More on the Flowers Foods Spin-Off
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More on the Flowers Foods Spin-Off I recently wrote an article on the tax
ramifications of the spin-off of Flowers Foods. http://www.bivio.com/trez_talk/mail-msg?t=11685700003
The advice in that article has been publicly
challenged by Adrienne Gormley of Easyware. It is unfortunate when advisors on
these matters give conflicting tax advice. Therefore, I am writing this second
article to show the documentation for my position and, I hope, to show Adrienne
and Easyware the error of their ways.
To refresh your memory, the transaction consisted
of redeeming shares of Flowers Industries with cash and shares of a new company,
Flowers Foods. I had said that you account for the transaction by recognizing a
sale of the Flowers Foods stock in the amount of the cash received plus the fair
market value of the new stock received.
Easyware took a different approach, saying that the
shares of the new company represent ordinary income as a dividend, and the cash
received represents a sale of the old stock. In effect, they are saying that
this is two separate transactions, and should be recognized as such.
This treatment flies in the face of the way that
the companies structured the transaction. As will be documented later, they took
great pains to say that it was a single transaction of redeeming the old shares
of Flowers Industries for cash plus shares of Flowers Foods. Here is an excerpt
from the website of Flowers Industries at http://www.flowersindustries.com/news/current/10312000QA.html
Will Flowers Industries' shareholders be
taxed on the distribution of
Flowers Foods common stock? On the cash payment from the Kellogg merger? The receipt by Flowers shareholders of
cash and shares of Flowers Foods
common stock will be a taxable transaction for U.S. federal income tax purposes and should be taxed as a capital gain. The tax consequences for each shareholder will vary depending on each shareholder's circumstances. Shareholders are urged to consult with their tax advisors. Note that they say the receipt of both the cash and
shares will be treated as capital gain, not as dividend income and capital
gains, as Easyware proposes. Incidentally, the Easyware approach results in
higher taxes, since a part of the proceeds will be taxed as ordinary
income.
I would hope that Adrienne and Easyware will
rethink their position on this, and, in the interests of their users, retract
their advice. Club treasurers don't need conflicting advice on
taxes. Now before I close, I have to say that nothing is
certain with the IRS. The professionals who put this deal together did
everything that they could to structure along the lines that I have indicated.
As is customary in proxy statements, they did try to cover themselves by saying
that the IRS could view this as two separate transactions, and thus recognize
ordinary income and capital gains. They don't believe that will happen, and
neither do I.
Here is the excerpt from the SEC
filing.......
For United States federal income tax purposes, the transaction is intended to constitute a single integrated transaction with respect to Flowers Industries and its shareholders in which the spin-off will be treated as a distribution in redemption of outstanding common stock of Flowers Industries in connection with the complete termination of the Flowers Industries shareholders' interest in Flowers Industries. Although Flowers Industries believes that the foregoing description correctly characterizes the transaction for United States federal income tax purposes and, therefore, that the spin-off should qualify under Section 302(b) of the Code, either because the integrated combination of the spin-off and the merger results in a complete termination of the Flowers Industries shareholders' interests in Flowers Industries or because the spin-off, in conjunction with the merger, is not essentially equivalent to a dividend, there is no specific authority on this point and the issue is not free from doubt. I have never seen any tax advisor recommend a
course different from the way the it was structured by the company, especially
when to do so results in a detriment to the taxpayer.
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