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Details: Why is the Micro Focus deal taxable to US shareholders? (Nov 13, 2019, Rev Apr 11, 2024.) Question? Email: info@hpalumni.org
Whether this was one of HPE's original intentions or not, outside tax counsel advised that the transfer of HPE's US-centric software business to the UK-based Micro Focus would be penalized by the US Government as a "corporate inversion" (a process by which companies move their legal home overseas to reduce their US tax bill) -- and was therefore taxable to US shareholders. Details: https://www.hpalumni.org/StockMicroFocusSpinoff
In an SEC filing, HPE suggested "One method of determining the fair market value" of the US ADSs at $29.34/share and the HPE shares at $14.22: HPE/MFGP/"Seattle Spinco" letter This "Dear Shareholder" letter does not appear to have been actually sent to all shareholders. Members report that HPE's cost-basis tracking recommendations are not reflected in the records at some brokerages, plan administrators, and transfer agents -- and not uniformly followed by others.
FWIW, to date no member has indicated -- privately or on the HPAA forums -- that their returns have been questioned by the IRS due to how they reported the many extremely complex HP/HPE-related stock transactions. Save the documents and spreadsheets you used.
Note: If you acquired MFGP through the HPE spinoff -- and accounted for it as HPE's outside tax counsel recommended in 2017-- therefore paying tax on a theoretical 2017 capital gain -- the cost basis for your MFGP stock would be reset to approx. $29.34/share, instead of being linked to the cost basis of your HPE stock. Be sure you note this in your own records (and in your broker's records, if your broker tracks cost basis) -- so that you don't pay tax twice on the same theoretical "gain."
What is reported to the IRS. Members have found that plan administrators, transfer agents, and brokerages vary significantly in how (or if) they track gain/loss and cost basis for the many complex HP-related stock events -- and what (if anything) they report to the IRS. Issues with major brokers
Details on the temporary corporation "Seattle SpinCo"
The last 10Q quarterly report before the spinoff indicated that the Software business segment generated 9% of HPE's revenue and 21% of HPE's earnings. (Page 21.)
The original Sep 7, 2016 HPE press release announcing the deal says "The transaction is expected to be tax-free to HPE." [emphasis added.] By contrast, the HPInc/HPE split was originally announced as "tax-free to HP's shareholders" and the DXC spinoff and merger as "tax-free to HPE and CSC and their respective shareholders."
The Sep 1, 2017 HPE press release announcing completion of the Micro Focus deal says "The spin-off of Seattle is intended to qualify as a generally tax-free transaction for US federal income tax purposes." [emphasis added.]
The HPE/MFGP/"Seattle Spinco" letter, dated September 26, 2017, which quotes the tax counsel opinion, says "Dear Shareholder" -- but does not appear to have been mailed to shareholders by the transfer agent, plan administrators, or Brokers. (These roles are defined here: Where's my stock? )
It says: "HPE received an opinion of counsel from Skadden, Arps, Slate, Meagher & Flom... ... subject to the application of the gain recognition provisions of section 367(a)(1) of the Code. As a result, you generally do not recognize gain or loss for US federal income tax purposes on receipt of the Seattle Class A common stock in the Distribution, but US shareholders will be required to recognize gain (but not loss) on the exchange of their Seattle Class A common stock for Micro Focus ADSs." [emphasis added] (The document has no letterhead or logo. To authenticate it, go to the HPE investor page and select "Software/Micro Focus Cost Basis.")
The December 15, 2017 FY 2017 Annual Report says: "We obtained a private letter ruling from the IRS regarding certain matters impacting the US federal income tax treatment of the completed separation of our former Enterprise Services business..." [i.e. the DXC spinoff] and "We have applied for a private letter ruling from the IRS regarding certain US federal income tax matters relating to the Software Separation..." [i.e. the Micro Focus spinoff.] (Page 27.)
Whether this was one of HPE's original intentions or not, the Micro Focus spin-merge is apparently being penalized by the US Government as a "corporate inversion."
"Corporate inversion is the process by which companies move overseas to reduce the tax burden on income. One way that a company can re-incorporate abroad is by having a foreign company buy its current operations. The foreign company then owns the assets, the old corporation is dissolved, and the business -- while it remains the same in its daily operations -- is now effectively domiciled in a new country... Corporate inversion is a legal strategy and is not considered tax evasion." Investopedia
The Federal law behind this is 26 US Code 367 -- "Foreign corporations. Transfers of property from the United States." See https://www.law.cornell.edu/uscode/text/26/367 (Cornell Law School's Legal Information Institute -- "a small not-for-profit group that believes everyone should be able to read and understand the laws that govern them, without cost.")
From page 4 of the letter: "The information set forth above and in the attached exhibits is for general information purposes only and does not purport to address all aspects of federal taxation that may be relevant to particular shareholders. This information does not constitute tax advice and may not be applicable to shareholders who are not citizens or residents of the united states. Nor does it address tax consequences which may vary with your individual circumstances. Accordingly, you are urged to consult your tax advisors to determine the application of the information set forth above and in the attached exhibits to your individual circumstances and the particular federal, foreign, state and local tax consequences of the spin–off to you." [Converted from all upper case.]
The only other place we have found where HPE covers the US tax issue is in the Seattle SpinCo SEC filing of 8/3/17 (page 54)
Documents on the Micro Focus website: "Tax Documentation Cover Letter" (The document has no letterhead or logo. To authenticate it, go to the Micro Focus ADR page and select the "Seattle SpinCo, Inc / Micro Focus Merger Tax Documentation Additional Information" link.) There is a link in that document to find Micro Focus Form 8937.
Go back to: Potential Micro Focus "Seattle SpinCo" 2017 US tax liability
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