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Wolters Kluwer Financial Services' CCH Capital Changes Releases Top Ten Corporate Actions Affecting Investors This Tax Season
Experts Also Include Five Honorable Mentions, Citing Very Active Year
1/11/07 WALTHAM, Mass. - Jan. 11, 2007 - Wolters Kluwer Financial Services today released its annual list of the Top Ten Corporate Actions for 2006 that could prove the most challenging for investors during the upcoming tax season. Prepared by the professional tax analysts and editors at CCH Capital Changes, a part of Wolters Kluwer Financial Services, the list also includes five additional "honorable mentions" due to the high level of complicated corporate actions during the past year. Understanding corporate events, such as distributions, mergers and spin-offs, is critical to investors as they try to accurately determine capital gains and losses at tax time. Calculating cost basis can be a time consuming process-particularly with transactions that have a higher level of complexity. "Many corporate actions have potential tax ramifications, however, each year we see a handful that could end up being particularly confusing for investors," said Denise Davidson, an attorney and managing editor for CCH Capital Changes. "By identifying what we believe are the most complex corporate actions, we hope to assist investors in deciding how their taxes will be impacted this year," explained Stevie Conlon, senior tax editor for CCH Capital Changes Reporter. The Top Ten list for 2006 comprises corporate action events affecting the securities of the following companies:
Since there were many other challenging corporate actions in 2006, CCH Capital Changes tax analysts and editors have also included a separate ?honorable mention? list. Those transactions, in no particular order, are:
Top Ten Corporate Actions Starwood - Determining Basis and Taxable Gain on Separation and Exchange of Paired Shares Host Marriott agreed to buy 38 hotels from Starwood Hotels & Resorts in a deal that required Starwood to separate its paired shares [NYSE: HOT] and exchange one of the component shares for Host Marriott common and cash. As the paired share had not traded separately, the tax basis of each component was not readily ascertainable. Holders needed to know the tax basis of the exchanged share in order to compute the amount of gain or loss recognized on the exchange. They essentially had to look back to when they acquired the paired shares to determine the tax basis for each component share. Vodafone (tied with Scottish Power) - Tax Consequences of Receipt of B Shares British companies such as Vodafone Group (and Scottish Power) regularly distribute special B shares to their shareholders, including holders of American Depositary Receipts (ADRs). The B shares typically provide for different redemption and dividend options that have different tax effects for UK holders. In the case of Vodafone, the difficulty for U.S. holders centered on the U.S. taxation of the distribution, including how to treat the B shares received and the subsequent redemption or dividend on the B shares. Alberto-Culver - Holders May Have to Overstate 2006 Income on $25 Special Dividend and File Amended Return in 2008 Alberto-Culver Co. separated its consumer products business and its retail business (Sally Beauty) into two publicly traded companies in a tax-free reorganization and paid a $25 special dividend. The problem for holders is determining what portion of the special dividend is ultimately taxable. Alberto-Culver expects the amount of the dividend will exceed its earnings and profits, which means a portion of the cash received will be treated as a nontaxable return of capital. The effect would be to reduce the holder's basis in both the Sally Beauty shares and the Alberto-Culver shares received in the reorganization. Acclaim Energy Trust - Unclear Tax Treatment with Potentially Different Outcomes Acclaim and StarPoint, both Canadian companies, merged to form Canetic Resources Trust and TriStar Oil and Gas Ltd. Acclaim shareholders received a distribution of TriStar common and TriStar warrants, and exchanged Acclaim units for Canetic units. The U.S. tax consequences of the exchange in part depended on whether the distribution of TriStar common and warrants was treated as "boot" or as a separate dividend. Each alternative would yield potentially different results as to the amount and character of income and gain recognized, and the basis in Canetic units received, placing shareholders in a difficult position. Syngenta - Tax Consequences of Distribution of Put Options to Shareholders Syngenta is a worldwide agricultural biotech company based in Switzerland that was formed from the merger of AstraZeneca's agribusiness and Novartis in 2000. On Feb. 22, 2006, Syngenta distributed one put option per share to the holders of its shares. For every 30 put options held, a holder could require the company to buy back one share of Syngenta stock on May 23, 2006, at a fixed price of 234 Swiss francs. Since Syngenta did not provide a U.S. or Swiss tax opinion regarding the distribution, intermediaries and investors had difficulty deciding how to properly book the transaction. The fundamental question was whether the distribution was taxable and the consequences to a holder if the put option was exercised. USG - Mandatory Allocation of Stock Basis to Rights Exercised or Sold In June of 2006, when USG Corp., formerly U.S. Gypsum Co., emerged from Chapter 11 bankruptcy, a trust was created to settle pending asbestos litigation claims and common shareholders retained their shares. Holders of common also received rights to purchase new common in the reorganized company. To fund the settlement of the asbestos claims, USG issued one stock right to purchase an additional share of common at $40 per share for each common share held. Because the value of the rights on the date of distribution was more than 15 percent of the value of the common on the same day, holders who sold or exercised their rights were required under U.S. tax law to allocate basis between their stock and the rights received. In allocating basis to the rights, holders had to reduce the basis of the common on which the rights were distributed. Some shareholders may not be aware of this mandatory allocation. Forest Oil - Determining the Valuation Date for Allocating Basis to Spin-off Shares Received Forest Oil Corp. spun-off its subsidiary, Forest Energy Resources, Inc., which