Wednesday, August 8, 2018
David Hasen (Florida), Asset Basis in Acquisitive Asset Reorganizations: General Utilities Hangover:
The rules that govern the tax basis and, by extension, the holding period of property received by an acquired corporation in an acquisitive reorganization are an unlovely patchwork that emerged from major changes to the tax law in 1986 and 1988. They not only fail to provide clarity but also do not reflect the fact that the acquired corporation, to the extent it engages in post-reorganization activity pursuant to the overall plan of reorganization, is in substance the agent of the acquiring corporation. Congress should amend the reorganization provisions to reflect this circumstance.
Conclusion: The basis and holding period rules for acquisitive reorganizations should reflect T’s status as nothing more than P’s agent as long as T’s actions are consistent with that status, such as where T uses boot received in the reorganizations exchange to satisfy its liabilities ancillary to its dissolution or where T distributes boot to its shareholders in liquidation. The rules also should accommodate the case, however, where T ends up acting other than in the capacity of an agent of P or a temporary custodian of P assets ticketed for disposition (whether to T’s creditors or its shareholders). Under this view, T’s receipt of boot in the reorganization should be subject to open transaction treatment and, to the extent T fulfills its role as P’s agent, should be treated as a “nothing” to both P and T. When T actually fulfills that rule, P is taxed but T is not, with holding period terminating on the date of that subsequent transaction and not the date of the merger exchange. While holding period is immaterial under current law, there is no guarantee that a capital gains preference for corporations will not reemerge at some point.
Where T ends up acting inconsistently with its presumptive role as P’s agent, the transaction is taxable on both sides and indeed as of the reorganization exchange date. Given the relatively short amount of time ordinarily needed to establish whether T has fulfilled its role as P’s agent, an open transaction regime seems entirely workable, especially if an interest charge on deferred payment is available to the government.