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T H E M & A T A X R E P O R T

Tribune Company. The transaction resulted in This transaction was carefully structured
an Employee Stock Ownership Plan (ESOP) to avoid the application of Code Sec.
owning all outstanding Tribune shares. Sam 409(p), which treats an ESOP owning an S
Zell received rights to acquire up to a 40-percent corporation as currently distributing to certain
interest in the Tribune Company. disqualified persons amounts accruing from
The first stage consisted of Zell investing $250 the S corporation. Additionally, an excise tax
million for $50 million of new Tribune shares is imposed on the deemed distribution. Zell
and a promissory note exchangeable into $200 managed to avoid the application of Code
million of Tribune shares. Next, the ESOP Sec. 409(p) by (1) not being a participant
purchased $250 million of new Tribune shares. in the Tribune ESOP; (2) not owning any
To finish this first stage, the Tribune Company Tribune shares; and (3) limiting his warrant to
initiated a cash tender offer to repurchase 50 a 40-percent potential interest in Tribune.
percent of its outstanding shares. The presentation covered a number of other
In the second stage, the ESOP formed a case studies, and each one was fascinating:
merger subsidiary that merged with and into The Tribune Company & Cablevision
the Tribune Company. All outstanding shares Systems, Corp.s leveraged partnership on
not held by the ESOP were automatically Newsday Inc.
redeemed. Zells initial $250 million investment MetLife, Inc.s tax-free split-off of
was then redeemed and replaced with a new Reinsurance Group of America to its
$315 million investment. shareholders
After the merger, the Tribune Company Focus Media Holding, Ltd.s asset sale and
elected to become an S corporation and now stock distribution
passes its taxable income/losses up to the These case studies brought real-world
ESOP. The ESOP is its only shareholder and is perspective and timeliness to a discussion of
also a tax-exempt entity. The Tribunes status current deal structures and tax effects. The two-
as an S corporation wholly owned by an ESOP day seminar provided 12 hours of continuing
is a particularly tax-efficient structure. legal education instruction. Enlightening and
Its operations are not taxed at the corporate engaging, it covered quite a wide range of topics.
level under Subchapter S. Items of income If you want an advanced and sophisticated
and loss pass through to the ESOP, but are course on corporate taxation, this ALI-ABA
not taxed because the ESOP is exempt from conference fits the bill. To purchase an online
taxation. Of course, participants in the ESOP version of this course or for information about
will ultimately be taxed when they receive other ALI-ABA courses and live events, go to
distributions from the ESOP. www.ali-aba.org or call (800) 253-6397.

Book Review: STRUCTURING VENTURE CAPITAL,


PRIVATE EQUITY, AND ENTREPRENEURIAL
TRANSACTIONS by Jack Levin
Reviewed by Robert W. Wood Wood and Porter San Francisco

Jack Levin of Kirkland & Ellis is no stranger BUYOUTS. Although Jack Levins name is
to M&A TAX REPORT readers. Indeed, anyone alone on the spine of this single volume on
involved in the merger and acquisition field is structuring VC and private equity deals, the
likely to recognize his name. As a leading tax 2008 edition lists as special editors Martin
practitioner in a leading firm, he is probably best Ginsburg of Georgetown and Don Rocap of
known for his collaboration with Professor Martin Kirkland & Ellis. (For recent review of MERGERS,
Ginsburg of Georgetown University Law Center. ACQUISITIONS, AND BUYOUTS, see Wood, Book
Together they authored the massive multi- Review: MERGERS, ACQUISITIONS, AND BUYOUTS,
volume treatise MERGERS, ACQUISITIONS, AND M & A TAX REP., May 2009, at 5.)

