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Deferring Taxes but Keeping the Cash

June 17, 2017

10 Public Companies that Deferred Billions in Taxes

 

In recent years, many public and private companies have been able to defer capital gains tax on appreciated assets while keeping up to 95% of the proceeds (versus 65%-75% in paying taxes).  

 

This holy grail of tax planning has been accomplished via a "monetized installment sale"  where the appreciated asset is sold under an installment agreement (tax deferred) and then by monetizing the notes via a non taxable loan.

 

The amounts and the companies that have structured such sales over the last several years include:

 

 1. The $43.25 Million Monetized Installment Sale by GREIF, Inc.

 

2. The $617 Million Monetized Installment Sale by Kimberly Clark.

 

3. The $4.8 Billion Monetized Installment Sale by International Paper

 

4. The $350 Million Monetized Installment Sale by Plum Creek

 

5. The $1.47 Billion Monetized Installment Sale by OfficeMax

 

6. The $774 Million Monetized Installment Sale by Meadwestvaco

 

7. The $183 Million Monetized Installment Sale by the St. Joe Company

 

8. The $22.5 Million Monetized Installment Sale by Rayonier

 

9. The $403 Million Monetized Installment Sale by Louisiana Paper

 

10. The $37.9 Million Monetized Installment Sale by Glatfelter [1]

 

As indicated above, the two main components of the transaction include:

 

a) selling an appreciated asset on terms in the form of an installment note; and

b) obtaining a loan in an amount approximating the face amount of the note. 

 

The specific steps to most of these transactions are outlined in an IRS Field Service Memo issued in 2012.  In its General Counsel Memorandum 20123401f, the Service reviewed a monetized installment sale and in declining to challenge the transaction, outlined the mechanics and roles of the parties.

 

Following is a summary of the mechanics and the parties’ roles in the IRS’ General Counsel Memo.  

 

The Mechanics

 

1. Taxpayer (Seller) needed to sell a large amount of corporate (farm) Assets to raise cash.

 

2. An advisor came to Seller with a prearranged series of transactions / structures to do so in a tax advantaged way (Promoted Transaction).

 

3. Advisor solicited bids from potential buyers, indicating that the Promoted Transaction was the preferred structure.

 

4. The winning bidder (Buyer) signed an Installment Agreement to purchase the Assets from Seller, with payments being over a period of years, thereby deferring the taxable gain.

 

5. The Buyer deposited cash (Deposit) with four banks in an amount of cash equal to the purchase price.

 

6. The four banks issued standby Letters of Credit in favor of the Seller in the event Buyer defaulted on the Installment Agreement.

 

7. The interest rates on the Deposit and on the Installment Agreement were variable but nearly identical; a fifth bank issued a hedge to protect against any mismatch of payments between the Deposit and the Installment Agreement.

 

8. Seller contributed the Installment Agreement to two new special purpose vehicles (New Subsidiaries), with part of the contribution being deemed a capital contribution, and part deemed a loan to the New Subsidiaries.

 

9. The New Subsidiaries got a Loan from a Bank, with the Installment Agreement and the Letters of Credit securing the loan.  (Note: under the Tax Code farm assets can be secured).  The New Subsidiaries transferred the Loan proceeds to the Taxpayer / Seller / Parent.

 

10. The amount of the Loan was "roughly equal to the sales proceeds" according to the GC Memo.

 

11. The lender 'initially' sourced the capital for the Loan from its 'conduit lenders'.  (No mention made as to what happened later or why the word 'initially' was used). New Subsidiaries did not receive funds from the Deposits.

 

12. The closing of the Loan occurred "N" days after the issuance of the Installment Agreement.  The precise number of days was not specified, and not material to their analysis.

 

13.The IRS stated that the interest rate on the Monetization Loans is unusual, however the loan agreement shows it to be structured as a commercial loan and all parties involved have treated the steps of the Transaction as a separate installment sale and monetization loan.

 

14. An IRS Agent with the Large Business & International Division (i.e. for Businesses with over $10 million in assets) submitted the transaction to the Regional IRS General Counsel in Houston.  They coordinated with the national office in preparing a response and concluded not to challenge the Taxpayer's deferral of capital gains tax 

 

As you can see, there are many elements and parties to this transaction beyond the traditional ‘seller that sells an asset to a buyer.

 

Following is a summary of all the parties, their role, risk, and compensation in the monetization transaction, as described by the IRS.

 

 

 

 

[1] See GREIF Inc. at http://www.investquest.com/iq/g/gef/fin/8k/gef8k060605.htm;

 

see Kimberly Clark at http://files.shareholder.com/downloads/KMB/4330473318x0xS55785-03-1/55785/filing.pdf at p. 126;

 

see International Paper at https://www.sec.gov/Archives/edgar/data/51434/000119312511100407/filename1.htm;

 

see Plum Creek at investor.weyerhaeuser.com/download/PCL+Q2+2000+10-Q.pdf

 

see St. Joe’s at http://ir.joe.com/secfiling.cfm?filingID=745308-14-22;

 

see MeadWestvaco at http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NTM3NjAyfENoaWxkSUQ9MjI2NTQwfFR5cGU9MQ==&t=1; and

 

see OfficeMax at http://investor.officedepot.com/phoenix.zhtml?c=94746&p=irol-faq. 

 

see Rayonier at https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.rayonier.com/Documents/2016_Annual_Report_RYN.aspx&ved=0ahUKEwjk6Ka1m4HUAhUT8GMKHQbhCucQFggfMAA&usg=AFQjCNE0YOGQCxnXiXBZf0D_-QwvorYcog&sig2=b5kdrLLVtnl-YlnQ_rxGNg

 

see L.P. Building Products at http://www.otcmarkets.com/edgar/GetFilingPdf?FilingID=11369524

 

see Glatfelter at http://www.glatfelter.com/about_us/news_events/press_release.aspx?PRID=10

 

 

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