Tax Treatment

[petrengr1]

From MIC (page 22):

"Tax Treatment

The fact that the exchange of Common Shares for ExxonMobil Shares and CRPs

pursuant to the Arrangement generally will be a taxable transaction for Canadian federal income tax

purposes and U.S. federal income tax purposes, and may also be a taxable transaction under the laws

of other jurisdictions."

[petrengr1]

From MIC page 38:

Any CRP Payout (including any amount paid with respect to any Payment Shortfall (except to the extent

attributable to any Loan Proceeds Payment)) shall be made free and clear of and without deduction for taxes, if

any, imposed under Part XIII of the ITA. Except to the extent otherwise described immediately above,

AcquisitionCo, the Borrower and the Escrow Agent (each, a “Payor"

will be entitled to deduct and withhold,

or cause to be deducted and withheld, from any CRP Payout, or any amount otherwise payable pursuant to the

CRP Agreement, such amounts as it is required to deduct and withhold with respect to the making of such

payment under any provision of applicable Law relating to any and all current or future taxes, levies, imposts,

deductions, charges or withholdings imposed or asserted by the United States, Canada or the jurisdiction of the

Borrower, and all interest, penalties

and other liabilities with respect thereto (“CRP Taxes&rdquo. To the extent that

amounts are so deducted and withheld, such deducted and withheld amounts will be treated for all purposes of

the CRP Agreement as having been paid to the person or entity in respect of which such deduction and

withholding was made. However, the portion of any Loan Proceeds Payment (or any other amount) that is paid

in respect of Accrued Interest (an “Interest Payment&rdquo by or on behalf of a Payor shall be made free and clear

of and without deduction for CRP Taxes, unless required by applicable Law. If a Payor must withhold or

deduct any CRP Taxes from or in respect of any such Interest Payment, then the Payor shall make such

withholding or deduction and timely pay the full amoun

t withheld or deducted to the relevant governmental

authority in accordance with applicable Law, and, subject to the requirement to provide certain documentation

described below, the sum payable in respect of such Interest Payment shall be increased by the

amount (an“additional amount&rdquo necessary so that after making all required withholdings or deductions (including

withholdings or deductions applicable to such additional amounts) the applicable recipient shall receive an

amount equal to the sum it would have received had no such withholdings or deductions been made.

Subject to the requirement to provide certain documentation described in the immediately following paragraph,

AcquisitionCo will indemnify each CRP Holder for the full amount of taxes imposed

under Part XIII of the

ITA on or with respect to any Interest Payment made or deemed to have been made by any Payor hereunder

paid by such CRP Holder and any liability (including penalties, interest and expenses (including reasonable

attorneys’ fees and expenses)) arising therefrom or with respect thereto, whether or not such CRP Taxes were

correctly or legally asserted by the relevant governmental authority.

Each Securityholder entitled to payment under the CRP Agreement is required to, (i) prior to the Effective

Time and upon any Permitted Transfer, provide to the Payor, upon request, (A) a valid U.S. Internal Revenue

Service Form W-8 or W-9 (or any successor forms thereto), as applicable, and (B) any other certificate or

information reasonably requested by the Payor to permit payments to be made pursuant to the CRP Agreement

without deduction for withholding CRP Taxes and, (ii) at such other times thereafter upon reasonable request

of the Payor, provide any of the foregoing forms, certificates or information. Notwithstanding anything to the contrary in the CRP Agreement, no Person shall have any obligation to pay additional amounts or shall have any indemnification obligation with respect to CRP Taxes (other than taxes imposed under Part XIII of the ITA in respect of payments that will be free and clear of and without deduction for such CRP Taxes, as described above) that are imposed with respect to payments made pursuant to the CRP Agreement as a result of a Securityholder’s failure to deliver the relevant documentation or information under the CRP Agreement."

I am glad they finally made this clear!!

2126- Can you interpret this for us. Thanks.

[2126]

I'll work on this and other issues from the MIC over this weekend. But right off the bat, my first reading indicates that Exxon/IOC realize that there is really no definitive IRS ruling that would give a clear indication regarding how the IRS would treat the CRP payments [and neither Exxon nor IOC intend to ask the IRS for a ruling to provide guidance on this question]. This leaves this question up for various different interpretations. The MIC states that shareholders should consult their own tax advisors regarding this issue. If Exxon's lawyers and accountants can not come up with a clear answer to this question, it is highly unlikely that any of our own individual tax advisors will have any better luck. As usual, IOC shareholders are on their own...

