreciated property to be immediately taxable
I.R.C. § 302(b)(3)
– relates to the tax treatment of stock redemptions. Stock redemptions are taxed as sales if they result in complete termination of shareholder interest.
– corporate formations, tax-free to founders contributing property in return for Newco stock
What was the flaw in the Wall Street Journal’s analysis of the price paid per cable subscriber by Cox Cable when it bought Gannet’s Cable TV business?
Failed to account for tax benefits of 338(h)(10) election in the transaction, which reduced the after-tax cost of the deal.
Based on a large scale academic study, what strategy have some elderly people pursued to reduce tax liabilities?
Time death to minimize estate taxes
What feature of the way in which the founder of RXBars set up his business created the reported tax benefits in the sale of that business to Kellogg?
It was an LLC, which allowed it to be sold in a step-up structure which created tax benefits and value – 3 pts
What event allowed KB Home to recognize $100+ million in tax benefits in its financial statements in 2010?
Carryback of NOLs to get a tax refund
What created tax benefits in the Lockheed Martin/Sikorsky Aircraft transaction?
338(h)(10) election
What basic tax strategy could the founder/owner of Tumblr potentially have executed when he sold Tumblr to Yahoo?
timed the sale of his company when tax rates were lower (accelerated the date of sale)
How much, in dollars, were the tax benefits in the Lockheed Martin/Sikorsky Aircraft transaction?
$1.9 billion approximately
What strategy did the band U2 undertake to reduce the taxes on the earnings on their recorded music (not their concert tours)?
moved ownership of their music catalog to the Netherlands
What is the basic conclusion regarding taxpayer behavior in the Gregory v. Helvering case quoted the first week of class?
Taxpayer is free to legally reduce his/her tax liability as much as possible.
What did Intel’s tax director tell a Senate panel that Intel would do if it could reincorporate today?
Reincorporate outside the United States
What was an asserted unintended consequence of President Clinton’s 1997 tax change that exempted $500,000 of gain on the sale of a personal residence from taxation?
Taxpayers invested too much in residential real estate, borrowed too much on residential real estate and that contributed to the recent financial crisis
How did Usain Bolt respond to the U.K.’s tax policies regarding athletes’ sources of income?
e refuses to run races there because the U.K. Taxes on his worldwide income based on his participating in track meets in the U.K.
ACM Partnership Case:
What was the expected net gain/loss for the partnership over the life of the transaction?
$0
ACM:
To which partner would most of the taxable gain from the partnership be allocated? How much tax would that partner pay on the taxable gain? Why?
Offshore partners, $0, Tax exempt in U.S.
What did the court indicate about Colgate’s consideration of those transaction costs?
Taxpayer (Colgate) did not consider the transactions costs or study the before tax profitability of the transaction. Hence, the court concluded it was not a real business deal but for the large tax savings.
As an executive, what is the lesson of the ACM case with regard to evaluation of tax advantaged transactions?
Evaluate a transaction’s non-tax benefits and its potential profitability and evaluate the transactions costs in light of those non-tax benefits.
How much were the transactions costs of the deal for Colgate?
About $3 million
In the first week of the class, some basic income shifting techniques were discussed as the basis for many tax strategies. One such strategy was shifting income from one time period to another. Please provide three real world examples of that strategy, as discussed during class.
1. Timing of Death (Managing of Estate Taxes)
2. Eisner’s stock options at Disney
3. Sec. of State Clinton’s law firm bonus (move from 1993 to 1992)
4. NOL Target firm with Stock options (excercised post-closing)
5. Subsidiary sale with intercompany contract (steel company with iron ore related subsidiary)
6. Timing of child birth
7. Tumblr Sale of Business
B. Another such income shifting strategy was shifting income from one type of income to another. Please provide two real world examples of that strategy, as discussed during class.
1. Seagram
2. Aluminum Smelting Business
a) What was the flaw in the Wall Street Journal’s analysis of the price paid per cable subscriber by Cox Cable when it bought Gannet’s Cable TV business?
