Statement of Tax Executives Institute, Inc. Page 7 make three general comments. First, we believe that the staff's supposition (expressed, -- -- -- or We do not believe, moreover, that the goal of integration Secondly, we believe that the staff's proposal to impose Specifically, the staff would limit relief from the proposed repeal of the General Utilities larger corporations would be complex. that providing relief to Statement of Tax Executives Institute, Inc. on the Subchapter C Revision Act of 1985 October 15, 1985 Page 8 We object to such a limited relief provision not only because the $1 million ceiling is at once arbitrary and unrealistically low, but because it seems to Owe its existence to little more than a deeply flawed "big is bad" mindset. To ask the question why should relief be granted to the sole owner of a corporation with a fair market value of $1 million or less and denied to 100 shareholders who together own a corporation whose fair market value is $2 million? is to expose the weak underpinnings of the staff's proposal. In addition, in light of the fact that the stock of large, publicly held companies is held in large measure by institutional investors (including pension plans and mutual funds) that represent multitudes of small investors, we believe that the attempted distinction between "large" and "small" companies and their respective shareholders is inappropriate. We urge the Committee to modify the - staff's proposals to ensure that they do not discriminate against shareholders of large, publicly held corporations. Thirdly, we generally oppose the imposition of further limitations on a corporation's ability to transfer its losses. In this regard, we note as a preliminary matter that the proposal to further limit the transferability of tax benefit carryforwards is inconsistent with one of the goals of the staff's acquisition proposals to separate shareholder tax treatment from corporate tax treatment. More fundamentally, we suggest that efforts to curb "trafficking" in tax benefit carryforwards should be tempered by two principles: first, that if the government is to be the partner of a business entity in good times (extracting a portion of the Statement of Tax Executives Institute, Inc. on the Subchapter C Revision Act of 1985 October 15, 1985 Page 9 income), why should it not also share - at least to the extent the losses to of limiting additional tax payments to the government incurred by the business entity in bad times; and secondly, that the transfer of control of a company from one group of stockholders another should not lead to the remaining minority shareholders' being unjustly deprived of the value inherent in the "target" corporation's tax benefit carryforwards. Stated differently, we believe it is wrong to simply assume that so-called "trafficking" in loss carryforwards is bad. After all, such losses were dearly paid for by those companies that incurred them. It does not seem unconscionable that those companies should be able to reduce their economic losses by transferring the potential tax benefits to an acquiring company. Consistent with these principles, TEI submits that absent a change of ownership permitting a single shareholder to hold 80 percent or more of the stock of a target corporation (thereby enabling it to file a consolidated return) and the target company's not continuing a principal business of the target company, there should be no reduction on the tax benefit carry forwards of the target corporation. This proposal, as well as our suggestions on how the limitation should be calculated where there is an 80 percent or greater change of control, is discussed in greater detail below. Comments on Specific Definitions and Elections Tax Executives Institute believes that the proposed adoption Statement of Tax Executives Institute, Inc. on the Subchapter C Revision Act of 1985 October 15, 1985 Page 10 of uniform definitions regarding corporate mergers and acquisitions and the proposal to make the tax treatment of qualified acquisitions elective are the most desirable of the staff's proposed changes. We believe, moreover, that the definitional changes could well be adopted by themselves and that their enactment should not necessarily be tied to the staff's other proposals, including the proposed repeal of the General Utilities doctrine. Specifically, proposed new section 364 would define "qualified acquisition" as meaning "qualified stock acquisition" or "qualified asset acquisition." Proposed new section 365 would treat all "qualified acquisitions" as "carryover basis acquisitions" unless an election were made to treat the acquisition as a "cost basis acquisition." As a result of the adoption of the uniform definitions, current section 368 would be repealed. By establishing uniform definitions and making the tax consequences of qualified acquisitions elective, the staff proposal would eliminate some of the most significant flaws in the current system of taxation: the lack of consistent and certain tax treatment. Under the proposal, taxpayers would be permitted to structure the tax consequences of a transaction to the business realities of the particular situation, rather than structuring the business realities to the tax consequences. In addition, the proposal would afford taxpayers the right to make separate cost-basis or carryover-basis elections with respect to each legal entity acquired in a given transaction (providing them much welcomed flexibility) and would obviate to a great extent the Statement of Tax Executives Institute, Inc. on the Subchapter C Revision Act of 1985 October 15, 1985 Page 11 need to contend with the highly complex consistency rules of section 338. This new flexibility would be augmented by a taxpayer's right under the proposal to make separate carryover-basis elections within a given legal entity for certain unamortizable intangibles (such as goodwill). Shareholder Level Tax Consequences TEI also supports the proposed separation of the shareholder level tax consequences by-shareholder basis - - which would be determined on a shareholderfrom the corporate level elections. Thus, under the staff's proposal, even if a transaction were treated as a cost-basis acquisition at the corporate level, it might be wholly or partially tax-free at the shareholder level, and the tax consequences one shareholder would not affect the tax treatment of other to shareholders or investors. The staff's proposals in this regard would bring a much needed element of consistency and certainty to the area of corporate acquisitions and would make it considerably easier for businesses to adequately assess the tax implications to shareholders of contemplated corporate transactions. The need for such certainty can be made manifest by reference to two "real world" cases one involving the tax consequences to shareholders of AT&T upon the government mandated break-up of the company, and the second one involving the tax consequences to shareholders of Hartford Fire Insurance Company upon the acquisition of the company by International Telephone & Telegraph Corporation. (The tax implications to the shareholders of the AT&T break-up are still before the courts, and in the IT&T |