Mergers & Acquisitions

Introduction

On April 9, 2024, the Department of the Treasury (“Treasury”) and the Internal Revenue Service (the “IRS”) issued two sets of proposed Treasury Regulations related to section 4501, REG-115710-22, which provides guidance on the application of section 4501, and REG-118499-23 (together with REG-115710-22, the

On December 27, 2022, the Internal Revenue Service (“IRS”) and the U.S. Department of the Treasury (the “Treasury”) released Notice 2023-2 (the “Notice”), which provides guidance regarding the application of the 1% excise tax on corporate stock buybacks under recently enacted section 4501 (the “Tax”).[1]  Taxpayers may rely on the Notice until proposed regulations are published.  The Notice also contains a request for comments on the rules included in the Notice and rules not included in the Notice.

The Treasury and the IRS took a literal interpretation of the statute; thus, the Tax applies broadly to stock repurchases and other transactions that are not traditionally viewed as stock buybacks, including a repurchase of mandatorily redeemable preferred stock (even if such stock was issued before January 1, 2023).  Special purpose acquisition companies (“SPACs”) will need to analyze whether a transaction is subject to the Tax under the general rules as the Notice does not include any special guidance for SPACs.  However, SPACs did receive comfort that redemptions that take place in the same year as a “complete liquidation” under section 331 are not subject to the Tax.

Today, December 19, 2021, Senator Joe Manchin (D., W.Va.) said that he opposes the Build Back Better Act, which effectively prevents its passage.  While there are no immediate prospects for the Build Back Better Act to become law, future tax acts tend to draw upon earlier proposals.  With a view

On November 17, 2020, the U.S. Internal Revenue Service (“IRS”) posted new FAQs providing that an acquisition of the stock or assets of a company that has received a loan under the Paycheck Protection Program (the “PPP”) generally will not cause the acquirer and members of its aggregated employer group

On September 10, 2019, the Internal Revenue Service (“IRS”) and the U.S. Department of the Treasury (the “Treasury”) issued proposed regulations (the “Proposed Regulations”) on calculation of built-in gains and losses under Section 382(h) of the Internal Revenue Code of 1986, as amended.[1] In general, the Proposed Regulations replace the existing guidance on the calculation of net unrealized built-in gains (“NUBIG”), net unrealized built-in losses (“NUBIL”), realized built-in gains (“RBIG”) and realized built-in losses (“RBIL”) under Section 382(h). This guidance had largely taken the form of Notice 2003-65[2] (the “Notice”), which had been the key authority relied upon by taxpayers for purposes of the various calculations required under Section 382(h).

By eliminating the Notice’s 338 Approach and by making certain other changes, the Proposed Regulations, if finalized in their current form, could significantly cut back on a loss corporation’s ability to use pre-change losses and therefore could substantially diminish the valuation of this tax asset in M&A transactions and could hamper reorganizations of distressed companies. In fact, these proposed changes could put more pressure on companies in bankruptcy to attempt to qualify for the benefits of Section 382(l)(5) or to engage in a “Brunos-like” taxable restructuring transaction, and, when those options are not available, could lead to more liquidations rather than restructurings.

The Proposed Regulations are another factor in a series of changes and circumstances that affect the value of tax assets such as net operating losses for corporations. Both the current low applicable federal long-term tax-exempt rate (1.77% for October 2019)—which creates relatively small Section 382 limitations—and the new rule from the 2017 tax reform that limits the usability of net operating losses arising in tax years beginning after December 31, 2017 to 80% of taxable income are developments that, in conjunction with the Proposed Regulations, put downward pressure on the expected value of this tax asset.

The Proposed Regulations are not effective until they are adopted as final regulations and published in the Federal Register, and will apply only with respect to ownership changes occurring after their finalization. Until that happens, taxpayers may continue to rely on the Notice for calculations of NUBIG, NUBIL, RBIG and RBIL.

On April 2, 2018, the Internal Revenue Service (“IRS”) released Notice 2018-29[1] (the “Notice”), announcing the intention of the IRS and the Department of the Treasury to issue regulations regarding the withholding requirements under Section 1446(f),[2] which was promulgated pursuant to recently enacted U.S. tax legislation, commonly referred

This post outlines at a high-level certain provisions under the recently enacted 2017 tax legislation (Pub. L. 115-97, the “Tax Act”) that may affect M&A Transactions.  Some of these rules are very complex, particularly in cross-border transactions, and this post describes them in general terms without all of their fine details.  The discussion of foreign corporations below is in the context of foreign subsidiaries of U.S. groups.

Multiple Lower Effective Corporate Tax Rates

There are now multiple effective corporate tax rates and the much-despised corporate alternative minimum tax has been repealed.  Because all of them are substantially below 35 percent, they may contribute to an increase in asset prices.  In addition, tax benefits now may be less valuable to corporate purchasers than to non-corporate buyers.

Base Corporate Income Tax Rate21 percent tax rate (effective for taxable years beginning after December 31, 2017).  No sunset provision.

Certain Foreign Source Income Earned from the U.S (“FDII”).—Intended to attract cross-border business back to the U.S., a tax rate lower than 21 percent is now imposed on certain excess returns earned by a U.S. corporation on the sale, license or lease of property or the provision of services to an unrelated foreign party for foreign use or consumption.  (Additional rules apply when the transaction is with a related party.)  In broad terms, the lower rate applies to the foreign source income from these transactions in excess of 10 percent of the corporation’s allocable depreciable tangible property basis.

Today, the Wall Street Journal considers again, on its front page above the fold, the potential benefits of corporate spin-off transactions (https://www.wsj.com/articles/the-reason-investors-love-spinoffs-juicier-returns-1507681008 (subscription required)). The Journal article notes that the S&P Spin-Off Index has outperformed the S&P 500 Index by nearly 190 percentage points in the last ten years.

On September 21, 2017, the Internal Revenue Service (the “IRS”) issued Revenue Procedure 2017-52[1] (the “Rev. Proc.”), introducing an 18-month “pilot program” in respect of corporate “spin-off,” “split-up” and “split-off” transactions (“Spin-off Transactions[2]). Under this pilot program, the IRS will again issue private letter rulings on the general federal income tax consequences of Spin-off Transactions intended to qualify as tax-free under Section 355 (a “Transactional Ruling”).[3]