Tax Aspects of Corporate Division

W. Eugene Seago

Description

This book explains and illustrates each of the requirements for a nontaxable corporate division and the methods for mitigating the tax consequences when those requirements cannot be satisfied.

For a variety of reasons, corporations can achieve business efficiencies by dividing into two or more entities. The tax consequences of the division could be that both the corporation and the shareholders must recognize taxable income, which often renders the division unfeasible.

In order to neutralize the tax effects of business-motivated decisions to divide the corporation, the tax law provides the means for the division to be accomplished without immediate tax consequences for the corporation and its shareholders. The enabling provisions are necessarily complex so as to prevent their exploitation and bring together several other corporate tax concepts dealing with dividends and reorganizations. Moreover, the rules have often changed.

This book explains and illustrates each of the requirements for a nontaxable corporate division and the methods for mitigating the tax consequences when those requirements cannot be satisfied. The author also provides numerous diagrams that summarize actual transactions.

Sujets

• Corporate
• Taxation
• Economie gestion
• Economics
• Business

Informations

• Publié par: Business Expert Press
• Date de parution: 01 février 2021
• Nombre de lectures: 0
• EAN13: 9781953349415
• Langue: English

Extrait

Tax Aspects of Corporate Division
Tax Aspects of Corporate Division
W. Eugene Seago
Tax Aspects of Corporate Division Copyright © Business Expert Press, LLC, 2021.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopy, recording, or any other except for brief quotations, not to exceed 250 words, without the prior permission of the publisher.
First published in 2021 by Business Expert Press, LLC 222 East 46th Street, New York, NY 10017 www.businessexpertpress.com
ISBN-13: 978-1-95334-940-8 (paperback) ISBN-13: 978-1-95334-941-5 (e-book)
Business Expert Press Financial Accounting, Auditing, and Taxation Collection
Collection ISSN: 2151-2795 (print) Collection ISSN: 2151-2817 (electronic)
Cover design by Charlene Kronstedt Interior design by S4Carlisle Publishing Services Private Ltd., Chennai, India
First edition: 2021
10 9 8 7 6 5 4 3 2 1
Printed in the United States of America.
Description
For a variety of reasons, corporations can achieve business efficiencies by dividing into two or more entities. The tax consequences of the division could be that both the corporation and the shareholders must recognize taxable income, which often renders the division unfeasible.
In order to neutralize the tax effects of business-motivated decisions to divide the corporation, the tax law provides the means for the division to be accomplished without immediate tax consequences for the corporation and its shareholders. The enabling provisions are necessarily complex so as to prevent their exploitation and bring together several other corporate tax concepts dealing with dividends and reorganizations. Moreover, the rules have often changed.
This book explains and illustrates each of the requirements for a nontaxable corporate division and the methods for mitigating the tax consequences when those requirements cannot be satisfied. The author also provides numerous diagrams that summarize actual transactions.
Keywords
useful to practitioners and students, analytical, current, explains the tax rules and their rationale, illustrates the applications of the law to frequently encountered transactions
Contents
Preface
Chapter 1 Corporate Division: Uses and Abuses
Chapter 2 General Requirements for a Tax-Free Spin-Off or Split-Off
Chapter 3 Corporate Business Purpose
Chapter 4 Not Used Principally as a Device for Distributing Earnings and Profits
Chapter 5 The Trade or Business Requirements
Chapter 6 Continuity of Interest
Chapter 7 The Acquisition of Control of a Corporation Conducting a Business
Chapter 8 Corporate Division and a Related Reorganization
Chapter 9 Examples of Section 355 Transactions
About the Author
Index
Preface
In a variety of circumstances management of a corporation may have good business reasons for dividing the corporation into two or more corporations in such a manner that shareholders in the original corporation own stock in each of the resulting entities. This may mean that assets must be moved from one corporate shell to another and stock must be distributed to the shareholders. Thus, under the general rules of taxation, the original corporation and their shareholders would realize taxable income. However, under certain conditions the realized gains are not taxed at the time of the distribution or exchange.
This book discusses the reasons the Internal Revenue Code provisions governing corporate division were first added to law, how the law was used and abused, and then how it was changed to curb the perceived abuses. The tax laws establish the conditions under which the division may occur without the recognition of gain by the corporation and the shareholders: These conditions relate to the business purpose, and continuity of investment, which are generally required for corporate restructuring. However, a corporate division provides opportunities for abuses of the laws. Any corporate management contemplating a division must be aware of the statutory safeguards against abuse built into the law, whether or not any abuse is intended.
