Tax-free Reorganization Research Articles

Was the Spin-Off of PayPal from eBay a Taxable or a Tax-Free Reorganization?

Was the Spin-Off of PayPal from eBay a Taxable or a Tax-Free Reorganization?

The Devolution and Inevitable Extinction of the Continuity of Interest Doctrine

The continuity of interest doctrine, in its present form, is the extrastatutory requirement that the historic shareholders of a target company must retain a quantum of equity interest in the acquiror in order for an acquisition to qualify as a reorganization entitled to tax-free treatment. If sufficient stock of the acquiror is not retained by the target's shareholders for a long enough period, the transaction is not a tax-free reorganization, and the target corporation and target shareholders (including those that did retain the acquiror's stock) are subject to tax on their gains. On the other hand, because the doctrine is not an anti-abuse rule, if the continuity of interest requirement is not met, the target and its shareholders are entitled to recognize any loss on the transaction.This summary of the doctrine and its consequences is, of course, greatly simplified. Every aspect of the continuity of interest doctrine carries with it a formidable array of complex issues. For example, for how long must the target's shareholders have held their stock to be considered "historic" shareholders? What types of interests in the target qualify as equity for purposes of the test? What type and quantum of continuing interest in the acquiror is required, and for how long and in what form must it be retained? Some of these questions have recently attracted significant attention as a result of a Tax Court case, J.E. Seagram Corp. v. Commissioner, newly issued regulations under section 338, and an announcement that the Internal Revenue Service is considering a comprehensive reassessment of the doctrine.

A Transcontinental 'A' Train? Foreign Mergers Under Section 368(a)(1)(A)

In this article, I address the tax consequences to U.S. investors from mergers between foreign corporations. The combination of the increasingly international capital markets and the global movement has highlighted the inequity of Treasury's current stance to deny such transactions the benefit of tax-free reorganization status under Section 368(a)(1)(A) of the Internal Revenue Code. The article argues that permitting foreign mergers to qualify as A reorganizations is faithful to the original intent of 368(a)(1)(A) and uses this historical perspective to provide a framework for developing a federal tax law definition of merger or consolidation. The article concludes that broadly applying such a tax-centered conception of the phrase can also help resolve the inequity between foreign and domestic transactions.

Taxing Divisive Mergers

Under the Internal Revenue Code (Code), a that is statutory, or conducted pursuant to the corporation laws of a state, is tax-free. Practically since its inception, this provision has invited abuse. Taxpayers have sought refuge behind liberal state laws, while the Internal Revenue Service (Service) and the courts have strained to preserve the integrity of the statutory concept. The latest such episode surrounds the invention of something called a This oxymoron describes a transaction in which more than one party may survive or be created while still meeting the definition of a merger under state law. If it qualifies under the Code, it permits a mere sale to receive the favored status of a tax-free reorganization. On January 19, 2000, the Service responded to the abusive potential of the divisive by declaring that such transactions do not qualify as mergers for tax purposes. While its position was not surprising, the analysis was unsettling. Based on its review of traditional state law requirements, the Service for the first time announced that the target must transfer substantially all of its properties and dissolve pursuant to the plan of merger. Thus, contrary to the move to disconnect federal income tax liability from state law classification, the Service explicitly embraced a state law focused interpretation. This Article argues that the Service should abandon its reliance on traditional state corporate law requirements in determining whether a qualifies for tax-free treatment. Instead, the Service can interpret the statutory language in a way that is both faithful to the text and legislative history and less dependent on the vagaries of state corporate law by giving merger its own meaning for federal income tax purposes.

Mergers, Taxes, and Historical Realism

Under the Internal Revenue Code, mergers and acquisitions qualifying as reorganizations are treated as non-events for tax purposes. Neither the shareholder nor the corporation recognizes gain or loss on the exchange of stock or securities in such transactions. In the midst of the largest merger movement in this country's history, this Article asks why we provide this generally favorable tax treatment. The long-accepted answer, set forth in a 1957 Harvard Law Review article entitled Mergers, Taxes, and Realism, is that while several rationales were offered originally, changed circumstances have left few plausible justifications. This Article disagrees, arguing that there is an historical and continuing explanation rooted in our conceptual understanding of income that has been largely ignored by commentators. The reorganization provisions were enacted at the height of a conceptual and practical debate between supporters of the consumption and accretion models. Taxpayers worried about the calculation of income based upon paper gains while the government worried about the indefinite deferral of taxation. The tax-free reorganization provision, enacted at a time when the legal status of the government's treatment of capital gains and stock dividends was still uncertain, effected a compromise between these two models of taxation. Given that the struggle between the accretion and consumption tax visions continues to this day, this Article concludes the tax-free reorganization remains an integral part of this compromise.

