Invesco’s Tax-Free Deal for Van Kampen

Invesco's foreign status makes a tax-free acquisition of Morgan Stanley's retail Van Kampen business a little more complicated, but not out of reach.

In this case, the nonvoting convertible preferred stock that Morgan Stanley is slated to receive — and that automatically converts into voting stock once it is transferred by Morgan Stanley outside of its affiliated group — does not convert the stock into voting stock for purposes of Section 368(a)(1)(B).4 If Morgan Stanley does avail itself of this option, the agreement, oddly, provides that Invesco is absolutely precluded from making a regular Section 338 election with respect to its “qualified stock purchase”5 of Van Kampen and that Morgan Stanley and Invesco are barred from executing a joint election under Section 338(h)(10) with respect to such qualified stock purchase.

As a result, Invesco will secure a “cost” basis only with respect to the “purchased assets” and will be saddled with a carryover basis with respect to the assets owned by Van Kampen and its subsidiaries even if Morgan Stanley elects the alternative transaction structure.

Contributing editor Robert Willens, founder and principal of Robert Willens LLC, writes a weekly tax column for

1 The transaction must be the same as described in Regulation Section 1.367(a)-3(d)(1)(i) through (v), which is the case with the Invesco/Van Kampen deal.
2 See Regulation Section 1.367(a)-3(d)(1)(i).
3 Or in exchange solely for the voting stock of a corporation in control of the acquiring corporation.
4 See Rev. Rul. 72-72, 1972-1 C.B. 104; X Corp. (X) desired to acquire all of the stock of Y Corp. (Y). Mr. A owned all of the stock of X. In order to acquire all of the stock of Y, X would have to issue additional voting common stock so that after the transaction the Y shareholders would own some 55% of X’s outstanding stock. Mr. A was concerned about relinquishing control of X. Therefore, X and the shareholders of Y agreed to an arrangement whereby Mr. A would retain an irrevocable right, for five years, to vote the stock to be received by the shareholders of Y. The voting restriction imposed by the agreement was printed on the stock certificates to be issued. On termination of the five-year period, the shareholders of Y would receive the right to vote their stock without restriction. The ruling observes that the arrangement prevented the shareholders of Y from voting their stock on their own behalf for a period of five years and perpetuated Mr. A’s voting control over all of the outstanding stock of X. The arrangement, the ruling notes, is the same as if X issued nonvoting stock that automatically converted to voting common stock after five years: in either case, the ruling concludes, the stock is not voting stock within the meaning of Section 368(a)(1)(B).
5 A qualified stock purchase means any transaction or series of transactions in which stock meeting the requirements of Section 1504(a)(2) (at least 80% of the stock measured by both voting power and value excluding, for this purpose, stock described in Section 1504(a)(4)) of one corporation is acquired by another corporation by purchase during the 12-month acquisition period. See Section 338(d)(3). The term, purchase, includes any acquisition of stock but only if, among other things, the stock is not acquired in an exchange to which Section 354 applies. See Section 338(h)(3)(A)(ii). In the instant case, the exchange of VK for I stock would not be an exchange to which Section 354 applies because the transaction in connection with which the exchange takes place is not, ab initio, a reorganization within the meaning of Section 368. See in this regard Turnbow v. Commissioner, 286 F.2d 669 (9th Cir. 1960), aff’d on other issues, 368 US 337 (1961).



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