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Will Potential Tax Liability Derail Dell-EMC Deal?

Could the historic deal reached by Dell to acquire EMC for $67 billion unwind if the IRS decides it wants a piece of it? Dell officials are reportedly concerned that the IRS could rule that the transfer of the tracking stock that comes with EMC's 81 percent stake in VMware could trigger a taxable distribution that would add $9 billion to the bill.

That's a worst-case scenario posed by the tech business site Re/code, citing multiple unidentified Dell insiders saying such a scenario is a concern. According to the report, Section 355, a provision of the U.S. tax law, describes circumstances that could trigger a tax upon the transfer of the VMware shares.

"Simply put, the law is intended to prevent corporate spinoffs or share distributions from helping pay for an acquisition, which appears to be what Dell is attempting to do,"  wrote Re/code author Arik Hesseldahl.  "If the IRS were to rule that the tracking stock qualifies as a taxable distribution of shares as defined in Section 355, it would remove a key plank of Dell's financing for the transaction. At minimum it would require Dell to borrow more money to pay EMC shareholders for the full value of the company. At worst, sources said, the added tax expense could derail the deal entirely."

Dell is aware of the risks, he noted, having made note of it in the Oct. 12 merger agreement on file with the SEC, which states: "Neither the Company nor any of its Subsidiaries has been a 'controlled corporation' or a 'distributing corporation' in any distribution occurring during the two-year period ending on the date hereof that was purported or intended to be governed by Section 355 of the Code."

Rather because EMC hasn't assumed any control of VMware over the past two years, the deal should "qualify as an exchange described in Section 351 of the Code," according to the merger agreement.

"This is a valid worry, but not a deal breaker," FBR Capital Markets analyst Daniel Ives told Reuters. "We see Michael Dell as making sure this deal goes through, even if it takes some deal tweaks along the way."

Posted by Jeffrey Schwartz on 11/10/2015 at 12:39 PM


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