Magazine for Senior Financial Executives: Spin-off insurance? – newswatch

Spin-off insurance? – newswatch – Brief Article

Marie Leone

In early August, the Internal Revenue Service officially stopped issuing private letter rulings (PLRs) for tax-free transactions. It’s a dramatic shift, The yearlong pilot program, which could become permanent, may lead companies to scuttle any potential spin-offs without a solid business purpose beyond the tax benefit. That’s because executives wouldn’t know whether a spin-off meets IRS standards until it’s audited–up to three years after closing.

The danger of getting it wrong, says Cravath, Swaine & Moore tax attorney Lewis Steinberg, is that the IRS could hit a company with a huge retroactive tax bill if a spin-off’s stock appreciates and the deal is stripped of its tax-free status.

Some companies are purchasing tax-opinion insurance policies, which generally pay tax penalties, fines, and interest if a spin-off fails the tax-free test. In June 2001, Georgia-Pacific purchased $500 million worth of coverage to protect the spin-off and later merger of The Timber Co. with Plum Creek after the IRS refused to issue a PLR. Says Lehman Brothers’s Robert Willens: “Since the IRS stopped issuing PLRs, companies are looking for other means of protection.”

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