What tax issues should the parties to the divisive transaction consider?
In Fall 1999, Ford Motor Company's board of directors announced the $25.8 billion spin-off of its 80.7% interest in the Associated First Capital Corporation finance unit to the Ford shareholders. Ford said that it would distribute about $22.7 billion in Associates shares to its holders of Ford common and Class B stock, and $3.1 billion in cash to shareholders who hold Ford stock in U.S. employee savings accounts. According to market observers who track Ford operations, the spin-off is one of several moves Ford has taken to increase shareholder value by selling off nonautomotive assets, moves that included the initial public offering in April 1999 of Hertz Corporation. Ford said that it will take a one-time, noncash, nontaxable gain of about $16.5 billion in the first quarter as a result of the spin-off.
The following issues need to be addressed in examining the tax consequences of the distribution of the Associated First Capital stock:
• What type of distribution is Ford Motor Company making?
• Does the transaction meet the requirements for a tax-free distribution under Sec. 355?
• What is the amount and character of the gain or loss that Ford Motor Company recognizes on the distribution of the Associated First Capital stock?
• Does any allocation of or reduction in Ford's E&P occur as a result of making the distribution?
• What is the amount and character of the gain recognized by Ford Motor Company's shareholders on receiving the Associates First Capital stock?
• What is the basis of the Associated First Capital stock in the hands of Ford Motor Company's shareholders? When does the shareholders' holding period for the shares received in the distribution begin?
The transaction is a spin-off because the Ford common and Class B shareholders receive Associated stock and do not surrender any Ford stock. The transaction meets all six requirements for a tax-free distribution under Sec. 355 that are outlined in the text. A number of business purposes exist for the transaction. The first is that the Associated First Capital stock is apparently undervalued by the marketplace. By having the stock trade separately, the Ford shareholders may be able to increase the total value of their stock holdings. A logical reason for the undervaluing is that the Ford stock being treated as partially an automotive company and partially a finance company. The distribution of the Associated stock permits each shareholder to decide whether to hold the stock of a finance company and/or an automotive company and not be forced to hold both. Thus, the corporate division probably has three intended economic consequences: (1) increase the value of the distributing and controlled corporations; (2) reduce the risk of the distributing and controlled corporations; and (3) increase the shareholders' total value. The transaction is a tax-free distribution to the Ford shareholders, except to the extent they receive cash in lieu of a fractional share of the Associated stock (Sec. 355(a)). The receipt of cash is treated as a stock redemption of the Associated fractional share the shareholders are entitled to receive. Thus, this part of the transaction should receive capital gain treatment under Sec. 302(b)(1) since none of the Ford shareholders own sufficient stock to have a majority ownership position. No E&P reduction occurs as a result of the stock distribution except to the extent required by the deemed redemption. The basis of the Ford stock is allocated between the Ford and Associated stocks held after the transaction according to their relative FMVs. The holding period for the Ford stock carries over to the Associated stock. Ford recognizes no gain upon distributing the Associates stock to its shareholders. Neither the Associated nor the Ford stock should be disqualified stock because no Ford shareholder should own a 50% or greater (actual or constructive) interest in Ford and/or Associated following the distribution so as to trigger the disqualified stock rules (Sec. 355(c)).
You might also like to view...
Typically, operational control is accomplished through reports issued
A. weekly. B. daily. C. monthly. D. annually. E. randomly.
You are interrupted while eating some yogurt and you store the remaining yogurt in the refrigerator. A day later you return and find the surface of the yogurt is no longer smooth but has broken into several liquified areas. You correctly guess that enzymes from your saliva, via the spoon, have continued digesting the yogurt in your absence. If you left the yogurt on the counter for another 24 hours, what would happen?
A. The reaction will soon stop because the amount of saliva is small, and you would have to add more saliva to continue the degradation. B. The reaction will continue since the enzymes have plenty of substrate. Additionally, it would speed up since the enzymes are exposed to warmer temperatures. C. The reaction will stop because you have altered the environment and denatured the enzyme. D. The reaction will continue until half is digested and then stop because the reaction between substrate and product will be balanced.
The just-in-time operating environment typically is characterized by a large number of non-value-adding activities
Indicate whether the statement is true or false
Which of the following is a criterion used in scaling factors?
A. ensure the degree is separated from the job B. ensure the use of more than five degrees per factor C. limit degrees to those necessary to distinguish between jobs D. have no more than five degrees per factor E. use sophisticated terminology in order to be perceived as important