The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
By Jennifer Giannattasio, Tax Principal, and Christina Edwall, Tax Manager
Deloitte Tax LLP, Washington DC and San Francisco, CA
On May 10, 2013, the Internal Revenue Service (IRS) released PLR 201319009 (the "PLR") addressing whether the transaction described therein constitutes a "covered transaction" within the meaning of Regs. §1.263(a)-5(e)(3). The PLR is interesting in that the IRS concludes that a §351 transaction with boot qualifies as a "covered transaction" thereby allowing the acquiring corporation to recover a portion of its transaction costs.
Regs. §1.263(a)-5(a) provides that a taxpayer must capitalize an amount paid to facilitate, among other transactions, (i) an acquisition of assets that constitute a trade or business, whether the taxpayer is the target or acquirer; (ii) an acquisition by the taxpayer of an ownership interest in a business entity if, immediately after the acquisition, the taxpayer and the business entity are related within the meaning of §267(b) or §707(b); (iii) a restructuring, recapitalization, or reorganization, including a spin-off; and (iv) a transfer described in §351.
However, to the extent that a transaction is a "covered transaction," certain costs are not required to be capitalized. A "covered transaction" is defined in Regs. §1.263(a)-5(e)(3), and includes (i) a taxable acquisition of assets that constitute a trade or business; (ii) a taxable acquisition of an ownership interest in a business entity (whether the taxpayer is the acquirer in the acquisition or the target of the acquisition) if, immediately after the acquisition, the acquirer and the target are related within the meaning of §267(b) or §707(b); and (iii) certain acquisitive reorganizations described in §368. The definition of a "covered transaction" does not include a §351 transaction.
In the PLR, Parent, Company 1, and Company 2 entered into a merger agreement providing for the combination of Company 1 and Company 2 under a new holding company, Parent. The combination was effectuated as follows:
Step 1: Company 1 formed Parent and Parent formed two wholly owned subsidiaries, Sub 1 and Sub 2.
Step 2: Sub 1 merged with and into Company 1 with Company 1 surviving. Pursuant to the merger, each share of common stock of Company 1 was converted into the right to receive a share of Parent stock (the "Company 1 Acquisition").
Step 3: Sub 2 merged with and into Company 2 with Company 2 surviving. Pursuant to the merger, each share of common stock of Company 2 was converted into (i) the right to receive $a in cash, without interest, and (ii) x shares of common stock of Parent (the "Company 2 Acquisition").
The Company 1 Acquisition qualified for tax-free treatment as an exchange under §351, a §368(a)(1)(B) reorganization, or a §368(a)(2)(E) reorganization. Neither the shareholders of Company 1 nor Parent recognized any gain or loss in the Company 1 Acquisition.
The Company 2 Acquisition was a §351 transaction with boot. Parent recognized no gain or loss in the Company 2 Acquisition. However, the Company 2 shareholders recognized gain, but not loss, on cash received in exchange for their Company 2 stock pursuant to §351(b).
The taxpayer made the following representation (among others):The Company 2 Acquisition was a taxable acquisition, which qualified as an exchange to which Section 351 applies. Pursuant to Section 351(b), the Company 2 shareholders recognized gain (if any), but not loss, to the extent cash was received in exchange for their Company 2 stock.
The PLR concludes that the Company 2 Acquisition is a "covered transaction" within the meaning of Regs. §1.263(a)-5(e)(3).
There is no authority that would treat the receipt of "cash or other property" or "boot" in a transaction that otherwise qualifies as an exchange to which §351 applies as a "covered transaction" for purposes of Regs. §1.263(a)-5(e)(3). The taxpayer in the PLR represented that the transaction at issue was a taxable acquisition, a necessary component to determining whether a certain transaction is a "covered transaction." Thus, it is unclear to what extent taxpayers may rely on the conclusion in the PLR without receiving a ruling from the IRS.
Authoritative tax law includes statutory, administrative, and judicial guidance. Statutory guidance includes the Internal Revenue Code, tax treaties and state tax laws. Administrative tax guidance may be used as precedent in a court of law (precedential authority), or may only be binding to the individual taxpayer (non-precedential authority). Examples of administrative guidance with precedential authority include Treasury Regulations, Revenue Rulings, and Revenue Procedures. Conversely, non-precedential authoritative guidance includes PLRs and Technical Advice Memorandums. While non-precedential authority is not binding on all taxpayers, it may provide insight on how the IRS may rule in similar facts and circumstances. Judicial guidance refers to guidance arising from decisions in court cases in within the appropriate taxing jurisdiction.
ASC 740 implications:
Accounting Standards Codification (ASC) 740 applies to all tax positions in a previously filed tax return or tax positions expected to be taken in a future tax return. Applying ASC 740 to determine how to recognize tax benefits in the financial statements is a two-step process of recognition (step 1) and measurement (step 2). When recognizing a tax position, an entity often must assess the positions technical merits under the tax law for the relevant jurisdiction to determine whether the tax position is more-likely-than-not to be sustained in the court of last resort.
In making the required assessment of the more-likely-than-not criterion:
a. It shall be presumed that the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information.
b. Technical merits of a tax position derive from sources of authorities in the tax law (legislation and statutes, legislative intent, regulations, rulings, and case law) and their applicability to the facts and circumstances of the tax position. When past administrative practices and precedents of the taxing authority in its dealings with the entity or similar entities are widely understood, for example, by preparers, tax practitioners, and auditors, those practices and precedents shall be taken into account.
c. Each tax position shall be evaluated without consideration of the possibility of offset or aggregation with other positions.1
While the PLR is non-precedential authoritative guidance regarding whether the described transaction constitutes a "covered transaction" within the meaning of Regs. §1.263(a)-5(e)(3), it may still be helpful to companies that would like to understand how the IRS may rule in similar facts and circumstances. Evaluating whether a tax position meets the recognition criteria is not a one-time assessment, and must be considered at each reporting date. Any changes in judgment about whether a tax position meets the recognition criteria should be based on management's assessment of new information only, not on a new evaluation or interpretation of previously available information. While the PLR represents new information, it is not precedential administrative guidance and therefore companies should discuss the issue with their attest firm to determine whether the PLR may result in subsequent recognition of a tax benefit in the financial statements.
For more information, in the Tax Management Portfolios, see Atkinson, Rohrs, and Walberg, 509 T.M., Principles of Capitalization, and Koutouras and Tizabgar, 782 T.M., Boot Distributions and Assumption of Liabilities, and and in Tax Practice Series, see ¶2920, Capital Expenditures, and ¶4910, Corporate Reorganizations.
© 2013 Deloitte Development LLC
Copyright©2013 by The Bureau of National Affairs, Inc.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)