TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, November 14, 2013

Fleischer: Tax Wizardry Accomplished With an Offbeat Merger

NY Times Dealbook (2013)New York Times DealBook:  Tax Wizardry Accomplished With an Offbeat Merger, by Victor Fleischer (San Diego):

For multinational corporations, the most common method of tax avoidance relies on moving intellectual property overseas, where profits derived from those assets can be sheltered in low-tax jurisdictions.

Other methods of tax avoidance have received less news media attention but are no less troubling. A recent deal by LIN Media, a media company backed by the private equity firm HM Capital Partners and the investment manager Royal W. Carson III, highlights two techniques. LIN Media owns 43 local television stations around the country, including the CBS affiliate WIVB in Buffalo, the Fox affiliate KHON in Honolulu and the CBS affiliate WISH in Indianapolis, along with other media assets.

In July, it merged with itself. Who knew this was possible? While the merger was trivial from a business standpoint, it generated half a billion dollars in tax losses that the company used to shelter its gain from an earlier deal and eliminate its tax liability. ...

The tax result is striking when you consider what happened from an economic perspective: nothing. LIN’s shareholders continue to own 100 percent of the company, just as before. Indeed, for accounting purposes, the transaction is a nonevent.

The IRS may have some options to challenge the deal, should it choose to do so. The merger of LIN into the L.L.C. has no real business purpose. In the context of reorganizations, courts have required parties to demonstrate a nontax business purpose for the deal as a precondition for tax-free benefits. Here, however, the deal is taxable, albeit one that generates tax losses, not gains. Thus, the requirement of a nontax business purpose may not apply.

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