Manchester United IPO: April, 2012

The owners of the famous British professional soccer club, Manchester United, the Glazer family which also owns the Tampa Bay Buccaneers football club, recently took Man U public. One-half of the shares made available in the IPO listed on the NYSE were owned by the Glazers. Were the IPO to have sold at $16 to $20 a share, as the owners hoped, that would support a enterprise value of the club of as much as $3.3 billion. Instead, however, the IPO price only fetched $14 per share. The Glazers had paid $1.47 billion for the club in 2005 and reportedly  financed the transaction with $662 million of debt. It has been said that the amount of debt on the books has hurt Man U’s ability to attract soccer talent. It even had to sell off one of its key players, Christiano Renaldo.

As recently reported in Tax Notes in its August 12, 2012 issue in a column written by well-known tax authority and commentator,  Lee A. Sheppard, Man U reorganized just before the public offering was effectuated. Presumably it was previously owned by a U.S. LLC taxable as a partnership. But as part of the IPO, Man U’s new parent corporation was a Cayman holding company which may have been purposely designed to avoid application of Section 367(d) which imposes a harsh charge on the transfer of U.S. based intangibles to a foreign corporation. This article provides a summary of the inversion rules as well as Section 367(d) within the context of the Man U reorganization. It should be apparent that the structure utilized may have had some non-tax benefits or purposes, but a tax benefit was end-running a section 367(d) charge on outbound intangibles by structuring the transaction as an (80% or more)  inversion.

IPO and Reorganization

It is reported that ½ of the IPO proceeds went to the Glazer family and player compensation. The other half will be used to pay down debt. The shares that were offered, Class A, have only 1/10 the voting power of Class B shares 98% of which are continued to be owned by the Glazers.

Half the proceeds went to the Glazers and the talent. The other half will go to reduce debt. The Glazers sold some of their own shares, but their 98 percent control will be maintained by Class B shares that carry 10 times the voting rights of the class A shares offered to the public. Under SEC regulations, the Glazers were permitted to retain control of Man U. You can find their SEC Form-1 filing on Edgar.

As further reported in Tax Notes, the estimated value of Manchester United is $2 billion and it is further estimated that self-created intangibles account for 1/3 of the club’s value. Accordingly,on a capitalized income basis, the intangibles have an approximate value of $700,000. Under Section 367(d), the roll out of the intangibles from a U.S. corporation to the new foreign Caymanian company would generate a substantial tax of  an amount equal to 35% of the future intangibles’ revenues as received during the lives of the various intangibles. The idea here was of course was to avoid application of Section 367(d) but still position an offshore holding corporation as the new owner. Presumably there were regulatory as well as governance issues which suggested use of the Grand Cayman corporate statute. The balance of the value in the club is comprised of player contracts (approximately $700 million), the stadium and training grounds and goodwill. accounts for more than half of its assets. Player contracts, by contrast, are recorded at $150 million.

Prior Structure

The Glazers, who are U.S. residents, own the club through Red Football LLC, a U.S. resident partnership. The LLC owned all of Red Football Shareholder Ltd., the British corporation that owned several British subsidiaries. In the reorganization, Red Football Shareholder Ltd. became a subsidiary of Manchester United Ltd., a Cayman-organized holding company. Some of the Cayman company's shares were offered to the public.

Red Football LLC contributed the shares of Red Football Shareholder Ltd. to Manchester United Ltd. ( the "new" Cayman corporation). In between Red Football Shareholder Ltd. and the operations are three British corporations. The lowest holding company is a British corporation also confusingly named Manchester United Ltd., which owns Old Trafford. That corporation has various operating subsidiaries, all British, among which is the team itself, Manchester United Football Club Ltd.

The operating group was previously subject to only British tax jurisdiction, because  Red Football Shareholder Ltd., the former parent, is a British resident and a "blocker" so to speak for the U.S. LLC, subject of course to the CFC rules which in this case may have been limited to investment earnings and perhaps royalty revenues. Most of the subsidiaries below Red Football Shareholder Ltd. are treated as through entities for U.S. tax purposes. The prospectus states that the reorganized group will be subject to both U.S. and U.K. tax rules.

