Head Games: The Power of Step Transactionand the RecastJared Dunkin, Sr. Director of Global Tax Planningjared_dunkin@disco...
Tax planning     “The hardest thing in the world to understand is income tax.” Einstein                                 T...
Esmark v. Commissioner  Beginning structure                      Step one                               Step two          ...
Step transaction – who has the power!      The most complex transactions involve multiple legal steps. The challenge     ...
Head games             5
Step transaction – who has the power!“Every stick crafted to beat on the head of a taxpayer will metamorphose sooner orlat...
Do you see what I see?                         7
Pre-sale restructuring Current  state                                       Business deal – Target owned by Parent and Pa...
Repatriation – status quo                  Scenario 1                                   USP                  Δ: 100       ...
Repatriation – section 304 (cool)                  Scenario 2                                  USP                  Δ: 100...
Repatriation – all cash D (really cool)                  Scenario 3                                   USP                 ...
Circular cash flow (mind blowing)  Desire                                              Fix                    USP         ...
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Head Games: The Power of Step Transaction and the Recast - Jared Dunkin, Discovery Communications

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Jared Dunkin, Discovery Communications - Speaker at the marcus evans Tax Officers Summit Fall 2012, held in Las Vegas, NV, delivered his presentation entitled Head Games: The Power of Step Transaction and the Recast

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Head Games: The Power of Step Transaction and the Recast - Jared Dunkin, Discovery Communications

  1. 1. Head Games: The Power of Step Transactionand the RecastJared Dunkin, Sr. Director of Global Tax Planningjared_dunkin@discovery.com240-662-6249November 8, 2012
  2. 2. Tax planning “The hardest thing in the world to understand is income tax.” Einstein  Tax department – help the company report and pay all of the tax that it owes, but also to structure its affairs so that it does not pay more in taxes than is necessary and does not pay more in taxes than similarly situated competitors pay  A basic tenet of our tax laws is that a taxpayer has the legal right to decrease or altogether avoid his taxes by means which the law permits. The taxpayer is not bound to choose that pattern that will best pay the Treasury. Gregory v. Helvering, 293 U.S. 465, 469 (1934)  Lots of tax planning ideas work as a technical matter but must determine whether tax planning goes too far and effectively violates the underlying spirit and intent of the law 2
  3. 3. Esmark v. Commissioner Beginning structure Step one Step two Esmark Public stock Public Mobil Esmark Mobil Public Esmark Mobil < 50% stock > 50% Esmark Vickers Vickers Esmark Vickers stock Vickers Esmark wants to dispose of Vickers (its energy business), but the stock Mobil acquired Esmark redeemed its has built in gain more than 50% of stock owned by Mobil Esmark stock in a with the Vickers stock Esmark also wants to public tender offer contract its capital structure*Judge said tax planning is an essential ingredient of business decision-making (and is an art) 3
  4. 4. Step transaction – who has the power!  The most complex transactions involve multiple legal steps. The challenge of tax practitioners is to know whether the form governs or whether the IRS and courts will use their recast power to determine the tax consequences of a transaction based on the substance of the transaction. The characterization can have significant tax consequences.  Step transaction doctrine integrates a series of formally separate steps into a single overall transaction, and potentially recharacterizes the integrated steps for US tax purposes. 4
  5. 5. Head games 5
  6. 6. Step transaction – who has the power!“Every stick crafted to beat on the head of a taxpayer will metamorphose sooner orlater into a large green snake and bite the Commissioner on the hind part.”Marty Ginsburg 6
  7. 7. Do you see what I see? 7
  8. 8. Pre-sale restructuring Current state  Business deal – Target owned by Parent and Parent wants to Parent sell all of Target’s assets  Legal problem – difficult to buy assets  IP issues – novation Target  SSE – sale of assets taxable locally, sale of stock not Pre-saleRestructuring Step 1 – Parent forms Newco and Parent contributes the stock of Target to Newco in exchange for Newco stock Step 2 – Target converts to LLC under Delaware law or CTB if foreign entity Target Newco Target Step 3 – Sale to buyer 8
  9. 9. Repatriation – status quo Scenario 1 USP Δ: 100 $100 FMV: 100 CFC1 CFC2 E&P: 100 • CFC2 makes a $100 cash distribution to USP • $100 dividend from CFC2 to USP • Potential withholding in CFC2 9
  10. 10. Repatriation – section 304 (cool) Scenario 2 USP Δ: 100 $100 FMV: 100 CFC1 stock CFC1 CFC2 E&P: 100 • USP sells CFC1 stock to CFC2 for $100 • $100 dividend from CFC2 to USP • No withholding because seen as sale by CFC2 jurisdiction 10
  11. 11. Repatriation – all cash D (really cool) Scenario 3 USP Δ: 100 $100 FMV: 100 CFC1 stock CFC1 CFC2 E&P: 100 CFC1 • USP sells CFC1 stock to CFC2 for $100, CFC1 files CTB election to be disregarded • No withholding because seen as sale by CFC2 jurisdiction and also no US dividend inclusion because boot within gain rule 11
  12. 12. Circular cash flow (mind blowing) Desire Fix USP USP Δ: 100 $100 E&P: 0 note CFC1 CFC1 Step 2 -$100 Step 1 -$100 E&P: 100 CFC2 CFC2 Cash: 100 E&P: 100 Cash: 100 • Desire - CFC1 wants to distribute $100 note and treat as tax-free basis recovery • Problem – CFC1 has no distributable reserves as required under local law for distribution • Fix – CFC2 distributes $100 to CFC1 and CFC1 contributes $100 back to CFC2 • Result – moves distributable reserves to CFC1 under local law, for US tax purposes does not meet E&P to CFC1 under circular cash flow doctrine 12

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