Various Cases & In-Class Discussions

Question 1

What did U.S. Senator Richard Durbin suggest might happen to Walgreens if it completed its proposed inversion?

Answer 1

Walgreens would lose some or all of its revenues from gov’t sources such as Medicare.

Question 2

What tax planning strategy did the Rolling Stones use to reduce their tax liabilities?

Answer 2

Shift ownership of their music catalog to the Netherlands

Question 3

In T-Mobile’s acquisition of Sprint, how much did investment bankers in the transaction estimate Sprint’s NOLs were worth approximately?

Answer 3

$4.4 billion

Question 4

What definition under tax law was key to the tax benefits sought by individuals in the Jade Trading case?

Answer 4

Contingent liability vs. obligation

Question 5

What type of transaction did Stamps.com complete to protect its net operating loss carryforwards?

Answer 5

NOL poison pill

Question 6

When CIT purchased 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?

Answer 6

$300M - $400M

Question 7

What created tax benefits for P&G in its acquisition of Clairol from Bristol Myers?

Answer 7

338(h)(10) election and the resulting step-up in tax basis of Clairol’s assets

Question 8

How much in PV $$ at the time of the deal were the tax benefits for P&G in the Clairol transaction?

Answer 8

About $1 billion

Question 9

How much, as a percentage of deal value, were the tax benefits for P&G in the Clairol transaction?

Answer 9

About 20% of the deal’s value

Question 10

How much were the tax benefits worth in the 2016 acquisition of Bai Brands by Dr. Pepper / Snapple?

Answer 10

$400M

Question 11

Why were there substantial tax benefits in the Bai Brands acquisition, but not in many acquisitions that occurred in 2016? What was different about the Bai Brands acquisition?

Answer 11

Bai Brands was an LLC, a pass through entity (single taxation)

Question 12

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?

Answer 12

About 10%

Question 13

How did taxpayers in Cook County Illinois respond to a large tax increase on soda and other sugary drinks?

Answer 13

They drove across county lines to buy soda in counties without the tax

Question 14

In what valuation situations should you consider double taxation? Give 2 examples.

Answer 14

1. Sale of a privately held company (income shifted out of business to an owner)
2. Sale of a subsidiary involved in intercompany transaction in which income is shifted from one subsidiary to another
3. Income shifted across state or international boundaries by inter-related companies

Question 15

What was the flaw in WSJ’s analysis of price paid per cable subscriber by Cox Cable when it bought Gannet’s Cable TV business?

Answer 15

Failed to account for tax benefits of 338(h)(10) election in the transaction, where there were incremental tax savings in the deal, which were about $350M

Question 16

Based on a large scale academic study, what strategy have some elderly people pursued to reduce tax liabilities?

Answer 16

Time death to minimize estate taxes

Question 17

What feature of the way in which founder of RXBars set up his business created the reported tax benefits in sale of that business to Kellogg?

Answer 17

It was an LLC, which allowed it to be sold in a step-up structure which created tax benefits and value

Question 18

What event allowed KB Home to recognize $100M+ in tax benefits in its financial statements in 2010?

Answer 18

Carryback of NOLs to get a tax refund

Question 19

What created tax benefits in the Lockheed Martin / Sikorsky AIrcraft transaction?

Answer 19

338(h)(10) election

Question 20

How much in dollars were the tax benefits in the Lockheed Martin / Sikorsky Aircraft transaction?

Answer 20

$1.9 billion approximately

Question 21

What basic tax strategy could the founder/owner of Tumblr potentially have executed when he sold Tumblr to Yahoo?

Answer 21

Timethe sale of his company when tax rates were lower by accelerating the date of sale

Question 22

What strategy did the band U2 undertake to reduce the taxes on the earnings on their recorded music (not their concert tours)?

Answer 22

Moved ownership of their music catalog to the Netherlands

Question 23

What is the basic conclusion regarding taxpayer behavior in the Gregory v. Helvering case quoted the first week of class?

Answer 23

Taxpayer is free to legally reduce his/her tax liability as much as possible

Question 24

What was an asserted unintended consequence of President Clinton’s 1997 tax change that exempted $500k of gain on sale of a personal residence from taxation?

Answer 24

Taxpayers invested too much in residential real estate, borrowed too much on residential real estate and that contributed to the recent financial crisis

Question 25

What did Intel’s tax director tell a Senate panel that Intel would do if it could reincorporate today?

Answer 25

Reincorporate outside the U.S.

Question 26

How did Usain Bolt respond to the U.K.’s tax policies regarding athletes’ sources of income?

Answer 26

He refuses to run races there because the U.K. taxes his worldwide income based on his participating in track meets in the U.K.

Question 27

How do expecting parents reduce income tax liabilities?

Answer 27

Accelerate the birth of children prior to Dec 31 to get a tax deduction / credit

Question 28

How do Chinese property owners reduce tax liabilities?

Answer 28

Divorce to reduce property taxes

Question 29

Unintended consequences of Clinton’s 1997 tax change

Answer 29

Speculation on personal residence real estate, excess leverage on personal residences (homes)

Question 30

What did R.H. Donnelley have that made is relatively more valuable than some other firms?

Answer 30

High tax basis in its assets

Question 31

About how much were the cash tax savings (undiscounted) that BofA stood to realize from using Countrywide FInancial’s tax losses in the first 5 years after the acquisition closed?

Answer 31

$500 million approximately

Question 32

What was the source of tax savings in Kinder Morgan’s restructuring and why did Kinder Morgan achieve such tax savings?

Answer 32

Step up in basis of Kinder Morgan’s assets because KM was a partnership (pass-through entity)

Question 33

Senator Carl Levin criticized tax benefits for Facebook’s ESOs - what did he miss?

