Adjusted federal long-term tax-exempt rate for November 2010 is 3.54%
Long-term tax-exempt rate for ownership changes during November 2010 is 3.86%
See Rev. Rul. 2010-26 for more details
Thursday, October 21, 2010
Wednesday, October 20, 2010
New Section Guidance - PLR 201039013
On October 1, the Internal Revenue Service (“IRS”) released Private Letter Ruling 201039013. For a copy of the ruling, please visit our website.
The ruling involved Taxpayer, a publicly traded loss corporation. Taxpayer was the common parent of an affiliated group of corporations that filed a consolidated return. Taxpayer had outstanding a single class of Common Stock and multiple classes of Preferred Stock that it issued and/or exchanged in various equity transactions. Taxpayer requested a ruling regarding the application of Section 382.
A summary of Taxpayer’s transactions follows:
Private Offering Transaction: Taxpayer issued Series 1 Preferred Stock to Group A in a private offering transaction. Group A consisted of two individuals. The Series 1 Preferred Stock was convertible into an equal number of shares of Common Stock. Taxpayer applied the cash issuance exception under Treas. Reg. § 1.382-3(j)(3) to this transaction.
Issuance to Public Groups: Taxpayer issued Series 2 Preferred Stock to its direct public groups. The Series 2 Preferred Stock was also convertible into Common Stock of Taxpayer at a set conversion price. Taxpayer applied the cash issuance exception to this transaction.
Reset Transaction: Pursuant to the terms of the investor agreement, the conversion price of the Series 1 Preferred Stock was reset. Taxpayer treated the transaction as a tax-free reorganization under Section 368(a)(1)(E).
Exchange Transaction: Taxpayer exchanged the Series 1 Preferred Stock held by Group A for an equal number of shares of New Series 1 Preferred Stock. Taxpayer treated the transaction as a tax-free reorganization under Section 368(a)(1)((E).
Series 1 Preferred Exchange Transaction: Taxpayer issued Security A (a new security instrument) and a warrant for shares of its Common Stock in exchange for all of the New Series 1 Preferred Stock that was owned by Group A. Taxpayer treated the transaction as a tax-free reorganization under Section 368(a)(1)((E).
Series 2 Preferred Exchange Transaction: Taxpayer issued Common Stock in exchange for shares of its Series 2 Preferred Stock and certain other preferred stock. Taxpayer treated the transaction as a tax-free reorganization under Section 368(a)(1)((E).
Warrant Transaction: The warrant that Taxpayer issued in connection with the Series 1 Preferred Exchange Transaction was cancelled. This occurred because a majority of the Common Stockholders agreed to increase the number of authorized shares of Common Stock.
Conversion Transaction: Group A, the holders of Security A converted the instrument into shares of Common Stock. Taxpayer treated the transaction as a tax-free reorganization under Section 368(a)(1)((E).
PLR 201039013 raised several interesting questions.
First, how should the Reset, the Series 1 and Series 2 Preferred Exchange, and the Conversion Transactions be treated for Section 382 purposes? The answer appears to have been based largely on the Taxpayer’s representations. Specifically, Taxpayer represented that each such transaction constituted a value-for-value exchange for purposes of Section 368(a)(1)((E). Thus, based on this representation, the IRS ruled that the stock Taxpayer issued in exchange for shares in the Reset, the Series 1 and Series 2 Preferred Exchange, and the Conversion Transactions would be allocated to its direct public groups. In other words, each of the preexisting direct public groups would be treated as receiving an amount of stock that was proportionate to the amount of stock they surrendered in the transactions. Interestingly, this is consistent with the rule described in Treas. Reg. § 1.382-3(j)(5), which provides that for purposes of applying both the small issuance and cash issuance exceptions, the loss corporation’s preexisting direct public groups receive a proportionate acquisition of exempted stock.
Next, how else to apply the HCP methodology? The IRS ruled that the HCP may be applied to identify 5-percent shareholders for all purposes of Section 382 (emphasis added), and in so doing clarified just how broad and expansive the HCP methodology could be.
Finally, what type of representations should similarly situated loss corporations consider making? PLR 201039013 gives some insight on this question. Here, Taxpayer made two specific representations. The first representation pertained to the Hold Constant Principle (“HCP”), as described in Notice 2010-50. Taxpayer represented that it did not have an “ownership change” during the relevant period (Date 1 through the date of the letter ruling). Why does this matter? Remember that Notice 2010-50 requires that a loss corporation satisfy certain consistency requirements. One such requirement is that a loss corporation must continue to use the HCP methodology through the first testing date that resulted in an “ownership change”. As applied here, Taxpayer’s representation appears to have satisfied this consistency requirement. The second representation pertained to the treatment of the Reset, the Series 1 and Series 2 Preferred Exchange, and the Conversion Transactions. As previously discussed, this representation appears to have been critical to the IRS’ determination that the stock be allocated to Taxpayer’s direct public groups. What would the outcome have been if the Taxpayer had not represented that the transactions were value-for-value exchanges?