Inversions: Section 7874

A corporate inversion involves a readjustment or reorganization of the corporate structure of a U.S. based multinational corporation, i.e., U.S. parent corporation and domestic and foreign subsidiaries perhaps where the U.S. parent re-arranges its stock so that a new foreign corporation, conveniently located in a tax haven or jurisdiction with a low corporate tax rate, essentially steps in the shoes of the U.S. based holding company relegating the U.S. holding company to a first tier subsidiary. Corporation inversions can be effectuated by stock and/or asset transfers although most reported corporate inversions are in the form of stock transfers. In stock inversions, the U.S. corporation’s shareholders exchange their shares of U.S. parent (pre-inversion) stock (and/or securities) for shares of the new parent, foreign corporation. An asset inversion is effectuated by merger of the U.S. holding company with a new foreign corporation organized and managed outside of the U.S. Other asset or stock transfers moving down the corporate chain of subsidiaries may also be part of the prearranged plan. The intended tax objective of the corporate inversion is to essentially shift all or a substantial portion of the U.S. multinational’s business operations outside of the U.S. so that income generated from foreign based activities, subject to the CFC rules under Subpart F, the PFIC provisions (Sections 1291-1298) or other pertinent exceptions, is not currently taxed in the United States. Part of the restructuring may include setting forth debt or other transactions between related parties to generate deductions such as royalties, management fees, rents, etc., or otherwise reduce U.S. source income. In many instances the new foreign parent corporation may have limited activities in the selected foreign jurisdiction of incorporation.

Prior to the enactment of Section 7874, an outbound exchange of domestic stock for stock of a foreign corporation generally resulted in gain (not loss) to a U.S. person in accordance with Section 367(a). Where foreign subsidiaries or other assets were transferred to the “new” foreign corporation, the transfers may have resulted in taxable dispositions under Sections 311(b), 367, 1248 or related provisions. 

Where assets are transferred by a U.S. parent to the “new” foreign corporation parent, the transferor corporation may be subject to gain recognition (but not loss) subject to any applicable limitation. At the shareholder level, the consolidation or merger whether under U.S. or foreign law, can qualify for non-recognition treatment at the shareholder level under Section 354 subject to the “boot” dividend and capital gains rules under Section 356 where the transaction falls satisfies the requirements for a tax-free reorganization. 

Inversion transactions may give rise to immediate U.S. tax consequences at the shareholder and/or the corporate level, depending on the type of inversion. In stock inversions, the U.S. shareholders generally recognize gain (but not loss) under section 367(a), based on the difference between the fair market value of the foreign corporation shares received and the adjusted basis of the domestic corporation stock exchanged. To the extent that a corporation's share value has declined, and/or it has many foreign or tax-exempt shareholders, the impact of this section 367(a) “toll charge” is reduced. The transfer of foreign subsidiaries or other assets to the foreign parent corporation also may give rise to U.S. tax consequences at the corporate level (e.g., gain recognition and earnings and profits inclusions under secs. 1001, 311(b), 304, 367, 1248 or other provisions). The tax on any income recognized as a result of these restructurings may be reduced or eliminated through the use of net operating losses, foreign tax credits, and other tax attributes.

American Jobs Creation Act and Section 7874 (PL 108-357, 10/22/2004)

Congress, faced with the business news reports of various migrations of well-known U.S. based multinationals to foreign countries through engaging in an inversion transaction where contacts with the new parent foreign corporation’s jurisdiction were minimal, decided it was appropriate to establish appropriate roadblocks or tax costs to the corporation inversion. The problem was the future revenue drain to the Treasury for eliminating a U.S. multinational’s U.S. residence and worldwide income profile. In responding to this threat, Congress enacted Section 7874 which treats certain inversion transactions (involving 80% or greater identity of prior stock ownership) have little or no effect and are to be disregarded for U.S. tax purposes. In other words, such new foreign corporations continue to be subject to worldwide tax as a U.S. domestic corporation.

