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Spinoff Deals May Be on Hold as Shutdown Drags On

Jan. 22, 2019, 6:23 PM

Merger and acquisition activity hit record-breaking levels in 2018. The government shutdown is holding up some of that activity in the early weeks of 2019, and those delays could continue after the government reopens.

Companies entering into tax-free spinoffs and other byzantine transactions often seek Internal Revenue Service statements providing certainty of the deal’s tax treatment in the form of private letter rulings. But because the agency isn’t fully operational due to the shutdown, some deals could be delayed as companies wait to get private letter rulings.

The IRS’s current staffing includes workers deemed necessary for the tax filing season, those whose activities are “necessary to safeguard human life or protect government property,” and a relative few who can continue to crank out regulations that tell taxpayers how to follow the laws, according to an updated IRS shutdown contingency plan.

“Generally speaking, that would not involve advising on transactions,” said Steve Fattman, a former IRS official and current executive director of Ernst & Young LLP’s Transaction Advisory Service in Washington. In the meantime, he added, “we’re basically on hold,” as “sometimes a deal is contingent on getting a private letter ruling.”

If the IRS requests more information for a ruling, and the companies involved face a deadline for supplying that information, “what does that mean for your deadline?” said Ellen McElroy, a partner at Eversheds Sutherland LLP in Washington, who represents clients with private letter rulings before the IRS National Office.

Waiting Game

The process, between request and PLR issuance, takes an average of roughly six months, depending on the deal, tax professionals said. But even after the shutdown ends, returning IRS workers will face a towering backlog, further delaying the rulings.

“It’s not even just the fact that you can’t start the process now. When the government reopens, the reality is there’s going to be all this backlog,” said Tijana Dvornic, a partner at Wachtell Lipton Rosen & Katz in New York who focuses on tax treatment of mergers and acquisitions, adding that some companies may simply opt to forgo the wait for rulings altogether.

“Frankly, it’s not just the IRS,” Dvornic said, pointing to shutdown-related work stoppages at the Securities and Exchange Commission. “It’s starting to affect real-world transactions, because we just haven’t had one of this length before.”

The IRS wasn’t immediately able to provide a response to requests for comment.

Fox, Disney, and MSG

Some companies pursuing tax-free spinoff deals, the complex sort in which advisers may typically request a private letter ruling, include Madison Square Garden Co. and 21st Century Fox Inc., which plans to merge with Walt Disney Co. Disney didn’t respond to requests for comment or confirm whether the company has requested a private letter ruling from the IRS. 21st Century Fox declined to comment. Madison Square Garden declined to comment.

After announcing in June that it was exploring the possibility of spinning off its sports teams, Madison Square Garden said in October that it “made important progress towards the potential spin-off” by filing a Form 10 registration statement with the SEC. The split—which would separate the namesake venue and bookings business from the New York Knicks and several other teams—“would be structured as a tax-free spin-off to all MSG shareholders,” according to the October announcement.

While the Madison Square Garden deal appears to fit the standard of a tax-free spinoff under tax code Section 355, the Disney-Fox transaction is less clear-cut. Disney, which plans to acquire 21st Century Fox after it spins off a “New Fox” company, considers the $71 billion in payouts to shareholders from the acquisition to be taxable. Fox, however, is inviting shareholders to consider the deal tax-free.

To contact the reporter on this story: Lydia O'Neal in Washington at loneal@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com

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