The ruling involved Taxpayer, a publicly traded loss corporation. Taxpayer was the common parent of an affiliated group of corporations that filed a consolidated return. Taxpayer had outstanding a single class of Common Stock and multiple classes of Preferred Stock that it issued and/or exchanged in various equity transactions. Taxpayer requested a ruling regarding the application of Section 382.
A summary of Taxpayer’s transactions follows:
Private Offering Transaction: Taxpayer issued Series 1 Preferred Stock to Group A in a private offering transaction. Group A consisted of two individuals. The Series 1 Preferred Stock was convertible into an equal number of shares of Common Stock. Taxpayer applied the cash issuance exception under Treas. Reg. § 1.382-3(j)(3) to this transaction.
Issuance to Public Groups: Taxpayer issued Series 2 Preferred Stock to its direct public groups. The Series 2 Preferred Stock was also convertible into Common Stock of Taxpayer at a set conversion price. Taxpayer applied the cash issuance exception to this transaction.
Reset Transaction: Pursuant to the terms of the investor agreement, the conversion price of the Series 1 Preferred Stock was reset. Taxpayer treated the transaction as a tax-free reorganization under Section 368(a)(1)(E).
Exchange Transaction: Taxpayer exchanged the Series 1 Preferred Stock held by Group A for an equal number of shares of New Series 1 Preferred Stock. Taxpayer treated the transaction as a tax-free reorganization under Section 368(a)(1)((E).
Series 1 Preferred Exchange Transaction: Taxpayer issued Security A (a new security instrument) and a warrant for shares of its Common Stock in exchange for all of the New Series 1 Preferred Stock that was owned by Group A. Taxpayer treated the transaction as a tax-free reorganization under Section 368(a)(1)((E).
Series 2 Preferred Exchange Transaction: Taxpayer issued Common Stock in exchange for shares of its Series 2 Preferred Stock and certain other preferred stock. Taxpayer treated the transaction as a tax-free reorganization under Section 368(a)(1)((E).
Warrant Transaction: The warrant that Taxpayer issued in connection with the Series 1 Preferred Exchange Transaction was cancelled. This occurred because a majority of the Common Stockholders agreed to increase the number of authorized shares of Common Stock.
Conversion Transaction: Group A, the holders of Security A converted the instrument into shares of Common Stock. Taxpayer treated the transaction as a tax-free reorganization under Section 368(a)(1)((E).
PLR 201039013 raised several interesting questions.
First, how should the Reset, the Series 1 and Series 2 Preferred Exchange, and the Conversion Transactions be treated for Section 382 purposes? The answer appears to have been based largely on the Taxpayer’s representations. Specifically, Taxpayer represented that each such transaction constituted a value-for-value exchange for purposes of Section 368(a)(1)((E). Thus, based on this representation, the IRS ruled that the stock Taxpayer issued in exchange for shares in the Reset, the Series 1 and Series 2 Preferred Exchange, and the Conversion Transactions would be allocated to its direct public groups. In other words, each of the preexisting direct public groups would be treated as receiving an amount of stock that was proportionate to the amount of stock they surrendered in the transactions. Interestingly, this is consistent with the rule described in Treas. Reg. § 1.382-3(j)(5), which provides that for purposes of applying both the small issuance and cash issuance exceptions, the loss corporation’s preexisting direct public groups receive a proportionate acquisition of exempted stock.
Next, how else to apply the HCP methodology? The IRS ruled that the HCP may be applied to identify 5-percent shareholders for all purposes of Section 382 (emphasis added), and in so doing clarified just how broad and expansive the HCP methodology could be.
Finally, what type of representations should similarly situated loss corporations consider making? PLR 201039013 gives some insight on this question. Here, Taxpayer made two specific representations. The first representation pertained to the Hold Constant Principle (“HCP”), as described in Notice 2010-50. Taxpayer represented that it did not have an “ownership change” during the relevant period (Date 1 through the date of the letter ruling). Why does this matter? Remember that Notice 2010-50 requires that a loss corporation satisfy certain consistency requirements. One such requirement is that a loss corporation must continue to use the HCP methodology through the first testing date that resulted in an “ownership change”. As applied here, Taxpayer’s representation appears to have satisfied this consistency requirement. The second representation pertained to the treatment of the Reset, the Series 1 and Series 2 Preferred Exchange, and the Conversion Transactions. As previously discussed, this representation appears to have been critical to the IRS’ determination that the stock be allocated to Taxpayer’s direct public groups. What would the outcome have been if the Taxpayer had not represented that the transactions were value-for-value exchanges?
Subscribe to:
Posts (Atom)