Uncertainty To Remain As IRS Not Issuing Broad Guidance For Spinoffs Just Yet

Those hoping for the IRS to provide clear guidance on spinoff related tax issues can keep holding their breath because it’s not coming anytime soon, at least according to Robert Wellen, associate chief counsel of the U.S. tax agency. According to Mr. Wellen, these types of projects take a lot of time to complete, but on the plus side, it does seem that work is taking place. I can imagine the difficulty in crafting language providing the necessary level of clarity to companies and investors while also minimizing unintended loopholes or consequences.

Tax free status (at least to US shareholders) is an aspect mostly taken for granted in spinoff transactions, but is obviously an important consideration for the company in structuring the deal (and to investors appreciating spinoff’s tax efficiency). While companies will always get tax opinions from big, brand name law firms, investors appreciate the security and elimination of tax risk by having the IRS rule on the issues or in other cases falling within specific IRS issued guidance or safe harbors.  Historically, it was common to see private letter rulings from the IRS blessing individual transactions, but in order to save time and money, the IRS did away with that several years ago in favor of ruling only on specific issues in the transaction.

Then Yahoo! (YHOO) famously tried to drive a truck through the grey zone with its proposed mega Alibaba (BABA) spinoff, er I mean, ‘small business unit spinoff’ which would just randomly be named Aabaco, leading the IRS to further restrict its rulings. Availability of private letter rulings for spinoffs involving small active businesses or REITs got cut. As a result of the uncertainty (and the IRS failing to provide a ruling), Yahoo ended up scrapping its planned spinoff and the seemingly endless saga/war over its future continues to rage on even today. In contrast, Darden (DRI) secured a private letter ruling for its REIT spinoff, Four Corners Property Trust (FCPT), and was thus able to complete the spin shortly thereafter.

Separately, REIT spinoffs were impacted by legislation passed during the end of year omnibus tax package which effectively eliminated non-REIT’s spinning off REITs. As a result, the pipeline of those types of spins dried up (excluding the current pipeline which was grandfathered in), although REITs are still allowed to spinoff REITs. HCP’s (HCP) recent healthcare portfolio spinoff announcement is an example of the pickup in that arena.

It’s not surprising to see spinoffs getting increased scrutiny given the uptick in overall spinoff transactions and the publicity of the transaction’s tax efficiency. As inversion backers and Pfizer (PFE) shareholders are no doubt aware, continuously touting tax efficiency is a good way to get the government to take a closer look, especially when billions of dollars are at stake. Overall, having clear guidance should be a positive, and it’s good to see the IRS working on speeding things up. Hopefully, the new guidance will provide the necessary clarity (without being too narrow or restrictive) and eliminate any tax and regulatory risk from future transactions.

Disclosure: Author holds no position in any stock mentioned.


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