Global Asset and Stock Deals
Tax Executives Institute
Western Michigan Chapter
March 17, 2011
Kalamazoo, MI
Thomas May (New York/Washington DC)
Your Trusted Tax Counsel®
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Presenter
Thomas May (New York, Washington, DC)
thomas.may@bakermckenzie.com
(212) 891-3983
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Acquisition
Financing
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Acquisition Financing
– Use of Luxembourg Company
$200 for
CPECs or
Convertible
Loan
USP
(US)
CFC1
(Luxembourg)
USS
(US)
$50 Equity
Holdco
(A)
Branch
(US)
$150 Loan
$200 in Cash
for FT Shares
FT
(A)
FT
(A)
Fiscal Unity
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Acquisition Financing
– Repatriation/Financing Technique
USP
(US)
$200 for USP
Shares
CFC1
(Luxembourg)
FS
(B)
Low Tax CFC
(A)
FT
(A)
$200 in USP
Shares for FT
Shares
FT
(A)
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Section 338(g)
Elections and Covered
Asset Acquisitions
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Section 338(g) Elections
– USP files a section 338(g) election with respect to FT
USP
(US)
USS
(US)
FT Shares
CFC1
(A)
$200 Cash
FT
(A)
FT
(A)
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Section 338(g) Elections
– Requirements for section 338(g) election:
– Acquisition of stock in FT meeting the requirements of
section 1504(a)(2) (80% vote and value) during a 12-month
period
– FT stock must be acquired in a transaction in which gain or
loss is recognized in full
– Section 338(g) election must be made on Form 8023 filed by
15th day of 9th month following month in which acquisition is
made
– Unlike section 338(h)(10) election, the seller’s consent is not
required for a section 338(g) election
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Section 338(g) Elections
– Effect of section 338(g) election
– FT (Old Target) treated as having sold all assets at close of
acquisition date for aggregate deemed sales price (“ADSP”)
– ADSP is equal to grossed-up amount realized on recentlypurchased stock plus the liabilities of Old Target
– Allocation of ADSP amongst target assets based on asset
classes
– FT recognizes taxable gain or loss on each asset
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Section 338(g) Elections
– Effect of section 338(g) election
– FT (New Target) is treated as new corporation which
purchased assets of Old Target at start of day after
acquisition date for adjusted grossed-up basis (“AGUB”)
– AGUB is sum of grossed-up basis of recently-purchased
stock, basis of non-recently purchased stock, and
liabilities of New Target
– Allocation of AGUB amongst assets based on asset
classes
– FT’s historic tax attributes erased
– FT’s depreciation deductions increased for US E&P
purposes but not foreign purposes
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Section 338(g) Elections
– Effect of sale of FT stock on Seller absent section 338(g)
election
– Seller recognizes taxable gain or loss on the sale of FT stock
– Gain or loss is capital in nature and either U.S. or foreign
source
– If Seller is U.S. person that owned 10% or more of voting
stock of FT during 5-year period ending on date of sale
when FT was CFC (“section 1248 conditions”), gain
treated as dividend income to extent of E&P accumulated
during period FT stock was held while FT was a CFC
– Dividend income may be general basket income
– If U.S. person is corporation, dividend carries FTCs (if
any)
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Section 338(g) Elections
– Effect of sale of FT stock on Seller with section 338(g) election
– Seller recognizes taxable gain or loss on the sale of FT stock
and FT recognizes gain or loss on deemed asset sale for E&P
purposes (and, potentially, subpart F purposes)
– Seller’s gain or loss is capital in nature and either U.S. or
foreign source
– If Section 1248 Conditions satisfied, gain treated as
dividend income to extent of existing E&P plus E&P on
deemed asset sale
– Is dividend income from deemed asset sale general
basket?
– Section 338(h)(16)
– Dilution of FTC pool – Cf. PLR 8938036 with CCA
200103031
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Covered Asset Acquisitions
– Section 901(m) provides that, if there is a covered asset acquisition
(“CAA”), the disqualified portion of foreign income tax determined with
respect to the income or gain attributable to the relevant foreign assets
is not taken into account in determining the credit under section 901 or
sections 902 and 960
– A CAA includes:
– a qualified stock purchase under section 338(a);
– any transaction treated as an acquisition of assets for U.S. federal
income tax purposes and treated as an acquisition of stock (or is
disregarded) for foreign income tax purposes;
– any acquisition of an interest in a partnership if a section 754
election is in place; and
– any other similar transaction identified by the Treasury
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Covered Asset Acquisitions
– Where there is a CAA, the disqualified portion of foreign taxes is, for
any taxable year, the ratio (expressed as a percentage) of the
aggregate basis differences (but not below zero) allocable to such
taxable year with respect to all relevant foreign assets divided by the
income on which the foreign income tax is determined
– The basis difference with respect to any relevant foreign asset is the
excess of the adjusted basis of such asset computed under U.S.
federal income tax principles immediately after the CAA over the
adjusted basis of such asset computed under U.S. federal income
principles immediately before the CAA
– Basis difference is allocated to taxable years based on cost
recovery method applicable under U.S. federal income tax law
– A foreign asset is relevant with respect to a CCA if income, deduction,
gain, or loss attributable to such asset is taken into account in
determining the foreign income tax
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Covered Asset Acquisitions
– Section 338 Election
– USP files a section 338(g) election with respect to FT
USP
(US)
FS
(B)
FT Shares
CFC1
(A)
FMV/Recovery Period
Asset A: $150/15-year
Asset B: $50/5-year
$200 Cash
FT
(A)
Basis
Asset A: $0
Asset B: $0
FT
(A)
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Covered Asset Acquisitions
– Section 338 Election
– USP files a section 338(g) election with respect to FT
– Calculation of disqualified portion
USP
(US)
CFC1
(A)
1.
