Transcript Example 1

American Bar Association
Section of Taxation
Corporate Tax Committee
September 13, 2003
Chicago, Illinois
Whither Section 382?
Moderator: Robert J. Mason
Ernst & Young LLP
Washington, DC
Mark S. Jennings
Timothy C. Sherck
Office of the Associate Mayer, Brown, Rowe & Maw LLP
Chief Counsel (Corporate)
Chicago, IL
Internal Revenue Service
Washington, DC
Daniel C. White
Lisa Joire
Bryan Cave LLP Ernst & Young LLP
St. Louis, MO
Washington, DC
1
Example 1
Pursuant to a merger on 1/1/2000,
the former L shareholders receive
42% of the P stock plus rights to
additional consideration under an
earn-out arrangement
Former L
Shareholders
42%
L
<NOL>
Merger
1/1/2000
P ESOP
12%
Public
46%
P
• Treas. Reg. § 1.382-2T(j)(2)(iii)(B)
• Section 382(e)
• 1994 FSA Lexis 212 (Aug. 18, 1994)
2
Example 2
On 2/1/2001, P ESOP
distributes P stock to plan
participants;
The distributed shares had
been acquired by P ESOP
on 1/1/1995
ESOP
Participants
Former L
Shareholders
Public
P ESOP
46%
42%
12%
• Treas. Reg. § 1.382-2T(h)(2)(iii)(B)
• Treas. Reg. § 1.382-2T(j)(3)(i)
P
• Treas. Reg. § 1.382-10T
• Treas. Reg. § 1.382-3(j)
3
Example 3
Investment Advisor to
Mutual Funds files a
Schedule 13G on
2/1/2003, reporting
ownership of 9% of the
outstanding P stock
Mutual
Funds
Former L
Shareholders
P ESOP
Public
9%
P
• Treas. Reg. § 1.382-2T(k)(1)(i), (k)(2)
• Treas. Reg. § 1.382-3(a)(1)(i)
• PLR 9533024 (May 19, 1995); PLR 9610012 (Dec. 5, 1995); PLR
9725039 (June 20, 1997)
4
Example 4
New
Shareholder
On 2/1/2001, the
acquisition of P stock by
New Shareholder results
in ownership change of P
Former L
Shareholders
P ESOP
Public
Above market lease
P
NUBIG
50% interest
in Partnership
FMV: $15M
• Section 382(e)
• Adjustments to value:
• Section 382(l)(1)
• Section 382(l)(4)
• Section 382(m)(5); Treas. Reg. § 1.382-8
100%
CFC stock
CFC
• Section 382(h)(6)
5
Example 5a
A
33.3%
A, B, and C form Venture
by each contributing
$335M for Venture
common stock, and Venture
borrows $650M from
Lender
At a time when the fair
market value of the Venture
assets is $250, C acquires
all of the Venture stock
owned by B
B
33.3% / 0%
Venture
Assets: $250M FMV
C
33.3% / 66.6%
$650M
Loan
Lender
• Section 382(k)(6)
• Treas. Reg. § 1.382-2T(f)(18)(iii); FSA
199910009 (Dec. 2, 1998), PLR 9441036 (Jul.
14, 1994), PLR 8945055 (Aug.16, 1989)
• Treas. Reg. § 1.1001-3
6
Example 5b
A
CS
Same facts as Example
5a, except Lender holds
$650M Venture
convertible preferred
stock (and not Venture
debt)
B
CS
C
CS
Lender
CPS
(Testing date
value ≈ 100%)
Venture
Assets: $250M FMV
• Treas. Reg. § 1.382-2T(c)(1)
• Section 382(l)(3)(C) and Treas. Reg. § 1.382-2T(l)
7
Example 6a
A
Venture realizes $400M
COD income upon the
issuance of stock in
cancellation of its debt
pursuant to a title 11
proceeding;
Venture reduces its NOL
by $400M
B
C
------Stock extinguished------
Venture
NOL $1B
Assets: $655M basis
$250M FMV
Lender
Stock in
cancellation
of debt
• Section 108(a)(1)(A), (b)(1) and (e)(8)
• Section 382(b)(3)(A), (h)(3)(A)(i), (h)(6)(A) and (h)(7)
• Notice 87-79; PLR 9226026 (Mar. 26, 1992); PLR 9328021 (Apr. 16,
1993); PLR 8923021 (Mar. 10, 1989)
8
Example 6b
A
Same facts as Example
6a, except Venture elects
under Section 108(b)(5) to
reduces basis in its assets
by $400M
B
C
------Stock extinguished------
Venture
NOL $1B
Assets: $655M basis
$250M FMV
Lender
Stock in
cancellation
of debt
• Section 108(b)(1)
• Section 382(h)(3)(B)
• PLR 9226064 (Mar. 31, 1992); PLR 9409037 (Dec. 7, 1993)
9