Tax research memo

Please prepare a tax memo. I attached the question and an example and the rubric so you can confirm expectations before submission.
Alfonso Gore was a marketing entrepreneur that was involved with internet marketing very early on (in
fact, he was sometimes fond of saying that he “invented the internet”). Although his traditional business was associated with telemarketing and direct mail marketing, he established an internet marketing division and an e-commerce division in the mid-1990s. Each of these operated as a wholly owned subsidiary under his parent corporationGore marketing was formed as a domestic C corporation in 2009. The two subsidiaries, IMC and ISC, were formed in 2012 and operated as partnerships under the check the box elections. In 2019, IMC was growing and needed a capital injection to continue with its growth. In looking for companies to help with funding, IMC identified SPAC Inc. SPAC was just concluding a significant investment in another unrelated business that had not worked out and was sitting on about $6 million in cash, which was actually less than the SPAC preferred shareholders were entitled to receive should SPAC liquidate.During negotiations over a business combination involving IMC and SPAC, friction developed between SPAC’s preferred shareholders and Gordon Gecko, one of IMC’s partners. The other partners urged Mr. Gecko to withdraw from the business to allow the intended transaction to go forward, but they lacked the funds to buy out his interest. Negotiations ultimately coalesced around a plan under which a portion of SPAC’s remaining cash would be used to redeem Mr. Gecko’s interest in IMC and the remainder used as operating capital for the transferred business.The TransactionsThe transactions in issue were implemented by several agreements, all dated on or as of November 25, 2019, including the Joint Venture Agreement (JVA) among IMC, SPAC, and an acquisition subsidiary (Target Inc) of SPAC; and a Stock Repurchase Agreement between Target and IMC; and a Unit Purchase Agreement between IMC and Mr. Gecko.IMC’s Acquisition of the Transferred BusinessIMC’s business assets were delineated in the agreement as the “Acquired Assets”. The term “Acquired Assets” means all of the rights, titles and interests in and to all of the assets, properties and rights owned if used or developed, created or held for use in the operation by the IMC business unit, the www.internetmarketing.com domain name and content, and the IMC consulting business Gore MarketingInternet Marketing LLC (IMC)Internet Sales LLC (ISC)

(collectively, the “Business”), but excluding the Excluded Assets (cash, receivables and certain specified contracts). The agreements provide a nonexclusive list of assets and properties included in Acquired Assets, including all “Intellectual Property” (broadly defined) “used in or useful to the Business.” The list of Acquired Assets also includes “any and all permits, certificates, licenses, franchises and authorizations obtained from any federal, state, municipal or local government”, “any and all books, records and other information, data and documentation of the Business or otherwise if directly related to any of the Acquired Assets”, and “all equipment, furnishings, inventories of goods and office supplies, paper, pre-paid postage and materials related to the consulting business including, without limitation, those items set forth on Schedule 1.1(b) attached hereto.” Schedule 1.1(b) to the agreement includes an eight-page list of what appears to be computer equipment. It also lists several items of office furniture (chairs, file and storage cabinets, tables, a bookshelf and couch, trash cans) and equipment (mail sorter, refrigerator, and microwave oven).Target’s Acquisition of the Assets of the Transferred Business and SPAC stockThe JVA provided for the simultaneous occurrence of two events: (1) the merger of Target into SPAC, (with Target being the survivor) and (2) IMC’s contribution to Target of the Acquired Assets of the transferred business. The JVA defines the assets to be contributed as those pursuant to the Acquired Assets definition. In exchange for those assets, IMC was entitled to receive 4,999,000 shares of Target’s common stock.The merger of Target into SPAC was approved by a shareholder consent executed by one of SPAC’s common shareholders and six of its preferred shareholders, who together held stock with 67.5% of the voting rights of all of the SPAC stock. In the merger, the former holders of preferred stock in the SPAC exchanged that stock for 2,731,808 preferred shares in Target. Target received common stock in SPAC. SPAC’s previously outstanding common stock was canceled in the merger for no consideration. The JVA expresses the intent of the parties to that agreement that the merger of Target into SPAC “qualify as a reorganization within the meaning of Section 368(a) of the Code”. By contrast, the description of the expected Federal income tax consequences of the merger included in the Information Statement prepared in connection with the transaction states: “In general, the Merger will be treated as a non-taxable transaction to the stockholders under Section 351 of the Code.” The statement makes no mention of section 354, the nonrecognition rule that would apply to the exchange of SPAC preferred stock for Target’s common stock if that exchange were “in pursuance of a plan of reorganization”.Redemption of Common Stock of TargetThe Stock Repurchase Agreement provided for IMC’s sale of 1,875,000 of Target’s common shares back to Target in exchange for $3 million in cash, with $2.7 million to be paid at closing on November 25, 2019, and an additional payment of $300,000 to be made on January 3, 2021. The JVA required Target to “use commercially reasonable efforts to give effect to [its] repurchase of 1,875,000 shares of Common Stock pursuant to the Stock Repurchase Agreement promptly following the Effective Time.”Initial Stock Certificate Issued by Target to IMC

