Character of Boot in Divisive Reorganizations: Revenue Ruling 93-62 Errs in Applying Clark

Saturday, January 1st, 1994 at 12:00 am by Joe Lawrence Fulwiler
Joe Lawrence Fulwiler, Character of Boot in Divisive Reorganizations: Revenue Ruling 93-62 Errs in Applying Clark, 1994 Colum. Bus. L. Rev. 113

The Internal Revenue Service recently released two Revenue Rulings designed to implement the Supreme Court’s holding in Comm’r v. Clark. In Clark, the Supreme Court addressed the tax treatment of “boot” received as part of an otherwise tax- free merger occurring in the context of an acquisitive corporate reorganization. The Court held that the tax treatment of the boot received by the shareholders of the target corporation should be determined under section 302 of the Internal Revenue Code (“Code”) and that the boot should be viewed as the product of a hypothetical redemption occurring immediately after the merger. The concept is that an amount of stock in the acquiring corporation equal in value to the boot is deemed to have been transferred to the target corporation’s shareholders in addition to the stock actually transferred to them. This phantom stock is then hypothetically redeemed by the acquiring corporation, thus yielding the boot to the shareholders that originally held stock in the target corporation. In Revenue Ruling 93-62 the Service attempts to apply the Clark holding to the slightly altered situation of a divisive corporate reorganization. The Service concludes in Revenue Ruling 93-62 that section 302 of the Code should be applied to a hypothetical redemption occurring immediately before the reorganization takes place. The result is that small amounts of boot will be given dividend treatment. Only relatively large distributions of boot will receive capital gains treatment.

This Note argues that Revenue Ruling 93-62 errs in applying Clark to split-off divisive corporate reorganizations and argues instead for a characterization that grants capital gains treatment to all boot in such transactions, regardless of amount. Part I examines the Code sections and the case law that underpin Clark and Revenue Ruling 93-62. Part II considers several alternative characterizations, other than the hypothetical pre-reorganization redemption chosen by the Service, that could be imputed to the facts involved in Revenue Ruling 93-62. Part III criticizes the characterization adopted in Revenue Ruling 93-62, and Part IV argues for one of the alternatives presented in Part II.

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