Tax

Question 1

3 Main types of tax planning

Answer 1

Converting income type
usually ordinary income -> capital gains

Shifting income between pockets

Shifting income from one time period to another

Question 2

Example of income type shifting

Answer 2

Seagram redeeming its interest in DuPont for consideration including warrants, which preserved its proportional control, thus making the transaction qualify as a dividend and subject to the DRD. Seagram received $1.7bn total tax savings, of which DuPont pocketed $700m

Question 3

Example of shifting income from one pocket to another

Answer 3

Only works at state level:

Company owns > 80% of a REIT
rents office space from its own REIT
Dividends itself back the money
Ends up with the same amount of money
PLUS a rent deduction

Question 4

Examples of shifting income from one time period to another

Answer 4

COLI
- I take out insurance

Shorting against the box:

• I hold appreciated shares
• I borrow the same number of shares and sell them
• I pay no tax on that sale, because I borrowed them
• Later I return the shares, using the original shares I had
• I pay tax on that
• The interest I pay to borrow the shares is the cost to defer the tax

Question 5

Hallmark of C Corporation taxation

Answer 5

Double taxation

Question 6

Tax code section governing corporate formation

Answer 6

Section 351

Question 7

Principle underlying Section 351

Answer 7

Section 351 makes most corporate formations nontaxable in order to stimulate entrepreneurial activity

Question 8

Why would corporate formation be taxable without Section 351

Answer 8

In a corporate formation, the contribution of property into a corporation would be a recognized event, requiring tax on the difference between the basis in the property contributed and its fair market value.

Question 9

3 basic conditions for Section 351

Answer 9

1. Investors contribute property to the corporation
2. Investors receive stock in the corporation
3. Investors collectively control 80% or more of the corporation after the transaction

Question 10

If section 351 applies, what are investors taxed on?

Answer 10

The lesser of realized gain and the boot received in the transaction; never a loss

Question 11

If section 351 applies, what is the corporation being formed taxed on

Answer 11

Nothing

Question 12

If section 351 applies, what is the basis of the investors in the stock received?

Answer 12

Substituted basis: basis of property contributed, plus any gain, less boot received

Question 13

What is the corporation’s basis in property contributed in a 351 formation

Answer 13

Carryover basis: investor’s basis in property contributed plus any gain recognized

Question 14

What is the investor’s holding period in the stock received in a 351 formation

Answer 14

Substituted holding period: holding period includes the period of time the investor held the contributed property. Cash has a holding period of zero for this purpose

Question 15

What is the corporation’s holding period in property contributed in a 351 formation

Answer 15

Same as the investor’s

Question 16

What is the idea of the “lesser of” rule?

Answer 16

Taxation on realized gain to the extent cash is received. (If there is more gain than cash received, only the cash portion is taxed; if there is more cash received than gain, only taxed on gain)

Question 17

What is the idea underlying the substituted basis rule?

Answer 17

Your basis goes up by any gain (you don’t have to pay tax on it again) but goes down by how much you’ve been cashed out

Question 18

Inherent tax penalty in 351 corporate formation

Answer 18

Duplication of tax liabilities

Question 19

Potential for backdoor liability sharing in 351 corporate formation

Answer 19

If A and B contribute to new corporation, and A’s property has a hidden tax liability while B’s does not, then B suffers

Question 20

5 major M&A/divestiture tax issues

Answer 20

SCBAL

1. Shareholders’ tax liability
2. Corporate-level tax
3. Basis
4. tax Attributes of target (NOLs, tax credits, basis in stock/assets of subsidiaries)
5. Leverage

Question 21

4 Structural/Tax divestiture issues

Answer 21

1. Cash received divesting parent?
2. Parent recognizes gain?
3. Shareholders recognize gain?
4. Basis step-up?

Question 22

Tax classification of acquisitions

Answer 22

1. Stock acquisition
   a. Taxable, no 338 election
   b. Taxable, 338 election
   c. Tax-free
2. Asset acquisition
   a. Taxable
   b. Tax-free
3. Taxable
   a. asset
   (Cash, yes, yes, yes, no)
   b. stock, 338 election
   (Cash, yes, yes, yes, no)
   c. stock, no 338 election
   (Cash, yes, no, no, yes)
4. Tax-free
   a. asset
   (Stock, no, no, no, yes)
   b. stock
   (Stock, no, no, no, yes)

Question 23

When is goodwill tax-deductible

Answer 23

When assets are stepped up