Answer 33

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 exercise

Question 34

How did Worldcom attempt to reduce its state income taxes?

Answer 34

Paid fee for “management expertise” to upstream entity in DE, thereby shifting income from high tax states to low/zero tax state

Question 35

Why were there tax benefits in the KKR IPO? Why were similar tax benefits generally not obtained in Facebook’s IPO?

Answer 35

Step up in basis. No such benefit for Facebook because it was/is a C-corp

Question 36

After the IRS issued the “Wells Fargo” ruling in 2008, how much more did Wells Fargo offer for Wachovia than Citigroup had previously offered?

Answer 36

$13 billion

Question 37

What type of transaction did Citigroup complete to protect its $43B of deferred tax assets?

Answer 37

NOL poison pill

Question 38

What created tax benefits for Express Scripts in the NextRx transaction?

Answer 38

Step up in tax basis from a 338(h)(10)

Question 39

How much, in dollars, were the tax benefits for Express Scripts in the NextRx transaction?

Answer 39

$800M to $1.2B

Question 40

How did the aluminum smelting business discussed in week #3 avoid double taxation of its profits? Provide 2 examples.

Answer 40

Excess rental fees paid by the corporation on real estate personally owned by corporation’s owner, consulting fees paid to owner or corporation

Question 41

Why were there tax benefits in the Blackstone IPO? Why were similar tax benefits generally not obtained in Google’s IPO?

Answer 41

Because Blackstone was a conduit, it could be sold in a manner that stepped up the tax basis of the target’s assets. Google was/is a C-corp so the tax benefits of a step-up were not viable

Question 42

As discussed in class, what strategy have companies doing business in India used to reduce their tax burdens?

Answer 42

Shift income to Mauritius

Question 43

How did UPS reduce income taxes on its package insurance business?

Answer 43

Spun off the package insurance business to Bermuda, then shifted income to Bermuda

Question 44

President George W. Bush signed a change in tax policy that benefited owners of professional sports franchises. What was that change?

Answer 44

Made certain professional sports franchise intangibles tax deductible

Question 45

What adverse effect were some companies concerned about if and when President Obama and Congress reduce U.S. corporate tax rates?

Answer 45

Companies with deferred tax assets (DTAs) would have lower GAAP earnings if corporate tax rates are reduced

Question 46

What events in the 1980s led to the U.S. corporate alternative minimum tax?

Answer 46

A number of firms reported large GAAP earnings yet paid relatively little income tax

Question 47

What was an unintended consequence of the 1993 tax deductible limit on executive compensation of $1M?

Answer 47

Excessive use of employee stock options and a resulting incentive for executives to inflate accounting earnings to ultimately commit accounting fraud

Question 48

What are 3 market and taxpayer actions that occurred in response to the re-election of President Obama and the expectation that tax rates will increase in 2013?

Answer 48

1) Increase in dividend payouts prior to 1/1/2013.
2) Sell off appreciated publicly traded equity positions prior to 1/1/2013
3) Sale of companies by owners prior to tax rates increase on 1/1/2013

Question 49

What was Enron’s stated business purpose with its MIPS transaction?

Answer 49

Improve balance sheet and income statement with lower cost of capital

Question 50

What did Joint Committee on taxation conclude about the benefits Enron sought in its MIPS transaction?

Answer 50

Improving balance sheet was a reasonable business purpose. Obtaining debt for tax purposes and equity for financial accounting achieved an ‘ideal objective’.

Question 51

How much did the JCT report were the transaction costs of Enron’s 1993 $200M MIPS offering?

Answer 51

A bit over $14M

Question 52

Provide 5 real-world examples of basic tax strategies that involve income shifting.

Answer 52

1. Aluminum Smelter – shift income to owner
2. Worldcom/MCI – shift income to Delaware via royalty (lower tax jurisdiction in DE)
3. WalMart – 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 – shift income high tax states to Texas
7. UPS – shift income to Bermuda via reinsurance arrangements post spin-off
8. Adult Bookstore – shift income to owner of business

Question 53

What circumstances does election make sense in sale of a subsidiary of a C-corp? (Name 4)

Answer 53

1) Stock basis < asset basis
2) Stock basis = asset basis
3) Stock basis > asset basis by a relatively small amount
4) Divesting parent has significant NOLs

Question 54

What type of event causes the fact pattern that makes a 338(h)(10) election sub-optimal when target is a subsidiary of a C-corp?

Answer 54

Target was previously acquired in a carryover basis transaction where the subsidiary’s stock basis exceeds the subsidiary’s asset basis

Question 55

How did Seagram account for DuPont transactions on GAAP statements?

Answer 55

As a sale (not a dividend).

Question 56

Why did Seagram record a deferred tax liability on its GAAP financial statements as a result of the DuPont transaction?

Answer 56

Due to the book/tax difference in the remaining 8.2M shares of DuPont that Seagram retained

Question 57

What line items of Seagram’s GAAP financial statements contained amounts that did not coincide with and were in fact not close to their corresponding economic values?

Answer 57

1) Deferred Tax Liability

2) Marketable Securities/Investments

Question 58

List 5 changes due to 2017 Tax Cut and Jobs Act

Answer 58

1) Corporate tax rate now 21% (was 35%)
2) Move to territorial tax system
3) Repeal corporate alternative minimum tax
4) Immediate expensing of qualified assets
5) Limits on corporate interest deductions

Question 59

When does 338(h)(10) election make sense if target is a subsidiary of a C corp?

Answer 59

1) Divesting parent owns at least 80% of subsidiary/target
2) Acquirer buys at least 80% of Target within 12 months
3) Make election within 8.5 months of deal closing

Question 60

When Google bought YouTube for $1.2B, how much tax deductible goodwill was created in the transaction?

Answer 60

$0 (no tax deductible goodwill created in deal)