On November 25, 2019, Target issued a certificate to IMC representing 3,125,000 shares of Target’s common stock. The number of shares represented by that certificate equals the 1,000 shares that the JVA described as issued and outstanding before that agreement (a certificate for which apparently had not yet been issued), plus the 4,999,000 shares Target was required by the JVA to issue in exchange for the transferred assets, less the 1,875,000 shares redeemed under the Stock Repurchase Agreement.Redemption of Mr. Gecko’s Interest in IMCUnder the Unit Purchase Agreement, Mr. Gecko sold his interest in IMC back to the partnership (IMC) in exchange for the consideration IMC was entitled to receive in redemption of 1,875,000 shares of Target’s common stock–that is, an immediate payment of $2.7 million in cash and the partnership’s (IMC) assignment to Mr. Gecko of its right to the additional future cash payment. Shortly before the closing of the transactions in issue, IMC’s partners amended section 10.3(a) of the partnership’s Operating Agreement (captioned “Other Allocation Rules”) to add the proviso that, “to the extent that taxable income or gain is recognized by the Company by reason of the Company’s receipt of money or other property that is used to fund the redemption of a particular Member’s Units in the Company, the Company shall allocate such taxable income or gain to such redeemed member.”IMC’s operating agreement gave its managers broad discretion over the timing and amount of distributions by the partnership. But the managers were required to make distributions, to the extent of available cash, to allow members to pay tax on their shares of the partnership’s income (referred to as the Tax Distribution Amount). Paragraph 4.6(a) of the Unit Purchase Agreement provides:In addition to the Closing Payment, the Company shall distribute, if applicable, to the Seller [Mr. Gecko] the Tax Distribution Amount as contemplated by Section 4.4 of the Operating Agreement as in effect on the date hereof at the time specified therein, provided however, that any taxable income attributable to so-called “boot” under Section 351 of the Code recognized by the Company by reason of the Company’s contribution of certain assets and liabilities of the Company to Target in exchange for Target shares that is allocated to Seller pursuant to the Operating Agreement shall be disregarded for purposes of calculating the Tax Distribution Amount.Voting Rights of Target’s ShareholdersTarget’s certificate of incorporation, as amended on the date of closing of the transactions in issue, provided that each of Target’s common shares was entitled to one vote. Target’s preferred stock was convertible into its common stock, and the preferred stock carried voting rights equal to those of the common stock into which it was convertible. Under the initial conversion ratio, the 2,731,808 shares of preferred stock in Target issued to the former SPAC shareholders could be converted into 3,122,843 common shares of Target.Prof. Gill’s Summary1. SPAC formed Target2. SPAC merged into Target with Target survivinga. SPAC preferred shareholders received Target preferred stockb. SPAC common shareholders were cancelled and the common shareholders received nothingOn November 25, 2019, Target issued a certificate to IMC representing 3,125,000 shares of Target’s common stock. The number of shares represented by that certificate equals the 1,000 shares that the JVA described as issued and outstanding before that agreement (a certificate for which apparently had not yet been issued), plus the 4,999,000 shares Target was required by the JVA to issue in exchange for the transferred assets, less the 1,875,000 shares redeemed under the Stock Repurchase Agreement.Redemption of Mr. Gecko’s Interest in IMCUnder the Unit Purchase Agreement, Mr. Gecko sold his interest in IMC back to the partnership (IMC) in exchange for the consideration IMC was entitled to receive in redemption of 1,875,000 shares of Target’s common stock–that is, an immediate payment of $2.7 million in cash and the partnership’s (IMC) assignment to Mr. Gecko of its right to the additional future cash payment. Shortly before the closing of the transactions in issue, IMC’s partners amended section 10.3(a) of the partnership’s Operating Agreement (captioned “Other Allocation Rules”) to add the proviso that, “to the extent that taxable income or gain is recognized by the Company by reason of the Company’s receipt of money or other property that is used to fund the redemption of a particular Member’s Units in the Company, the Company shall allocate such taxable income or gain to such redeemed member.”IMC’s operating agreement gave its managers broad discretion over the timing and amount of distributions by the partnership. But the managers were required to make distributions, to the extent of available cash, to allow members to pay tax on their shares of the partnership’s income (referred to as the Tax Distribution Amount). Paragraph 4.6(a) of the Unit Purchase Agreement provides:In addition to the Closing Payment, the Company shall distribute, if applicable, to the Seller [Mr. Gecko] the Tax Distribution Amount as contemplated by Section 4.4 of the Operating Agreement as in effect on the date hereof at the time specified therein, provided however, that any taxable income attributable to so-called “boot” under Section 351 of the Code recognized by the Company by reason of the Company’s contribution of certain assets and liabilities of the Company to Target in exchange for Target shares that is allocated to Seller pursuant to the Operating Agreement shall be disregarded for purposes of calculating the Tax Distribution Amount.Voting Rights of Target’s ShareholdersTarget’s certificate of incorporation, as amended on the date of closing of the transactions in issue, provided that each of Target’s common shares was entitled to one vote. Target’s preferred stock was convertible into its common stock, and the preferred stock carried voting rights equal to those of the common stock into which it was convertible. Under the initial conversion ratio, the 2,731,808 shares of preferred stock in Target issued to the former SPAC shareholders could be converted into 3,122,843 common shares of Target.Prof. Gill’s Summary1. SPAC formed Target2. SPAC merged into Target with Target survivinga. SPAC preferred shareholders received Target preferred stockb. SPAC common shareholders were cancelled and the common shareholders received nothing