[petrengr1]

From MIC (page 22):

"Tax Treatment

The fact that the exchange of Common Shares for ExxonMobil Shares and CRPs

pursuant to the Arrangement generally will be a taxable transaction for Canadian federal income tax

purposes and U.S. federal income tax purposes, and may also be a taxable transaction under the laws

of other jurisdictions."

The way the above is written it makes it look like BOTH the exchange of common shares for Exxon stock AND the CRP payment are taxable events. Does that mean we will have been deemed to have sold our IOC shares on the effective date and bought Exxon stock, thereby necessitating the payment of taxes on both and starting the clock over over again for the determination of short term or long term capital gains?

[Putncalls]

It's an adjustment of basis event. If you keep your XOM use the basis on the CRP cash. I don't know if you can take a loss at that point though.

[2126]

In most merger/acquisition situations in the US, Puts is correct that they are 'adjustment of basis' events; that is, one's basis and holding period in the target corporation's stock (IOC) is carried over to the acquiring corporation's stock (Exxon) and it is NOT a taxable event until you subsequently sell the shares that you have acquired in the acquiring corporation [using your original basis/holding period in the target corporation stock to determine capital gain or loss].

There are, however, many, many different methods to set up a merger/acquisition which have very different tax consequences for both the target and acquiring companies AND for the target shareholders. It appears that the Exxon/IOC Arrangement is one of those methods with very different tax consequences for IOC shareholders [No surprise...sadly]

Although, as I said, many common M&A situations allow a carry-over of basis, that is NOT what IOC/Exxon are stating in the Arrangement. What they outline in the Arrangement has some very different [and very unclear regarding the CRP] tax consequences.

It is clearly stated that the exchange of IOC shares for Exxon shares IS a taxable event, and that gain/loss WILL be recognized as of the effective date of the Arrangment. [US Federal Income Tax Consequences of the Arrangement, P. 62 and p.95 of the MIC PDF].

What is also stated is that capital gain/loss will be recognized by IOC shareholders on the exchange of shares with Exxon, based on the market value of the Exxon shares, and cash in lieu of shares [basically cash paid for fractional shares], AND the market value of the CRP [CVR in the OSH deal] as of the effective date of the Arrangement. [But see below regarding the possibility of being unable to claim any loss based on the CRP value until such value is actually known] Such gain/loss would be based on the IOC shareholder's basis and holding period as of the effective date.

On the Effective date, IOC shareholders would then receive the Exxon shares with a new basis of current market value of those Exxon shares as of the effective date [let's say around October 1, 2016].

I am not a tax expert, but I know that this is a very unusual tax treatment in this type situation. I can only assume that Exxon's and IOC's lawyers/accountants have set up the Arrangement in such a manner as to have a good argument that the IRS should accept this tax treatment. The Exxon deal treatment of the CRP differs from the OSH/Total deal in two significant ways: First, the Exxon CRP is specifically set up to be non-tradable [as opposed to the OSH/Total CVR]; and second, the Exxon CRP will specifically not be listed on any trading exchange [again opposed to the OSH/Total CVR]. As such, Exxon/IOC has set the CRP up to not have any method of valuation [by being non-tradable and non-exchange listed] prior to the certification results next year, other than the current market value at the effective date.

The ultimate tax consequences for IOC shareholders will be anywhere from OK [if you have a high basis in the IOC shares, which will allow you to have a significant capital loss and reset your basis in the Exxon shares at market value on the effective date; although annual capital losses are limited to $3000/year, but can be carried forward] to horrendous [if you have an overall low basis in IOC shares, on which you will have a massive capital gains tax due for tax year 2016 on the recognized gain for all IOC shares].

Let me explain in more detail what the Arrangement states:

