M & A Roundup – Washington Update: M&A, Restructuring Taxes Proposed

The Clinton administration wants to strip away the favorable tax status for some mergers and restructurings, including some newly popular innovations. If the proposals are enacted by Congress, they either would raise taxability or impose taxes where none exist, erasing some benefits and making the transactions harder to execute. Probably the most publicized proposal would require newly purchased sports teams to write off players’ contracts over 15 years rather than the much shorter periods favored by owners. However, there could be broader impact from parts of the package that would hit two-step spin-offs, tracking stocks, and “downstream” mergers. The provisions dealing with m&a and restructurings are in a comprehensive package of federal tax law changes that the administration offered in conjunction with its 2001 budget requests. Should slower depreciation of athletes’ contracts be mandated, future buyers of sports franchises would lose a popular device for quick recovery of a big chunk of the purchase price in short order. Fast write-offs generate large amounts of depreciation and increase cash flow in a few years immediately following the deal. Write-offs over 15 years would result in smaller annual amounts for depreciation and tax savings and could discourage buyers from paying the escalating prices for sports teams. Under the proposal, players contracts would be on the same footing as most intangible assets in mainstream businesses changing hands through m&a. Sports teams were exempt when Congress voted in 1993 to create a 15-year window for depreciating the bulk of intangible assets obtained through a change of control transaction. However, Robert Willens, senior vice president and tax expert at Lehman Brothers, questioned the economic wisdom of a longer depreciation period, noting that most players have relatively short careers. “It has no basis in reality,” he said. “It’s a punitive provision.” Other parts of the program could levy taxes on some spin-off-based restructurings. One is the two-step spin-off in which a parent company sells stock in a subsidiary to the public and later spins off the remaining interest as a dividend to its own shareholders. Presently, the recipient shareholders don’t pay taxes as long as the parent controls 80% of the sub’s voting power. The administration proposal would require the parent to own 80% of the value of the sub’s shares as well, for the deal to go forward tax-free. Willens noted that a number of deals in recent years, including the DuPont Co. divorce from Conoco Inc. and IMS International Inc.’s freeing of Gartner Group Inc., would not have met the stiffer requirements for tax avoidance. AMR Corp. currently is distributing its interest in publicly traded SABRE Holdings Corp. in a similar transaction format. Meanwhile, the administration tax writers asked for imposition of a first-time tax on tracking stocks if the shares are distributed to stockholders as a dividend or through an exchange offer. Willens said the proposal would treat tracking shares as property rather than stock, thus subjecting them to taxes. A downstream merger solves a tax problem In the seldom-used downstream merger, a company acquires another firm that is a major shareholder. Ideally, the transaction is done for stock which the target’s shareholders get tax-free. But the administration proposal would tax any type of currency when the target owns less than 20% of the acquirer. As a result of the most recent downstream merger, Liberty Media Group, publicly traded tracking stock of AT&T Corp., acquired Associated Group Inc., a major stockholder in AT&T, and solved a crushing tax problem. Associated’s block of AT&T had climbed in value and the company would have faced a huge tax tab if it sold the stock for cash. Instead, Associated shareholders were given 0.496 share of AT&T and 1.21 shares of Liberty for each share owned on a tax-free basis and individual stockholders replaced Associated in AT&T’s stockholder ranks. Willens said the entire slate of m&a and restructuring changes would not produce much revenue but was being pushed as supposed tax-equalization measures.