At a lower threshold of retained continuity of stock ownership, i.e. greater than 50% but less than 80% ownership in the new foreign parent corporation, Congress was willing to concede that such change in stock ownership may be reflective of a transaction that had a sufficient non-tax effect. Still, heightened scrutiny and other limitations would be applied to such transactions to avoid the erosion of the U.S. tax based through related-party transactions. In such a case, any applicable corporate-level “toll charges” for establishing the inverted structure are not offset by tax attributes such as net operating losses or foreign tax credits. Specifically, any applicable corporate-level income or gain required to be recognized under sections 304, 311(b), 367, 1001 , 1248, or any other provision with respect to the transfer of controlled foreign corporation stock or the transfer or license of other assets by a U.S. corporation as part of the inversion transaction or after such transaction to a related foreign person is taxable, without offset by any tax attributes (e.g., net operating losses or foreign tax credits). This rule does not apply to certain transfers of inventory and similar property. These measures generally apply for a 10-year period following the inversion transaction.

Corporate Inversion Transaction Type I: Transactions Involving At Least 80% Identity of Stock Ownership

The first type of inversion subject to Section 7874 is a transaction in which, pursuant to a plan, i.e., if the acquisition of a domestic corporation or partnership occurs within a 4 year period beginning on the date which is 2 years before the required ownership percentage threshold is met as to such corporation or partnership, or a series of related transactions: (i) a U.S. corporation becomes a subsidiary of a foreign-incorporated entity or otherwise transfers substantially all of its properties to such an entity in a transaction completed after March 4, 2003; (ii) the former shareholders of the U.S. corporation hold (by reason of holding stock in the U.S. corporation) 80% or more (by vote or value) of the stock of the foreign-incorporated entity after the transaction; and (iii) the foreign-incorporated entity, considered together with all companies connected to it by a chain of greater than 50% ownership (i.e., the “expanded affiliated group”), does not have substantial business activities in the entity's country of incorporation, compared to the total worldwide business activities of the expanded affiliated group. Where applicable Section 7874 treats the foreign corporation for all purposes of the Code as domestic. Presumably then the gain recognition provision, Section 367(a), does not apply to such 80% transactions.

In testing for the requisite ownership percentage, stock held by members of the expanded affiliated group that includes the foreign incorporated entity is disregarded. For example, if a U.S. parent corporation converts an existing wholly owned U.S. subsidiary into a new wholly owned controlled foreign corporation, the stock of the new foreign corporation would be disregarded. Stock sold in a public offering related to the transaction also is disregarded for these purposes.

Transfers of properties or liabilities as part of a plan a principal purpose of which is to avoid the purposes of the proposal are disregarded. In addition, Congress, as reflected in the Senate Report to the provision, granted the Treasury authority to prevent the avoidance of the purposes of the proposal, including avoidance through the use of related persons, pass-through or other noncorporate entities, or other intermediaries, and through transactions designed to qualify or disqualify a person as a related person or a member of an expanded affiliated group. Similarly, the Treasury Secretary is granted authority to treat certain non-stock instruments as stock, and certain stock as not stock, where necessary to carry out the purposes of the proposal.

Corporate Inversion Transaction Type II: Transactions Involving At Least 60% But Less than 80% Identity of Stock Ownership

The second type of inversion transaction under Section 7874, provided the 80% ownership transaction is not in play, occurs if a 60% threshold stock ownership test is met. The foreign entity in this context is referred to as a “surrogate” foreign corporation. Under a Type II inversion, the foreign corporation is still respected and treated as a foreign corporation for U.S. federal tax purposes, but any applicable corporate-level “toll charges” for establishing the inverted structure are not offset by the transferring corporation’s tax attributes such as net operating losses or foreign tax credits. Specifically, any applicable corporate-level income or gain required to be recognized under Sections 304, 311(b), 367, 1001, 1248 or any other provision with respect to the transfer of controlled foreign corporation stock or the transfer or license of other assets by a U.S. corporation as part of the inversion transaction or after such transaction to a related foreign person is taxable, without offset by any tax attributes (e.g., net operating losses or foreign tax credits). This rule does not apply to certain transfers of inventory and similar property. The applicable rules under a Type II corporate inversion will apply for a 10-year period following the inversion transaction.

