Question

Under IRC Section 311(b)(2), when a corporation distributes a property, subject to a liability, or the shareholder assumes the obligation of the distributing corporation, the fair market value (FMV) of the property is at least equal to the amount of the liability. Assume your client made a nonliquidating distribution with FMV exceeding its adjusted basis. What are the potential tax effects to the distributing company (client) and the receivers (shareholders)? Propose a plan in which you mitigate the potential tax impact on your client and the shareholders.

Answer 1

MY PLAN TO MITIGATE POTENTIAL TAX IMPACT ON MY CLIENT AND SHAREHOLDER :

Consistent with shareholder-level taxes influencing organizational form decisions (and firms catering to existing tax-exempt investors), I find that firms with greater pre-carve-out tax-exempt ownership are less likely to form MLPs. For a one-standard-deviation increase in tax-exempt ownership across the mean, firms are 20 percent less likely to form an MLP. I find little evidence that tax-sensitive investors affect organizational form choice. However, in robustness tests, I find some evidence that firms form MLPs to attract new tax-sensitive investors

INVESTOR POINT OF VIEW :   

Investors not only potentially influence firm policy, they may also react (i.e., sort) to firm policy. My second research question focuses on investor ownership changes following an MLP IPO. I expect tax-sensitive (tax-exempt) ownership in the MLP to be larger (smaller) than in the parent after the carve-out due to existing tax-sensitive investors shifting to the MLP, existing tax-exempt investors avoiding the MLP, and new tax-sensitive investors purchasing MLP units. Once again, these results are not foregone conclusions as the trade-offs between tax and non-tax factors could favor non-tax factors, as discussed further in Section II. For example, if existing investors prefer the pre-divestiture firm's asset mix, then they have an interest in owning the MLP, resulting in no difference in MLP and parent ownership. My sample consists of MLP carve-outs occurring from 1993 to 2013 and an industry-size-year matched sample of control firms that did not carve-out MLPs. To examine the effect of shareholder-level taxes on organizational form, I estimate a logit regression of the MLP IPO decision as a function of heterogeneous shareholder-level taxes among a firm's owners, which I operationalize as the level of tax-sensitive and tax-exempt ownership of each firm, controlling for other factors that affect firms' organizational form choices. To examine if investors' reactions to organizational form choices vary predictably with shareholder-level taxes, I calculate changes in ownership from the quarter before to the quarter after the MLP IPO effective date. I focus on shareholders with clear tax preferences that I can identify as tax-exempt or tax-sensitive..

CONCLUSION :

It is important to consider potential unintended consequences of tax reforms on firms' organizational form and investors' stock ownership. Specifically, my results inform the implications of enacting different tax rates for alternative organizational forms. Differential rates may encourage the use of alternative forms in ways inconsistent with policymakers' intent, raising significant concerns in recent tax reform proposals..