Chapter 1 of this book briefly discusses the development of the tax rules related to corporate division. Chapters 2 , 3 , 4 , 5 and 6 discuss specific requirements the division must satisfy to gain the preferred tax treatment for the shareholder and the corporation. Chapters 7 and 8 discuss more recent changes in the law that may require the distributing corporation to recognize gain when the shareholder is not taxed on the transactions. Chapter 9 serves as a review of the materials in the other chapters by discussing specific factual situations where the law has been applied.
As will be seen, corporate division often brings into play a variety of corporate tax laws, including distributions, reorganizations, stock redemptions and consolidated tax returns. Moreover, a corporate division is often integrated with other transactions, which creates issues about which steps must be considered in evaluating the corporate division. Thus, guiding clients through a corporate division requires the application of the practitioner’s cumulate knowledge and skills. Corporate division is where the practitioner must “put it all together.”
CHAPTER 1
Corporate Division: Uses and Abuses
Introduction
This book is about the tax consequence of dividing a corporation into two or more corporate entities. The division usually takes the form of a spin-off, split-off, or a split-up.
In a spin-off , a corporation distributes to its shareholders a controlling in the stock of a subsidiary. In another form of a spin-off, a corporation may transfer some of its assets to a newly formed corporation in exchange for all of the corporation’s stock, which the parent corporation distributes to its shareholders. For the shareholder, the spin-off is equivalent to a dividend in the form of stock in another corporation, and for the distributing corporation, the spin-off is economically equivalent to paying a dividend to its shareholders in the form of stock in another corporation.
A split-off is the same as a spin-off , except that not all of the shareholders participate: That is, the parent corporation transfers its stock that is a controlling interest in a subsidiary to one or a limited group of its shareholders in exchange for their stock in the distributing corporation. The split-off is essentially a stock redemption.
A split-up is similar to a spin-off, except that all the assets of a corporation are divided between two new corporations in exchange for all of their stock. Then the original corporation distributes to its shareholders the stock in the two corporations, and the original corporation dissolves. For the shareholders, the split-up is similar to a stock dividend.
In each of these three types of transactions, the corporation and the shareholders have altered their property rights through exchanges and distributions. Therefore, under the general rules of taxation, realized gains or losses must be recognized. 1 However, the tax law contains specific rules for these transactions that provide the corporation the unique ability to distribute property to its shareholders without the corporation and its shareholders incurring a tax liability.
Rationale for the Exception
The Spin-Off
In a multitude of situations, corporate management may determine that for good business reasons, the shareholders should directly own the corporation’s subsidiary or that the corporation should be divided into two or more corporations. If the general rules for the taxation of corporations and their shareholders were applied, a substantial tax burden could accompany the implementation of the business decision. Thus, the tax laws would not be neutral in regard to this type of business decision. The lack of neutrality in the tax laws can also work in the other direction: That is, the tax laws can also create benefits such that actions will be undertaken primarily to achieve the tax benefit, rather than to achieve a business purpose. Thus, over the past 100 years, the tax laws regarding corporate division have undergone substantial changes in an attempt to make the tax laws neutral in the sense of not interfering with business-motivated decisions but without creating tax-motivated transactions.
The need to neutralize the tax laws in regard to business decisions is illustrated by an early case, Rockefeller v. United States , 2 where a vertically integrated oil company produced, refined, and transported (through its pipelines) petroleum products. The transportation business was subject to regulatory controls that complicated the other corporate operations. These complications could be eliminated by transferring the transportation business to a newly formed subsidiary corporation and distributing the stock to the parent corporation’s shareholders. Therefore, the oil company created a new corporation and transferred the transportation assets to the new corporation in exchange for all of the new corporation’s stock, which was distributed to the oil company shareholders. Thus, the shareholders previously owned a corporation that included the transportation and oil production businesses, and after the transactions, the shareholders owned stock in two corporations conducting the same businesses formerly combined in one corporation. The Court noted that the shareholders did not experience an increase in wealth as a result of receiving the stock. This was true because the value of parent corporation that included the oil and transportation assets was equal to the sum of the value of the oil business retained by the parent and the new cor