Startegic Tax Planning

1
Startegic Tax Planning

• Restructuring Chapter 13

2
Restructuring

• In early 1980s, U.S. businesses began a process
  of restructuring
• Focus is to increase shareholder value
• Proper tax management can enhance value-adding

3
Financial Restructuring

• Financial structure must respond to the evolving
  needs and changing environment of firm

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Financial Restructuring

• Early retirement of bonds
• A gain or loss is recognized at redemption
• Firms call bonds if they are paying an interest
  rate much higher than market and transaction
  costs do not exceed any savings
• Redemption can be tax-free if reissued to
  existing bondholders

5
Financial Restructuring

• Converting Bonds
• No gain or loss if converted into common stock
• Conversion must be prorata and no boot is given
  in addition to stock
• Stock Redemptions
• Common stock converted into another type of stock
  or bond, then tax-free

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Financial Restructuring in the SAVANT Framework

• Strategy
• The firms tax status favors capital structure
• Value-Adding
• Tax management should consider the effects on the
  firms financial statements
• Anticipation
• Debt-equity mix should maximize after-tax
  value-added by issuing debt or equity that is
  convertible at the firms discretion

7
Business Restructuring

• Process Restructuring
• Costs related to actual manufacturing process are
  eligible for (RD) tax credit

8
Legal Entity Restructuring

• Impetus is to separate high and low performing
  lines of business
• After divesture, capital markets are given
  separate financial statements for each newly
  separated business
• Qualifies as D reorganization and is tax-free to
  all parties involved

9
Legal Entity Restructuring

• Split-offs
• Occurs when a parent corporation isolates one of
  its businesses and transfers the shares to the
  parents shareholders
• Split-ups
• A parent corporation divides itself into two or
  more subsidiaries and then distributes their
  stock to its shareholders

10
Divestitures in the SAVANT Framework

• Strategy
• If business is worth retaining from a strategic
  perspective, then a divisive reorganization may
  be called for
• Value-Adding
• If line of business is very unprofitable, it may
  be better to sell it than to divide it
• Anticipation
• It may be better to wait until NOL expires before
  getting rid of unit

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Selling Off Parts of the Business

• Incentive is to separate profitable business
  units from unprofitable one
• Capital markets can discern which parts of the
  business are better performers

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Selling a Business to an Outside Entity

• If incorporated, can sell assets or shares
• If not incorporated, only assets can be sold
• Firm recognizes gain or loss on an asset-by-asset
  basis

13
Selling a Business to an Outside Entity

• Using SAVANT
• Strategy
• If sales proceeds will be reinvested in operating
  assets, then sales should be structured to
  minimize taxes
• Value-Adding
• Measures of value-added will improve after
  disposing business
• Transaction costs are highest for stock-swap,
  second highest for 1031 exchange, and lowest for
  straight asset or stock sale
• Negotiating
• Intangibles are amortized over 15 years
• Acquired goodwill is tested annually
• Negotiation is determining fair market value