3. IMC transferred is business assets to Target in exchange for 4.999 million shares of Target common stock.4. Immediately after, IMC sold 1,875 million shares of Target it received in the deal to Target in exchange for cash ($2.7 million in 2019 and the rest in 2021).5. Target used this cash to redeem Gecko’s LLC units in IMC.]The 2019 partnership tax returns of IMC do not reflect any receipt from Target of $2.7 in proceeds that was received from Target as part of the redemption of Target stock. However, in both 2020 and 2021, Target included amortization of the boot portion of the gain that was added to the assets acquired as a result of the cash payment from Target to IMC. Lastly, Gecko reported a redemption gain (long-term capital) associated with his Target stock interests in 2019. Required:Based on the facts provided, prepare a tax research memo that determines whether Target is eligible for §351 treatment for this transaction or if they are required to maintain tax-free reorganization treatment under §368(a) as one of the agreements mentioned (assuming it even qualifies as a §351 or §368(a)). As a hint, you may want to consider the case Comm. v. National Alfalfa (417 US 134 (1974)). Please note that if the tax memo is not in the required format and/or contains very little analysis you will receive a zero (0) for the assignment. All good faith efforts are capable of receiving a minimum of 60% but less than a good faith effort will be awarded zero points.You will need to support your conclusion using primary sources of tax law. Your textbook is NOT primary authority nor are IRS Publications You must use proper citation form in your memo The form for this communication should be professional and in the form of a tax research memo (example posted on Canvas). Do yourself a favor and look at the grading rubric before you submit. This memo should be whatever length you feel is appropriate to resolve the issues. We do NOT use a bibliography or list of references in a tax research memo. We do not include Background in a tax memo. You will see that citations are within the text of the document in the example. Once a court case has been cited in full, it can be referred to using simply the name in italics.

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