March 17, 2011 Kalamazoo, MI Your Trusted Tax Counsel ® Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference within the organization to a “partner” means a person who is a partner, or equivalent, in a member firm or its affiliate. Similarly, reference to an “office” means an office of any such law firm. Global Asset and Stock Deals Tax Executives Institute Western Michigan Chapter Thomas May (New York/Washington DC)
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March 17, 2011 Kalamazoo, MI Your Trusted Tax Counsel ® Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance.
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March 17, 2011Kalamazoo, MI
Your Trusted Tax Counsel®
Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference within the organization to a “partner” means a person who is a partner, or equivalent, in a member firm or its affiliate. Similarly, reference to an “office” means an office of any such law firm.
– Effect of section 338(g) election– FT (New Target) is treated as new corporation which
purchased assets of Old Target at start of day after acquisition date for adjusted grossed-up basis (“AGUB”)– AGUB is sum of grossed-up basis of recently-purchased
stock, basis of non-recently purchased stock, and liabilities of New Target
– Allocation of AGUB amongst assets based on asset classes
– FT’s historic tax attributes erased– FT’s depreciation deductions increased for US E&P
– Effect of sale of FT stock on Seller absent section 338(g) election– Seller recognizes taxable gain or loss on the sale of FT stock
– Gain or loss is capital in nature and either U.S. or foreign source
– If Seller is U.S. person that owned 10% or more of voting stock of FT during 5-year period ending on date of sale when FT was CFC (“section 1248 conditions”), gain treated as dividend income to extent of E&P accumulated during period FT stock was held while FT was a CFC– Dividend income may be general basket income– If U.S. person is corporation, dividend carries FTCs (if
– Effect of sale of FT stock on Seller with section 338(g) election– Seller recognizes taxable gain or loss on the sale of FT stock
and FT recognizes gain or loss on deemed asset sale for E&P purposes (and, potentially, subpart F purposes)– Seller’s gain or loss is capital in nature and either U.S. or
foreign source– If Section 1248 Conditions satisfied, gain treated as
dividend income to extent of existing E&P plus E&P on deemed asset sale– Is dividend income from deemed asset sale general
basket?– Section 338(h)(16)– Dilution of FTC pool – Cf. PLR 8938036 with CCA
Covered Asset Acquisitions– Section 901(m) provides that, if there is a covered asset acquisition
(“CAA”), the disqualified portion of foreign income tax determined with respect to the income or gain attributable to the relevant foreign assets is not taken into account in determining the credit under section 901 or sections 902 and 960
– A CAA includes:
– a qualified stock purchase under section 338(a);
– any transaction treated as an acquisition of assets for U.S. federal income tax purposes and treated as an acquisition of stock (or is disregarded) for foreign income tax purposes;
– any acquisition of an interest in a partnership if a section 754 election is in place; and
– any other similar transaction identified by the Treasury
Covered Asset Acquisitions– Where there is a CAA, the disqualified portion of foreign taxes is, for
any taxable year, the ratio (expressed as a percentage) of the aggregate basis differences (but not below zero) allocable to such taxable year with respect to all relevant foreign assets divided by the income on which the foreign income tax is determined
– The basis difference with respect to any relevant foreign asset is the excess of the adjusted basis of such asset computed under U.S. federal income tax principles immediately after the CAA over the adjusted basis of such asset computed under U.S. federal income principles immediately before the CAA – Basis difference is allocated to taxable years based on cost
recovery method applicable under U.S. federal income tax law– A foreign asset is relevant with respect to a CCA if income, deduction,
gain, or loss attributable to such asset is taken into account in determining the foreign income tax
– USP files a section 338(g) election with respect to FT
– Calculation of disqualified portion
USP(US)
CFC1(A)
1. Aggregate Basis Difference Allocable to Year 1: $202. Foreign Taxable Income in Year 1: $1003. Foreign Taxes: $354. Disqualified Portion of Foreign Taxes: $20/$100 x $35 = $7
– Disqualified portion of foreign taxes is deductible for U.S. federal income tax purposes (e.g., for earnings and profits purposes)
– In the case of a section 338 election, CAA is treated as occurring at close of acquisition date
– If basis of asset immediately after CAA is less than basis immediately before CAA, difference is taken into account as a negative basis difference (thereby decreasing disqualified portion of foreign taxes)
– If there is a disposition of any relevant foreign asset, any remaining basis difference with respect to that asset is allocated to year of disposition
– Effective date– Subject to transition rules, CAA rules apply to CAAs after
– USP files a section 338(g) election with respect to FT– Disqualified portion exists even if there is a foreign step up as well!!
– JCT report indicates it is anticipated that Treasury will exclude CAAs in which basis of relevant foreign assets is increased for foreign tax purposes
USP(US)
CFC1(A)
1. Aggregate Basis Difference Allocable to Year 1: $202. Foreign Taxable Income in Year 1: $100 - $20 = $803. Foreign Taxes: $284. Disqualified Portion of Foreign Taxes: $20/$100 x $28 = $5.6
Pursuant to requirements relating to practice before the Internal Revenue Service, any tax advice in this communication (including any attachments) is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing, or recommending to another person any tax-related matter.