Based on a large scale academic study, what strategy have some expecting parents pursued to reduce income tax liabilities?
What strategy have some Chinese property owners purportedly used to reduce their tax liabilities?
What type of transaction did Citigroup complete to protect its $43 billion of deferred tax assets?
What created tax benefits for Lockheed Martin in its acquisition of Sikorsky Aircraft?
How much, in dollars, were the tax benefits for Lockheed Martin in the Sikorsky Aircraft transaction?
Why were there tax benefits in the Blackstone IPO? Why were similar tax benefits generally not obtained in Google’s IPO?
What did R.H. Donnelley have that made it relatively more valuable than some other firms?
Approximately how much were the cash tax savings (undiscounted) that Bank of America stood to realize from using Countrywide Financial’s tax losses in the first five years after the acquisition closed?
As discussed in class, how did UPS reduce the tax liabilities on its operations?
What are six types of acquisitions that result in the creation of tax deductible goodwill (include acquisitions of C-Corporations, their subsidiaries or acquisitions of S-corporations, be specific including tax code sections where appropriate)?
1. Taxable asset acquisition (C-Corp target)
2. Taxable asset acquisition (Subsidiary of a C-Corp)
3. Taxable asset acquisition (S-Corp target)
4. Taxable stock acquisition with a regular 338 election (C-Corp target)
5. Taxable stock acquisition with a 338(h)(10) election (Subsidiary of a C-Corp)
6. Taxable stock acquisition with a 338(h)(10) election (S-Corp target)
What are three types of taxable acquisitions that do not result in tax deductible goodwill (you may include acquisitions of C-Corporations or their subsidiaries or acquisitions of S corporations)?
1. Taxable stock acquisition without a regular 338 election (C-Corp target)
2. Taxable stock acquisition without a 338(h)(10) election (subsidiary of a C-Corp)
3. Taxable stock acquisition without a 338(h)(10) election (S-Corp target)
If you were “pitched” a transaction that provided tax losses that were 15 times the size of the amount of the fee/investment and you were to be in the investment for about 30 days, what have courts (e.g., LaVerne v. Commissioner, Neonatology Associates v. Commissioner, and Pasternak v. Commissioner) said about how you as the taxpayer should view the transaction?
It’s “too good to be true”, and if you proceed, don’t be surprised if you are challenged by the taxing authority.
Taxpayer (Colgate) did not consider the transactions costs or study the before tax profitability of the transaction. Hence, the court concluded it was not a real business deal but for the large tax savings
A. What was the source or nature of the tax benefits sought in the Scottish Power case?
A. - Shifting income out of the U.S. through intercompany debt financing. – 2 pts
B. What was Pacificorp’s debt rating prior to its acquisition by Scottish Power?
B. – Debt Rating was “A” – 2 pts
C. What relevance was Pacificorp’s debt rating to the tax dispute in the Scottish Power case?
C. The high debt rating was important to establish that Pacificorp could take on additional debt, thereby providing some evidence that intercompany debt could have been arranged through a third party. – 2 pts
D. What are four of the factors considered by the court in Scottish Power in determining that the advance in question was debt rather than equity?
D. Any four of the following:
1. Labels on the instruments,
2. Fixed Maturity Date,
3. Source of payments,
4. Right to force payment,
5. Status equal to or inferior to other corporate creditors,
6. Parties Intent,
7. Not Thinly Capitalized,
8. Payment of interest out of dividends,
9. Ability to obtain loans from third parties.
Here is a set of facts about the pending divestiture of Portage's holding of 30% of the stock of Waterway.
• Portage is a Delaware C-corporation.
• Waterway is a Delaware C-corporation that is 30% owned by Portage. The remaining 70% is owned by public shareholders (e.g., individuals, etc.).
• Portage has a basis in the stock of Waterway of approximately $1 million. The fair market value of the stock is about $100 million. Portage's tax rate is 35%.
• Portage wants to monetize it's position in Waterway, but it wants to avoid paying the large tax that a sale would encompass.
