Chapter 10 Pt.1 Flashcards
What are the risks of acquiring the assets of another business and putting them into an existing entity?
Liabilities that could affect the entity and put the original assets at risk.
What are the facts and issues of Revenue Ruling 2000-S?
Facts:
- Situation 1:
- Target corp transfers some of its assets and liabilities to an acquiring corporation
- The remainder of the assets are held by target
- Target does not go out of existence following the transaction
- Target shareholders receive acquirer’s stock in exchange for a portion of their target stock- they continue to hold the remainder of their target stock
- The transaction qualifies as a merger under the laws of state X
Issue:
- Does this qualify as a statutory merger?
Holding:
- No. Target must transfer all of its assets and liabilities to acquirer and target must then go out of existence. Note that this is divisive- some assets get transferred to acquirer and others are retained by target. Any statutory merger that is divisive will fail. Divisive reorganizations must meet the strict requirements of a divisive D reorg.
What are the facts and issues of Rev Ruling 2000-5 Situation 2?
Revenue Ruling 2000-5
Facts:
Situation 2:
Target corporation transfers some of its assets and liabilities to each of two acquiring corporations
Target corporation liquidates
Target shareholders get stock in each of two acquiring corporations (in exchange for 100% of their target corporation stock)
The transaction qualifies as a merger under the laws of State X
Issue:
Does this qualify as a statutory merger?
Holding:
No. Once again, this is a divisive transaction. The assets of target end up in two separate corporations. Any statutory merger that is divisive will fail. Divisive reorganizations must meet the strict requirements of a divisive D reorganization.
What are the requirements of a Type A statutory merger?
Requirements of a Type A – Statutory Merger
- Merger must be effected “pursuant to the statutes necessary to effect the merger or consolidation” (not just state law as required prior to 2006)
- All of target’s assets and liabilities must be transferred to acquirer
- There must be only one acquirer
- Target must go out of existence
- The transaction cannot be divisive – if divisive it will fail
Under the continuity of shareholder interest, what are the 3 requirements?
Continuity of Shareholder Interest
Three Requirements:
Qualitative
- Consideration received by one or more of the shareholders must be stock (not securities). There must be a continuing equity interest on the part of at least one shareholder
Quantitative
- Stock must be a “substantial” part of consideration
- 2005 regulations provide that 40% or more of total consideration must be stock
- Not all target shareholders must take stock
- The 40% test is an aggregate test – in aggregate the target shareholders must receive 40% stock – meaning of the total consideration given, 40% or more must be stock
Temporal
- How long does the target shareholder need to hold onto the acquirer’s stock?
- Pre-1998 – target shareholders required to hold stock for a reasonable period of time (but what is a reasonable period of time?)
- Post-1998 – target shareholders are no longer required to hold on to the acquirer’s stock following a reorganization
- FYI – this does not apply in a divisive D reorganization (see §355(e))
What are the facts and issues of the Seagram Corp case?
J.E. Seagram Corp. v. Commissioner
Facts:
- Seagrams commenced a cash tender offer for a large portion of the publicly traded stock of Conoco (hostile takeover)
- DuPont commenced a competing tender offer for Conoco (friendly takeover)
- The Conoco/DuPont offer called for Conoco to be merged into DuPont if DuPont acquired more than 50% of Conoco
- Seagrams acquired approximately 32% while DuPont acquired more than 50%
- Because DuPont acquired control of Conoco, Seagrams tendered its 32% ownership
- Seagrams filed its tax return and treated the transfer of its Conoco shares as a taxable sale (which generated a loss for Seagrams)
- Seagrams argued that the merger of Conoco into DuPont was not tax-free because the historic shareholders of Conoco were no longer a party to the reorganization and as such the continuity of shareholder interest could not be met!!
Issue:
Was the continuity of interest met such that the merger was a tax-free statutory merger?
Holding:
Yes. For a public company, it’s almost impossible to test whether the continuity of shareholder interest test has been met.
What are the requirements of a statutory merger?
Requirements of a Type A – Statutory Merger
- Merger must be effected “pursuant to the statutes necessary to effect the merger or consolidation” (not just state law as required prior to 2006)
- All of target’s assets and liabilities must be transferred to acquirer
- There must be only one acquirer
- Target must go out of existence
- The transaction cannot be divisive – if divisive it will fail
- Merger must meet both the qualitative (stock must be received by one or more target shareholder) and quantitative (40% or more stock) tests under the continuity of shareholder interest test
What are the 2 issues of continuity of business enterprise?
Continuity of Business Enterprise
- Requires that the acquirer either:
- Continue the historic business of the target or
- Use a significant portion of the target’s assets in some business activity
In other words, the acquirer can’t sell off the target’s assets and convert them to passive investments
What are the issues and facts of rev ruling 81-247?
Revenue Ruling 81-247
Three Situations:
- In a transaction anticipated to qualify as a statutory merger, corporation X acquired the assets of corporation Y, a manufacturing business. Immediately thereafter, X transferred all assets received from Y to corporation Z, its wholly-owned subsidiary engaged in a manufacturing business. Z then used the assets in its manufacturing business.
- Same facts as in situation 1 except X operates a manufacturing business too. X retained some of Y’s assets following the merger and transferred the balance to Z. Both X and Z continued to use Y’s assets in their respective manufacturing businesses.
- Same facts as in situation 1 except X divided Y’s assets into three parts and transferred the three parts to three separate wholly-owned subsidiaries. All three subs operated manufacturing businesses and following the transfer used Y’s assets in their respective businesses.
- In all three situations, the historic business of Y was not continued. In situations 2 and 3, the assets retained or transferred did not constitute a significant portion of Y’s assets.
Issue:
In each of the three situations, is the continuity of business enterprise met such that the purported merger qualifies as tax-free?
Holding:
In all three situations, the continuity of business enterprise is met.
What are the 7 requirements of a Type A statutory merger?
Requirements of a Type A – Statutory Merger
- Merger must be effected “pursuant to the statutes necessary to effect the merger or consolidation” (not just state law as required prior to 2006)
- All of target’s assets and liabilities must be transferred to acquirer
- There must be only one acquirer
- Target must go out of existence
- The transaction cannot be divisive – if divisive it will fail
- Merger must meet both the qualitative (stock must be received by one or more target shareholder) and quantitative (40% or more stock) tests under the continuity of shareholder interest test
- Target’s historic business must continue once acquired by acquirer or a substantial part of target’s historic assets must be used in a trade or business of acquirer (or an entity controlled by acquirer)
