In an internal legal memorandum (ILM 201414015), the IRS concluded that a target corporation did not join the purchasing corporation's consolidated group until the target's stock was released from escrow.
Under the facts of the memo, the taxpayer purchased a target corporation under a stock purchase agreement (SPA), through which the initial purchase was for less than 80% of the stock of the target, but the taxpayer was bound to purchase the remaining stock in later transactions. Upon the initial purchase, the remaining 20% of the target's stock was placed into escrow. The terms of the SPA stated that while the remaining stock was in escrow, the voting rights of that stock, as well as the right to receive dividends, remained with the seller.
The IRS concluded that the target company did not join the group as of the initial SPA date because the taxpayer did not own the target's stock within the meaning of Section 1504, which adopts an 80% by vote and value test. The taxpayer argued that due to the binding commitment of the SPA, the benefits and burdens of ownership passed.
The IRS was not persuaded, concluding that the statute has an explicit ownership requirement, and that the remainder of the stock had voting and dividend rights still indirectly held by the seller. By contrast, under Rev. Rul. 55-458, when escrowed stock could be voted by the acquirer and dividend rights inured to the acquirer, the stock was ruled to be indirectly owned by such acquirer, allowing for immediate consolidation.
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