Federalizing the Tax-Free Merger: Toward an End to the Anachronistic Reliance on State Corporation Laws

This articles examines the requirement that a merger be statutory, or conducted pursuant to the corporation laws of a state, to be tax-free. The statutory merger requirement for reorganizations is an anachronistic remnant of the 1930s belief that state corporation laws are effective regulators of corporate combinations and bulwarks against abuse of the tax-free reorganization provisions. This reliance on state corporate law standards is not only inconsistent with the recently adopted check-the-box regulations and no longer much of a regulator of any kind, but also is counterproductive in that it introduces disparities of treatment between parties based on their location. Ironically, the statutory merger requirement could conceivably prevent de facto mergers and mergers involving single-member limited liability companies, but permit mergers under nouveau corporate law statutes that do not require the parties to merge under any conventional sense of the word. Form is elevated above substance in a way that is both irrational and unproductive. In light of the failed efforts to remove the A reorganization from the Code altogether, the Article concludes that the statutory merger requirement should be eliminated from the A reorganization so that a more uniform standard can be applied by the courts and the IRS.

Discussion of Purchase versus Pooling of Interests: The Search for a Predictor

The setting for this paper is 1955, an early date in terms of the pooling concept. Since ARB 48 was not issued until 1957, the conditions that surround the data selected for this paper must rest on ARB 40 for the most part. ARB 40 was issued in 1950. I recall the period well because I became interested in the problem about that time. The state of the art of pooling was, in my judgment, limited to a few sophisticates in reasonably large companies. As a matter of fact, many in academic circles did not have an appreciation of the pooling concept in 1955, nor did industry, in general, either. This is an important matter in trying to assess the significance of this paper. If, as I contend, widespread knowledge of the pooling concept was not the case, then the number of applications of the approach in mergers does not rest on a choice between purchase and pooling but rather purchase alone. Another matter which deserves attention is the pressure of taxation. The allowance of a tax-free reorganization placed a burden on accountants to adopt a method to handle the increasing traffic in this area. The substance of the problem was simply that assets in a tax-free reorganization would, if acquired, carry forward their book values to the acquirer. Because whole businesses were being transferred rather than discrete assets, the decision to use a procedure that conformed to the tax seems to have been made. The pooling concept was born to accommodate this problem. Some argue that financial accounting need not, in fact should not, conform to tax methods. Other accountants do not feel so rigid and are willing to adapt financial accounting to tax accounting, at least in important matters. Few would argue that a business combination is unimportant, because assets, personnel, and business status are all a part

Income Taxes. Reorganizations. Exchange of Bankrupt Corporation's Assets for Stock of Corporation Which Later Transferred the Assets to Its Wholly Owned Subsidiary Held Not a Tax-Free Reorganization

Income Taxes. Reorganizations. Exchange of Bankrupt Corporation's Assets for Stock of Corporation Which Later Transferred the Assets to Its Wholly Owned Subsidiary Held Not a Tax-Free Reorganization

Taxation: Federal Income Tax: Exchange of Debentures for Preferred Stock as Tax-Free Reorganization

Taxation: Federal Income Tax: Exchange of Debentures for Preferred Stock as Tax-Free Reorganization

"Business Purpose" and Tax-Free Reorganization

"Business Purpose" and Tax-Free Reorganization

Income Tax. Corporate Dividends and Distributions. Accumulated Deficits of Subsidiaries Dissolved in Tax-Free Reorganization Held to Reduce Parent's Accumulated Profits in Computing Shareholder's Tax on Dividends

Income Tax. Corporate Dividends and Distributions. Accumulated Deficits of Subsidiaries Dissolved in Tax-Free Reorganization Held to Reduce Parent's Accumulated Profits in Computing Shareholder's Tax on Dividends

Income Taxes. Reorganizations. Bondholders' Exchange of Insolvent Corporation's Assets for Stock Control of Successor Corporation Held Not Tax-Free Reorganization

Income Taxes. Reorganizations. Bondholders' Exchange of Insolvent Corporation's Assets for Stock Control of Successor Corporation Held Not Tax-Free Reorganization

Classification of Foreclosure Mergers as Tax-Free Reorganization Exchanges

Classification of Foreclosure Mergers as Tax-Free Reorganization Exchanges