The Spin-Off Of PayPal From eBay: Taxable Or Tax-Free Reorganization?

Gretchen Lawrie (Cal State-LA) & John R. Cooper (Cal State-LA), Was the Spin-Off of PayPal from eBay a Taxable or a Tax-Free Reorganization?, 9 J. Case Rsch. & Inquiry 126 (2024):

This case study reviews the facts of eBay, Inc.’s spin-off of PayPal, Inc., which presents an opportunity to reinforce the student’s understanding of the complex US corporate reorganization provisions. The case study leads to the question: What would have been the US tax and non-tax consequences of eBay’s spin-off of PayPal for eBay, PayPal, and eBay’s shareholders?

In 1995, Pierre Omidyar launched AuctionWeb, a web-based online auction site where buyers and sellers could trade antiques, collectables, coins, and other goods. In 1997, AuctionWeb was renamed eBay, Inc. By 2014, eBay was “a global commerce leader with 149 million active buyers” with more than 700 million live listings at any given time (eBay 2014).

In 1998, Peter Thiel and Max Levchin founded Confinity, Inc. (Confinity), which focused on mobile payments sent from personal digital assistants (Forest 2014; O’Connell 2020; eBay 2023). In 1999, Confinity launched a product that allowed individuals to make electronic payments to each other and to merchants through e-mail. In March 2000, Confinity merged with an online bank, X.com and changed its name to X.com. In October 2000, X.com decided to discontinue its online banking services and focus on its online payment product. In 2001, X.com changed its name to PayPal, Inc. (PayPal Holdings 2022).

By 2002, approximately 60 percent of PayPal’s business was processing transactions on eBay (eBay 2002). In July 2002, eBay acquired PayPal for approximately $1.5 billion resulting in the combination of eBay’s online marketplace with PayPal’s online payments system (eBay 2023). In 2015, eBay spun off PayPal. As two independent publicly traded companies, eBay operated its marketplace business and PayPal operated eBay’s payments business (eBay 2014).

What would have been the U.S. tax and non-tax consequences of eBay’s spin-off of PayPal for eBay, PayPal, and eBay’s shareholders?