EY requests ‘immediate’ Treasury tax guidance on split-offs

Dive Brief:

Within days of President Biden signing into law the broad health and climate legislation that contains a new 15% Corporate Alternative Minimum Tax (AMT), Ernst & Young fired off a letter Thursday to the U.S. Treasury Department asking for “immediate” guidance on how so-called split-off divestitures will be treated for the purposes of calculating whether a firm is an “applicable corporation” that is subject to the new tax, according to a copy of the letter sent to CFO Dive.
EY is asking in essence that relief in the form of an exception be given so that, for the purposes of AMT, split-off transactions would not result in a financial reporting gain, meaning that they would not have the potential to boost a company's book income above the threshold that would make it subject to the new tax. The tax will effectively apply to companies with book income of $1 billion or more.
“Corporations that have been carefully planning to separate businesses through a ‘split-off’ may be harmed if guidance is not provided that excepts split-offs from the calculation of financial statement income for purposes of the Corporate AMT. Taxpayers that would otherwise not have been subject to the Corporate AMT would either need to abandon their current plan to undertake a ‘split-off’ or be willing to pay tax under the Corporate AMT,” the letter from EY executives led by Karen Gilbreath Sowell, EY Global Transaction Advisory Leader, stated.

Dive Insight:

CFOs and their accountants and tax-preparers are just beginning to grapple with the ramifications of the AMT. While an estimated 150-200 large companies are expected to be subject to the new tax, its complexity will require financial executives at many more companies to prepare for it, Edward Karl, vice president of taxation at American Institute of Certified Public Accountants (AICPA), told CFO Dive earlier this week.

The split-off issue that is emerging as a flashpoint is a form of divestiture where the parent company's shareholders can keep current shares or exchange them on a non-pro rata basis as compared to a spin-off in which the subsidiary's stock is distributed on a pro-rata basis. Both are tax free transactions under Internal Revenue Code Section 355 but in financial statements under GAAP rules only the split-off is shown as a gain.

"We’re not asking for a change in the way financial statements are done, but we are asking for that not to be taken into account for the purposes of the AMT," Sowell said in an interview, adding that the guidance is needed by companies who have been working on such transactions expecting them to be tax-free. "We’re asking for quick guidance to take this issue off the table because it’s extremely disruptive in the marketplace.”

The letter, dated Aug. 18, was addressed to Lily Batchelder, assistant secretary for tax policy at the Treasury Department, and two other executives, according to the letter. It points out that the current tax-treatment related to the divestitures has been in place for decades. The Revenue Act of 1954 enacted Section 355 of the International Revenue Code which treats both spin-off and split-off transactions the same for tax purposes. “Fundamentally, a ‘split-off’, just like a ‘spin-off’ was viewed by Congress as a tax-free corporate reorganization that generally should not be a taxable event,” the letter states.

EY executives, writing in the letter, acknowledge that split-offs are treated differently for financial statement purposes, while asserting that “the highly technical accounting nuance...should not affect whether a taxpayer is subject to the Corporate AMT.”

The Treasury Department did not immediately respond to a request for comment.