M&A Insights

Reducing the Impact of Section 382 Built in Loss rules for Intangible Assets

posted Mar 14, 2014, 12:26 PM by John Ye

An opportunity may exist for a corporation, that otherwise would be subject to a Section 382 limitation, to realize beneficial tax treatment on the sale of intangible assets. If a company wishes to sell high-basis, low-value intangibles, the Section 382 limitation generally prohibits the company from recognizing the built-in loss on the disposition. For business reasons, the company has no desire to continue to use or own the property, but would prefer to retain the benefits of the built-in loss upon disposition of the intangible.

Generally, when intangible assets are sold within 5 years (the §382 recognition period) after a change of ownership, the taxpayer is unable to fully recognize the built-in loss because it is subject to the Section 382 limitation. However, the taxpayer will not be subject to Section 382 if the transaction is structured so that a loss is not recognized. For example, if only a portion of its high-basis, low-value intangible assets are sold, the taxpayer is not permitted to recognize a loss under Section 197(f), therefore rendering the Section 382 loss limitation inapplicable. The taxpayer, or a member of the taxpayer's controlled group, intentionally would retain ownership of the remaining portion of these high-basis, low-value Section 197 intangible assets and lease these remaining intangibles to the buyer.

Under Section 197(f), a loss from the sale of a Section 197 intangible asset may not be recognized if the taxpayer, or a member of the taxpayer's controlled group, continues to own at least one Section 197 intangible asset acquired in the same transaction. Thus, by retaining ownership of a portion of the intangible assets, the loss generated by the sale of the other intangible assets would be disallowed under Section 197 and not subject to the Section 382 limitation. The taxpayer then would be entitled to recognize the built-in loss by selling the retained Section 197 intangible assets to the lessee/buyer at least five years after the date of the ownership change that created the taxpayer's Section 382 limitation.

Williams Act

posted Jul 18, 2013, 10:00 AM by John Ye

Sponsored by Senator Harrison Williams.
Enacted in 1968.
Amended the Exchange Act to add Sections 13(d), 13(e), and 14(d) – (f).
Section 13(g) added in 1977 to address disclosure gaps created by the “acquisition” prerequisite (element) of  Section 13(d).
 Purpose of beneficial ownership reporting: provide security holders, issuers and the market with information relating to potential changes in corporate control, and the persons who hold that potential given their large stockholdings.
Adopted with a view toward alerting “the marketplace to every large, rapid aggregation or accumulation of securities…which might represent a potential shift in corporate control.”

Type D Reorganization (Assets for Shares)

posted Jun 3, 2013, 8:14 AM by John Ye   [ updated Jul 9, 2013, 12:44 PM ]

A Type D reorganization is an acquisition of a Target’s assets and liabilities in exchange for Buyer shares that is described in paragraph D of Section 368(a)(1) of the Internal Revenue Code.  A Type D reorganization is very similar to a Type C reorganization, except that the Buyer transfers assets to the Target in exchange for shares.

In general, there are two types of Type D reorganizations – acquisitive and divisive.

In an acquisitive Type D reorganization, the Buyer must transfer “substantially all” of its assets to the Target.  “Substantially all” means 90% of the Buyer’s net assets or 70% of its gross assets.

The Buyer must obtain at least 50% of the voting stock of the Target, thereby achieving control in the course of the transaction.  The Target’s shares must be distributed to the Buyer’s shareholders.

The Buyer must liquidate itself at the conclusion of a Type D reorganization.

In a divisive Type D reorganization, the Buyer is divided into two or more pieces.  New corporations are created to receive the assets of the Buyer.  The Buyer must receive at least 80% of the stock of the new corporations.  The shares of the new corporations are distributed to the stockholders of the Buyer.

There are three types of divisive Type D reorganizations – spin-offs, split-offs and split-ups.

A spin-off is a transaction in which the Buyer’s shareholders receive Target shares in exchange for Buyer assets contributed to the Target.


(For a larger view, click on the graphic)


A split-off is a transaction in which the Buyer’s shareholders receive Target shares in exchange for Buyer assets which they contribute to the Target and Buyer shares which they surrender to the Buyer.