Required: The CFO of Portage calls you and asks you for assistance in divesting its position in Waterway. What do you suggest?
Consider a derivative based divestiture – issue a convertible debt security that converts into the value of the 30% position at a future date.
Your brother owns 100% of Hoosier (a C-Corporation) and he is complaining that the corporation pays significant income taxes and that he also personally pays income taxes on the dividends that the corporation pays him. What are three things that your brother can do to avoid this so-called “double taxation?”
1. Pay excessive salary
2. Pay himself for various services provided to corporation (consulting fee)
3. Pay rent on property owned personally by shareholder (e.g., office building)
List three tax planning strategies discussed in class that a U.S. company completing a merger based inversion (e.g., of the form of the proposed Pfizer/Allergan transaction) might use to reduce the combined firm’s income tax liabilities post-merger (9 points)
a. Intercompany debt to shift income out of U.S. to low tax jurisdictions (e.g., Luxembourg)
b. Paying licensing fees from high tax jurisdictions to low tax jurisdictions for use of intangible property thereby shifting income from high tax to low tax jurisdiction
c. Any other similar strategy to b. involving across border payments (e.g., rent, management fees, etc.)
d. Moving non-US subsidiaries of Pfizer “out from under” U.S. tax system so future earnings are not subject to U.S. taxation. e. Various types of cost shifting in which costs are shifted into U.S. and other high tax jurisdictions from low tax jurisdictions of Allergan/Pfizer.
a) In testimony before the U.S. Congress, what did the tax director of the U.S. corporation Intel state he wished Intel would have done in regards to its tax planning?
Incorporate outside the United States when Intel was founded.
What was the source of tax savings in Kinder Morgan’s restructuring and why did Kinder Morgan achieve such tax savings?
Step up in basis of Kinder Morgan’s assets, because KM was a partnership (pass-through entity)
How much in $ were the tax savings that Lockheed Martin realized when it acquired Sikorsky from UTC in 2015?
About $1.9 billion.
How did UPS reduce income taxes on its package insurance business?
spun off profitable insurance business to Bermuda and shifted insurance profits to Bermuda where tax rates were lower.
Senator Carl Levin criticized tax benefits associated with Facebook’s employee stock options. In doing so, he compared the tax deductions on the stock options to the GAAP expense associated with those same options. What did he fail to understand about that comparison?
GAAP accounting for stock options is based on option value at date of grant, while tax deduction on options is based on value of options at date of excercise.
What simple strategy could the owners of Tumblr have used to save significant income taxes on the sale of Tumblr to Yahoo?
Timed the sale of shares when tax rates were lower
How did Worldcom attempt to reduce its state income taxes?
Paid fee for “management expertise” to upstream entity in Delaware, thereby shifting income from high tax states to low/zero tax state.
Step up in tax basis, from a 338(h)(10)
About 20% of the deal’s value
Approximately how much as a percentage of the equity value of the transaction were the tax benefits that Southwest expected to realize as a result of its acquisition of Airtran?
8-9%
Why were there tax benefits in the KKR IPO? Why were similar tax benefits generally not obtained in Facebook’s IPO?
Step-up in basis. No such benefit for Facebook because it was/is a C corporation.
In week #3, double taxation was discussed at some length. In what valuation situations should you consider double taxation? Give two examples.
i.
ii.
i. valuation of a subsidiary in a conglomerate (income shifting across states/countries);
ii. Valuation of a business within a portfolio of commonly owned businesses in which income shifting was likely to occur,
iii. Valuation of a privately held business in which income was shifted from corporation to owners so as to avoid double tax on dividends.
What are three tax features of partnerships?
1. No entity level tax
2. Special allocations of income and loss
3. Basis includes liabilities
What are three tax features of S-corporations?
2. Income allocated based on stock ownership – no special allocations
3. Shareholder basis is basis in stock adjusted for corporate gains/losses
When is a C-corporation a beneficial organizational form relative to an S-corporation or a partnership type entity? (Consider tax rates, investor types, income types, etc.) Give at least two examples.
