Divestiture Structure and Tax Attributes: Evidence from the Omnibus Budget Reconciliation Act of 1993
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Using data from 1991 through 1994, this study investigates the effect of tax provisions on divestiture structure. Specifically, a set of taxable asset and taxable stock sell-offs are analyzed to assess the impact of a tax-law change requiring purchased intangibles to be amortized over 15 years on the structure of these divestitures. The results provide evidence that allowing the amortization of goodwill, a previously nondeductible intangible asset, increases the likelihood of step-up (goodwillcreating) divestitures. However, the likelihood of step-up transactions decreases as a function of the level of other transaction intangibles such as customer lists. Although the incidence of step-up transactions does not increase after the passage of the tax law, the results show that the structure of individual transactions is affected in an offsetting manner as a function of goodwill and other transaction intangibles.This study also provides evidence suggesting that inferences vary depending on how transactions are classified. An additional analysis where structure is determined strictly by the legal form of the divestiture rather than by its tax treatment demonstrates the result of misclassifying taxable stock transactions that are taxed as taxable asset transactions (338(h)(10) divestitures). In this analysis, goodwill deductibility is not a significant factor in determining the likelihood of transaction structure. However when the 338(h)(10) divestitures are eliminated from the sample altogether, goodwill deductibility is again significant in explaining the likelihood of divestiture structure, as is consistent with the original model. These results suggest that transaction classification is important when examining the effect of tax provisions or attributes on divestiture structure.
