Question
May 4, 2006
Via Telecom, 202-326-2624
Federal Trade Commission
Premerger Notification Office
Bureau of Competition
(Attn: Mr. Michael Verne)
6th & Pennsylvania Avenue, N.W., Room 303
Washington, D.C. 20580
Re: Determination of the "Acquiring Person"in the transfer of assets to an Exchange Accommodation Titleholder
Dear Mr. Verne:
On behalf of a client of my law firm thatplans to participate in a deferred exchange under Section 1031 of the InternalRevenue Code (the "Code"), we are writing to confirm that thestaff of the Premerger Notification Office of the Federal Trade Commission("FTC") concurs with our analysis regarding the determination of the"acquiring person" in the below-described
transaction.
This letter pertains to the transaction that you andI discussed in our telephone call on Tuesday. The facts, as generally describedduring our telephone call but with some additional details, such asregarding size-of-person and the specific revenue procedure adopted by theInternal Revenue Service ("IRS"), are as follows:
Description of the Factual Circumstances
A. The Parties: Thefollowing parties are participating in the transaction:
"Company A" is an ultimate parent entity, owns several broadcastingstations licensed by the Federal Communications Commission (the"FCC") and has assets in excess of $113.4 million.
The"EAT" is a newly formed limited liability company, wholly owned by "CompanyB," which is in the business of serving as an "ExchangeAccommodation Titleholder" under the IRS's rules and policies. Parent B,"a natural person who is Company B's ultimate parent, has assets in excess of$11.3 million.
B.The Pending Transaction:
Company A has contracted to acquire a broadcasting station(the "Replacement Station") owned by a third party for apurchase price in excess of $56.7 million, which acquisition will be subject topremerger clearance. Company A wishes to effect a "like-kindexchange" in accordance with IRS rules and policies by first disposing ofa currently owned station (the "Relinquished Station"), whichhas a value in excess of $56.7 million.
Section 1031 of the Code generally permits a taxpayerto defer tax on the disposition of, in this instance, the Relinquished Stationif it thereafter acquires a Replacement Station of equal or greatervalue. If the taxpayer has entered into a contract to acquire the ReplacementStation but has not yet contracted for the disposition of theRelinquished Station, the IRS will permit the taxpayer to transfer theRelinquished Station to an EAT to facilitate the like-kind exchange. Thetaxpayer then acquires the Replacement Station to complete the tax-deferredlike-kind exchange. Thereafter, the taxpayer negotiates for the sale of the RelinquishedStation by the EAT to an unrelated, independent third party.
If the relationship between the taxpayer and the EATis structured pursuant to a safe harbor established by the Internal RevenueService in IRS Revenue Procedure 2000-37, the EAT will be treated separately for federalincome tax purposes, and the taxpayer will be permitted like-kind exchangetreatment. This favorable treatment will apply even though the EAT may be thetaxpayer's agent for accounting, regulatory, and state, local, or foreign taxpurposes.
Summary of TransactionSteps
Set forth below is an outline of the steps Company Awill take to complete the exchange, consistent with the rules and regulationsof the IRS and the FCC.
1. Priorto the closing of the acquisition of the Replacement Station, Company A and theEAT will enter into an "EAT Sale Contract," providing for thetransfer of title to the Relinquished Station by Company A to the EAT, subjectto FCC consent to the assignment of the FCC licenses. The purchase price forthe Relinquished Station will be set by Company A.
2. Company A and the EAT will also enter into an agency contractthat will contain the following provisions:
(a) CompanyA will loan the EAT the purchase price for the Relinquished Station on a nonrecoursebasis other than against the assets of such station, The loan will be evidencedby a promissory note to be repaid by the EAT when the Relinquished Station issold to a third party with the amount due on the promissory note beingadjusted to equal the net sales proceeds received by the EAT on such sale.
(b) Company A willundertake to find a buyer for the Relinquished Station and to negotiate anasset sale contract for its sale. The EAT will agree to sell the RelinquishedStation pursuant to the terms of the asset sale contract.
(c) Untilthe Relinquished Station is sold, Company A will continue to operate thestation and receive its revenues, pay its expenses, and bear the risk of loss.The EAT only receives a set fee for its services.
(d) If theRelinquished Station has not been sold to a third party within 180 days, thenthe EAT has the right to require Company A to repurchase the station, andCompany A has the right to repurchase it. The price to be paid upon suchrepurchase will be the unpaid balance of the promissory note given by the EATto Company A,
(e) The EAT willact as Company A's agent for all purposes other than federal income taxpurposes. Company A will indemnify the EAT and hold it harmless against alllosses that it may incur while it holds the Relinquished Station.
Application of the HSR Act
Duringour telephone conversation, we discussed the above transaction and how todetermine the acquiring person for purposes of the application of theHart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSRAct"). Based upon our discussion, the acquiring person of theRelinquished Assets would be determined in accordance with the followinganalysis:
Control. 801.1(b) of the FTC's rules provides inpart that "The term control (as used in the terms control(s), controlling,controlled by and under common control with) means:
(1)Either. (i) Holding 50 percent or more of the outstanding voting securities ofan issuer or
(ii) In the case of an unincorporatedentity, having the right to 50 percent or more of the profits of the entity, orhaving the right in the event of dissolution to 50 percent or more of theassets of the entity; or ..."
The EATis an unincorporated entity, the only asset of which will be the RelinquishedStation. Throughout the duration of the EAT's agency, Company A shall be entitledto all of the cash flow and profits of the Relinquished Station, and bear allthe risks with respect to the station's operations. Company B, as the EAT'sowner, will only be entitled to a fee for the EAT's services as CompanyA's agent in connection with the transaction. In the event of any dissolutionof the EAT (which would be in violation of the EAT's agency agreement withCompany A), Company A would have recourse to the assets of the RelinquishedStation in satisfaction of amounts due under the EAT's promissory note .Company B would not be entitled to the assets of the Relinquished Station.
Company A will (i) provide a loan to the EAT toacquire the Relinquished Station, (ii) retain the benefits and burdens ofstation operation throughout the duration of EAT's agency, and (iii) have theright to reacquire the Relinquished Station if it does not complete thenegotiation of an asset sale contract for the sale of the Relinquished Stationto a third party.
Based on the facts and the foregoing analysis,Company A would be both the "acquired person" and the "acquiringperson" in its transfer of the Relinquished Station to the EAT.Furthermore, because under no event does Company B "control" the EATas contemplated by 801.1(b)(1)(ii), neither Company B nor Parent B will be anacquiring person.
IntrapersonTransaction. 80230(a) of the FTC's rules provides in pertinent partthat "An acquisition . . . in which the acquiring and at least one of theacquired persons are, the same person by reason of 801.1(b)(1) of this chapter. . . is exempt from the requirements of the Act, Consequently, the transfer ofthe Relinquished Station to the EAT, in which Company A would be both the"acquired person" and the "acquiring person," would be exempt.
As we discussed, in any sale by the EAT of theRelinquished Station to a third party, Company A would be the "acquiredperson." Consequently, its size of person (in excess of $113.4 million)would apply in the determination of filing requirements under the HSR Act.
If this letter in any way misstates the substance ofour conversation or the views of the Premerger Notification Office, please letme know at your earliest convenience, Unless I hear from you to the contrary,we, as counsel to Company A, will continue to advise our client that they mayrely on the conclusions set forth herein. Thank you for your assistance in thismatter.