(For a larger view, click on the graphic)


A split-up is a transaction in which the Buyer is split into multiple new Targets and the Buyer shareholders receive shares in the Targets in exchange for their shares in the Buyer.

(For a larger view, click on the graphic)



  • Corporation may be divided without tax consequences to the shareholders


  • Complex
  • In some cases requires that the Buyer be liquidated

Internal Control Defined

posted Jul 12, 2012, 6:56 AM by John Ye

Internal control is a process designed to provide reasonable assurance regarding the
achievement of objectives in the following categories:
· Effectiveness and efficiency of operations
· Reliability of financial reporting
· Compliance with applicable laws and regulations
Several key points should be made about this definition:
1. People at every level of an organization affect internal control. Internal control is, 
to some degree, everyone's responsibility.  Within the University of California,
administrative employees at the department-level are primarily responsible for
internal control in their departments.
2.  Effective internal control helps an organization achieve its operations, financial 
reporting, and compliance objectives. Effective internal control is a built-in part of 
the management process (i.e., plan, organize, direct, and control).  Internal control
keeps an organization on course toward its objectives and the achievement of its
mission, and minimizes surprises along the way.  Internal control promotes
effectiveness and efficiency of operations, reduces the risk of asset loss, and helps to 
ensure compliance with laws and regulations.  Internal control also ensures the
reliability of financial reporting (i.e., all transactions are recorded and that all recorded 
transactions are real, properly valued, recorded on a timely basis, properly classified, 
and correctly summarized and posted).
3. Internal control can provide only reasonable assurance - not absolute assurance -
regarding the achievement of an organization's objectives. Effective internal control 
helps an organization achieve its objectives; it does not ensure success.  There are 
several reasons why internal control cannot provide absolute assurance that objectives 
will be achieved: cost/benefit realities, collusion among employees, and external
events beyond an organization's control.

VIE's, Intercompany Debt, and Consolidated Statement of Cash Flows

posted Mar 30, 2012, 7:22 AM by John Ye

Variable Interest Entities (VIE’s)
ØEstablished as a separate business structure
vJoint Venture
ØFrequently has neither independent management nor employees
ØTypical purposes
  • vTransfers of financial assets
  • vLeasing
  • vResearch and development
  • vHedging financial instruments
Intra-Entity Debt Transactions - Debt Acquired from Outside
ØThe acquired debt must be treated as if it has been extinguished.
ØAny related gain or loss related to this “early extinguishment of debt” must be immediately recognized by the consolidated entity.
ØSubsequent payment of principal or interest is treated as a cash transfer.

The Internal Control for Fraud Prevention: A Checklist

posted Mar 20, 2012, 12:22 PM by John Ye   [ updated Mar 20, 2012, 12:23 PM ]

As more companies prioritize China operations as part of their future growth strategy, less than effective internal control systems in China are no longer an option. For those small and mid-sized enterprises (SMEs) that dismiss internal control systems reviews and audits as a burden of the giants, specialists warn that this is not the case.
As such, Yes PLLC is devoted to understanding effective internal control systems in the Chinese context and the role of audits in detecting and preventing fraud.
  •  Internal Control and Audit in the Chinese Business Context
  •  China’s Internal Control and Audit Regulatory Framework
  •  Operational Audits: Lessons for Internal Control
We can discuss further the Internal Control for Fraud Prevention: A Checklist.


Choosing the Post-M&A Consolidation Method

posted Mar 19, 2012, 8:29 AM by John Ye

No matter which method the Parent chooses to record the Sub’s activity, the consolidated totals end up the SAME!

This is because we are eliminating all the entries that we made during the year, regardless of the method used, and regardless of the amount!


Investment Account

Income Account


Continually adjusted to reflect ownership of acquired company.

Income accrued as earned;  amortization and other adjustments are recognized.

Initial Value

Remains at Initially-Recorded cost

Cash received is recorded as Dividend Income

Partial Equity

Adjusted only for accrued income and dividends received from acquired company.

Income accrued as earned;  no other adjustments recognized.

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