Taxation of Expatriated Entity’s Inversion Gain

Under a Type II corporate (or partnership) inversion, the expatriated entity’s “inversion gain” is subject to federal income tax at the maximum corporate rate, presently 35%, without reduction by any tax attribute such as a net operating loss or foreign tax credits. See §§7874(a). The taxable income of an “expatriated entity” for any tax year includes the portion of the “applicable period”, e.g., 10 years following the inversion transaction, must be at least the amount of the entity's “inversion gain” for the tax year.

 “Inversion gain” is income or gains realized by reason of the expatriated entity’s transfer during the applicable period of stock or other properties and any income received or accrued during the applicable period by reason of a license of any property by an expatriated entity: (i) as part of the acquisition which results in an expatriated entity or (ii) after the acquisition if the transfer or license is to a “foreign related person” which is based by applying the constructive ownership rules of Section 267(b) or Section 707(b), or under common control per Section 482.. Inversion gain does not include, however, dealer property per Section 1221(a)(1) as held by the expatriated entity.

Example One. On December 1, 2012, A, a U.S. corporation, transfers its assets to “Newco” foreign corporation organized in the Cayman Islands for 75% of Newco’s stock which stock is distributed to A’s shareholders. A is an expatriated entity under Section 7874(a)(2)(i) and Newco a foreign surrogate corporation. Section 7874(a)(2)(B). The exchange is effectuated to meet the requirements of a Type D reorganization. Still, gain is recognized by A under Section 367(a)(5) which also constitutes inversion gain under Section 7874(d)(2)(A). As inversion gain, A is taxed at the maximum corporate rate without use of its losses or other tax attributes. 

Example Two. In 2012, a subsidiary of ForeignCo, a Caymanian corporation, merges into A, a U.S. corporation. Foreign Co. is treated as the acquiring corporation and the former shareholders of A receive 70% of ForeignCo’s stock. No substantial business operations are conducted by ForeignCo in the Grand Caymans. A is an expatriated entity (Type II) under Section 7874(a)(2)(i) and ForeignCo is a surrogate foreign corporation. The shareholders of A corporation recognize any gain on the exchange of their A stock for Foreign Co stock. A recognizes no gain on the inversion and has no inversion gain. In 2015 and 2016, assets of A’s U.S. subsidiaries and stock of other A U.S. subsidiaries are transferred to ForeignCo. Assuming the assets and stock has appreciated, A is treated as receiving “inversion gain” per Section 7874(d)(2)(B) because there is a transfer to a related foreign person after the transfer and the transfers are within the 10 year applicable period which begins in 2012. In Year 3 and Year 4, assets of certain of T's U.S. subsidiaries and stock of other T subsidiaries are transferred to ForeignCo.

The tax on the inversion gain recognized under Section 7874(d)(2)(B) is not reduced by tax credits (other than the foreign tax credit) except to the extent that the tax exceeds the amount obtained by multiplying the inversion gain by the maximum U.S. corporate income tax rate and the inversion gain is treated as U.S. source income in determining the foreign tax credit. Section 7874(e)(1). This U.S. source income treatment also applies for purposes of taking foreign tax credits into account in computing Section 1248 gain.

