The following article is adapted from reprinted from the M&A Tax Report, Vol. 7, No. 12, July 1999, Panel Publishers, New York, NY.


By Robert W. Wood, San Francisco

The U.S. West and Global Crossing transaction is making history on a number of fronts, making the upstart Global Crossing one of the major success stories of this now waning decade. The tax aspects of this metamorphosis bear review, even if they involve a kind of mixed bag of issues. The structure of the Global Crossing/U.S. West transaction seems, at least in part, to have been designed to achieve certain positive tax outcomes and, simultaneously, to avoid certain less-than-desirable tax consequences. This kind of push-me/pull-you transaction is the grist of most acquisition structuring.

An unusual aspect of the transaction involves the acquisition by U.S. West, via a tender offer, of 9.5% of the stock of Global Crossing prior to the consummation of the business combination. Apparently, this purchase is being undertaken to, among other things, insure that the former U.S. West shareholders emerge from such business combination with ownership of something more than 50% of the voting power and value of the outstanding stock of the surviving entity. The retention of this degree of ownership, on the part of the former U.S. West shareholders, may be designed to immunize the spinoff (the transaction in which U.S. West and MediaOne were separated) from a challenge, by the IRS under Section 355(e), the so-called "anti-Morris Trust" provision.

No, Morris

That section says, in relevant part, that a spinoff will be taxable (at least at the corporate level) if it is part of a plan (or series of related transactions) pursuant to which one or more persons acquire stock representing a 50% interest in either (or both) corporate parties to the spinoff. By allowing the U.S. West shareholders to retain in excess of 50% of the stock of the entity resulting from the business combination, U.S. West will not have to confront Section 355(e). The 50% threshold will not have been exceeded, so there will be no problem. Thus, U.S. West will not need to establish that the Global Crossing transaction was not part of a plan that commenced with the spinoff.

If the 50% threshold were crossed, then a presumption kicks in. The statute contains a presumption that any such acquisition, occurring within the four-year period that begins two years prior to the spinoff, is part of such a plan or series of related transactions. However, this presumption can be rebutted if the facts disclose that no such plan existed.

Interestingly, the phrase, "plan or series of related transactions," has not, as of yet, been defined in this context. The phrase probably doesn't need a whole lot of defining, as we all know a plan or series of related transactions when we see one. It seems likely that this phrase will be given its normal meaning. It is a little troubling, though, not to have any definition. It is hard to imagine that it could be seriously asserted that such spinoff and what by all accounts is a business combination that was not envisioned at the time of the spinoff could be considered part of such a plan. In any event, by insuring that the U.S. West shareholders emerge with control of the surviving entity, the parties obviate the need to demonstrate that these events were not part of a plan.

Foreign Aspects

In addition, as an integral part of the transaction, Global Crossing is, apparently, reincorporating in the United States. Projections suggest that this element of the transaction will cause it to incur, over the projection period, approximately $1 billion in taxes that could have otherwise been avoided. The motivation for this aspect of the transaction may have been to insure that the stock swap, in which U.S. West's shareholders exchange their shares for shares of Global Crossing, constitutes a tax-free exchange. On its face, the stock swap would attain tax-free status, as it looks like a reorganization. Or does it?

Maybe it does, but bear in mind that where a foreign corporation is the issuing corporation in an otherwise tax-free reorganization involving a U.S. target, the transaction will forfeit its tax-free status if more than 50% of the stock of the issuing corporation is received in the transaction by U.S. transferors. (In addition, for the exchange to be tax free, the transaction must satisfy an active trade or business test pursuant to which, among other things, the transferee foreign corporation must have been engaged, outside the United States, for the entire 36-month period preceding the transfer in the active conduct of a trade or business. This requirement may also have been an issue).

50% Control Required

To render their spinoff immune from a Section 355(e) challenge, the U.S. West shareholders had to maintain more than 50% of the stock of the surviving entity. Accordingly, if Global Crossing retains its foreign status, given the level of ownership in Global Crossing needed to accrue to the U.S. West shareholders (to protect the spinoff), the stock swap could have been rendered taxable by virtue of these restrictions. This desire to "protect" the tax-free nature of the stock swap may, therefore, have constituted a good part of the motivation for the move by Global Crossing to reincorporate itself in the United States. It's a good illustration of competing tax considerations.

U.S. West and Global Crossing: Taxing History, Vol. 7, No. 12, The M&A Tax Report (July 1999), p. 1.