2.
3.
4.
Aggregate Basis Difference Allocable to Year 1: $20
Foreign Taxable Income in Year 1: $100
Foreign Taxes: $35
Disqualified Portion of Foreign Taxes: $20/$100 x $35 = $7
FT
(A)
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Covered Asset Acquisition
– Other Special Rules
– Disqualified portion of foreign taxes is deductible for U.S. federal
income tax purposes (e.g., for earnings and profits purposes)
– In the case of a section 338 election, CAA is treated as occurring at
close of acquisition date
– If basis of asset immediately after CAA is less than basis
immediately before CAA, difference is taken into account as a
negative basis difference (thereby decreasing disqualified portion of
foreign taxes)
– If there is a disposition of any relevant foreign asset, any remaining
basis difference with respect to that asset is allocated to year of
disposition
– Effective date
– Subject to transition rules, CAA rules apply to CAAs after
December 31, 2010
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Covered Asset Acquisitions
– Section 338 Election
– USP files a section 338(g) election with respect to FT
– Calculation of earnings and profits and foreign tax credits
USP
(US)
1.
2.
3.
4.
5.
6.
Dividend in Year 1:
Section 78 Gross-Up:
U.S. Taxable Income:
U.S. Tax Liability:
Foreign Tax Credits:
Excess Foreign Tax Credits:
$45
$28
$73
$26
$28
$2
CFC1
(A)
FT
(A)
1.
2.
3.
4.
5.
U.S. Taxable Income in Year 1:
Less Amortization:
Less Foreign Taxes:
U.S. Earnings and Profits:
Foreign Tax Credits:
$100
$20
$35
$45
$28
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Covered Asset Acquisitions
– Section 338 Election
– USP files a section 338(g) election with respect to FT
– Disqualified portion exists even if there is a foreign step up as well!!
– JCT report indicates it is anticipated that Treasury will exclude CAAs
in which basis of relevant foreign assets is increased for foreign tax
purposes
USP
(US)
CFC1
(A)
1.
2.
3.
4.
Aggregate Basis Difference Allocable to Year 1: $20
Foreign Taxable Income in Year 1: $100 - $20 = $80
Foreign Taxes: $28
Disqualified Portion of Foreign Taxes: $20/$100 x $28 = $5.6
FT
(A)
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Covered Asset Acquisitions
– Pre-CAA Planning
– FT’s election to be treated as a partnership is a liquidation
taxable under sections 331 and 336
– Step transaction, substance over form, economic substance,
etc.
USP
(US)
CFC1
(A)
FT
(A)
FP transfers
21% of the
stock of FT to
FC1
FP
(A)
FP and FC1
transfer all of
FT stock to
CFC1
FC1
(A)
79%
21%
FT
(A)
FT elects to be treated as a
partnership for U.S. federal
income tax purposes
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Post-Acquisition
Integration
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Post-Acquisition Integration
– Pursuant to Treas. Reg. section 1.368-2(l) and Rev. Rul. 200483, transaction is treated as a reorganization under section
368(a)(1)(D)
– Impact of CCA 201032035 (i.e., must FT be solvent?)
USP
(US)
USP transfers the stock
of FT to CFC1
CFC1
(A)
FT
(A)
FT
(A)
FT elects to be treated as a
disregarded entity or
merges into CFC1
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Post-Acquisition Integration
– Proper characterization?
– Double 351 plus a D reorganization, 351 plus a triangular C
reorganization, or D reorganization with grandparent stock
USP transfers
the stock of FT
to CFC1
CFC1 transfers
the stock of FT
to CFC2
CFC2 transfers
the stock of FT
to CFC3
USP
(US)
CFC1
(A)
FT
(C)
CFC2
(B)
CFC3
(C)
FT
(C)
FT elects to be treated as a
disregarded entity or
merges into CFC3
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Post-Acquisition Integration
– Proper characterization?
– Merger of UST1 into USP
– Sale of FT3’s assets and liabilities to CFC4
– Drop and check of FT1 into CFC2
USP transfers
the stock of FT1
to CFC1
CFC1 transfers
the stock of FT1
to CFC2
USP
(US)
CFC1
(A)
CFC2
(D)
CFC3
(B)
FT1
(D)
CFC4
(C)
FT1 elects to be treated
as a disregarded entity or
merges into CFC1
Cash
UST1 merges
into USP
Cash
FT1
(D)
Cash
Cash
All of FT3’s Assets
and Liabilities
UST1
(US)
Cash
FT2
(A)
FT3
(C)
UST2
(US)
Cash
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Thank You!
Pursuant to requirements relating to practice before the Internal Revenue Service, any tax advice in this communication
(including any attachments) is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties
imposed under the United States Internal Revenue Code, or (ii) promoting, marketing, or recommending to another
person any tax-related matter.
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