• A US holder of IOC shares will recognize a capital gain or loss on the effective date of the Arrangement
• Such gain/loss will be based on the difference between a) the total of the cash and fair market value of the Exxon share and CRP rights and b) the IOC shareholder's basis in his/her IOC stock
• The short/long-term holding period for any such gain/loss will be based on an ending date as of the effecitve date of the Arrangement
• The basis for the new Exxon shares AND the CRP rights that an IOC shareholder will receive from the Arrangement will be the market value of the Exxon shares and the CRP rights as of the effective date.
• The determination of the 'market value' of the CRP on the effective date will be the IOC pps premium over the $45 Exxon share exchange price on the date prior to the  effective date. [Currently this is holding at about $4.00] This and the above point mean that if the CRP value comes in eventually above $4.00, such difference will be gain in the year received -- 2017 [see below whether this is capital or ordinary]
• The new capital gains holding period for the new Exxon shares AND CRP rights received will begin on the effective date of the Arrangement.[Meaning if you take the CRP payment in 2017, before the effective date determined in 2016, say October 1st, the gain will be short-term]
• Another wrinkle: IOC could be determined to be a Passive Foreign Investment Company for US income tax purposes, which would have the effect of the gains recognized on the effective date being deemed ordinary income over the life of the holding period for IOC shareholders [based pro-rata on the MAXIMUM tax rates applicable for each year IOC shares were held], plus punitive interest charges on such gains. This would be a devastating blow to IOC shareholders! Horrible tax consequences all at once on the effective date of the Arrangement.
• IOC shareholders will not generally be able to claim a loss based on the imputed market value of the CRP until the actual value of the CRP is known. [Thus, If one sells their new Exxon shares after the effective date but prior to the certification appraisal value being known next year and since the CRPs are non-tradable...well, you better get a good tax advisor]
• The Arrangement makes clear that it is not known whether any gain/loss based on the CRP will be a capital or ordinary income gain/loss.
• If the CRP is paid over 6 months after the effective date [very likely], IOC shareholders will need to pay ordinary income tax on imputed interest based on the actual CRP payment value which is over the market value of the CRP on the effective date. [ie. if the CRP pays out $15 after about April 1, 2017, IOC holders will be subject to ordinary income tax on interest based on the difference in values [$15 -- $4 = $11/CRP] over the time period the CRP became effective and the date on which one receives payment on it.

AS you can see, the Exxon/IOC tax consequences are very much different and very much more complex than is common in a typical M&A situation. Depending on how the IRS actually looks at this deal, the tax consequences for IOC shareholders could range from just OK to absolutely horrible, depending on one's current basis and holding period.

Clearly, this tax situation is very unclear [tongue firmly in cheek].

And I do not see any general tax advisors [other than experts in M&A situations with CRPs included--good luck finding one of those] as having any clue whatsoever on how to proceed with one's tax advice.

I'll try to explain in another post how I believe all of these tax consequences will play out for IOC shareholders with high and low basis amounts, etc.

I wish it were not so, but it appears that we IOC shareholders are, again, taking it on the chin, with a sucker punch from IOC and Exxon.

[Stavros]

I wish it were not so, but it appears that we IOC shareholders are, again, taking it on the chin, with a sucker punch from IOC and Exxon.

All the more reason for Retail Shareholders AND many of the Institutions to vote a big fat NO to this stinking rotten deal.

I for one will not bend over and ask to be hosed yet again by pinkus fuctus.

[petrengr1]

In most merger/acquisition situations in the US, Puts is correct that they are 'adjustment of basis' events; that is, one's basis and holding period in the target corporation's stock (IOC) is carried over to the acquiring corporation's stock (Exxon) and it is NOT a taxable event until you subsequently sell the shares that you have acquired in the acquiring corporation [using your original basis/holding period in the target corporation stock to determine capital gain or loss].

There are, however, many, many different methods to set up a merger/acquisition which have very different tax consequences for both the target and acquiring companies AND for the target shareholders. It appears that the Exxon/IOC Arrangement is one of those methods with very different tax consequences for IOC shareholders [No surprise...sadly]

Although, as I said, many common M&A situations allow a carry-over of basis, that is NOT what IOC/Exxon are stating in the Arrangement. What they outline in the Arrangement has some very different [and very unclear regarding the CRP] tax consequences.

It is clearly stated that the exchange of IOC shares for Exxon shares IS a taxable event, and that gain/loss WILL be recognized as of the effective date of the Arrangment. [US Federal Income Tax Consequences of the Arrangement, P. 62 and p.95 of the MIC PDF].

What is also stated is that capital gain/loss will be recognized by IOC shareholders on the exchange of shares with Exxon, based on the market value of the Exxon shares, and cash in lieu of shares [basically cash paid for fractional shares], AND the market value of the CRP [CVR in the OSH deal] as of the effective date of the Arrangement. [But see below regarding the possibility of being unable to claim any loss based on the CRP value until such value is actually known] Such gain/loss would be based on the IOC shareholder's basis and holding period as of the effective date.

On the Effective date, IOC shareholders would then receive the Exxon shares with a new basis of current market value of those Exxon shares as of the effective date [let's say around October 1, 2016].

