Thursday, March 7, 2013
Jeffrey T. Sheffield (Northwestern) presents Spinoffs, Corporate Capital Structure, and Disguised Sales, 91 Taxes 119 (Mar. 2013), at Northwestern today as part of its Advanced Topics in Taxation Colloquium Series hosted by Herbet Beller, Thomas Brennan, David Cameron, Philip Postlewaite, and Robert Wootton:
The IRS is currently studying under what circumstances a distributing corporation (P) should be permitted to distribute stock or securities of the distributed corporation (S) in exchange for P debt, tax-free as part of a Code § 355 spinoff of S. Consideration of this issue, and related issues regarding debt assumptions, should begin by distinguishing between (i) internal restructurings, where in preparation for the spinoff existing assets and liabilities are allocated between P and S; and (ii) external dispositions, where as part of the spinoff P exchanges an interest in the S business for cash or its equivalent. Spinoff-related internal restructuring activities generally should be considered simple readjustments of continuing property interests that do not trigger corporate-level gain recognition. Code § 357(c) (which can cause P to recognize gain to the extent liabilities assumed by S exceed the tax basis of assets transferred to S), and analogous gain-triggering Code provisions such as those governing the distribution of S debt and securities, should generally not apply to spinoffs. On the other hand, spinoff-related external disposition activities are more properly viewed as sale transactions and generally should trigger corporate-level gain recognition. The concept of a disguised sale -- developed most thoroughly to date as part of the partnership provisions in subchapter K -- could be used to help identify spinoff-related external disposition activities that should be treated as sales, and to measure the amount of any related corporate-level gain recognition.