Measuring Voting Power

Article excerpt

Many important tax consequences depend on whether a taxpayer or group of taxpayers owns stock representing 80% of the voting power of all classes of another corporation's voting stock. For example, to file consolidated income tax returns companies must have 80% ownership--together with ownership of a similar percentage of equity value. Ownership of the requisite voting power also is necessary to achieve a tax-free spinoff.

Voting power calculations were previously thought to be wholly mechanical. The sole criterion of voting power was participation in management by electing directors (see revenue rulings 69-126 and 84-6). More important, intrashareholder agreements, in which voting power was ceded through proxy arrangements, were considered harmless because they did not detract from the required voting power.

Now, however, the measurement of voting power is no longer a mechanical proposition. In letter ruling 9252002, a corporation was able to elect directors who could cast 80% of the board's votes. However, the subsidiary's charter was concurrently amended to place certain matters beyond the board's power by requiring a majority vote of each class of directors. …