I am not a tax expert, but I know that this is a very unusual tax treatment in this type situation. I can only assume that Exxon's and IOC's lawyers/accountants have set up the Arrangement in such a manner as to have a good argument that the IRS should accept this tax treatment. The Exxon deal treatment of the CRP differs from the OSH/Total deal in two significant ways: First, the Exxon CRP is specifically set up to be non-tradable [as opposed to the OSH/Total CVR]; and second, the Exxon CRP will specifically not be listed on any trading exchange [again opposed to the OSH/Total CVR]. As such, Exxon/IOC has set the CRP up to not have any method of valuation [by being non-tradable and non-exchange listed] prior to the certification results next year, other than the current market value at the effective date.

The ultimate tax consequences for IOC shareholders will be anywhere from OK [if you have a high basis in the IOC shares, which will allow you to have a significant capital loss and reset your basis in the Exxon shares at market value on the effective date; although annual capital losses are limited to $3000/year, but can be carried forward] to horrendous [if you have an overall low basis in IOC shares, on which you will have a massive capital gains tax due for tax year 2016 on the recognized gain for all IOC shares].

Let me explain in more detail what the Arrangement states:

• A US holder of IOC shares will recognize a capital gain or loss on the effective date of the Arrangement
• Such gain/loss will be based on the difference between a) the total of the cash and fair market value of the Exxon share and CRP rights and b) the IOC shareholder's basis in his/her IOC stock
• The short/long-term holding period for any such gain/loss will be based on an ending date as of the effecitve date of the Arrangement
• The basis for the new Exxon shares AND the CRP rights that an IOC shareholder will receive from the Arrangement will be the market value of the Exxon shares and the CRP rights as of the effective date.
• The determination of the 'market value' of the CRP on the effective date will be the IOC pps premium over the $45 Exxon share exchange price on the date prior to the  effective date. [Currently this is holding at about $4.00] This and the above point mean that if the CRP value comes in eventually above $4.00, such difference will be gain in the year received -- 2017 [see below whether this is capital or ordinary]
• The new capital gains holding period for the new Exxon shares AND CRP rights received will begin on the effective date of the Arrangement.[Meaning if you take the CRP payment in 2017, before the effective date determined in 2016, say October 1st, the gain will be short-term]
• Another wrinkle: IOC could be determined to be a Passive Foreign Investment Company for US income tax purposes, which would have the effect of the gains recognized on the effective date being deemed ordinary income over the life of the holding period for IOC shareholders [based pro-rata on the MAXIMUM tax rates applicable for each year IOC shares were held], plus punitive interest charges on such gains. This would be a devastating blow to IOC shareholders! Horrible tax consequences all at once on the effective date of the Arrangement.
• IOC shareholders will not generally be able to claim a loss based on the imputed market value of the CRP until the actual value of the CRP is known. [Thus, If one sells their new Exxon shares after the effective date but prior to the certification appraisal value being known next year and since the CRPs are non-tradable...well, you better get a good tax advisor]
• The Arrangement makes clear that it is not known whether any gain/loss based on the CRP will be a capital or ordinary income gain/loss.
• If the CRP is paid over 6 months after the effective date [very likely], IOC shareholders will need to pay ordinary income tax on imputed interest based on the actual CRP payment value which is over the market value of the CRP on the effective date. [ie. if the CRP pays out $15 after about April 1, 2017, IOC holders will be subject to ordinary income tax on interest based on the difference in values [$15 -- $4 = $11/CRP] over the time period the CRP became effective and the date on which one receives payment on it.

AS you can see, the Exxon/IOC tax consequences are very much different and very much more complex than is common in a typical M&A situation. Depending on how the IRS actually looks at this deal, the tax consequences for IOC shareholders could range from just OK to absolutely horrible, depending on one's current basis and holding period.

Clearly, this tax situation is very unclear [tongue firmly in cheek].

And I do not see any general tax advisors [other than experts in M&A situations with CRPs included--good luck finding one of those] as having any clue whatsoever on how to proceed with one's tax advice.

I'll try to explain in another post how I believe all of these tax consequences will play out for IOC shareholders with high and low basis amounts, etc.

I wish it were not so, but it appears that we IOC shareholders are, again, taking it on the chin, with a sucker punch from IOC and Exxon.

2126- Thank you for that fantastic summary of what all of this means. If the vote is 'for' this information will be very helpful to all IOC shareholders. I suggest that each of you print this off for future reference.

Excellent work & thanks again!!!!

[Northoil]

“When I use a word,” Humpty Dumpty said … “it means just what I choose it to mean — neither more nor less.”

To focus on the share exchange itself, below are edited quotes from the MIC.  The tax treatment of the CRP is a separate issue.  Fractional shares, holding periods, etc are omitted detail.