1. When corporate tax rate is much lower than personal tax rate 2. When investors will not benefit from the flow through of losses, but the corporation will derive some future benefit
When is an S-corporation (or a partnership type entity) a beneficial organizational form relative to a C-corporation type entity? (Consider tax rates, investor types, income types, etc.). Give at least two examples.
1. When personal tax rate is low relative to the corporate tax rate 2. When investors will benefit from the flow through of losses
If you wanted to have a corporation taxed like a partnership, but could not convert the corporation to a partnership, what technique/strategy might you employ?
• Increase leverage in the corporation and that eliminates the corporate tax and causes the corporation to be taxed like a partnership.
Your brother owns 100% of Longhorn (a C-Corporation) and he is complaining that the corporation pays significant income taxes and that he also personally pays income taxes on the dividends that the corporation pays him. What are three things that your brother can do to avoid this so-called “double taxation?”
A. In a straight I.R.C. Section 368 “B” acquisition:
1) What is acquired?
Stock
What is the requirement for tax-free treatment with respect to the proportion of consideration that must be acquirer stock?
100% Stock
What types of acquirer stock can be used with this acquisition structure?
Voting Stock
List three tax planning strategies discussed in class that Pfizer/Allergan might use to reduce the combined firm’s income tax liabilities post-merger
d. Moving non-US subsidiaries of Pfizer “out from under” U.S. tax system so future earnings are not subject to U.S. taxation.
e. Various types of cost shifting in which costs are shifted into U.S. and other high tax jurisdictions from low tax jurisdictions of Allergan/Pfizer.
I.R.C. § 368(a)(1)(A)
tax free stock for asset merger
makes constructive sales of appreciated property taxable at the time of constructive sale
allows for tax-free liquidation of corporate subsidiaries
As discussed in class, what strategy have companies doing business in India used to reduce their tax burdens?
Shift income to Mauritius
As noted recently in the financial press, what adverse effect were some companies concerned about if and when President Obama and Congress reduce U.S. corporate tax rates?
Firms with deferred tax assets will have lower GAAP earnings if corporate tax rates are reduced
As discussed in class, what events in the 1980s led to the U.S. corporate alternative minimum tax?
A number of firms reported large GAAP earnings, but paid relatively little income tax
What was an asserted unintended consquence of the 1993 tax deductible limit on executive compensation of $1 million?
Excess use of employee stock options and a resulting incentive for executives to inflate accounting earnings and ultimately commit accounting fraud
President George W. Bush signed a change in tax policy that benefitted owners of professional sports franchises. What was that change?
it made some pro sports related intangible assets tax deductible
What are three market and taxpayer actions documented in the financial press, and discussed in class, that occurred in response to the re-election of President Obama and the expectation that tax rates will increase in 2013?
i. increase in dividend payouts prior to 1/1/2013 (e.g., Costco, Walmart)
ii. selloff of appreciated publicly traded equity positions prior to 1/1/2013
iii. sale of companies by owners prior to increase in tax rates on 1/1/2013
tax benefits from stepping up the tax benefits of KKR’s assets. Facebook was a C corporation pre-IPO, so such benefits were unavailable to Facebook
Approximately how much as a percentage of deal value were the tax benefits that Southwest expected to realize as a result of its acquisition of Airtran?
about 9%
a. Under what circumstances (fact pattern) does a 338 (h)(10) election make sense? Consider only circumstances involving the sale of a subsidiary of a C-corporation.
It’s likely “too good to be true”, and if you proceed, don’t be surprised if you are challenged by the taxing authority.
What are three basic requirements necessary for a corporate formation to qualify as tax-free?
1. Contribute Property
2. Receive stock of Newco
3. Those shareholders contributing property have control of at least 80% of Newco after contribution
Some in the financial press noted that Facebook recognized relatively little employee stock option compensation expense on its audited financial statements (for stock options held by among others Mark Zuckerberg), but at the same time Facebook was likely to take several billion dollars of tax deductions on those same employee stock options. What explains this inconsistency in the audited financial statements and tax return positions of Facebook?
