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HBI » Topics » If the IRS determines that our spin off from Sara Lee does not qualify as a tax-free distribution or a tax-free reorganization, we may be subject to substantial liability.These excerpts taken from the HBI 10-K filed Feb 19, 2008. If the
IRS determines that our spin off from Sara Lee does not qualify
as a “tax-free” distribution or a “tax-free”
reorganization, we may be subject to substantial
liability.
Sara Lee has received a private letter ruling from the Internal
Revenue Service, or the “IRS,” to the effect that,
among other things, the spin off qualifies as a tax-free
distribution for U.S. federal income tax purposes under
Section 355 of the Internal Revenue Code of 1986, as
amended, or the “Internal Revenue Code,” and as part
of a tax-free reorganization under Section 368(a)(1)(D) of
the Internal Revenue Code, and the transfer to us of assets and
the assumption by us of liabilities in connection with the spin
off will not result in the recognition of any gain or loss for
U.S. federal income tax purposes to Sara Lee.
Although the private letter ruling relating to the qualification
of the spin off under Sections 355 and 368(a)(1)(D) of the
Internal Revenue Code generally is binding on the IRS, the
continuing validity of the ruling is subject to the accuracy of
factual representations and assumptions made in connection with
obtaining such private letter ruling. Also, as part of the
IRS’s general policy with respect to rulings on spin off
transactions under Section 355 of the Internal Revenue
Code, the private letter ruling obtained by Sara Lee is based
upon representations by Sara Lee that certain conditions which
are necessary to obtain tax-free treatment under
Section 355 and Section 368(a)(1)(D) of the Internal
Revenue Code have been satisfied, rather than a determination by
the IRS that these conditions have been satisfied. Any
inaccuracy in these representations could invalidate the ruling.
If the spin off does not qualify for tax-free treatment for
U.S. federal income tax purposes, then, in general, Sara
Lee would be subject to tax as if it has sold the common stock
of our company in a taxable sale for its fair market value. Sara
Lee’s stockholders would be subject to tax as if they had
received a taxable distribution equal to the fair market value
of our common stock that was distributed to them, taxed as a
dividend (without reduction for any portion of a Sara Lee’s
stockholder’s basis in its shares of Sara Lee common stock)
for U.S. federal income tax purposes and possibly for
purposes of state and local tax law, to the extent of a Sara
Lee’s stockholder’s pro rata share of Sara Lee’s
current and accumulated earnings and profits (including any
arising from the taxable gain to Sara Lee with respect to the
spin off). It is expected that the amount of any such taxes to
Sara Lee’s stockholders and to Sara Lee would be
substantial.
Pursuant to a tax sharing agreement we entered into with Sara
Lee in connection with the spin off, we agreed to indemnify Sara
Lee and its affiliates for any liability for taxes of Sara Lee
resulting from: (1) any action or failure to act by us or
any of our affiliates following the completion of the spin off
that would be inconsistent with or prohibit the spin off from
qualifying as a tax-free transaction to Sara Lee and to Sara
Lee’s stockholders under Sections 355 and 368(a)(1)(D)
of the Internal Revenue Code, or (2) any action or failure
to act by us or any of our affiliates following the completion
of the spin off that would be inconsistent with or cause to be
untrue any material, information, covenant or representation
made in connection with the private letter ruling obtained by
Sara Lee from the IRS relating to, among other things, the
qualification of the
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spin off as a tax-free transaction described under
Sections 355 and 368(a)(1)(D) of the Internal Revenue Code.
Our indemnification obligations to Sara Lee and its affiliates
are not limited in amount or subject to any cap. We expect that
the amount of any such taxes to Sara Lee would be substantial.
If the IRS determines that our spin off from Sara Lee does not qualify as a “tax-free” distribution or a “tax-free” reorganization, we may be subject to substantial liability. Sara Lee has received a private letter ruling from the Internal Revenue Service, or the “IRS,” to the effect that, among other things, the spin off qualifies as a tax-free distribution for U.S. federal income tax purposes under Section 355 of the Internal Revenue Code of 1986, as amended, or the “Internal Revenue Code,” and as part of a tax-free reorganization under Section 368(a)(1)(D) of the Internal Revenue Code, and the transfer to us of assets and the assumption by us of liabilities in connection with the spin off will not result in the recognition of any gain or loss for U.S. federal income tax purposes to Sara Lee. Although the private letter ruling relating to the qualification of the spin off under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code generally is binding on the IRS, the continuing validity of the ruling is subject to the accuracy of factual representations and assumptions made in connection with obtaining such private letter ruling. Also, as part of the IRS’s general policy with respect to rulings on spin off transactions under Section 355 of the Internal Revenue Code, the private letter ruling obtained by Sara Lee is based upon representations by Sara Lee that certain conditions which are necessary to obtain tax-free treatment under Section 355 and Section 368(a)(1)(D) of the Internal Revenue Code have been satisfied, rather than a determination by the IRS that these conditions have been satisfied. Any inaccuracy in these representations could invalidate the ruling. If the spin off does not qualify for tax-free treatment for U.S. federal income tax purposes, then, in general, Sara Lee would be subject to tax as if it has sold the common stock of our company in a taxable sale for its fair market value. Sara Lee’s stockholders would be subject to tax as if they had received a taxable distribution equal to the fair market value of our common stock that was distributed to them, taxed as a dividend (without reduction for any portion of a Sara Lee’s stockholder’s basis in its shares of Sara Lee common stock) for U.S. federal income tax purposes and possibly for purposes of state and local tax law, to the extent of a Sara Lee’s stockholder’s pro rata share of Sara Lee’s current and accumulated earnings and profits (including any arising from the taxable gain to Sara Lee with respect to the spin off). It is expected that the amount of any such taxes to Sara Lee’s stockholders and to Sara Lee would be substantial. Pursuant to a tax sharing agreement we entered into with Sara Lee in connection with the spin off, we agreed to indemnify Sara Lee and its affiliates for any liability for taxes of Sara Lee resulting from: (1) any action or failure to act by us or any of our affiliates following the completion of the spin off that would be inconsistent with or prohibit the spin off from qualifying as a tax-free transaction to Sara Lee and to Sara Lee’s stockholders under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code, or (2) any action or failure to act by us or any of our affiliates following the completion of the spin off that would be inconsistent with or cause to be untrue any material, information, covenant or representation made in connection with the private letter ruling obtained by Sara Lee from the IRS relating to, among other things, the qualification of the
Table of Contentsspin off as a tax-free transaction described under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code. Our indemnification obligations to Sara Lee and its affiliates are not limited in amount or subject to any cap. We expect that the amount of any such taxes to Sara Lee would be substantial. | EXCERPTS ON THIS PAGE:
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