Example Three. After a 60-80% corporate inversion, a pre-inversion, foreign subsidiary of the expatriated (U.S.) entity is sold for a gain under the applicable 10 year period. Gain recognized as to the expatriated entity’s sale of a foreign subsidiary is tax under Section 1248 and characterized as ordinary income (dividend) to the extent of accumulated earnings and profits. The gain recognized by the expatriated entity is inversion gain and is taxable at the highest corporate income tax rate under Section 11. The inversion gain or rate of tax on the inversion is reduced by the expatriated entity’s operating loss, loss carryforwards or other tax credits (other than foreign tax credits).

Where the expatriated entity is a partnership, i.e., a direct or indirect transfer of substantially all properties constituting a trade or business of a domestic partnership with the former partners of the U.S. partnership acquiring 60% but less than 80% ownership (by vote or value) of the surrogate foreign corporation's stock and there are insufficient business activities in the foreign corporation's country of organization or creation the inversion gain is realized and taxed at the partner level . Section 7874(e)(2)(A). A partner’s inversion gain for a particular year is the sum of such partner’s distributive share of the partnership's inversion gain plus gain recognized by the partner for the tax year resulting from the partner's transfer during the applicable period (of any partnership interest in the partnership to the surrogate foreign corporation and is computed at the highest rate of tax on individuals. Special rules apply in computing the individual partner’s tax on the inversion gain. Section 7874(e)(3).

Application to Certain Partnership Transactions

Section 7874 also applies to transactions in which a foreign-incorporated entity acquires substantially all of the properties constituting a trade or business of a domestic partnership, if after the acquisition at least 60% of the stock of the entity is held by former partners of the partnership who received such shares in exchange for interests in the partnership and provided that the other terms of the basic definition are met. All partnerships that are under common control, as defined under Section 482, constitute a single partnership unless otherwise provided in regulations. As discussed, any inversion gain of the expatriated partnership is taxed at the partner level..

Special Grandfather Rule

A transaction otherwise meeting the definition of an inversion transaction is not treated as an inversion transaction if, on or before March 4, 2003, the foreign-incorporated entity had acquired directly or indirectly more than half of the properties held directly or indirectly by the domestic corporation, or more than half of the properties constituting the partnership trade or business.

Anti-Avoidance Rules To Be Provided by Regulations

Transfers of properties or liabilities as part of a plan a principal purpose of which is to avoid the purposes of the provision are disregarded. In addition, the Treasury was authorized to issue regulations to prevent the avoidance of Section 7874 such as through the use of related persons, pass-through or other noncorporate entities, or other intermediaries, and through transactions designed to qualify or disqualify a person as a related person or a member of an expanded affiliated group. Similarly, Congress authorized the Treasury the authority to treat certain non-stock instruments as stock, and certain stock as not stock. where necessary, to carry out the purposes of the provision. See §7874(g). Temporary regulations (TD 9265) were published in the Federal Register (71 FR 32437) on June 6, 2006, concerning the treatment of a foreign corporation as a surrogate foreign corporation (2006 temporary regulations). A notice of proposed rulemaking (REG-112994-06) cross-referencing the temporary regulations was published in the same issue of the Federal Register (71 FR 32495). On July 28, 2006, Notice 2006-70 (2006-2 CB 252), (see § 601.601(d)(2)(ii)(b)) was published, announcing that the effective date in § 1.7874-2T(j) would be amended for certain acquisitions initiated prior to December 28, 2005. Final and Temporary Regulations under Section 7874 (TD 9453, 6/9/09) provided guidance on determining whether a foreign corporation is a "surrogate foreign corporation" under Section 7874.

Override of Tax Treaties: Section 7874(f)

Congress specifically intended that the provisions of Section 7874 would override any existing tax treaty that would apply in a manner that is inconsistent with the rules and impacts of Section 7874. See §§ 7894 and 7852(d). While in general the last in time of a treaty or IRC provision controls, this is not the case for purposes of Section 7874.