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Jack Levin has now benefitted us all once important issues as the impact (both tax
again with a comprehensive one volume and economic) on holders of stock options,
guide to structuring venture capital, private accounting rules for options, stock sales and
equity and other types of transactions. This stock grants, and many other topics.
is a strongly practitioner-oriented book with Chapter 5 covers buyouts, with an emphasis
enormous scope. Levin has done a magnificent on the structural considerations for same.
job of demystifying this area. He provides For each structure, the author points out the
structural advice, numerous alternatives and key acquisition issues (providing a helpful
an admirable nontax focus, while at the same checklist). He also addresses the pluses
time being ever-mindful of tax considerations. and minuses of each approach from a tax,
mechanical and even regulatory viewpoint.
Just the Basics There is significant attention given to
Levin starts with an introductory chapter liabilities and how they should be addressed.
that distinguishes private equity and venture In these trying economic times, that focus is
capital investing from other types of investing. especially appropriate. Levin discusses key
This chapter contains a useful history, all of debt financing issues with aplomb, suggesting
the necessary nomenclature for dealing with which things are most important, what you
private equity and VC investments, and a as a negotiating lawyer should request and
review of the myriad and diverse circumstances various ways in which to attempt to negotiate
in which these vehicles are employed. the relative rights of various financing parties.
Chapter 2 commences an examination of the He addresses the various players, including
all-important structural possibilities, focusing mezzanine lenders, and suggests how
primarily on nonconvertible debentures and to reconcile all of the competing interests.
preferred stock. Levin addresses such nontax Interestingly, sandwiched into the middle of
concepts as structuring control of the board of Chapter 5 is the discussion of the federal
directors, dilution issues, private offerings as income tax aspects of buyouts. Once again,
well as initial public offerings. He addresses Levin methodically walks through the
compliance with Securities and Exchange various structural choices, describing the tax
Commission rules, including private offerings advantages and disadvantages of each.
and the various types of restrictions on resale He then reviews private company buyouts
that are typically imposed. separately, followed by public company
Chapter 3 addresses flow-through structures, buyouts. The author concludes Chapter 5 with
including partnerships, LLCs and S corporations. what are primarily accounting rules regarding
The author does an admirable job of weaving recapitalizations. Throughout, examples and
together the various considerations, including planning pointers are sprinkled liberally. They
mechanics and nontax considerations, as well make the book into an enormously valuable
as the tax advantages and limitations present practitioner tool.
within each sphere. Chapter 6 discusses debt and equity securities
Chapter 4 is entitled Structuring Growth- and executive deferred compensation rules. The
Equity Investment in an Existing Company. latter have become especially important (and
This chapter deals with what may be the hardest especially tricky). Although there is a great deal
topic to address: the alteration of an existing more in the chapter, the authors discussion
company structure to facilitate investments. of Code Sec. 409A and its requirements and
Levin covers redemptions (both tax and nontax), compliance regimes is particularly lucid.
recapitalizations, preferred stock dividend Chapter 7 discusses consolidations of
structures and many others. He even discusses fragmented industry players. This chapter has
the applicability of the antiestate freeze rules. little bearing to my practice, but I nevertheless
found its discussion interesting. The author
New Funds and Reorganized Funds takes a deal structure viewpoint, analyzing
In his explication of the rearrangement of an each prospective roll-up by starting out with a
existing company through a recapitalization way to structure it and then walking through
or otherwise, Levin addresses seriatim such each consequence. Levin does this with a:

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holding company structure; helpful advice about how to apply what you
partnership or LLC holding company with have learned. This is a quibble, however, and
corporate subsidiaries; it may be that most readers will appreciate
partnership or LLC holding company, which Chapter 10 appearing where it does, serving as
itself has partnership or LLC subsidiaries; a kind of summary application of the various
single corporate structure; rules that have preceded it. Chapter 10 actually
single partnership or LLC structure; and refers to the different forms of the fund, profit
finally, and loss allocation suggestions, management
direct ownership of individual corporations and management fees, and many applicable
by shareholders (with no holding company). laws that will be triggered.
The Appendices contain a collection of Internal
Turn-Arounds and Exits Revenue Code sections, regulations, pertinent
Levins eighth chapter deals with the structural revenue procedures, revenue rulings and so
aspects of turnarounds of troubled companies. on. Perhaps more helpful than any of this, the
The book retains its theme of architecture, but this Appendices also contain a variety of securities
chapter is peppered with structuring advice about and bankruptcy law sections. Corporate,
net operating losses and other tax advantages, partnership and LLC statutes under Delaware
and the special rules of Code Sec. 382(l)(5). law are included, as are key Bankruptcy Code
Finally, Chapter 9 of Levins book addresses rules. On top of everything else, Levin includes
exit strategies. This miscellany covers sales various SEC regulations, something that tax
and IPOs and is a wealth of practical business lawyers are not used to looking up.
advice, securities rules and requirements, tax All in all, Levins book is more than worth
advice and various mechanical approaches. the price. It is available from Aspen Publishers,
There is one remaining chapter in the book part of Wolters Kluwer, for $270 for the book
before we reach the Appendix material, and alone. The combined print and CD price
that is Chapter 10 concerning Structuring is $440, or you can buy the CD alone for
Formation of Private Equity Fund. Personally, $285. Details are at www.aspenpublishers.com/
I would have preferred this chapter earlier Product.asp?catalog_name=Aspen&product_
on in the volume, since it contains so much id=0735574685&promoID=EE99.

Stock Offering Lawsuit Settlement Held Deductible


By Robert W. Wood Wood & Porter San Francisco

Many, if not most businesses, seem to assume the IRS considered a fact pattern involving
automatically that any settlement payment a class action settlement arising out of a
they make in any way related to their trade or stock offering. This ruling involved a federal
business will be fully deductible. Litigation, securities law class action filed against the
after all, seems to be a cost of doing business taxpayer company. The complaint alleged that
these days. Tax specialists know, however, that the taxpayer violated various securities laws
not everything is deductible. Some settlements by issuing false and misleading statements
must be capitalized, and that can be painful. concerning its revenues, earnings, profitability
The most classic category of settlement and financial condition.
payment that would be capitalized relates The claims related to a variety of revenue
to disputes over title to assets. Yet there are and earnings projections and statements,
many other types of expenses that must be and were alleged to have violated Section
capitalized as well. Consider stock redemption 10(b) of the Securities Exchange Act of 1934,
or stock offering expenses. Section 20(a) of the same act, and Sections
11, 12(a)(2) and 15 of the Securities Act of
Settlement Offering 1933. Eventually, the taxpayer settled, paying
Recently, in LTR 200911002 (Tax Analysts Doc. a settlement amount as well as legal and
2009-5561, 2009 TNT 48-20, Dec. 2, 2008), administrative fees.

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