Push-down accounting and alternatives: risks and opportunities in corporate consolidations.

As the pace of corporate consolidations -- mostly through mergers and acquisitions -- escalates throughout the United States and the balance of the world, numerous state and local tax concerns are be coming increasingly important. Because many of these concerns arise from issues that rarely

have any federal tax effect, owing to the general use of consolidated federal returns, the issues often escape thorough examination and analysis prior to the execution of the business transactions; this can be a very costly mistake for taxpayers. The treatment of interest expense and certain balance sheet items are the most significant and accordingly are the focus of this article.

Deductibility of Interest Expense

Perhaps the most common area of controversy and a subject ripe for planning arises when one corporation ("Holding") incurs substantial debt to acquire stock of another corporation ("Target"). When Holding has substantial interest expense but little or no income and Target has substantial net operating income, taxpayers often seek to utilize the interest expense to offset Target's income.

A. Push-Down Accounting

Push-down accounting is the practice of attributing a corporate parent's item of income or expense (or asset, liability, or basis) to a subsidiary of that parent. The item is generally attributable to or related to the subsidiary, but was originally, and still might be legally, the parent's. This concept is justified under Generally Accepted Accounting Principles (GAAP).

The Securities and Exchange Commission (SEC) has issued a bulletin stating that debt should be pushed down if "(1) [Target] is to assume the debt of [Holding,] either presently or in a planned transaction in the future; (2) the proceeds of a debt or equity offering of [Target] will be used to retire all or a part of [Holding's] debt; or (3) [Target] guarantees or pledges its assets as collateral for [Holding's] debt." "Push Down" Basis of Accounting for Parent Company Debt Related to Subsidiary Acquisition, SEC Staff Accounting Bulletin No. 73 (Dec. 30, 1987). In situations where a corporation has incurred debt in connection with its acquisition of stock of another corporation and these criteria are not met or where the SEC rules are not applicable to the transaction, push down of debt, while not required, is still an acceptable accounting method.