This document discusses various tax planning strategies involving step transactions and restructuring. It summarizes: 1) The step transaction doctrine allows courts to integrate a series of separate transactions into a single transaction and recharacterize the steps for tax purposes. 2) Pre-sale restructuring techniques are described, such as forming a new company and contributing a target business to facilitate an asset sale. 3) Repatriation strategies are outlined to avoid foreign withholding taxes, such as selling stock between foreign affiliates under section 304 or making an entity disregarded to treat a distribution as a sale. 4) A "circular cash flow" technique is described to move distributable reserves between affiliates to facilitate

1. Head Games: The Power of Step Transaction
and the Recast
Jared Dunkin, Sr. Director of Global Tax Planning
jared_dunkin@discovery.com
240-662-6249
November 8, 2012

2. Tax planning
“The hardest thing in the world to understand is income tax.” Einstein
 Tax department – help the company report and pay
all of the tax that it owes, but also to structure its
affairs so that it does not pay more in taxes than is
necessary and does not pay more in taxes than
similarly situated competitors pay
 A basic tenet of our tax laws is that a taxpayer has
the legal right to decrease or altogether avoid his
taxes by means which the law permits. The taxpayer
is not bound to choose that pattern that will best pay
the Treasury. Gregory v. Helvering, 293 U.S. 465,
469 (1934)
 Lots of tax planning ideas work as a technical matter
but must determine whether tax planning goes too far
and effectively violates the underlying spirit and
intent of the law
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3. Esmark v. Commissioner
Beginning structure Step one Step two
Esmark
Public stock
Public Mobil
Esmark Mobil
Public
Esmark Mobil < 50% stock
> 50%
Esmark
Vickers
Vickers Esmark Vickers
stock
Vickers
Esmark wants to dispose
of Vickers (its energy
business), but the stock Mobil acquired Esmark redeemed its
has built in gain more than 50% of stock owned by Mobil
Esmark stock in a with the Vickers stock
Esmark also wants to
public tender offer
contract its capital
structure
*Judge said tax planning is an essential ingredient of business decision-making (and is an art)
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4. Step transaction – who has the power!
 The most complex transactions involve multiple legal steps. The challenge
of tax practitioners is to know whether the form governs or whether the IRS
and courts will use their recast power to determine the tax consequences of
a transaction based on the substance of the transaction. The
characterization can have significant tax consequences.
 Step transaction doctrine integrates a series of formally separate steps into
a single overall transaction, and potentially recharacterizes the integrated
steps for US tax purposes.
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5. Head games
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6. Step transaction – who has the power!
“Every stick crafted to beat on the head of a taxpayer will metamorphose sooner or
later into a large green snake and bite the Commissioner on the hind part.”
Marty Ginsburg
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7. Do you see what I see?
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8. Pre-sale restructuring
Current
state
 Business deal – Target owned by Parent and Parent wants to
Parent
sell all of Target’s assets
 Legal problem – difficult to buy assets
 IP issues – novation
Target
 SSE – sale of assets taxable locally, sale of stock not
Pre-sale
Restructuring Step 1 – Parent forms Newco and
Parent contributes the stock of Target to Newco
in exchange for Newco stock
Step 2 – Target converts to LLC under
Delaware law or CTB if foreign entity
Target Newco
Target
Step 3 – Sale to buyer
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9. Repatriation – status quo
Scenario 1
USP
Δ: 100 $100
FMV: 100
CFC1 CFC2
E&P: 100
• CFC2 makes a $100 cash distribution
to USP
• $100 dividend from CFC2 to USP
• Potential withholding in CFC2
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10. Repatriation – section 304 (cool)
Scenario 2
USP
Δ: 100 $100
FMV: 100
CFC1
stock
CFC1 CFC2
E&P: 100
• USP sells CFC1 stock to CFC2 for $100
• $100 dividend from CFC2 to USP
• No withholding because seen as sale by
CFC2 jurisdiction
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11. Repatriation – all cash D (really cool)
Scenario 3
USP
Δ: 100 $100
FMV: 100
CFC1
stock
CFC1 CFC2 E&P: 100
CFC1
• USP sells CFC1 stock to CFC2 for $100, CFC1 files CTB
election to be disregarded
• No withholding because seen as sale by CFC2 jurisdiction and
also no US dividend inclusion because boot within gain rule
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12. Circular cash flow (mind blowing)
Desire Fix
USP USP
Δ: 100 $100
E&P: 0 note
CFC1 CFC1
Step 2 -$100 Step 1 -$100
E&P: 100
CFC2 CFC2
Cash: 100
E&P: 100
Cash: 100
• Desire - CFC1 wants to distribute $100 note and treat as tax-free basis
recovery
• Problem – CFC1 has no distributable reserves as required under local law for
distribution
• Fix – CFC2 distributes $100 to CFC1 and CFC1 contributes $100 back to
CFC2
• Result – moves distributable reserves to CFC1 under local law, for US tax
purposes does not meet E&P to CFC1 under circular cash flow doctrine 12