To further control the benefits of an inversion the U.S. negotiated treaty changes with Barbados and the Netherlands in compressing the “limitation of benefits provisions” under the tax treaties with such countries. The protocols became effective beginning in 2005. Under the new Barbados limitation of benefits provision, a company can claim residence in Barbados only if it has regularly traded shares and those shares are primarily traded on the exchanges of Barbados, Jamaica, and Trinidad. Barbados, Arts. 22(1)(c)(i)(b), (4). In the case of a subsidiary, at least 50% of the shares must be owned by companies meeting the locus of trading test, and the subsidiary must further satisfy an earnings stripping limitation, designed to prevent profits from the subsidiary from being paid to persons who are not residents of Barbados. Under the earnings stripping limitation, less than 50% of the Barbados subsidiary's income may be paid or accrued in payments deductible for Barbados tax purposes to persons who are nonresident in Barbados.

The revised Dutch treaty limitations of benefits provision is less stringent. While a company’s shares must be regularly traded the trading may occur on several specified developed country exchanges besides the United States and Holland. Nevertheless, the company will not be entitled to treaty benefits if it has “no substantial presence” in Holland. Netherlands, art. 26(2)(c)(i). In the case of a subsidiary, at least 50% percent of the shares must be owned by five or fewer companies that meet the trading test. Art. 26(2)(c)(ii).. In the case of a Dutch resident company, it has “no substantial presence” in Holland if (i) the aggregate volume of trading in its shares is greater in the NAFTA region than in Europe or (ii) the company's shares traded are either not traded in Europe or less than 10 percent of worldwide trading in its shares occurs in Europe, and the company's primary place of management and control is not in Holland.

Other Related Changes Enacted With Section 7874.

The American Jobs Creation Act also introduced an excise tax, per Section 4985, upon the stock compensation of certain corporate insiders to the expatriated entity in cases where any shareholders are required to recognize gain on their stock as a result of the inversion. New Section 6043A requires the information of “potential inversions”. See Notice 2005-7, 2005-3 IRB 340. 

Section 367(d)

In a transfer by a U.S. person of U.S. based “intangibles” to a foreign (controlled) corporation or in a tax-free reorganization, Section 367(a) steps aside and the transaction is governed by Section 367(d). Intangibles are described in Section 936(h)(3)(B) and include patents, trademarks, copyrights, franchises, licenses, methods, and similar items, but not goodwill. In such instance the U.S. transfer is treated as having sold the intangible property in exchange for a hypothetical series of payments which are contingent upon the productivity, use or disposition of the property and taxed, at ordinary income rates, on amounts that reasonably reflect the amounts he would have received over the useful life of the property or, in the case of certain dispositions, after the transfer at the time of such disposition. See Notice 2012-39, 2012-31 IRB 95. The rule was enacted to police the transfer of valuable U.S. intangibles outside of the U.S. without imposition of a tax on the value of the intangibles based on their projected value over their useful life. See Treas. Reg. §1.482-7(cost sharing regulations pertaining to intangibles).

Section 367(d)(2)(A) provides that the U.S. person transferring the intangible property is treated as having sold the property in exchange for payments that are contingent upon the productivity, use, or disposition of such property. The transferor is treated as receiving amounts that reasonably reflect the amounts that would have been received: (i) annually in the form of such payments over the useful life of such property (per § 367(d)(2)(A)(ii)(I)), or (ii) in the case of a disposition of the intangible property following such transfer (whether direct or indirect), at the time of the disposition (§ 367(d)(2)(A)(ii)(II)). An indirect disposition of the intangible property following the transfer includes a disposition of the transferor's interest in the transferee corporation. S. Rep. No. 169, 98th Cong., 2d Sess., at 367 (1984). The amounts taken into account under Section 367(d)(2)(A)(ii) must be commensurate with the income attributable to the intangible. See Section 367(d)(2)(A) (flush language).

Under Section 367(d)(3), the Treasury is authorized to issue regulations under Section 367(d)(2) to also apply to the transfer of intangible property by a United States person to a partnership. As of this date no such regulations have been issued.

