Paul L. Caron

Tuesday, December 9, 2008

Willens: Wells Fargo and PNC: Tax Refunds in the Offing?

Tax Analysts Robert Willens (Robert Willens LLC, New York; Adjunct Professor, Columbia) has published Wells Fargo and PNC:  Tax Refunds in the Offing?, 121 Tax Notes 1193 (Dec. 8, 2008):

Wells Fargo & Co. (WFC) and PNC Financial Services Group Inc. will be acquiring Wachovia Corp. (WB) and National City Corp. (NCC), respectively, in transactions structured as direct two-party mergers. In each case, the acquired entity (WB and NCC) will be merging with and into the issuing entity (WFC and PNC). The latter will acquire -- by operation of law -- all of the target's assets held at the time of the merger and will assume all of the target's liabilities. Unlike the transaction in which Bank of America annexed Countrywide Financial, the targets will be merging with and into the issuing corporation rather than with and into a limited liability company created by the issuing corporation for the express purpose of participating in the combination.

The merger, in each case, will easily meet the requirements imposed for attaining reorganization treatment. Each merger should qualify as a reorganization within the meaning of section 368(a)(1)(A). In each case, the merger will exhibit the requisite continuity of interest because the consideration to be conveyed by the issuing corporation to the target's shareholders will consist solely of its voting common stock, much more than a substantial part of the value of the proprietary interests in each target will be preserved in the transaction. See reg. section 1.368-1(e)(1)(i). Each merger will satisfy the continuity of business enterprise requirement because, in each instance, the issuing corporation (or one or more members of the issuing corporation's qualified group) will continue the target's historic business or, alternatively, use a significant portion of the target's historic business assets in a business. See reg. section 1.368-1(d)(1).

Moreover, in each case, the merger is being undertaken for one or more valid corporate business purposes. Accordingly, because each merger will qualify as a reorganization, the exchanging shareholders will recognize neither gain nor loss on the exchange of their stock in the target for stock in the issuing corporation: Both the target and the issuing corporation will be a party to the reorganization. See section 354(a)(1). Also, the issuing corporation will succeed to the target's basis in its assets as well as the target's holding period for such assets. See sections 362(b) and 1223(2). It appears that, given the depressed state of the market with respect to loans and securities of the type held in abundance by WB and NCC, the basis of the acquired assets will be substantially in excess of the aggregate fair market value of those assets.

What will happen if, after the merger, the target's assets, through write-down (due to a finding of partial worthlessness) or sale or other disposition, produce losses and deductions that are so substantial that the acquirer is thrust into a net operating loss posture? What is the disposition of those losses? Can those losses produce tax benefits for the acquiring entity even though those losses are traceable to assets and activities formerly carried on by the acquired entity? The final answer appears to be yes.

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