“the Consideration in exchange for Common Shares … will be a taxable transaction for U.S. federal income tax purposes. In general, a U.S. holder that exchanges its Common Shares for ExxonMobil Shares… will recognize gain or loss in an amount equal to the difference between … the fair market value of the ExxonMobil Shares and … (the) adjusted tax basis in the (IOC) Shares exchanged therefor.”

​​“Gain or loss must be calculated separately for each block of Common Shares … acquired at different times or different prices.”

“U.S. holder’s tax basis in the ExxonMobil Shares .. will equal the fair market value of such ExxonMobil Shares … and the holding period …will begin on the date after the Effective Date.”

Summing up, the exchange is immediately taxable, long- or short-term, and you start afresh with the XOM shares.  This language is very clear – crystal, in fact. 

However, let me point out the following:

1.  The “in general” phrase leaves a lot of wiggle room.

2.  Who made Exxon our tax advisor?  What is in the Agreement is not law, nor does it govern what happens outside the Agreement.  As has been noted, the normal treatment is that the value and holding period of your IOC shares carries over to the XOM shares.  The tax event comes when you sell the XOM shares, not when you get them.  Why is this transaction special and different? ​

3.  From 2126: “ I am not a tax expert, but I know that this is a very unusual tax treatment in this type situation. I can only assume that Exxon's and IOC's lawyers/accountants have set up the Arrangement in such a manner as to have a good argument that the IRS should accept this tax treatment.”  Whatever their reasons, it’s not because they’re looking out for us.  It clearly doesn’t.  Maybe it benefits them somehow; it doesn’t mean we have to adopt the method.  The IRS may accept other methods, too.

​4.  I (also not a tax expert) intend to take the standard approach.  It’s the normal treatment, and it’s defensible in the unlikely event it’s ever questioned.

5.  ​I once had a disagreement with a tax advisor – he wanted to take a certain tax-saving approach on whatever it was and I thought it wasn’t a correct interpretation.  He said he knew, but said “there’s no law against trying”.  We did it his way and it stood up.  Call it the “Humpty Dumpty technique”.

​

[katytrader]

“When I use a word,” Humpty Dumpty said … “it means just what I choose it to mean — neither more nor less.”

To focus on the share exchange itself, below are edited quotes from the MIC.  The tax treatment of the CRP is a separate issue.  Fractional shares, holding periods, etc are omitted detail.

“the Consideration in exchange for Common Shares … will be a taxable transaction for U.S. federal income tax purposes. In general, a U.S. holder that exchanges its Common Shares for ExxonMobil Shares… will recognize gain or loss in an amount equal to the difference between … the fair market value of the ExxonMobil Shares and … (the) adjusted tax basis in the (IOC) Shares exchanged therefor.”

​​“Gain or loss must be calculated separately for each block of Common Shares … acquired at different times or different prices.”

“U.S. holder’s tax basis in the ExxonMobil Shares .. will equal the fair market value of such ExxonMobil Shares … and the holding period …will begin on the date after the Effective Date.”

Summing up, the exchange is immediately taxable, long- or short-term, and you start afresh with the XOM shares.  This language is very clear – crystal, in fact. 

However, let me point out the following:

1.  The “in general” phrase leaves a lot of wiggle room.

2.  Who made Exxon our tax advisor?  What is in the Agreement is not law, nor does it govern what happens outside the Agreement.  As has been noted, the normal treatment is that the value and holding period of your IOC shares carries over to the XOM shares.  The tax event comes when you sell the XOM shares, not when you get them.  Why is this transaction special and different? ​

3.  From 2126: “ I am not a tax expert, but I know that this is a very unusual tax treatment in this type situation. I can only assume that Exxon's and IOC's lawyers/accountants have set up the Arrangement in such a manner as to have a good argument that the IRS should accept this tax treatment.”  Whatever their reasons, it’s not because they’re looking out for us.  It clearly doesn’t.  Maybe it benefits them somehow; it doesn’t mean we have to adopt the method.  The IRS may accept other methods, too.

​4.  I (also not a tax expert) intend to take the standard approach.  It’s the normal treatment, and it’s defensible in the unlikely event it’s ever questioned.

5.  ​I once had a disagreement with a tax advisor – he wanted to take a certain tax-saving approach on whatever it was and I thought it wasn’t a correct interpretation.  He said he knew, but said “there’s no law against trying”.  We did it his way and it stood up.  Call it the “Humpty Dumpty technique”.

​

Northoil, I agree with your observations here, but would add for those with shares held in street names of US brokers, there is potentially additional problems/confusion on how the broker reports details to IRS.  If they simply use the XOM "advice"  one is left with needing to challenge what they report as basis  on the Form 1099-B even before any potential squabble with IRS.