Academic journal article Journal of Accountancy

Du Pont and Seagram Make Merger History

Academic journal article Journal of Accountancy

Du Pont and Seagram Make Merger History

Article excerpt

8

J.E. Seagram Corp. is involved in a dispute with the IRS that has reached the Tax Court. The resolution will have widespread ramifications regarding the tax consequences of mergers and other stock-for-stock transactions.

At issue is E.I. Du Pont De Nemours & Co.'s 1981 acquisition of Conoco Inc. Seagram owned a substantial amount of Conoco stock that, eventually, was transferred to Du Pont in exchange for the latter's paper. Seagram is now seeking to deduct the $545 million it lost on the trade.

The IRS contends, however, that the Du Pont-Conoco transaction was a tax-free reorganization, so the Seagram loss was deferred on the exchange and, in effect, resides in the basis of the Du Pont stock.

For a merger to be a tax-free reorganization, the transaction must show "continuity of proprietary interest.'' This means the "historic" shareholders of the target corporation must receive and retain a significant amount of equity in the acquiring corporation. "Significance" relates to the equity component of the total consideration received. For advance ruling purposes, the IRS requires at least 50% of the merger consideration to be stock. …

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