then merged into a third company, Mariner Energy, Inc. Shareholders were required to allocate their original basis in Forest Oil between their Forest Oil common and the Forest Energy common received in the spin-off. The basis allocated to the Forest Energy shares carried over to the Mariner Energy common received in the merger. CCH Capital Changes published two basis allocations for the transaction. The CCH basis allocation was based on the average of the high and low trading prices for both stocks on the date of distribution. This is consistent with general IRS guidance regarding the determination of fair market values and basis allocations. This was also consistent with the tax opinion provided by the company which specified that the allocation should be made on the date of distribution. CCH Capital Changes also published the company's basis allocation which, despite the company's specific guidance, was based on ex-date prices. Extendicare - Potential Adverse U.S. (and Canadian Withholding) Tax Consequences for U.S. Holders Extendicare is a major provider of long-term care and related services in the U.S. and Canada. It distributed shares of Assisted Living Concepts Inc. to shareholders in November, 2006 and converted the remainder of the company into a real estate investment trust. The company alerted holders that they could incur more U.S. tax liability by participating in the exchange and distribution than by selling their Extendicare shares prior to the effective date, and that participating in the transaction would require holders to file a gain or loss recognition statement with the IRS. In addition, a U.S. holder would be subject to Canadian withholding tax on a deemed dividend and potential Canadian income tax filing requirements. Holders thus had an opportunity to potentially lower their U.S. tax liability and avoid both an IRS and Canadian filing requirement and Canadian withholding tax by selling their shares prior to the transaction. Fuel-Tech - Special U.S. Tax Concerns & Elections for Holders on Reincorporation Into the U.S. Fuel-Tech, a Netherlands Antilles corporation, reincorporated into Delaware. Shareholders received shares of the Delaware company in exchange for their foreign shares. While a stock-for-stock exchange in a reincorporation is generally thought of as a nontaxable transaction, in this case, only U.S. holders with a de minimis holding (less than $50,000) in Fuel-Tech N.V. received nontaxable treatment without taking additional steps. Virginia Gold Mines - Potentially Adverse Passive Foreign Investment Company Issues When Goldcorp Inc. acquired Canadian mining company, Virginia Gold Mines Inc., shareholders received Goldcorp shares and shares of a wholly owned Virginia subsidiary, Virginia Mines Inc. The trouble for U.S. holders was that Virginia appeared to be a passive foreign investment company (PFIC) at all relevant times, while Goldcorp did not expect to qualify as a PFIC at the time of the acquisition. If a U.S. holder purchases stock in a company that becomes classified as a PFIC while the holder owns shares, the PFIC rules can subject the holder to significant and unanticipated federal income tax liabilities on corporate actions involving the stock. As a result, receipt of Virginia Mines shares could be considered an excess distribution under the PFIC rules, generally taxed at the highest ordinary income tax rates, and subject to special calculation and interest charges. In addition, even though the exchange of Virginia shares for Goldcorp shares might have otherwise qualified as a nontaxable reorganization, holders who failed to make proper elections under the PFIC rules were required to recognize gain (but not loss) on the exchange. Because the PFIC rules applied, such gain would be taxed, not as capital gain, but at the highest ordinary income tax rates, subject to special calculation and interest charges. Honorable Mention Corporate Actions Wrigley: Proper valuation for allocating basis to class B shares received as dividend (B shares were physical securities and were traded on OTC market) McDonald?s/Chipotle: Exchange tender offer for McDonald?s shares for Chipotle class B shares Modern Times Group/Metro: Complex and uncertain tax treatment on distribution to Modern Times shareholders of Modern Times class B shares subject to mandatory redemption one month later for shares of Metro International (a European based newspaper publisher) held by Modern Times UAL: Complex bankruptcy reorganization with uncertain tax treatment for holders Natural Resources, Ltd: Tax treatment to holders on conversion of subordinated units and cash for fractional shares based on partnership rules rather than rules applicable to stock About CCH Capital Changes CCH Capital Changes, a part of Wolters Kluwer Financial Services, is a leading tax authority for U.S. and global corporate actions. With more than 100 years of data coverage, financial services firms rely on CCH Capital Changes for its cost basis tracking and legacy of unparalleled legal, tax and accounting analysis of corporate actions. The vast archive of corporate actions coverage found in CCH Capital Changes ranges from value-added tax analysis, commentaries and opinions to gains or losses resulting from taxable transactions and adjustments. About Wolters Kluwer Financial Services Wolters Kluwer Financial Services provides best-in-class compliance, content, and technology solutions and services that help financial organizations manage risk and improve efficiency and effectiveness across their enterprise. The organization's prominent brands include Bankers Systems, VMP? Mortgage Solutions, PCi, GainsKeeper?, CCH? Capital Changes, NILS INSource?, AuthenticWeb?, CCH Wall Street and GulfPak. Wolters Kluwer Financial Services? solutions include integrated and stand-alone compliance and work flow tools, documentation, analytics, authoritative information, and professional services. Customers include banks, credit unions, mortgage lenders, securities, and insurance organizations of all sizes throughout the United States. For more information on Wolters Kluwer Financial Services, visit www.WoltersKluwerFS.com. Wolters Kluwer Financial Services is a unit of Wolters Kluwer, a leading global information services and publishing company with annual revenues (2006) of ?3.7 billion and approximately 19,900 employees worldwide. For more information, visit www.wolterskluwer.com. |
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