For GAAP accounting, firms amortize the fair value of stock options at the date of grant (often a relatively low value) over the service period. For tax purposes, firms claim an expense on the difference between the fair market value of the firm’s stock at the date of exercise less the option’s strike price (the “spread on exercise”). Thus, GAAP and tax use different methodologies to measure stock option expense, and measure amounts at different points in time (date of grant for GAAP, date of exercise for tax)
1. What benefits did Enron’s MIPS transaction provide for Enron?
Improved Enron’s balance sheet (leverage ratios)
What did the Joint Committee on taxation conclude with regard to the benefits Enron sought in its MIPS transaction and that many other taxpayers also pursued?
Improving the balance sheet was a reasonable business purpose and obtaining capital that was debt for tax purposes and equity for financial accounting achieved an “ideal objective.”
What was Enron’s stated business purpose with its MIPS transaction?
Improve balance sheet and income statement, lower cost of capital
How much did the JCT report were the transactions costs of Enron’s 1993 $200 million MIPS offering?
A bit over $14 million
How did Seagram account for the DuPont transaction on its GAAP statements?
Why did Seagram record a deferred tax liability on its GAAP financial statements as a result of the DuPont transaction?
Due to the book/tax basis difference in the remaining 8.2 million shares of Du Pont that Seagram retained
As a result of the DuPont transaction, what elements (line items) of Seagram’s GAAP financial statements contained amounts that did not coincide with and in fact were not close to their corresponding economic values?
i. Deferred Tax Liability
ii. Marketable Securities/Investments
Your client (a Fortune 500 company) has a subsidiary that makes personal computers. It wants to divest itself of the personal computer business. It is considering spinning off this subsidiary rather than some other divestiture technique. Your client purchased the personal computer business 7 years ago for $2 billion in cash, and the current tax basis that the parent has in the stock of the subsidiary is $2 billion, while the tax basis of the assets of the subsidiary are $1.7 billion. The subsidiary is worth approximately $8 billion. The personal computer business comprises about 40% of the value of the divesting parent corporation, whose current equity capitalization is about $20 billion. What valuable option might your client lose if the spin-off divestiture structure is selected rather than some other divestiture alternative?
Value of a step-up structure from a 338(h)(10) election
Software Target with NOLs:
You just graduated from Booth and are working in the Treasury group of a large software corporation that is very profitable and expects to be profitable in the future. You just received an email that your company is considering acquiring another software firm for $1.1 billion and there will be a preliminary meeting to discuss the pending acquisition in 90 minutes. You go online, and quickly look at the financial statements of the potential target and see that it has $545 million of net operating loss carry forwards with a remaining life of 11 years. You also look up the current federal long-term tax-exempt rate and see that rate is 3.77%. You believe a reasonable discount rate in this situation is 8%. Estimate the value of the target’s NOLs to your company in $ millions and as a percentage of the $1.1 billion purchase price. Assume your firm’s tax rate is 35%.
$103.62 million (2.5 pts),
and about 9.42% of deal value (2.5 pts)
In the first week of the class, some basic income shifting techniques were discussed as the basis for many tax strategies. One such strategy was shifting income from one pocket to another. Please provide five real world examples of that strategy, as discussed in class.
1. Aluminum Smelter – shift income to owner
2. Worldcom/MCI – shift income to Delaware via royalty
3. Wal-Mart – shift income to Delaware REIT via rent payments
4. Google – shift income out of the U.S. via payments on intangibles
5. Mauritius – shift income out of china to Mauritius
6. Texas Software company (former student) – shift income to Texas from high tax states
7. UPS – shift income to Bermuda via reinsurance arrangements post-spin off
8. Adult Bookstore – shift income to owner of business
9. Inversions – shift income to low tax jurisdictions through various techniques
10. Intercompany debt financing to shift income to low tax jurisdications (e.g. Scottish Power Case)
Last changed10 months ago