Analyzing the Tax Impacts of the Man U IPO and Reorganization

The reorganization of Man U which included the IPO was structured to fall with the treatment of an inversion transaction under the 80% or Type I inversion. In such instance the exchange of interests, i.e., Red Football LLC’s contribution of its Red Football stock to the Cayman holding company in an exchange that would presumably qualify as a tax-free reorganization, perhaps a Type B or type C. Under the Type I corporate inversion, the Caymanian corporation would be treated as a U.S. domestic corporation for Code purposes. Thus, the reorganization and transfers of non-intangible assets would be governed by Section 351 and not by Section 367(a). This would protect the Glazers from gain recognition on the exchange of stock by application of Section 367(a).

As mentioned, Section 367(d) provides that outbound transfers of intangibles, including outbound reorganizations, are taxable to the extent of the value of the intangibles such as patents, franchises, licenses, trademarks but not goodwill. Section 367(d) states that outbound reorganizations are taxable to the extent that intangibles are transferred. While it is reported that Man U’s financial statements did not separate out “section 367(d) type intangibles” from goodwill, it is clear that Man U had a “goal full of section 367(d) intangibles”.

Section 367 applies to a reorganization exchange or a transfer of property that would otherwise be defined under Section 351. Here, Red Football LLC contributed its shares of Red Football Shareholder Ltd. to the newly organized Caymanian holding company in an exchange that presumably was a reorganization. So, Section 367(a) (and Section 367(d)) would seem to apply to the reorganization of Man U.

But does this all change if Section 7874, particularly a Type I inversion occurs? In such case, the new Caymanian corporation would be a domestic corporation for Internal Revenue Code purposes. This presumably removes Section 367(a) and Section 367(d) from the mix. Looks like two good “goalie kicks for scores” for Man U doesn’t it. By purposely falling inside the scope of the Type I inversion provision under Section 7874, the U.S. partners and corporation pay no tax on the reorganization, that is U.S. tax. And, in particular, Section 367(d) is completely avoided because the Caymanian corporation is “domestic” for all purposes under the Code, including compliance purposes. The Caymanian corporation would still be taxed on its worldwide income in the U.S. and that would include royalty income on the soccer club’s intangibles were presumably were transferred to the Caymanian holding company. The intangibles, since they are “self-created” are non-amortizable under Section 197. Any foreign taxes paid to the U.K. on royalty income would be creditable under Sections 901 and 902.

Section 7874(a)(2)(B), a so-called 60-80% Type II inversion as referenced above, sets forth three conditions for an inversion or “expatriated” entity to be taxed on inversion gain. First, a foreign acquirer must directly or indirectly acquire the business of a domestic partnership (as occurred in Man U, or domestic corporation. Second, the former owners of the domestic partnership (or corporation) must own at least 60% of the foreign acquirer by reason of their former ownership. Third, the expanded affiliated group must not have "substantial business activities" in its new foreign parent's country of residence.

Where Section 7874(b) applies, i.e., the former U.S. resident owners own 80% or more of the foreign acquirer, it is automatically treated as a domestic corporation for all purposes of the code under Section 7874(b). The Man U prospectus admits that the Cayman holding company will be taxable as a U.S. resident corporation because it will have indirectly acquired the trade or business of a domestic partnership (Red Football LLC), it will have no personnel or substantial business activity in the Caymans, and 80% will remain in the hands of the Glazer family when the offering is ignored. So, Section 7874(b) applies, at least in its view.

Still, there was a potential tax impact to the transaction for the Glazers in the form of “inversion gain”. Since the Glazers owned the club by being members of a pass through entity, Red Football LLC, they would presumably be subject to inversion gain under Section 7874(a)(2)(ii). Section 7874(e)(2) defines inversion gain as including deferred gains of previous outbound transfers but presumably there was none because the operating corporation was encapsulated from an operational standpoint in the U.K.

Let’s hear it for the Manager of Man U, Sir Alex Ferguson. Good luck this season! Remember, your club is presumably still owned by a U.S. corporation.