Unallocated Premium in Corporate Acquisitions Under the ALI Subchapter C Proposals | The Tax Lawyer
Updated: 5 days ago
This article was originally published in Vol. 34, No. 2 (Winter 1981) edition of The Tax Lawyer. The full pdf is linked below, and you can find it in JSTOR.
This paper was first written in 1979 while I was still in law school, for a seminar on Corporate Tax Policy taught by Professor Bernard Wolfman. At the time, he was one of the consultants for a project by the American Law Institute for the reform of the corporate tax law. Naturally, he was keen to get his students to write about those proposals; and since most of us had no ideas for a paper topic, we were happy to follow his suggestions.
I ended up drawing the topic of “unallocated premium.” This ungainly term is used in the ALI Proposals to refer to two different things, depending on the context. In the context of an asset or other “cost basis” acquisition, it essentially means goodwill: the excess of the purchase price over the sum of the values of the identifiable assets acquired. In the context of a stock of other “carryover basis” acquisition, it means the excess of the purchase price over the tax basis of those assets. The use of this term is at times confusing, but it also facilitated the development of common themes for cost-basis and carryover-basis acquisitions, as was done in this paper.
You can read the full article here:
At the time, the ALI Proposals seemed like pie in the sky, but many of the corporate tax reforms of the 1980s were inspired by these proposals, most notably the repeal of the General Utilities doctrine, the creation of the Section 338 election to treat a stock purchase as an asset purchase, and the Section 382 limitations on the use of loss carryforwards. And in a small way, this paper may have influenced those developments.Professor Wolfman encouraged me to publish the paper, so I submitted it to The Tax Lawyer. At that time, the editor-in-chief was James Lewis, a giant of the tax bar at Paul Weiss who had long been a champion of General Utilities repeal and was a consultant for the ALI as well. He assigned one of his associates at Paul Weiss, David Patterson, to edit the paper, and I remain grateful for his hard work in turning what was essentially a piece of student writing into something more respectable professionally.
The paper appeared in the Winter 1981 issue of The Tax Lawyer. Shortly afterwards I heard from one of my classmates, André LeDuc, now a partner at Skadden Arps but then on the staff of the Senate Finance Committee, which was developing some proposals on corporate tax reform, including General Utilities repeal. The Finance Committee’s 1983 proposals for General Utilities repeal included an exception for goodwill, consistent with the ALI Proposals. Their report, however, noted the existence of arguments against such an exception, citing my paper. A couple of years later, when the House Committee on Ways and Means was developing tax reform legislation, they included General Utilities repeal but dropped the exception for goodwill. And that was the form in which General Utilities repeal was included as part of the Tax Reform Act of 1986.
What I failed to realize as a law student in the 1970s was that goodwill was where the money was, particularly in the overheated stock markets of the next two decades. The need to protect this new addition to the corporate tax base led to a series of further restrictions, starting with changes to block “son of mirror” transactions, and culminating in the restrictions on “reverse Morris Trust” transactions. I began to think that tax policymakers had taken this idea too far, and thought about writing another paper saying just that. As it turned out, however, someone else wrote that paper instead, saving me the trouble. And fittingly, the author, Ruth Mason, was another student in that same Corporate Tax Policy seminar, more than 20 years after me.
About The Tax Lawyer
The Tax Lawyer the nation’s premier, peer-reviewed tax law journal is published quarterly. The Tax Lawyer endeavors to provide scholarly articles by notable tax attorneys and professors, key reports by Section of Taxation committees and task forces, and student notes and comments on timely topics that the editorial board believes to be of professional interest to members of the Section and the tax profession.
Comments