Avoiding boot in a spinoff.Corporate AVOIDING BOOT IN A SPINOFF Spinoff A new, independent company created through selling or distributing new shares for an existing part of another company. Notes: Spinoffs may be done through a rights offering. To qualify a distribution as a tax-free spinoff, at least 80% of the controlled entity's stock must be distributed. Moreover, at least 80% of the subsidiary's stock must have been owned throughout the preceding five years or, alternatively, acquired within that period in a wholly tax-free transaction. When 80% ownership has existed for the requisite period but the subsidiary has repurchased stock from minority shareholders within the five-year period, a portion of the stock distributed will be treated (to both the distributing corporation and its shareholders) as taxable "boot." The "tainted taint v. taint·ed, taint·ing, taints v.tr. 1. To affect with or as if with a disease. 2. To affect with decay or putrefaction; spoil. See Synonyms at contaminate. 3. " portion is equivalent to the percentage of the subsidiary's stock reacquired from the minority shareholders. In litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute. When a person begins a civil lawsuit, the person enters into a process called litigation. involving AT&T's breakup--which took the form of a series of tax-free spinoffs--the Tax Court concluded that AT&T successfully avoided this boot problem with respect to tainted stock of Pacific T&T (one of the regional companies AT&T was required to divest To deprive or take away. Divest is usually used in reference to the relinquishment of authority, power, property, or title. If, for example, an individual is disinherited, he or she is divested of the right to inherit money. ) by dropping that stock into a new company, Pacific Telesis
Pacific Telesis Group was one of the seven Regional Bell Operating Companies created after the 1984 breakup of AT&T as a holding company for Pacific Bell and Nevada Bell. , and distributing Pacific Telesis stock to its shareholders. Pacific Telesis stock was "untainted" because it had been acquired in a tax-free incorporation. Observation: In a recently issued private letter ruling, the Internal Revenue Service found that a similar pattern of transactions involving the trust of Edna Dunn (an AT&T shareholder picked to be a test case) successfully avoided the boot problem. Before this ruling, it was thought the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. would continue to litigate the issue. Accordingly, these so-called Dunn Trust transactions can now be safely structured. |
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