Transcript Document

Corporate Divestitures
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Occur when a corporation disposes of a
subsidiary or separate line of business
Same 4 alternative structures:
Taxable asset disposition
 Taxable stock disposition
 Nontaxable asset disposition
 Nontaxable stock disposition
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Includes spin-off, split-off, and split-up transactions
Taxable Subsidiary Sales
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Taxable asset sale
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Subsidiary recognizes gain or loss on sale of
assets
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Character of gain is ordinary to extent attributable to
inventory and depreciation recapture, remainder is capital
Gain or loss included in consolidated tax return filed with
divesting parent corporation
Divesting parent corporation can liquidate
subsidiary after asset sale if desired, without tax
cost
 Acquirer takes a cost basis in the assets acquired
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Taxable Subsidiary Sales continued
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Taxable stock sale without Sec. 338(h)(10)
election
Parent corporation recognizes gain or loss on the
sale of subsidiary stock
 Acquirer takes a cost basis in the stock acquired
and becomes the subsidiary’s new parent
corporation
 Subsidiary’s tax basis in its assets is unchanged –
no step up or step down to FMV
 May produce fewer non-tax costs in comparison to
asset sale (title transfer of one asset versus many)
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Taxable Subsidiary Sales continued
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Taxable stock sale with Sec. 338(h)(10)
election – election to treat the sale of
controlled subsidiary stock as an asset sale
Acquirer must obtain 80% of subsidiary’s stock
within a 12-month period
 Election made jointly by acquirer and divesting
parent corporation
 Subsidiary recognizes gain or loss on difference
between purchase price and net asset basis
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Taxable Subsidiary Sales continued
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Taxable stock sale with Sec. 338(h)(10)
election
Subsidiary’s tax basis in its assets is stepped up or
down to FMV
 Acquirer takes a cost basis in the stock acquired
and becomes the subsidiary’s new parent
corporation
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Example: Taxable Subsidiary Sales
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Parent owns the stock of Sub (tax basis $5
million). Tax basis of Sub’s assets is $3 million; it
has no liabilities, loss or credit carryovers.
Acquirer is willing to pay $9 million for Sub’s
assets. At this price, the tax benefits of a basis
step-up are worth $1.5 million.
What are the tax consequences of the 3 forms of
taxable sale? What do Parent and Acquirer prefer?
 At what price without the election is Acquirer indifferent
between a stock purchase without a Sec. 338(h)(10)
election and making the election? At this price, what
does Parent prefer?
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Tax-Free Subsidiary Sales
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Divesting parent can be the selling shareholder
in a Type A, B, or C reorganization
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Such a ‘sale’ results in divesting parent owning a
large block of stock in the acquirer that may be
difficult to sell and will trigger gain recognition on sale
Equity carve-out
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Sale of part of controlled subsidiary’s stock in an IPO
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No gain or loss if stock issued by sub versus owned by
parent
Typically limited to 20% or less of voting control
Tax-Free Spin-off
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Tax free under Sec. 355 if:
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Parent has 80% control prior to spin-off and distributes control
in the spin-off
Subsidiary and parent must continue to engage in a business
that had been conducted for at least 5 years before the
distribution
Parent must have held the stock of the subsidiary for at least
5 years before the distribution (unless acquired in a
nontaxable transaction)
Must have a valid business purpose
Shareholders of the divesting parent must maintain control of
parent and subsidiary post-spin-off
Parent and subsidiary cannot be acquired within 2 years of
the spin-off
Tax Consequences of a Qualifying
Spin-off
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No gain or loss recognized by divesting parent
Parent shareholders allocate a portion of tax
basis in parent shares to subsidiary shares
received
Subsidiary’s tax basis in its assets is
unchanged